Report Template Update  = 04-30-05_rev.12  
Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

G D U
ENERIC  RUG  TILIZATION IN 

S M P
TATE  EDICAID  ROGRAMS

Daniel R. Levinson

Inspector General 

July 2006

OEI-05-05-00360
 Report Template Update  = 04-30-05_rev.12  
Office of Inspector General 

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
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abuse, and mismanagement and promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on 
significant issues.  Specifically, these evaluations focus on preventing fraud, waste, or 
abuse and promoting economy, efficiency, and effectiveness in departmental programs.  
To promote impact, the reports also present practical recommendations for improving 
program operations. 
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers.  The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. OCIG imposes program exclusions and civil 
monetary penalties on health care providers and litigates those actions within HHS. 
OCIG also represents OIG in the global settlement of cases arising under the Civil False 
Claims Act, develops and monitors corporate integrity agreements, develops compliance 
program guidances, renders advisory opinions on OIG sanctions to the health care 
community, and issues fraud alerts and other industry guidance.    E X E C U T I V E   S U M M A R Y  

OBJECTIVE 
To determine the extent of generic drug utilization in State Medicaid 
programs during 2004. 
BACKGROUND 
Medicaid is a jointly funded Federal and State health insurance 
program for certain low income and medically needy persons. 
Prescription drug costs are one of the largest and fastest growing 
Medicaid expenditures, totaling more than $34 billion in fiscal     
year 2003. 
Rising Medicaid costs have bolstered Federal support for using generic 
drugs to contain Medicaid prescription drug expenditures.  A generic 
drug is chemically identical to its brand name counterpart, with the 
same therapeutic effect and the same risk-benefit profile.   Generic 
drugs are, on average, 63 percent less expensive than brand name 
drugs. 
The Centers for Medicare & Medicaid Services (CMS) has encouraged 
generic drug substitution (i.e., substituting a generic drug for its brand 
name equivalent) as a safe and effective way for States to increase 
generic drug utilization and reduce costs.  Many States have 
implemented policies to encourage generic substitution in their State 
Medicaid programs.   
Generic substitution is not possible when a provider prescribes a single 
source drug (i.e., a drug that has no generic equivalent).  While single 
source drugs are the only available treatment for some conditions, other 
conditions are treatable with a number of drugs, some of which have 
generic equivalents and some of which do not.  Some States and private 
insurers encourage health care providers to prescribe drugs with generic 
equivalents rather than single source drugs, which tend to be newer and 
more expensive.  
The overall level of generic drug utilization is determined both by the 
frequency of generic substitution at the pharmacy counter and by 
physician prescribing patterns.  Therefore, in addition to assessing 
overall generic drug utilization (i.e., the percentage of all prescriptions 
that were generics), this study calculated the following indicators that 
contributed to overall generic utilization: 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  i  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
1. 	Generic substitution rate: the percentage of all prescriptions for 
multisource drugs (i.e., drugs that have a generic substitute) that 
were dispensed as generics. 
2. 	Single source prescribing rate: the percentage of all prescriptions 
that were written for single source drugs (i.e., drugs that have no 
generic version). 
FINDINGS 
On average, generics were dispensed 89 percent of the time when 
generic substitutes were available. The generic substitution rate 
measures how often generics are dispensed when generic substitutes 
are available. Across all States, both the median and the average 
generic substitution rates were 89 percent. Twenty-three States had 
generic substitution rates at or above 90 percent. This compares 
favorably with a 90 percent private sector benchmark. 
Overall, generic substitution rates were similar across States. However, 
States showed substantial variation in their generic substitution rates 
within certain therapeutic classes (i.e., groups of drugs that treat the 
same medical condition). For example, the generic substitution rate for 
anticoagulant drugs (blood thinners) ranged from 27 percent in one 
State to 100 percent in another. 
On average, 41 percent of prescriptions were written for drugs that 
have no generic substitutes. Single source drugs have no generic 
substitutes. Therefore, the proportion of prescriptions that are written 
for them (i.e., the single source prescribing rate) limits States 
opportunities for generic drug utilization. 
On average, single source drugs comprised 41 percent of all prescriptions 
filled. Thus, for this 41 percent of prescriptions, there was no opportunity 
to dispense a generic drug. Across State Medicaid programs, the single 
source prescribing rate ranged from 34 percent to 50 percent. 
On average, 54 percent of all drugs dispensed were generics.  The 
generic utilization rate is the percentage of all prescriptions dispensed 
that were generics. Across all States, both the median and the average 
generic utilization rates were 54 percent. By State, generic utilization 
rates varied from 44 percent to 61 percent. To place these rates in 
context, trade publications report 2004 generic utilization rates of 
approximately 48 percent to 52 percent for many private pharmacy benefit 
organizations and health plans. 
OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  ii  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
Variation in generic utilization was primarily explained by variation in 
single source prescribing. Generic drug utilization is affected both by 
generic drug substitution and by physician prescribing patterns. 
However, because generic substitution was both high and consistent 
across States, single source prescribing was the primary explanation for 
differences in generic drug utilization overall. Generic utilization was 
highest in States where single source prescribing was lowest. 
CONCLUSION 
We found that overall, State Medicaid programs demonstrated high 
generic drug utilization in 2004. On average, 54 percent of all 
prescriptions dispensed were generics, a figure that compares favorably 
to rates reported in the private sector. 
On average, generics were dispensed 89 percent of the time when 
generic substitutes were available. The high levels of generic 
substitution that we found for many Medicaid programs suggest that 
many States may have already achieved most of the growth in generic 
utilization possible through increasing generic substitution. However, 
certain therapeutic classes show substantial variation in States generic 
substitution rates, and thus, greater potential for gains in States with 
lower rates in these classes. 
To achieve significant increases in generic drug utilization, it is 
important to recognize that single source drug prescribing caps the level 
of generic drug utilization that a State Medicaid program can attain. 
States may realize greater gains by encouraging the prescribing of 
multisource drugs, which have generic equivalents, through counter-
detailing, step therapy requirements, or other means. However, such 
efforts must be undertaken with caution to ensure that patients 
maintain access to appropriate treatment. 
In light of these findings, we suggest that CMS consider the following: 
o 	 For States seeking to further increase generic substitution, CMS 
could assist States in identifying and targeting their efforts to 
promote generics in therapeutic classes wherein their State rate is 
substantially lower than other States and opportunities for gains 
are greatest. 
o 	 For States seeking more substantial gains in generic utilization, 
CMS could offer information and technical assistance in shifting 
utilization from single source to multisource drugs in a clinically 
OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  iii  E X E C U T I V E   S U M M A R Y  
responsible manner.  In particular, CMS has developed expertise in 
the therapeutic interchangeability of drugs through Medicares 
oversight of Part D formularies.  Such expertise would be a valuable 
resource for States that desire assistance in developing policies to 
influence prescribing patterns while ensuring that beneficiaries 
maintain access to appropriate treatment. 
AGENCY COMMENTS 
In its comments, CMS indicated that it strongly encourages the 
dispensing of generic drugs. As OIG noted in our report, drug 
manufacturer rebates may occasionally provide States with better 
prices on some brand name drugs than on generics. CMS suggested 
that this could account for lower generic utilization rates for certain 
therapeutic classes in some States.  In response to our suggestions, 
CMS stated that it will share this report with States and encourage 
State Medicaid agencies to review their generic drug use by therapeutic 
class. Finally, CMS indicated its willingness to share its expertise on 
therapeutic interchangeability with States but noted that States also 
have other qualified sources of this information. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  iv    T A B L E   O F   C O N T E N T S  

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 i 
I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Generics dispensed in 89 percent of cases where 

   a generic exists  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

Single source drugscomprised 41 percent of prescriptions. . . . . . .  8

Of all drugs dispensed, 54 percent were generics  . . . . . . . . . . . . . .  9

CONC LUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

  AgencyComments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

E N D NO T ES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

A:	  Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

B: 	Generic Drug Utilization Indicators by State. . . . . . . . . . . . . .  19

C: 	Analysis of the Impact on Medicaid Generic Drug Utilization  

 of Dual Eligibles 2006 Shift to Medicare. . . . . . . . . . . . . . . . .  21

D:	  AgencyComments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS    I N T R O D U C T I O N  

OBJECTIVE 
To determine the extent of generic drug utilization in State Medicaid 
programs during 2004. 
BACKGROUND 
Medicaid Prescription Drug Coverage 
Medicaid is a jointly funded Federal and State health insurance 
program for certain low-income and medically needy persons. 
Individual States establish eligibility requirements, benefit packages, 
and payment rates for their Medicaid programs under broad Federal 
standards administered by the Centers for Medicare & Medicaid 
Services (CMS). Medicaid requires that States provide basic services to 
beneficiaries to receive Federal matching funds.  States may also receive 
Federal funding if they provide other optional services. 
All State Medicaid programs have elected to include prescription drug 
coverage. States are constrained by Federal law and regulation from 
implementing certain drug cost containment tools that are available to 
private health plans. Most significantly, Medicaid must cover all drugs, 
brand and generic, whose manufacturers have entered into Medicaid 
Rebate Agreements (with a few specific exceptions).1 
Medicaid Prescription Drug Expenditures 
Prescription drug coverage is one of the largest and fastest growing 
Medicaid expenditures.  In fiscal year 2003, Medicaid spent more than 
$34 billion on prescription drugs.2  Medicaid prescription drug costs 
doubled between 1998 and 2002, rising from less than 8 percent to over 
11 percent of the total Medicaid budget.3  From 2000 to 2002 alone, 
prescription drug expenditures in fee-for-service Medicaid programs 
grew faster than expenditures in any other Medicaid service category, 
averaging an 18.8 percent increase per year.4  As a result of rising costs, 
States currently devote over one-fifth of their budgets to Medicaid 
spending.5 
Approximately 6 million beneficiaries are eligible for both Medicaid and 
Medicare (dual eligibles).6  This population represents about 15 percent 
of all Medicaid beneficiaries.7  On January 1, 2006, prescription drug 
coverage for these beneficiaries transferred from Medicaid to Medicare.8 
This shift may affect Medicaid drug utilization patterns and 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  1  I N T R O D U C T I O N  
expenditures, given dual eligibles extensive utilization of prescription 
drugs. However, Medicaid will continue to be responsible for 45 million 
nondually eligible beneficiaries. 
Generic Drugs 
A generic drug is chemically identical to its brand name counterpart, 
with the same therapeutic effect and the same risk-benefit profile.  To 
be approved by the Food and Drug Administration (FDA), a generic 
drug must contain the same amount(s) of the same active ingredient(s) 
as the brand name product.9   (For a detailed definition of this and other 
key terms, please see Appendix A.)  The generic drug must also be the 
same strength, be available in the same dosage, have the same route of 
administration, and have essentially the same labeling as the brand 
name drug. Generic drug manufacturing and packaging facilities are 
held to the same safety and quality standards as those of brand name 
drugs. 
Potential Savings from Increasing Generic Drug Utilization 
Generic drugs are much less expensive than brand name drugs.  In 
2003, the average brand name prescription cost $83.66, while the 
average generic prescription cost $30.58, a 63 percent difference.10 
Rising Medicaid costs have bolstered Federal support for using generic 
drugs to contain Medicaid prescription drug expenditures.11 During 
congressional hearings on Medicaid prescription drug reimbursement 
held in December 2004, the Chairman of the Committee on Energy and 
Commerce stated that . . . generic drugs have a critical role to play in 
containing soaring drug costs.12  Congress has also indicated its 
interest in using generic drugs to control costs; the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 
includes provisions to promote generics in the new Medicare 
prescription drug benefit. 
Pursuant to Federal law and regulation, States retain some flexibility in 
containing Medicaid drug costs through encouraging a shift from brand 
name to generic drug utilization.  States can achieve this shift by 
encouraging pharmacies to dispense generics when possible and by 
encouraging doctors to prescribe multisource drugs (i.e., drugs with 
generic equivalents) when clinically indicated.  
Forty-one State Medicaid programs have mandatory generic 
substitution policies, which require that generic drugs be dispensed 
whenever a generic version of the drug is available.13  However, many 
States allow physicians to override mandatory generic substitution by 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  2  II NN TT RR OO DD UU CC TT II OO NN
indicating Dispense as Written and/or Brand Medically Necessary on 
the prescription. A few States require physicians or pharmacists to take 
additional steps to override the substitution, such as obtaining prior 
authorization from the Medicaid program and/or citing a specific 
medical necessity for the brand (such as allergy to an inactive 
ingredient in the generic) before the brand name drug can be dispensed. 
Some State Medicaid programs have taken other measures to encourage 
generic drug utilization. These include placing generics on the 
preferred drug list, setting higher copayments for brand name drugs, 
paying higher pharmacy dispensing fees for generic drugs, requiring 
beneficiaries to try a generic drug for their condition before covering a 
brand name drug (step therapy), and educating health care providers 
about use of generic drugs (counter-detailing).14 
Generic Drug Substitution 
Generic substitution means dispensing a generic drug instead of its 
brand name equivalent. Generic substitution is only possible when a 
health care provider prescribes a multisource drug (i.e., a drug with a 
generic equivalent). Generic substitution occurs when a physician 
prescribes the generic version of a multisource drug rather than its 
brand name equivalent, or when a pharmacist is presented with a 
prescription for a multisource brand name drug and dispenses the 
generic version instead.15 
Theoretically, States should be able to achieve high generic substitution 
rates, because generic drugs are chemically and therapeutically 
equivalent to their brand name counterparts. There are situations in 
which generic substitution is not possible, but these circumstances are 
rare. For example, a small percentage of patients may medically 
require the brand name version of a drug if they are allergic to an 
inactive ingredient such as a dye or binder found in the generic version. 
Additionally, disruptions in the supply chain may mean that a 
pharmacy occasionally does not have the generic version of a drug in 
stock and must dispense the brand name.16 Despite these potential 
barriers, generic substitution rates above 90 percent have been reported 
by private health plans.17 
Generic substitution is an attractive option for cost containment, 
because it can save money without adversely affecting beneficiaries 
health. CMS encourages generic substitution as a safe and effective 
strategy by which States may lower Medicaid drug costs, noting the 
90 percent substitution rates achieved in some private health plans.18 
OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  3  I N T R O D U C T I O N  
While generic substitution generally achieves savings, it may not save 
money in all circumstances.  Medicaids net drug payments are based on 
reimbursement to pharmacies, minus rebates from drug manufacturers. 
Shifting from brand name to generic drugs will almost always lower 
Medicaid reimbursements because generic drugs are generally much 
less expensive than brand name drugs. However, States usually receive 
higher Medicaid rebates for brand name drugs than for generic drugs. 
In some cases, it is possible that the higher Medicaid rebate could lead 
to a lower net payment for a brand name drug than for its generic 
equivalent. 
Single Source Drug Prescribing   
The rate at which single source drugs (i.e., drugs with no generic 
equivalents) are prescribed in a State depends on a number of factors. 
These include prescriber habits, patient demand for newer or highly 
advertised drugs, and therapeutic advances associated with newer 
drugs. For some conditions, single source drugs are the only available 
treatment. However, other conditions are treatable with a number of 
different drugs, some of which have generic equivalents and some of 
which do not.  For some patients, only one prescription drug option is 
appropriate, but for other patients, a variety of drugs may work equally 
well. In those instances, some States and private insurers encourage 
health care providers to prescribe drugs with generic equivalents rather 
than single source drugs, which tend to be newer and more expensive.  
SCOPE AND METHODOLOGY 
Scope 
This study focused on analyzing States patterns of generic drug 
utilization rather than describing States policies.  Detailed information 
on State Medicaid policies, including policies that encourage generic 
utilization, is available from multiple sources.  Further, we did not test 
for evidence of causal links between State policies and patterns of 
generic drug utilization.  Generic drug utilization is influenced by 
numerous factors in addition to State Medicaid policies, and we had no 
means of controlling for those factors to identify the effects of the 
policies themselves. 
Instead, by calculating indicators of generic utilization and 
benchmarking States against one another, this study explored the 
potential avenues for increasing generic drug utilization.  We did not 
make any clinical assessments as to what rates of generic substitution, 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  4  II NN TT RR OO DD UU CC TT II OO NN
single source drug prescribing, or overall generic utilization are 
desirable or appropriate. 
Methodology 
In this study, we analyzed the population of national drug codes (NDC) 
for drugs purchased by State Medicaid programs through fee-for-service 
in 2004. To do so, we used utilization data from the Medicaid Drug 
Rebate (MDR) program and drug product data from First DataBank. 
The MDR data do not include utilization for drugs purchased by 
managed care organizations or pharmacy benefit managers under 
contract with State Medicaid agencies. The data also do not include 
utilization for drugs purchased from entities that receive the 340B 
discount.19 Drug utilization data were not available for the State of 
Arizona because it did not participate in the MDR program. 
Because the populations that use prescription drugs most heavily, as 
well as pharmacy benefits as a whole, are frequently excluded from 
Medicaid managed care, the fee-for-service population accounts for the 
majority of Medicaid prescriptions.20 
Measuring Generic Utilization 
For each State (including the District of Columbia, herein referred to as 
a State), we calculated the overall rate of generic drug utilization by 
dividing the total number of generic drug prescriptions by the total of all 
prescriptions. We also calculated the following two indicators that 
contribute to overall utilization: 
1. 	 Generic substitution rate: we divided the number of generic drug 
prescriptions by the total of all multisource prescriptions (both 
generic and multisource brand). We considered a drug substitutable 
if it has an FDA A-rated generic equivalent available.21 
2. 	 Single source prescribing rate: we divided the total of all single 
source prescriptions by the total of all prescriptions. 
To determine whether the shift of dual eligibles from Medicaid to 
Medicare drug coverage will likely affect Medicaid generic utilization 
patterns, we repeated our calculation of the generic substitution rate, 
single source prescribing rate, and generic utilization rate with dual 
eligibles excluded from the analysis. We estimated the proportion of 
prescriptions for each NDC that were dispensed to dual eligibles using 
2003 Medicaid Statistical Information System data (the most recent 
available). See Appendix C for our analysis of the impact on Medicaid 
OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  5  I N T R O D U C T I O N  
generic drug utilization of the dually eligible populations shift to 
Medicare. 
Comparing Patterns of Generic Utilization 
To compare generic drug utilization among State Medicaid programs, 
we calculated the mean, median, standard deviation, and range for each 
indicator. 
Standards 
This study was conducted in accordance with Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  6  FF II NN DD II NN GG SS   
  F I N D I N G S  
On average, generics were dispensed 89 percent  The generic substitution rate 
of the time when generic substitutes were  measures how often generics are 
dispensed when generic substitutes 
available 
are available. CMS has encouraged 
State Medicaid programs to increase generic substitution, noting that 
some private health plans have achieved rates of over 90 percent.22 
Overall, Medicaid was close to achieving this private sector benchmark 
in 2004. Across all States, both the median and the average generic 
substitution rates were 89 percent. Twenty-three States had generic 
substitution rates at or above 90 percent.  Appendix B displays the 
generic substitution rate for each State Medicaid program. 
We found no evidence that generic substitution will change 
substantially due to the 2006 transfer of dual eligibles from Medicaid to 
Medicare drug coverage.  Excluding dual eligibles from the analysis 
produced an average generic substitution rate of 88 percent for nondual 
eligibles, just 1 percentage point lower than the overall average.  
Appendix C provides additional analysis of the impact on Medicaid 
generic drug utilization of the dually eligible populations shift to 
Medicare. 
Generally, generic substitution rates were similar across States 
Across States, Medicaid programs did not demonstrate substantial 
variation in their levels of generic substitution.  The lowest State rate 
was 83 percent, 9 percentage points below the highest State rate of 
92 percent. However, the majority of States were clustered tightly 
around the median substitution rate of 89 percent.  For example, 
substitution rates for the middle 80 percent of States all fell within a    
4 point range, from 87 percent to 91 percent.   
However, States generic substitution rates varied within certain therapeutic 
classes of drugs 
Within certain therapeutic classes (i.e., groups of drugs that treat the 
same medical condition), some State Medicaid programs achieved 
substantially higher generic substitution rates than others. For 
example, the generic substitution rate for anticoagulant drugs (blood 
thinners) ranged from 27 percent in one State to 100 percent in another. 
For other therapeutic classes, States demonstrated greater consistency 
in their generic substitution rates. For example, generic substitution 
rates for narcotic analgesics (pain relievers) ranged from 95 percent to 
100 percent across the States.  Table 1 presents the minimum and 
maximum generic substitution rates across States for selected 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  7  FF II NN DD II NN GG SS  
therapeutic classes, as well as the total 2004 Medicaid reimbursement 
for multisource drugs in each class to provide an overview of fiscal 
significance. 
Table 1: Substitution Rates and Reimbursement Across State Medicaid Programs 
for Selected Therapeutic Classes in 2004 
Percentage  Medicaid 
Therapeutic Class  Minimum  Maximum 
Point Difference  Reimbursement* 
Narcotic analgesics  95%  100%  5  $712,000,000 
Psychostimulants-
61%  89%  28  $616,000,000 
Antidepressants 
Anticonvulsants  80%  99%  19  $570,000,000 
Diabetic therapy  63%  91%  28  $396,000,000 
Antiulcer/gastrointestinal 
69%  99%  30  $302,000,000 
preparations 
Antiarthritics  86%  100%  14  $264,000,000 
Anticoagulants  27%  100%  73  $187,000,000 
Bronchial dilators  31%  78%  47  $154,000,000 
Antinauseants  93%  100%  7  $130,000,000 
Systemic contraceptives  4%  79%  75  $98,000,000 
*Rounded to the nearest million. Includes reimbursement only for multisource drugs in each therapeutic class. 
Source: Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 
Single source drugs have no 
On average, 41 percent of prescriptions were 
generic substitutes. When a 
written for drugs that have no 
single source drug is prescribed, 
generic substitutes 
a generic drug cannot be 
dispensed. Therefore, the proportion of prescriptions that are written 
for single source drugs (i.e., the single source prescribing rate) limits 
States opportunities to utilize generic drugs. 
On average, single source drugs comprised 41 percent of all 
prescriptions filled. Thus, for this 41 percent of prescriptions, there was 
no opportunity to dispense a generic drug. 
OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  8  F I N D I N G S  
Levels of single source drug prescribing varied across States 
Across State Medicaid programs, the single source prescribing rate 
ranged from a high of 50 percent (New Jersey) to a low of 34 percent 
(Washington and Hawaii). Consequently, there were substantially 
fewer opportunities to dispense generic drugs in some States than in 
others.  Many factors may affect single source drug prescribing, 
including patient mix, prescriber habits, advances in certain drug 
treatments, and patient demand for newer or highly advertised drugs. 
Appendix B provides the single source prescribing rate for each State. 
The generic utilization rate is the
On average, 54 percent of all drugs dispensed 
percentage of all prescriptions
were generics 
dispensed that were generics.  Across 
all States, both the median and the average generic utilization rates 
were 54 percent.  To place these numbers in context, trade publications 
report 2004 generic utilization rates of approximately 48 percent to  
52 percent for many private pharmacy benefit organizations and health 
plans.23 
State Medicaid programs varied in their generic utilization.  The 
highest State rate (61 percent) was 17 percentage points higher than 
the lowest State rate (44 percent).  In four States, 60 percent or more of 
all drugs dispensed were generics.  By comparison, in eight States less 
than half of all drugs dispensed were generics.  Appendix B provides the 
generic utilization rate for each State. 
Variation in generic utilization was primarily explained by variation in single 
source drug prescribing 
Generic drug utilization is affected both by generic drug substitution 
and by physician prescribing patterns.  However, because there was 
little variation in generic substitution, it did not play a major role in 
explaining differences between States in overall utilization.  For 
example, 17 States had generic substitution rates of 90 percent.  
However, generic utilization in those States ranged from 48 percent to 
61 percent. 
In contrast, the relationship between generic utilization and single 
source prescribing was strong. Generic utilization was highest in States 
where single source prescribing was lowest.  For example, of all     
50 States reviewed, Washington had the highest generic utilization 
(State rate was 61 percent) and the lowest single source prescribing   
(34 percent). Conversely, New Jersey had both the lowest generic 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  9  F I N D I N G S  
utilization (State rate was 44 percent) and the highest single source 
prescribing (50 percent). 
Chart 1 displays 2004 generic utilization and single source prescribing 
data from the 50 States. 
Chart 1: State Medicaid Programs Generic Utilization Rates  
vs. Single Source Drug Prescribing Rates in 2004 
65% 
s
e
at
R
n  60% 
o
Statesati 
z
2G0e0n4e ricUtili  55% 
Utilizatc ion 
ri
Rates e
en 50% 
G
4 
0
0
2 45% 
s' 
e
at
St 40% 
30%  35%  40%  45%  50%  55% 
States' 2004 Single Source Prescribing Rates 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  10    CC OO NN CC LL UU SS II OO NN   

We found that, overall, State Medicaid programs demonstrated high 
generic drug utilization in 2004.  On average, 54 percent of all prescriptions 
filled were generics.  To place this rate in context, trade publications 
report 2004 generic utilization rates of 48 percent to 52 percent for 
many private pharmacy benefit organizations and health plans.24 
On average, generics were dispensed 89 percent of the time when 
generic substitutes were available.  Twenty-three States had generic 
substitution rates at or above 90 percent, comparing favorably with the 
90 percent private sector benchmark noted by CMS.  The high levels of 
generic substitution that we found for many Medicaid programs suggest 
that many States may have already achieved most of the growth in 
generic utilization possible through increasing generic substitution.  
Still, some States, particularly those with substitution rates below the 
median, may wish to consider taking additional measures to increase 
generic substitution.  Certain therapeutic classes show substantial 
variation in States generic substitution rates, and thus, greater 
potential for gains in States with lower rates in those classes. 
To achieve significant increases in generic drug utilization, it is 
important to recognize that single source drug prescribing caps the level 
of generic drug utilization a State Medicaid program can attain.  States 
may realize greater gains by encouraging the prescribing of multisource 
drugs, which have generic equivalents, through counter-detailing, step 
therapy requirements, or other means.  However, such efforts must be 
undertaken with caution to ensure that patients maintain access to 
appropriate treatment. 
In light of these findings, we suggest that CMS consider the following: 
o	 For States seeking to further increase generic substitution, CMS could 
assist States in identifying and targeting their efforts to promote 
generics in therapeutic classes wherein their State rate is 
substantially lower than other States and opportunities for gains are 
greatest. 
o 	 For States seeking more substantial gains in generic utilization, 
CMS could offer information and technical assistance in shifting 
utilization from single source to multisource drugs in a clinically 
responsible manner.  In particular, CMS has developed expertise in 
the therapeutic interchangeability of drugs through Medicares 
oversight of Part D formularies.  Such expertise would be a valuable 
resource for States that desire assistance in developing policies to 
influence prescribing patterns. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  11  C O N C L U S I O N  

AGENCY COMMENTS 
In its comments, CMS indicated that it strongly encourages the 
dispensing of generic drugs. As OIG noted in our report, drug 
manufacturer rebates may occasionally provide States with better 
prices on some brand name drugs than on generics. CMS suggested 
that this could account for lower generic utilization rates for certain 
therapeutic classes in some States.  In response to our suggestions, 
CMS stated that it will share this report with States and encourage 
State Medicaid agencies to review their generic drug use by therapeutic 
class. Finally, CMS indicated its willingness to share its expertise on 
therapeutic interchangeability with States but noted that States also 
have other qualified sources of this information.  
The full text of CMSs comments is included in Appendix D. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  12    E N D N O T E S  

1 These exceptions include:  agents when used to promote fertility; 
agents when used for cosmetic purposes or hair growth; agents when 
used for the symptomatic relief of cough and colds; prescription vitamins 
and mineral products, except prenatal vitamins and fluoride 
preparations; nonprescription drugs; barbiturates; and benzodiazepines.  
42 U.S.C.  1396r-8(d)(2). 
2 Testimony of Dennis Smith, Director, Center for Medicaid and State 
Operations, Centers for Medicare & Medicaid Services, before the House 
Energy and Commerce Subcommittee on Oversight and Investigations, 
December 7, 2004.  Available online at 
new.cms.hhs.gov/apps/media/press/testimony.asp?Counter=1278. 
Accessed January 18, 2006. 
3 Bruen, Brian and Ghosh, Arunabh.  Kaiser Commission on Medicaid 
and the Uninsured.  Medicaid Prescription Drug Spending and Use, 
page 3. June 2004. 
4 Ibid. 
5 National Governors Association and National Association of State 
Budget Officers.  Fiscal Survey of States, page 3.  June 2005. 
6 Centers for Medicare & Medicaid Services.  A Strategy for 
Transitioning Dual Eligibles from Medicaid to Medicare Drug Coverage. 
May 2, 2005.  Available online at 
www.cms.hhs.gov/medicarereform/strategyforduals.pdf. 
7 Centers for Medicare & Medicaid Services.  2003 CMS Statistics. 
Available online at www.cms.hhs.gov/researchers/pubs/03cmsstats.pdf. 
8 Centers for Medicare & Medicaid Services.  A Strategy for 
Transitioning Dual Eligibles from Medicaid to Medicare Drug Coverage. 
May 2, 2005.  Available online at 
www.cms.hhs.gov/medicarereform/strategyforduals.pdf. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  13  9 Food and Drug Administration.  What are Generic Drugs?  
Available online at www.fda.gov/cder/ogd/#Introduction. Accessed 
January 18, 2006. 
10 National Association of Chain Drug Stores.  Issue Brief:  Retail 
Prescription Prices for Generic Drugs.  October 2004.  Available at 
www.nacds.org/user-assets/pdfs/gov_affairs/issuebriefs/. 
11 For example:  Centers for Medicare & Medicaid Services.  Safe and 
Effective Approaches to Lowering Prescription Drug Costs:  Best 
Practices Among State Medicaid Drug Programs.  September 9, 2004. 
Also, Medicaid Prescription Drug Reimbursement: Why the 
Government Pays Too Much, 2004:  Hearing Before the Subcommittee 
on Oversight and Investigations of the Senate Committee on Energy and 
Commerce, 108th Congress, 2nd Session. 
12 Medicaid Prescription Drug Reimbursement:  Why the Government 
Pays Too Much, 2004:  Hearing Before the Subcommittee on Oversight 
and Investigations of the Senate Committee on Energy and Commerce, 
108th Congress, 2nd Session. 
13 National Pharmaceutical Council.  Pharmaceutical Benefits Under 
State Medical Assistance Programs, 2003. 
14 National Pharmaceutical Council.  Pharmaceutical Benefits Under 
State Medical Assistance Programs, 2003. 
Crowley, Jeffrey; Ashner, Deb; Elam, Linda.  Kaiser Commission on 
Medicaid and the Uninsured.  Medicaid Outpatient Prescription Drug 
Benefits: Findings from a National Survey, 2003.  December 2003.    
Page iv. 
Centers for Medicare & Medicaid Services.  Medicaid Prescription 
Reimbursement by State  Quarter Ending March 2005.  Available online 
at www.cms.gov/meidcaid/drugs/pre0305.pdf. Accessed August 22, 2005. 
15 In some States, pharmacists must inform and/or obtain the 
consumers permission to make this substitution.  Additionally, such 
substitution at the pharmacy counter may be requested by the consumer 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  14  in order to save money on copays, coinsurance, or out-of-pocket drug 
costs. 
16 Food and Drug Administration.  Drug Shortages.  Available online 
at www.fda.gov/cder/drug/shortages. Accessed August 18, 2005. 
17 Centers for Medicare & Medicaid Services.  Safe and Effective 
Approaches to Lowering Prescription Drug Costs:  Best Practices Among 
State Medicaid Drug Programs.  September 9, 2004. 
18 Ibid. 
19 The 340B Drug Discount Program is a Federal discount program that 
requires pharmaceutical manufacturers to lower outpatient drug prices 
for qualified Federal grantees including Community Health Centers and 
Disproportionate Share Hospitals. 
20 Centers for Medicare & Medicaid Services.  Statistical Compendium:  
Medicaid Pharmacy Benefit Use and Reimbursement in 1999.  Exhibit 3. 
21 Generic drugs that receive an A rating have been found by FDA to be 
pharmaceutically and therapeutically equivalent to the brand name 
product.  All A-rated products either have no known or suspected 
bioequivalence problems (codes AA, AN, AO, AP, and AT), or any 
suspected bioequivalence problems have been resolved with in vivo or in 
vitro evidence (code AB). 
Food and Drug Administration, The Orange Book, page xii.  Available 
online at www.fda.gov/cder/orange/obannual.pdf. Accessed February 9, 
2006. 
22 Centers for Medicare & Medicaid Services.  Safe and Effective 
Approaches to Lowering Prescription Drug Costs:  Best Practices Among 
State Medicaid Drug Programs.  September 9, 2004. 
23 Managed Care Week.  Some Insurers Say Pharmacy Costs Could 
Help Drive Medical Cost Growth in 2004.  May 24, 2004.  Available 
online at 
www.aishealth.com/ManagedCare/GenBus/MCWSomeInsure.html. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  15  PharmaCare.  Press Release:  Advantage Health Solutions and 
PharmaCare Partnership Results in Proven Cost Savings.  October 13, 
2004. Available online at www.pharmacare.com/corporate/news_info.jsp. 
Drug Benefit News.  Continued Increases in Generic Utilization Mean 
Big Savings.  October 15, 2004.  Available online at 
www.aishealth.com/DrugCosts/DBNGeneric.html. 
Raymond James Associates, Inc.  CaremarkRX.  Available online at 
www.raymondjames.com/pdfs/company/cmx080405c_1636.pdf. 
Samalonis, Lisa B. Drug Topics.  Generic Drug Use Varies Widely by 
State. April 1, 2005.  Available online at 
www.drugtopics.com/drugtopics/articleDetail.jsp?id=152728. 
24 Ibid. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  16  A P P E N D I X   ~   A  
  A P P E N D I X   ~   A  

KEY TERMS 
Single source drug: A brand name drug with no generic equivalent.  
Multisource brand drug: A brand name drug with at least one generic 
equivalent. Medicaids technical term for these drugs is innovator 
multiple-source drugs. 
Generic drug: A drug that is a chemical copy of a brand name drug.  
Medicaids technical term for these drugs is non-innovator multiple-
source drugs.  All generic drugs are considered multisource drugs, since 
a brand version was available first. 
Generic utilization rate:  The percentage of all prescriptions filled that 
were generics. 
Generic substitution: Substituting a generic drug for its brand name 
equivalent. 
Generic substitution rate:  The percentage of prescriptions for all 
multisource drugs (both multisource brand and generic) that are 
dispensed as generics. This indicator measures how often a generic is 
dispensed when a generic version of the prescribed drug exists.  It is 
sometimes referred to as the generic penetration or efficiency rate. 
Single source drug prescribing rate: The percentage of all prescriptions 
that are written for single source drugs.  This indicator measures how 
often providers write a prescription for a drug that has no generic 
equivalent. 
Therapeutic substitution: Substituting one drug for another that is 
chemically different but treats the same medical condition. 
Active ingredient: A substance in a drug that gives the drug its 
pharmaceutical effect.  A multisource brand name drug and its generic 
equivalent(s) share the same active ingredient.  
Inactive ingredient: A substance in a drug that does not impact its 
pharmaceutical effect, such as dyes or fillers.  A multisource brand 
name drug and its generic equivalent(s) may have different inactive 
ingredients. 
Therapeutic class: A group of drugs that treat the same medical 
condition. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  17  A P P E N D I X   ~ A  
National drug code (NDC): A unique numeric identifier for each drug 
that includes information about the manufacturer, strength, dosage, 
and package size. 
Step therapy: A cost control mechanism that requires patients to try a 
less expensive (often generic) drug for their condition before a more 
expensive (often brand name) drug will be covered. 
Counter-detailing: Educational outreach to health care providers. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  18    A P P E N D I X   ~   B  

GENERIC DRUG UTILIZATION INDICATORS BY STATE 
Table 2 presents the following rates for each State Medicaid program. 
o Generic substitution rate:  the percentage of all prescriptions for 
drugs with generic equivalents that were dispensed as generics.  
o Single source prescribing rate:  the percentage of all prescriptions 
that were for single source drugs, which have no generic equivalent. 
o Generic utilization rate:  the percentage of all prescriptions filled 
that were generics. 
Table 2: Generic Drug Utilization in State Medicaid Programs, 2004 
Generic   Single Source  Generic 
State 
Substitution Rate  Prescribing Rate  Utilization Rate 
Alabama  90%  35%  61% 
Alaska  85%  48%  46% 
Arkansas  88%  44%  52% 
California  83%  46%  50% 
Colorado  89%  40%  55% 
Connecticut  90%  46%  49% 
Delaware  89%  46%  49% 
District of Columbia  91%  44%  52% 
Florida  92%  45%  51% 
Georgia  89%  43%  52% 
Hawaii  92%  34%  60% 
Idaho  89%  46%  49% 
Illinois  89%  36%  59% 
Indiana  90%  36%  59% 
Iowa  89%  39%  57% 
Kansas  90%  42%  53% 
Kentucky  90%  37%  59% 
Louisiana  89%  43%  52% 
Maine  84%  42%  53% 
Maryland  90%  47%  48% 
Massachusetts  90%  38%  58% 
Michigan  90%  40%  55% 
Minnesota  91%  39%  56% 
Mississippi  90%  43%  52% 
Missouri  90%  38%  56% 
Source:  Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  19  A P P E N D I X   ~   B  

Generic Drug Utilization in State Medicaid Programs, 2004 Continued 
Generic   Single Source  Generic 
State 
Substitution Rate  Prescribing Rate  Utilization Rate 
Montana  88%  40%  56% 
Nebraska  89%  36%  59% 
New Hampshire  88%  39%  56% 
New Jersey  89%  50%  44% 
New Mexico  86%  36%  58% 
New York  87%  45%  50% 
Nevada  90%  41%  54% 
North Carolina  88%  45%  49% 
North Dakota  88%  41%  53% 
Ohio  87%  42%  54% 
Oklahoma  90%  37%  58% 
Oregon  90%  35%  60% 
Pennsylvania  88%  43%  51% 
Rhode Island  91%  43%  52% 
South Carolina  89%  45%  49% 
South Dakota  88%  45%  50% 
Tennessee  90%  39%  56% 
Texas  90%  40%  55% 
Utah  89%  39%  56% 
Vermont  91%  43%  51% 
Virginia  88%  39%  56% 
Washington  90%  34%  61% 
West Virginia  89%  39%  55% 
Wisconsin  90%  39%  56% 
Wyoming  87%  45%  51% 
Source:  Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  20    A P P E N D I X   ~   C  

ANALYSIS OF THE IMPACT ON MEDICAID GENERIC DRUG 
UTILIZATION OF DUAL ELIGIBLES 2006 SHIFT TO MEDICARE 
In 2006, dual eligibles began receiving prescription drug coverage 
through Medicare.  Dual eligibles made up approximately 15 percent of 
Medicaid beneficiaries in 2004, and their transfer from Medicaid to 
Medicare will affect Medicaids overall prescription drug expenditures.  
However, excluding dual eligibles from our analysis made little 
difference in patterns of generic drug utilization. Table 3 displays 2004 
average generic substitution, single source prescribing, and generic 
utilization rates for all Medicaid beneficiaries and for nondually eligible 
beneficiaries. 
Table 3: 2004 Indicators of Generic Drug Utilization:  
All Medicaid Beneficiaries vs. Nondually Eligible Beneficiaries 
Generic   Single Source  Generic  
Substitution Rate  Prescribing Rate  Utilization Rate 
All Medicaid Beneficiaries  89%  41%  54% 
Nondually Eligible Beneficiaries  88%  43%  53% 
Percentage Point Difference  (-1)  +2  (-1) 
Source:  Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  21    AA PP PP EE NN DD II XX    ~~    DD   

AGENCY COMMENTS

  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  22    A C K N O W L E D G M E N T S  

This report was prepared under the direction of Ann Maxwell, Regional 
Inspector General for Evaluation and Inspections in the Chicago 
regional office.  Other principal Office of Evaluation and Inspections 
staff who contributed include: 
Erin Lemire, Project Leader 
Louise Schoggen, Lead Analyst 
Mark Stiglitz, Program Analyst 
Tom Komaniecki, Senior Program Analyst 
Linda Boone Abbott, Program Specialist 
Tricia Davis, Director, Medicare and Medicaid Branch 
  OEI-05-05-00360  GENERIC DRUG UTILIZATION IN STATE MEDICAID PROGRAMS  23