Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

A Q D
DDITION OF  UALIFIED  RUGS

M F
TO THE  EDICAID  EDERAL 

U L L
PPER  IMIT  IST 

Inspector General 
December 2004 
OEI-03-04-00320  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 OIG's 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 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management 
and program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs. 
Office of Investigations
The OIG's 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. The OI also oversees 
state Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
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. The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department. The 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.  
 A B S T R A C T
The objectives of this study were to (1) determine the length of time it 
took the Centers for Medicare & Medicaid Services (CMS) to include 
drugs on the Federal upper limit list once the drugs met the statutory 
and regulatory criteria, and (2) calculate the losses that may have 
resulted due to drugs not being added to the list in a timely manner.  
We found that CMS does not consistently add qualified drugs to the 
Federal upper limit list in a timely manner. Of the 252 first-time 
generic drugs approved between January 2001 and December 2003,   
109 products met the statutory and regulatory criteria for inclusion; 
however, only 25 were actually added.  For the 25 drugs that were 
added, CMS took an average of 36 weeks to place the products on the 
list once the drugs were qualified for inclusion.  As of July 15, 2004, the 
84 drugs that were not added had been qualified for an average of 
55 weeks. Qualified drugs not being added to the list in a timely 
manner cost the Medicaid program an estimated $167 million between 
2001 and 2003.  We recommend that CMS establish an administrative 
procedure and schedule to govern the determination and publication of 
Federal upper limits. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  i    E X E C U T I V E   S U M M A R Y   
OBJECTIVE 
The objectives of this study were to:  (1) determine the length of time it 
took the Centers for Medicare & Medicaid Services (CMS) to include 
drugs on the Federal upper limit list once the drugs met the statutory 
and regulatory criteria, and (2) calculate the losses that may have 
resulted due to drugs not being added to the list in a timely manner.   
BACKGROUND 
Statutory and regulatory criteria require CMS to include a drug on the 
Federal upper limit list if:  (1) at least three versions of the drug are 
rated as therapeutically equivalent by the Food and Drug 
Administration, and (2) the drug has at least three suppliers listed in 
current editions of national compendia.  However, according to CMS 
staff, the agency will only establish a Federal upper limit if it would 
lead to cost savings.  Neither the regulation nor the statute set 
timeliness guidelines for adding qualified drugs to the Federal upper 
limit list. 
The Federal upper limit amount for a drug is set at 150 percent of the 
published price for the least costly therapeutically equivalent product 
plus a reasonable dispensing fee. The CMS publishes the list of drug 
products with Federal upper limits in the State Medicaid Manualand 
on its Web site. 
In February 2004, the Office of Inspector General (OIG) issued a report 
entitled Omission of Drugs from the Federal Upper Limit List in 
2001 (OEI-03-02-00670).  We found that 90 drug products were not 
included on the Federal upper limit list in 2001 despite meeting the 
criteria established by Federal laws and regulations. Medicaid could 
have saved $123 million in 2001 by adding 55 of the 90 drug products to 
the Federal upper limit list.  In June 2004, the OIG received a letter 
from the U.S. House of Representatives Committee on Energy and 
Commerce, Subcommittee on Oversight and Investigations requesting 
that we provide further analysis of CMSs oversight of the Federal 
upper limit list. 
We developed a list of first-time generic drug products approved by the 
Food and Drug Administration between January 2001 and December 
2003. We then determined if and when each of these drug products 
qualified for inclusion on the Federal upper limit list according to 
statutory and regulatory criteria.  For each calendar quarter that a 
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qualified drug was not included on the Federal upper limit list, we 
calculated potential Medicaid losses by: (1) subtracting the potential 
Federal upper limit amount from the average Medicaid price, and 
(2) multiplying the price difference by Medicaid utilization. We then 
aggregated the losses for each quarter to determine the overall potential 
losses to Medicaid caused by qualified drugs not being added to the 
Federal upper limit list in a timely manner. 
FINDINGS 
The CMS does not consistently add qualified drugs to the Federal 
upper limit list in a timely manner. The CMS did not consistently add 
qualified drugs to the Federal upper limit list in a timely manner during 
the period under review. Of the 252 first-time generic drugs approved 
between 2001 and 2003, 109 products met the statutory and regulatory 
criteria for inclusion on the Federal upper limit list. While 25 of the 109 
drugs had been added to the list by July 15, 2004, very few were 
included in a timely manner. As of that date, 84 of the 109 drugs we 
reviewed had not been added by CMS. 
For the 25 drugs that were added, CMS took an average of 36 weeks to 
place the products on the Federal upper limit list once they met all 
requirements for inclusion. Only 3 of the 25 drugs were included on the 
list at the time they qualified. Three of the drugs were added more than 
1 year after they first became eligible for inclusion. 
Eighty-four drugs approved between 2001 and 2003 are currently 
qualified for the Federal upper limit list but have not been added by 
CMS. As of July 15, 2004, these 84 drugs had been qualified for an 
average of 55 weeks yet were still not included on the Federal upper 
limit list. Twenty-nine of these drugs had been qualified for at least 
80 weeks (approximately 1 year and 7 months). 
Medicaid lost an estimated $167 million between 2001 and 2003 
because qualified drugs were not added to the Federal upper limit 
list in a timely manner. Failure to add qualified drugs in a timely 
manner cost the Medicaid program an estimated $167 million (both 
Federal and State shares) between 2001 and 2003. Eighty-five percent 
($143 million) of the estimated losses were attributable to lags in adding 
just 8 drugs. 
The product with the highest loss figure, Fluoxetine 20 mg capsules 
(brand name Prozac), illustrates the effect of not adding drugs to the 
Federal upper limit list in a timely manner. The two-quarter lag in 
OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  iii  E X E C U T I V E   S U M M A R Y  
adding the 20 mg dosage size of Fluoxetine capsules cost Medicaid an 
estimated $57 million. 
In the next several months, new generic versions of several other major 
brand name drugs may become qualified for the Federal upper limit list. 
For example, Gabapentin (brand-name Neurontin), Oxycodone 
Hydrochloride (brand-name Oxycontin), and Paroxetine Hydrochloride 
(brand-name Paxil) have recently come off patent and, therefore, now 
have available generic versions.  These 3 drugs accounted for a total of 
$5.3 billion in retail sales in 2003. As was the case with Fluoxetine, not 
adding these three drugs in a timely matter could cause substantial 
losses to Medicaid. 
RECOMMENDATION 
The CMS should establish an administrative procedure and 
schedule to govern the determination and publication of Federal 
upper limits. 
We believe that all qualified drugs should be included on the Federal 
upper limit list in a timely manner. The findings of both this report and 
our February 2004 report show that lags in adding qualified drugs are 
costing the Medicaid program substantial amounts.  However, we are 
aware of the difficulties CMS faces in managing the Federal upper limit 
list. As CMS noted in their comments to the previous report, 
pharmaceutical pricing and product information changes almost daily.  
While we continue to believe that all qualified drugs should be added to 
the Federal upper limit list in a timely manner, another option would be 
for CMS to consider focusing its resources on high-volume brand name 
drugs that are coming off patent.  As our findings show, a large portion 
of the estimated losses can be attributed to lags in adding a small 
number of major drugs.  If CMS makes a concerted effort to keep track 
of FDA ratings, number of suppliers, and published prices for these 
high-volume products, significant lags in placing qualified drugs on the 
Federal upper limit list could be avoided, thereby saving Medicaid 
millions of dollars per year. 
Agency Comments 
The CMS concurred with intent of our recommendation and stated that 
it had taken steps to support this objective.  However, CMS did not 
concur with the OIGs methodology and the subsequent savings 
estimates. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  iv    T A  B L E   O F   C O N T E N T S  
ABSTRACT ....................................................... i 

EXECUTIVE SUMMARY ........................................ ii 

INTRODUCTION ................................................ 1 

F I N D IN G S

Drugs are not consistently added in a timely manner ............ 6 

Drugs not being added timely costs Medicaid millions ........... 8 

RECOMMENDATION ........................................... 10 

APPENDICES 
A : Complete List of 109 Reviewed Drugs ..................... 12 

B: Estimated Losses to Medicaid ............................. 15 

C:  Methodology ............................................ 16 

D : Centers for Medicare & Medicaid Services Comments ....... 20 

ACKNOWLEDGMENTS ......................................... 22 
   I N T R O D U C  T I O N
OBJECTIVE 
The objectives of this study were to:  (1) determine the length of time it 
took the Centers for Medicare & Medicaid Services (CMS) to include 
drugs on the Federal upper limit list once the drugs met the statutory 
and regulatory criteria, and (2) calculate the losses that may have 
resulted due to drugs not being added to the list in a timely manner.   
BACKGROUND 
Medicaid Program 
Medicaid is a jointly funded, Federal and State health insurance 
program for certain low income and medically needy people.  Individual 
States establish eligibility requirements, benefits packages, and 
payment rates for their Medicaid programs under broad Federal 
standards administered by CMS.  Federal regulations mandate that 
States provide basic services to beneficiaries in order to receive Federal 
matching funds.  States may also receive Federal funding if they 
provide other optional services as well.  One of the most commonly 
covered optional services that States provide is prescription drug 
coverage. All 50 States and the District of Columbia currently offer 
prescription drug coverage under the Medicaid program.  In calendar 
year (CY) 2003, CMS estimates that Medicaid payments for prescription 
drugs totaled over $31 billion.1 
Medicaid Drug Reimbursement Methodology 
Each State is required to submit a Medicaid State plan to CMS 
describing its payment methodology for covered drugs.  Federal 
regulations require, with certain exceptions, that each States 
reimbursement for a drug not exceed the lower of its estimated 
acquisition cost plus a reasonable dispensing fee or the providers usual 
and customary charge to the public for the drug.  States have 
implemented dispensing fees that range from $1.89 to $11.46 per 
prescription. 
The CMS allows States flexibility to define estimated acquisition cost. 
Most States base their calculation of estimated acquisition cost on a 
drugs average wholesale price (AWP) discounted by a certain 
percentage.  In CY 2003, this discount ranged from 5 percent to  
1 This amount includes both the Federal and State shares of payments.  It does not include 
rebates collected under the Medicaid Drug Rebate program. 
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50 percent of AWP, sometimes depending on whether the drug was 
brand name or generic or on the type of pharmacy from which the drug 
was purchased.  A small number of States use wholesale acquisition 
costs plus a percentage markup rather than or in addition to discounted 
AWPs when determining estimated acquisition cost.  
For certain drugs, States also use the Federal upper limit and/or State 
maximum allowable cost programs in determining reimbursement 
amounts.  The CMS has established Federal upper limit amounts for 
over 400 drugs. In addition, numerous States have implemented a 
maximum allowable cost program to limit reimbursement amounts for 
certain drugs.  Individual States determine the types of drugs that are 
included in their maximum allowable cost program and the method by 
which the maximum allowable cost for a drug is calculated.  
In summary, States use a variety of different pricing mechanisms when 
setting reimbursement amounts.  In most cases, States reimburse for a 
drug at the lower of its estimated acquisition cost, the Federal upper 
limit amount, the State maximum allowable cost, or the providers usual 
and customary charge, plus a reasonable dispensing fee. 
Federal Upper Limit List 
Pursuant to 42 CFR  447.332, CMS is to establish Federal upper limits 
in order to reduce the amount that Medicaid reimburses for multiple-
source drugs.  According to CMS, Federal upper limits were put in place 
to ensure that the Federal Government acts as a prudent payer by 
taking advantage of current market prices for multiple-source drugs. 
Federal regulation (42 CFR  447.301) defines a multiple-source drug as 
 . . . a drug marketed or sold by two or more manufacturers or labelers 
or a drug marketed or sold by the same manufacturer or labeler under 
two or more different proprietary names or both under a proprietary 
name and without such a name. In other words, a multiple-source 
drug is a drug that has more than one brand or generic version. 
Originally, under 42 CFR  447.332, CMS was to establish a Federal 
upper limit amount for a drug when:  (1) all versions of a drug had been 
rated as therapeutically equivalent by the Food and Drug 
Administration (FDA), and (2) at least three suppliers of the drug were 
listed in current editions (or updates) of published compendia of cost 
information for drugs available for sale nationally.  The Omnibus 
Budget Reconciliation Act of 1990 changed the criteria originally 
established by the regulation by requiring a Federal upper limit when 
three or more versions of a drug had been rated therapeutically and 
pharmaceutically equivalent by FDA, regardless of the ratings of other 
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 U C T I O N  
versions.  The FDA identifies equivalent drugs in its publication 

Approved Drug Products with Therapeutic Equivalence Eva
luations. 

According to FDA, drugs that are therapeutically equivalent are 

designated as A-rated.  Neither the regulation nor the statute set

timeliness guidelines for adding qualified drugs to the Federal upper 

limit list. 

Federal regulation (42 CFR  447.332) sets the Federal upper limit 
amount at 150 percent of the published price for the least costly 
therapeutically equivalent product that can be purchased in quantities 
of 100 tablets or capsules plus a reasonable dispensing fee.  If the drug 
is not typically available in quantities of 100 or if the drug is a liquid, 
the Federal upper limit amount is based on a commonly listed size. 
The CMS applies an additional standard in determining which drugs 
should be included on the Federal upper limit list.  According to CMS 
staff, only drugs that could potentially lead to savings should be subject 
to Federal upper limits. Therefore, if a drug does not have a published 
price that when multiplied by 150 percent is lower than the AWP (upon 
which reimbursement is typically based), CMS does not include the 
product on the Federal upper limit list.2 
In summary, statutory and regulatory criteria require that CMS include 
a drug on the Federal upper limit list if:  (1) at least three versions of 
the drug are rated as therapeutically equivalent by FDA, and (2) the 
drug has at least three suppliers listed in national compendia.  The 
CMS uses an additional standard that requires that the Federal upper 
limit amount would potentially lead to cost savings.  
The CMS publishes a list of drugs for which Federal upper limits are 
established in the State Medicaid Manual and on its Web site.3 Any 
revisions to the Federal upper limit list are typically noted in Medicaid 
program memoranda and on the CMS Web site.  The CMS establishes 
an upper limit for specific forms and strengths for each multiple-source 
drug on the list.  The Federal upper limit list also provides the source of 
the pricing information used to calculate the upper limit amount for 
each drug. 
2 In our previous report, we disagreed with CMS about the usage of this additional 
standard.  States reimburse for a drug at the lower of its estimated acquisition cost, the 
Federal upper limit amount, the State maximum allowable cost, or the providers usual 
and customary charge.  Therefore, States would only pay the Federal upper limit amount 
for a drug if it were the lowest of these options.   
3 Federal upper limit information is located at www.cms.gov/medicaid/drugs/drug10.asp. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  3  I N T R O D
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Related Work by the Office of Inspector General 
In February 2004, the Office of Inspector General (OIG) issued a report 
entitled Omission of Drugs from the Federal Upper Limit List in 
2001 (OEI-03-02-00670).  The OIG found that 90 drug products were not 
included on the Federal upper limit list in 2001 despite meeting the 
criteria established by Federal laws and regulations. Medicaid could 
have saved $123 million in 2001 by adding 55 of the 90 drug products to 
the Federal upper limit list.  The remaining 35 drug products met the 
criteria for inclusion on the Federal upper limit list, but did not have 
any associated savings. The OIG recommended that CMS take steps to 
ensure that all drugs meeting the criteria set forth in Federal laws and 
regulations are included on the Federal upper limit list. 
Inspection Requested by Congressional Subcommittee 
On June 29, 2004, the OIG received a letter from the United States 
House of Representatives Committee on Energy and Commerce, 
Subcommittee on Oversight and Investigations.  The letter expressed 
concern with the amount of time CMS takes to add new generic 
products to the Federal upper limit list, and requested that the OIG 
provide an analysis of the issue.  Among other things, we were asked to 
determine the amount of time it takes for qualified drugs to be included 
on the Federal upper limit list, and the subsequent cost to the program 
of drugs not being added in a timely manner. 
METHODOLOGY 
Determining Generic Drugs Approved From 2001 to 2003   
We developed a list of all first-time generic drugs approved by FDA 
between January 2001 and December 2003. According to FDA, a first-
time generic is a drug that has never been approved as a generic before 
and is, therefore, a new generic to the marketplace.  After deducting 
certain over-the-counter and physician-administered products, we 
created a list of 252 first-time generic drugs approved between 2001 and 
2003. 
Determining if Approved Drugs Meet Federal Upper Limit Criteria 
The CMS is required to include on the Federal upper limit list all 
prescription drugs that have three versions rated therapeutically 
equivalent by FDA and three suppliers listed in national compendia.  
For each of the 252 first-time generic drugs approved between 2001 and 
2003, we determined if three therapeutically equivalent versions were 
listed by FDA, and, if so, the date that the third therapeutically 
equivalent version was approved.  To determine if these drugs also met 
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the three-supplier criterion, we obtained data from the Red BookTMfor 
WindowsCD-ROM (a national compendium). For each of the drugs 
with three A-rated versions, we determined the first subsequent quarter 
(i.e., the first quarter after a third A-rated version was approved) that 
three suppliers were listed in the Red Book. 
In total, 109 of the first-
time generics approved in 2001, 2002, or 2003 met both criteria for 

inclusion on the Federal upper limit list. For the remainder of this 

report, the phrase reviewed drugs will refer to these 109 products. 

Determining if Drugs were on the Federal Upper Limit List 
We obtained the most recent Federal upper limit list from the CMS Web 
site. We also obtained from the Web site all changes to the list between 
November 22, 2000, and July 15, 2004, and the date that the Federal 
upper limit prices for a drug were to go into effect. We determined if 
any of the 109 reviewed drugs were on the Federal upper limit list, and, 
if so, the date they were added. For any drugs that were included on 
the list, we determined the amount of time between when they became 
qualified for the Federal upper limit list and the date they were actually 
added.4 
Estimating Potential Losses 
For each quarter that a drug was qualified for but not included on the 
Federal upper limit list, we compared the potential Federal upper limit 
amount (150 percent of the lowest published price) to the average 
Medicaid reimbursement amount for the drug that quarter.5  If the 
result was a positive number (i.e., the Federal upper limit amount was 
less than the average Medicaid amount), we multiplied it by the total 
number of units reimbursed by Medicaid that quarter. The product of 
this multiplication shows the estimated losses Medicaid had that 
quarter due to the drug(s) not being included on the Federal upper limit 
list. We aggregated the quarterly totals to determine the total 
estimated losses to the program between 2001 and 2003. 
A more complete discussion of our methodology is presented in 
Appendix C. 
4 For the purposes of this report, the term qualified refers to the date that a drug met the 
statutory and regulatory criteria for inclusion on the Federal upper limit list. 
5 Because the Federal upper limit amount is calculated by multiplying the lowest published 
price for a drug by 150 percent, there are instances when this amount would be higher 
than the reimbursement amount based on discounted AWP. In order to limit the time 
required to do this analysis, we only calculated estimated losses for drugs that may have 
actually led to losses (e.g., had at least one published price that when multiplied by 
150 percent was below AWP). 
OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  5  
 F I N D I N G S
The CMS does not consistently add qualified  The CMS did not consistently add 
drugs to the Federal upper limit list in a timely  qualified drugs to the Federal upper 
limit list in a timely manner during 
manner 
the period under review. Of the 
252 first-time generic drugs approved between 2001 and 2003, 109 met 
the statutory and regulatory criteria for inclusion on the list.  While 25 
of the 109 drugs had been added to the Federal upper limit list by July 
15, 2004, very few of the 25 were included in a timely manner.  As of 
that date, an additional 84 of the 109 reviewed drugs had not been 
added by CMS.  A list of the 109 drugs is presented in Appendix A. 
The 25 drugs that were included on the Federal upper limit list had been 
qualified for an average of 36 weeks before being added by CMS. 
For the 25 drugs that were added, CMS took an average of 36 weeks to 
place the products on the Federal upper limit list once the drugs met 
the statutory and regulatory criteria for inclusion.  Only 3 of the  
25 drugs were included on the list at the time they first became 
qualified.  Table 1 below presents a summary of the time CMS took to 
include the 25 drugs. 
The longest period between when a drug initially qualified and when it 
was actually added to the Federal upper limit list was for two versions 
of Metformin Hydrochloride, a drug used to treat Type II diabetes.  The 
third A-rated versions of Metformin Hydrochloride were approved in 
January of 2002, and the 500 mg and 850 mg dosage sizes had three 
suppliers as of April 1, 2002. However, CMS did not add the drugs until 
March 18, 2004, or 102 weeks after the drugs first became qualified. 
Table 1: Amount of Time Between When a Drug Qualified and When a Drug Was Added 
Number of Weeks Qualified  Number of Drugs 
0 weeks  3 
20 weeks  2 
23 weeks  5 
35 weeks  8 
36 weeks  1 
48 weeks  3 
More than 52 weeks  3 
Average 36 Weeks  25 Drugs 
Sources: FDA Web site, Red Book, Federal upper limit list 
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 S  
In addition to the statutory and regulatory criteria, CMS applies an 
additional standard requiring that a Federal upper limit amount would 
potentially lead to cost savings before a drug is included on the list. 
Using CMSs additional standard, these 25 drugs were still not added to 
the Federal upper limit list in a timely manner. On average, the 
25 drugs were included on the Federal upper limit list 32 weeks after 
they may have first led to cost savings (i.e., met CMSs additional 
standard). 
Eighty-four drugs that were not added to the Federal Upper Limit list had 
been qualified for an average of 55 weeks.  
Eighty-four of the 109 drugs we reviewed had not been added by CMS 
as of July 15, 2004. At that date, these 84 drugs had been qualified for 
an average of 55 weeks.  Twenty-nine of these drugs had been qualified 
for at least 80 weeks (approximately 1 year and 7 months).  A summary 
of these 84 drugs is presented in Table 2 below. 
Table 2:  Drugs Not Included on the Federal Upper Limit List as of 7/15/2004 
Number of Weeks Qualified  Number of Drugs 
15 weeks or less  16 
28 weeks  14 
41 weeks  11 
54 weeks  9 
67 weeks  5 
80 weeks  15 
93 weeks  5 
More than 104 weeks  9 
Average 55 Weeks  84 Drugs 
Sources: FDA website, Red Book, Federal upper limit list 
Twenty-three of these eighty-four met CMSs additional cost-savings 
standard as well.  Each of these 23 drugs had sufficiently low published 
prices that may have led to savings, yet were still not included on the 
Federal upper limit list by CMS.    
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Medicaid lost an estimated $167 million between  Between 2001 and 2003, only 27 of 
2001 and 2003 because qualified drugs were not  the 109 reviewed drugs were 
associated with potential losses 
added to the Federal upper limit list in a timely 
caused by products not being 
manner 
added to the Federal upper limit 
list when they first qualified.6  However, the failure to add these 
27 drugs in a timely manner cost the Medicaid program (both Federal 
and State shares) an estimated $167 million over the 3-year period.  A 
majority of the losses were attributable to just eight drugs. These  
8 drugs, listed in Table 3 below, were each associated with more than 
$5 million in estimated losses, accounting for 85 percent ($143 million) 
of the total.  A complete list of the drugs and their potential losses is 
provided in Appendix B. 
Table 3:  Largest Losses Associated with Qualified Drugs 
Drug  Number of Quarters Delay7  Estimated Losses 
Fluoxetine HCL 20 mg capsule  2  $56,697,780 
Buspirone HCL 15 mg tablet  2  $23,261,047 
Metformin HCl 1 gm tablet  7  $16,011,279 
Famotidine 20 mg tablet  1  $11,487,628 
Buspirone HCL 10 mg tablet  2  $10,536,672 
Tramadol HCl 50 mg tablet  2  $9,632,958 
Metformin HCl 850 mg tablet  7  $8,893,822 
Fluoxetine HCl 10 mg capsule  2  $6,404,089 
Sources: FDA Web site, Red Book, Federal upper limit list, CMS State Medicaid Data 
The product with the highest estimated loss figure, Fluoxetine 
Hydrochloride 20 mg capsules (brand name Prozac), illustrates the 
potential effect of not adding drugs to the Federal upper limit list in a 
timely manner.  As Table 3 shows, the two-quarter lag in adding the  
6 Because Medicaid payment data were unavailable for 2004, we could only calculate 
potential losses for the period between 2001 and 2003.  Thirty-three of the reviewed drugs 
did not meet the statutory and regulatory criteria until 2004, and were therefore not 
included in any savings estimates.  In addition, failure to add some drugs with sufficiently 
low published prices in a timely manner did not actually lead to any losses. 
7 Medicaid expenditure data were only available by quarter.  Therefore, for the purposes of 
calculating potential losses, if a drug was added to the Federal upper limit list at any 
point during a quarter, we considered it included for the entire quarter. 
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 S  
20 mg dosage size of Fluoxetine Hydrochloride capsules cost Medicaid 
an estimated $57 million.8  The first generic version of Fluoxetine 
Hydrochloride 20 mg capsules was approved in August 2001.  According 
to FDA, the product had three therapeutically equivalent versions as of 
January 2002.  The April 2002 Red Booklisted more than three
suppliers for the drug.  Based on the lowest published price, a Federal 
upper limit for Fluoxetine Hydrochloride 20 mg capsules should have 
been set at $0.60 (150 percent of $0.40) by April 1, 2002.  However, CMS 
did not place Fluoxetine Hydrochloride  20 mg capsules on the Federal 
upper limit list until December 1, 2002 (at $0.60 per capsule).  During 
this period, four other versions of Fluoxetine Hydrochloride also 
qualified for the Federal upper limit list.  In total, not adding these four 
versions when they first qualified cost Medicaid an additional $15 
million. 
In the next several months, new generic versions of several other major 
brand name drugs may become qualified for the Federal upper limit list. 
For example, Gabapentin (brand-name Neurontin), Oxycodone 
Hydrochloride (brand-name Oxycontin), and Paroxetine Hydrochloride 
(brand-name Paxil) have recently come off patent.  These three drugs 
accounted for a total of $5.3 billion in retail sales in 2003.  As was the 
case with Fluoxetine, not adding these three drugs to the Federal upper 
limit list in a timely matter could cause substantial losses to Medicaid. 
8 The estimated $57 million in losses only includes the period between April 1 and     
September 30, 2002.  It does not include the partial quarter between October 1 and    
December 1, 2002.  Nor does it account for the fact the drug may have been qualified for 
inclusion as early as January 29, 2002. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  9  F I N D I N G S
  R E C O M M E N  D A T  I O N  
The CMS should establish an administrative procedure and 
schedule to govern the determination and publication of Federal 
upper limits. 
We believe that all qualified drugs should be included on the Federal 
upper limit list in a timely manner. The findings of both this report and 
our February 2004 report show that lags in adding qualified drugs are 
costing the Medicaid program substantial amounts.  However, we are 
aware of the difficulties CMS faces in managing the Federal upper limit 
list. As CMS noted in their comments to the previous report, 
pharmaceutical pricing and product information changes almost daily.  
While we continue to believe that all qualified drugs should be added to 
the Federal upper limit list in a timely manner, another option would be 
for CMS to consider focusing its resources on high-volume brand name 
drugs that are coming off patent.  As our findings show, a large portion 
of the estimated losses can be attributed to lags in adding a small 
number of major drugs.  If CMS makes a concerted effort to keep track 
of FDA ratings, number of suppliers, and published prices for these 
high-volume products, significant lags in placing qualified drugs on the 
Federal upper limit list could be avoided, thereby saving Medicaid 
millions of dollars per year. 
Agency Comments 
The CMS concurred with intent of our recommendation and stated that 
it had taken steps to support this objective.  However, CMS did not 
concur with the OIGs methodology and subsequent savings estimates. 
Specifically, CMS stated that the OIG incorrectly describes the 
therapeutic equivalency criterion used to determine if drugs should be 
placed on the Federal upper limit list.  According to CMS, for a drug to 
meet the criterion, the FDA must list two therapeutically equivalent 
formulations of the drug when all formulations of that drug product are 
A rated. Where there are also B rated drugs included with the A 
drugs, there must be at least three A drugs listed as therapeutically 
and pharmaceutically equivalent.  The CMS believes this criterion is 
more rigorous. 
The CMS then lists additional actions they take above those performed 
by the OIG, including (1) consulting additional compendia beyond the 
Red Book, and (2) verifying that the drug is actually available in the 
market by contacting manufacturers and suppliers. 
The full text of CMSs comments is presented in Appendix D. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  10  R E C O M M E N D A T I O N  
OIG Response 
In their comments, CMS stated that they have taken steps to address 
our recommendation.  However, CMS did not provide any details on 
these steps.  Therefore, we cannot determine if CMSs efforts will 
alleviate the problems identified in this report. 
In response to CMSs comments concerning therapeutic equivalency 
requirements, we point out that the Omnibus Budget Reconciliation Act 
of 1990 explicitly states, [CMS] shall establish a Federal Upper 
reimbursement limit for each multiple source drug for which the FDA 
has rated three or more products therapeutically and pharmaceutically 
equivalent, regardless of whether all such additional formulations are 
rated as such...  We understand that before this statute was enacted, 
regulations may have allowed for a Federal upper limit to be established 
if only two versions of a drug were available and both were 
therapeutically equivalent.  However, as we read the statutory 
provisions, a product must have three A-rated versions to be included on 
the Federal upper limit list.   
In any case, CMSs interpretation would potentially allow for more 
instances where a product would be placed on the Federal upper limit 
list. The OIGs interpretation requires three versions of a drug to be  
A-rated while CMS takes the position that two may be sufficient. If the 
OIG followed CMSs interpretation, it is possible that we would have 
identified additional drugs that should have been added. 
Finally, we recognize that CMS takes additional steps in determining 
product availability, and understand their reasons for doing so. 
However, CMS has not explained why the additional steps account for 
the delays identified by the OIG. 
  OEI-03-04-00320  ADDITION OF QUALIFIED DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  11    A P P E N D I X   ~   A
Complete List of 109 Reviewed Drugs 
3 A-rated 3 Supplier  Federal Upper 
Drug  Unit  Strength   Date  Date  Limit Date 
Acetaminophen; Butalbital; Caffeine; 
Codeine  Capsule; Oral  325MG;50MG;40MG;30MG  22-Aug-01  01-Oct-01 
Amcinonide  Cream; Topical  0.10%  31-May-02  1-Jul-02 
Ammonium Lactate  Cream; Topical  12%  10-Apr-03  1-Jul-03 
Amoxicillin  Suspension; Oral  400MG/5ML  4-Dec-02  1-Jan-03 
Amoxicillin  Suspension; Oral  200MG/5ML  4-Dec-02  1-Apr-03 
Amoxicillin; Clavulanate Potassium  Tablet; Oral  875MG;125MG  17-Sep-02  1-Oct-02 
Amoxicillin; Clavulanate Potassium  Tablet; Oral  500MG;125MG  30-Oct-02  1-Jan-03 
Amoxicillin; Clavulanate Potassium  Suspension; Oral  200MG/5ML;28.5MG/5ML  16-Dec-02  1-Jan-03 
Amoxicillin; Clavulanate Potassium  Suspension; Oral  400MG/5ML;57MG/5ML  16-Dec-02  1-Jan-03 
Amoxicillin; Clavulanate Potassium  Chewable Tablet; Oral  200MG;28.5MG  3-Dec-03  1-Jan-04 
Amoxicillin; Clavulanate Potassium  Chewable Tablet; Oral  400MG;57MG  3-Dec-03  1-Jan-04 
Betamethasone Diproprionate  Augmented Gel; Topical  0.05%  2-Dec-03  1-Jan-04 
Betamethasone Diproprionate  Augmented Cream; Topical  0.05%  9-Dec-03  1-Jan-04 
Betamethasone Diproprionate; 
Clotrimazole  Cream; Topical  0.05%  5-Jun-01  01-Jul-01 
Bupropion Hydrochloride  ER Tablet; Oral  150MG  22-Mar-04  1-Apr-04 
Buspirone Hydrochloride  Tablet; Oral  5MG  27-Feb-02  01-Apr-02  01-Dec-02 
Buspirone Hydrochloride  Tablet; Oral  10MG  27-Feb-02  01-Apr-02  01-Dec-02 
Buspirone Hydrochloride  Tablet; Oral  15MG  27-Feb-02  01-Apr-02  01-Dec-02 
Buspirone Hydrochloride  Tablet; Oral  30MG  25-Mar-04  01-Apr-04 
Butorphanol Tartrate  Nasal Spray  1MG/SPRAY  12-Mar-02  01-Apr-02 
Cefaclor  ER Tablet; Oral  500MG  4-Sep-02  1-Oct-02 
Cefuroxime Axetil  Tablet; Oral  250MG  2-Oct-02  1-Jan-03 
Cefuroxime Axetil  Tablet; Oral  500MG  2-Oct-02  1-Jan-03 
Clindamycin Hydrochloride  Capsule; Oral  300MG  18-Mar-03  01-Apr-03 
Econazole Nitrate  Cream; Topical  1%  26-Nov-02  1-Jan-03 
Ethinyl Estradiol; Norethindrone 
Acetate  Tablet; Oral  0.03MG;1.5MG  18-Sep-03  1-Oct-03 
Ethinyl Estradiol; Norethindrone 
Acetate  Tablet; Oral  0.02MG;1MG  18-Sep-03  1-Jan-04 
Ethinyl Estradiol; Norgestimate  Tablet; Oral  0.035MG;0.25MG  9-Jan-04  1-Apr-04 
0.035MG,0.035MG,0.035MG 
Ethinyl Estradiol; Norgestimate  Tablet; Oral  ;0.18MG,0.215MG,0.025MG  26-Mar-04  1-Apr-04 
Famotidine  Tablet; Oral  20MG  16-Apr-01  01-Jul-01  20-Nov-01 
Famotidine  Tablet; Oral  40MG  16-Apr-01  01-Jul-01  20-Nov-01 
Flecainide Acetate  Tablet; Oral  100MG  28-Oct-02  01-Jan-03 
Flecainide Acetate  Tablet; Oral  150MG  28-Oct-02  01-Jan-03 
Flecainide Acetate  Tablet; Oral  50MG  28-Oct-02  01-Jan-03 
Fludrocortisone Acetate  Tablet; Oral  0.1MG  21-Jan-03  1-Apr-03 
Fluoxetine Hydrochloride  Capsule; Oral  10MG  29-Jan-02  01-Apr-02  01-Dec-02 
Fluoxetine Hydrochloride  Capsule; Oral  20MG  29-Jan-02  01-Apr-02  01-Dec-02 
Fluoxetine Hydrochloride  Capsule; Oral  40MG  29-Jan-02  01-Apr-02  01-Dec-02 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  12  A P P E N D I X ~ A  

3 A-rated 3 Supplier  Federal Upper 
Drug  Unit  Strength   Date  Date  Limit Date 
Fluoxetine Hydrochloride  Solution, Oral  20MG/5ML  29-Jan-02  01-Apr-02  01-Dec-02 
Fluoxetine Hydrochloride  Tablet; Oral  10MG  29-Jan-02  01-Apr-02  01-Dec-02 
Fosinopril Sodium  Tablet; Oral  10MG  23-Apr-04  1-Jul-04 
Fosinopril Sodium  Tablet; Oral  20MG  23-Apr-04  1-Jul-04 
Fosinopril Sodium  Tablet; Oral  40MG  23-Apr-04  1-Jul-04 
Hydrocodone Bitartrate; Ibuprofen  Tablet; Oral  7.5MG;200MG  31-Dec-03  1-Jan-04 
Ipratropium Bromide  Nasal Spray  0.021MG/SPRAY  31-Mar-03  1-Jul-03 
Ipratropium Bromide  Nasal Spray  0.042MG/SPRAY  31-Mar-03  1-Jul-03 
Isotretinoin  Capsule; Oral  10MG  24-Dec-02  1-Jan-03 
Isotretinoin  Capsule; Oral  20MG  24-Dec-02  1-Jan-03 
Isotretinoin  Capsule; Oral  40MG  24-Dec-02  1-Jan-03 
Lidocaine; Prilocaine  Cream; Topical  2.5%;2.5%  27-Aug-03  1-Oct-03 
Lisinopril  Tablet; Oral  30MG  1-Jul-02  1-Oct-02  11-Mar-03 
Lithium Carbonate  ER Tablet; Oral  300MG  21-Apr-03  1-Jul-03 
Lithium Carbonate  ER Tablet; Oral  450MG  21-Aug-03  1-Oct-03 
Lovastatin  Tablet; Oral  10MG  17-Dec-01  01-Jan-02  01-Dec-02 
Lovastatin  Tablet; Oral  20MG  17-Dec-01  01-Jan-02  01-Dec-02 
Lovastatin  Tablet; Oral  40MG  17-Dec-01  01-Jan-02  01-Dec-02 
Mefloquine Hydrochloride  Tablet; Oral  250MG  29-Dec-03  1-Jan-04 
Megestrol Acetate  Suspension; Oral  40MG/ML  15-Feb-02  01-Apr-02 
Metformin Hydrochloride  Tablet; Oral  500MG  24-Jan-02  1-Apr-02  18-Mar-04 
Metformin Hydrochloride  Tablet; Oral  850MG  24-Jan-02  1-Apr-02  18-Mar-04 
Metformin Hydrochloride  Tablet; Oral  1GM  24-Jan-02  1-Apr-02 
Metolazone  Tablet; Oral  2.5MG  23-Dec-03  1-Jan-04 
Metolazone  Tablet; Oral  10MG  24-Dec-03  1-Apr-04 
Metolazone  Tablet; Oral  5MG  1-Mar-04  1-Apr-04 
Midodrine Hydrochloride  Tablet; Oral  5MG  11-Sep-03  1-Jan-04 
Mirtazapine  Tablet; Oral  15MG  19-Jun-03  1-Oct-03 
Mirtazapine  Tablet; Oral  30MG  19-Jun-03  1-Oct-03 
Mirtazapine  Tablet; Oral  45MG  19-Jun-03  1-Oct-03 
Mixed Salts (Amphetamine)  Tablet; Oral  2.5MG  14-Jun-02  1-Jul-02 
Mixed Salts (Amphetamine)  Tablet; Oral  1.25MG  19-Jun-02  1-Jul-02 
Mixed Salts (Amphetamine)  Tablet; Oral  5MG  14-Jun-02  1-Oct-02 
Mixed Salts (Amphetamine)  Tablet; Oral  7.5MG  14-Jun-02  1-Oct-02 
Mixed Salts (Amphetamine)  Tablet; Oral  1.875MG  9-Sep-03  1-Apr-04 
Mixed Salts (Amphetamine)  Tablet; Oral  3.125MG  9-Sep-03  1-Apr-04 
Mixed Salts (Amphetamine)  Tablet; Oral  3.75MG  9-Sep-03  1-Apr-04 
Mometasone Furoate  Ointment; Topical  0.10%  14-Nov-03  1-Jan-04 
Mupirocin  Ointment; Topical  2%  7-Nov-03  1-Jan-04 
Nizatidine  Capsule; Oral  150MG  5-Jul-02  1-Oct-02  11-Mar-03 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  13  A P P E N D I X ~ A  

3 A-rated 3 Supplier  Federal Upper 
Drug  Unit  Strength   Date  Date  Limit Date 
Nizatidine  Capsule; Oral  300MG  5-Jul-02  1-Oct-02  11-Mar-03 
Ofloxacin  Tablet; Oral  200MG  2-Sep-03  1-Oct-03 
Ofloxacin  Tablet; Oral  300MG  2-Sep-03  1-Oct-03 
Ofloxacin  Tablet; Oral  400MG  2-Sep-03  1-Oct-03 
Omeprazole  DR Capsule; Oral  20MG  1-Nov-02  1-Jan-03 
Omeprazole  DR Capsule; Oral  10MG  1-Nov-02  1-Oct-03 
Oxaprozin  Tablet; Oral  600MG  31-Jan-01  01-Apr-01  01-Dec-02 
Paroxetine Hydrochloride  Tablet; Oral  10MG  8-Mar-04  1-Apr-04 
Paroxetine Hydrochloride  Tablet; Oral  20MG  8-Mar-04  1-Apr-04 
Paroxetine Hydrochloride  Tablet; Oral  30MG  8-Mar-04  1-Apr-04 
Paroxetine Hydrochloride  Tablet; Oral  40MG  8-Mar-04  1-Apr-04 
Pergolide Mesylate  Tablet; Oral  .05 MG  4-Sep-03  1-Jan-04 
Pergolide Mesylate  Tablet; Oral  .25MG  4-Sep-03  1-Jan-04 
Pergolide Mesylate  Tablet; Oral  1MG  4-Sep-03  1-Jan-04 
Prednisolone Sodium Phosphate  Solution; Oral  5MG/5ML  23-Dec-02  1-Jan-03 
Promethazine Hydrochloride  Suppository; Rectal  12.5MG  11-Apr-03  1-Jul-03 
Propafenone Hydrochloride  Tablet; Oral  300MG  7-Feb-02  01-Apr-02 
Rimantidine Hydrochloride  Tablet; Oral  100MG  30-Aug-02  01-Oct-02 
Sotatol Hydrochloride  Tablet; Oral  120MG  8-Apr-04  1-Jul-04  27-Jun-04 
Sotatol Hydrochloride  Tablet; Oral  160MG  8-Apr-04  1-Jul-04  27-Jun-04 
Sotatol Hydrochloride  Tablet; Oral  80MG  8-Apr-04  1-Jul-04  27-Jun-04 
Tamoxifen Citrate  Tablet; Oral  10MG  20-Feb-03  1-Apr-03 
Tamoxifen Citrate  Tablet; Oral  20MG  20-Feb-03  1-Apr-03 
Tizanidine Hydrochloride  Tablet; Oral  2MG  3-Jul-02  1-Oct-02  11-Mar-03 
Tizanidine Hydrochloride  Tablet; Oral  4MG  3-Jul-02  1-Oct-02  11-Mar-03 
Torsemide  Tablet; Oral  100MG  27-May-03  1-Jul-03 
Torsemide  Tablet; Oral  10MG  27-May-03  1-Jul-03 
Torsemide  Tablet; Oral  20MG  27-May-03  1-Jul-03 
Torsemide  Tablet; Oral  5MG  27-May-03  1-Jul-03 
Tramadol Hydrochloride  Tablet; Oral  50MG  19-Jun-02  1-Jul-02  11-Mar-03 
Trimethobenzamide Hydrochloride  Capsule; Oral  300MG  28-Aug-03  1-Oct-03 
Sources: FDA Web site, Red Book, Federal upper limit list 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  14    A P P E N D I X   ~   B
Estimated Losses to Medicaid 
Quarters  Potential 
Drug  Strength  Form  Delay  Losses 
Fluoxetine HCL  20 MG  Capsule  2  $56,697,780 
Buspirone HCL  15 MG  Tablet  2  $23,261,047 
Metformin HCl  1 GM  Tablet  7  $16,011,279 
Famotidine  20 MG  Tablet  1  $11,487,628 
Buspirone HCL  10 MG  Tablet  2  $10,536,672 
Tramadol HCl  50 MG  Tablet  2  $9,632,958 
Metformin HCl  850 MG  Tablet  7  $8,893,822 
Fluoxetine HCL  10 MG  Capsule  2  $6,404,089 
Metformin HCl  500 MG  Tablet  7  $4,922,364 
Fluoxetine HCL  40 MG  Capsule  2  $4,015,053 
Fluoxetine HCL  10 MG  Tablet  2  $3,276,601 
Tamoxifen Citrate  10 MG  Tablet  3  $2,285,933 
Oxaprozin  600 MG  Tablet  6  $2,184,381 
Buspirone HCL  5 MG  Tablet  2  $2,163,399 
Famotidine  40 MG  Tablet  1  $1,601,892 
Fluoxetine HCL  20 MG/5 ML  Solution  2  $1,299,147 
Mirtazapine  30 MG  Tablet  1  $572,887 
Nizatidine  150 MG  Capsule  1  $448,501 
Tamoxifen Citrate  20 MG  Tablet  3  $444,140 
Mirtazapine  45 MG  Tablet  1  $413,550 
Flecainide Acetate  50 MG  Tablet  3  $339,654 
Mirtazapine  15 MG  Tablet  1  $254,751 
Flecainide Acetate  100 MG  Tablet  3  $148,689 
Flecainide Acetate  150 MG  Tablet  3  $115,875 
Lisinopril  30 MG  Tablet  1  $32,077 
Nizatidine  300 MG  Capsule  1  $20,014 
Rimantidine HCL  100 MG  Tablet  1  $829 
TOTAL  $167,465,012 
Sources: FDA Web site, Red Book, Federal upper limit list 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  15    A P P E N D I X   ~   C
METHODOLOGY 
Determining Generic Drugs Approved From 2001 to 2003   
We developed a list of all first-time generic drugs approved by FDA between January 
2001 and December 2003.  According to FDA, a first-time generic is a drug that has 
never been approved as a generic before and is, therefore, a new generic to the 
marketplace. Prior to approval of a first-time generic, only brand versions were 
available for sale.  Using information obtained from the FDA Web site, we determined 
that 331 first-time generic drugs were approved during this time period.9 
To focus on prescription drugs that are typically available at pharmacies, we removed 
from the list 50 injectable drugs and 17 over-the-counter products.  We also removed 
12 drugs that had additional branded versions (i.e., non-generics) available before 
2001, and therefore may have been eligible for inclusion on the Federal upper limit list 
prior to the review period.  After these deductions, 252 drugs remained on our list of 
first-time generics approved between January 2001 and December 2003.  
Determining if Approved Drugs Meet Federal Upper Limit Criteria 
The CMS is required to include on the Federal upper limit list all prescription drugs that 
have three versions rated therapeutically equivalent by FDA and three suppliers listed 
in national compendia. On June 1, 2004, we downloaded a file containing therapeutic 
equivalence data from the FDA Web site.  For each of the 252 first-time generic drugs 
approved between 2001 and 2003, we determined if three therapeutically equivalent 
versions were listed on the FDA file, and, if so, the date that the third therapeutically 
equivalent version was approved. Of the 252 drugs, 113 had at least 3 versions rated 
therapeutically equivalent by FDA. 
To determine if these drugs also met the three-supplier criterion, we obtained data from 
the Red BookTM for WindowsCD-ROM, a national drug compendium published
quarterly by Micromedex (hereinafter, referred to as Red Book).  For each of the  
113 drugs with three A-rated versions, we determined the first subsequent quarter (i.e., 
the first quarter after a third A-rated version was approved) that three suppliers were 
listed in Red Book. All but 4 drugs had the required number of suppliers listed in a 
subsequent quarter, leaving 109 of the first-time generics approved in 2001, 2002, or 
2003 that met the criteria for inclusion on the Federal upper limit list.   
9 The 331 drugs represent various forms and dosage sizes of approved products.  For example, a product with 
dosage sizes of 20 mg, 40 mg, and 80 mg counted as three drugs. 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  16  A P P E N D I X ~ C  
Determining if Drugs were on the Federal Upper Limit List 
We obtained the current Federal upper limit list from the CMS Web site.  We also 
obtained from the Web site all changes to the list between November 22, 2000, and     
July 15, 2004.  We determined if any of the 109 reviewed drugs were on the Federal 
upper limit list, and, if so, the date they were added.  For any drugs that were included 
on the list, we determined the amount of time between when they became qualified for 
the Federal upper limit list and the date they were actually added. 
For example, Oxaprozin had its third A-rated version approved in January 2001.  We 
checked subsequent quarters of Red Bookand determined that the drug had three 
suppliers as of April 1, 2001. Oxaprozin was added to the Federal upper limit list on 
December 1, 2002. Therefore, the amount of time between when Oxaprozin first 
qualified for the Federal upper limit list and when it was actually added equaled    
87 weeks. 
Estimating Potential Losses 
For each quarter that a drug was qualified for but not included on the Federal upper 
limit list, we compared the potential Federal upper limit amount to the average 
Medicaid reimbursement amount for the drug that quarter. Because the Federal upper 
limit amount is calculated by multiplying the lowest published price for a drug by  
150 percent, there are instances when this amount would be higher than the 
reimbursement amount based on discounted AWP.  In order to limit the time required to 
do this analysis, we only calculated estimated losses for drugs that may have been 
associated with actual losses if not added in a timely manner (e.g., had at least one 
published price significantly below AWP). 
Calculating Potential Federal Upper Limit Amounts 
To calculate a potential Federal upper limit amount, we used pricing information from 
the Red Book. Federal regulations set the upper limit amount at 150 percent of the least 
costly therapeutically equivalent product that can be purchased in package sizes of  
100 (with certain exceptions). Therefore, for every calendar quarter that a drug was not 
included on the Federal upper limit list, we determined which of the A-rated versions 
available in a package size of 100 had the lowest price listed in the Red Book. If a drug 
was not typically available in a package size of 100, we determined the lowest price for 
the most common package size listed in the Red Book. We then multiplied this price by  
150 percent to determine the Federal upper limit amount for the drug each quarter.  We 
did not verify that the prices published in the Red Boo
kwere actually available in the
marketplace.10

10 According to staff, CMS often verifies that the lowest published price is actually available in the marketplace 
by contacting manufacturers and/or distributors. 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  17  A P P E N D I X ~ C  
Calculating Medicaid Reimbursement Amounts 
To determine the amount Medicaid reimbursed for the drugs, we downloaded      
50 Medicaid payment and utilization files for CY 2001 through CY 2003 from CMSs Web 
site. State reimbursement data was only available by quarter.  We did not obtain data 
from the first 2 quarters of CY 2004 because the files were not yet available; therefore, 
potential losses could only be calculated through the end of CY 2003.  We also did not 
include data from Arizona because its drug reimbursement and utilization files were not 
available.  Each file contained variables representing total State reimbursement, 
number of units reimbursed, and number of prescriptions written for every drug by 
calendar quarter. 
The total State reimbursement amount listed in the files included both the payments for 
the drug and the dispensing fees paid to the pharmacy.  To determine a States 
reimbursement for the drug only, we: 
(1) calculated the total amount paid in dispensing fees for the drug by 
multiplying the States dispensing fee by the number of prescriptions written for 
the drug in each State each quarter; 
(2) subtracted total dispensing fees from the total reimbursement for the drug in 
each State each quarter; and 
(3) aggregated reimbursement for the drug only, number of units reimbursed, 
and number of prescriptions written for the drug each quarter. 
We then calculated the average Medicaid reimbursement amount per quarter for each of 
the drugs by dividing the total of all States reimbursement for the product (without the 
dispensing fee) by the total number of units reimbursed. 
Calculating Potential Losses 
For each drug for which the untimely addition may have led to losses, we subtracted the 
potential Federal upper limit amount from the average Medicaid reimbursement 
amount.  If the result was a positive number (i.e., the Federal upper limit amount was 
less than the average Medicaid amount), we multiplied it by the total number of units 
reimbursed that quarter.  The product of this multiplication shows the estimated losses 
Medicaid had that quarter due to the drug(s) not being included on the Federal upper 
limit list. We aggregated the quarterly totals to determine the total estimated losses to 
the program between 2001 and 2003. 
Our methodology assumes that each of the reviewed drugs became qualified for the 
Federal upper limit list on the first day of a calendar quarter.  However, drugs could be 
added to the Federal upper limit list at any time.  To allow for this when calculating 
losses, we considered a drug that was added at any point in the quarter to be included for 
the entire quarter, and therefore it was not accounted for in our estimates.  For example, 
Oxaprozin first became qualified for the Federal upper limit list on April 1, 2001, but the 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  18  A P P E N D I X ~ C  
drug was not added to the Federal upper limit list until December 1, 2002.  Therefore, 
we calculated potential losses for the last 3 quarters of 2001 and the first 3 quarters of 
2002 (April 1, 2001, through September 30, 2002), but did not calculate losses for the 
period between October 1, 2002, and December 1, 2002 (the date Oxaprozin was added).  
Because of this, our estimates of program losses may be below the true amount. 
Furthermore, because State reimbursement data was not available for CY 2004, we were 
unable to calculate losses for any drugs approved between 2001 and 2003 that did not 
meet all criteria for inclusion until 2004.  
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  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  20    OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  21  
 A C K N O W L E D G M E N T S
This report was prepared under the direction of Robert A. Vito, Regional Inspector 
General for Evaluation and Inspections in the Philadelphia regional office, and Linda 
M. Ragone, Deputy Regional Inspector General.  Other principal Office of Evaluation 
and Inspections staff who contributed include: 
David Tawes, Project Leader 
Tricia Davis, Director, Medicare and Medicaid Branch 
  OEI-03-04-00320  ADDITION OF ELIGIBLE DRUGS TO THE MEDICAID FEDERAL UPPER LIMIT LIST  22