Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

V S M
ARIATION IN  TATE  EDICAID 

D P
RUG  RICES

Inspector General 
September 2004 
OEI-05-02-00681   A B S T R A C T  
To assess the extent to which States Medicaid pharmacy 
reimbursement varies for the same drugs, we analyzed fiscal year 
(FY) 2001 prescription drug reimbursement data for 28 national 
drug codes (28 drugs) from 42 States. The highest paying States 
unit reimbursement price ranged from 12 to 4,073 percent more per 
drug than the lowest paying State for the 28 drugs.  Medicaid could 
have saved $86.7 million in FY 2001 if all States had reimbursed at 
the same price as the lowest paying State for each of the 28 drugs. 
Multiple factors contribute to the differences in drug prices across 
States. Even States with the same formula for estimating 
pharmacy acquisition costs demonstrated variation in their average 
annual reimbursement prices. We recommend that the Centers for 
Medicare & Medicaid Services share more accurate drug pricing 
information with States, conduct further research on the factors 
that affect States drug prices, and annually review States 
reimbursement data to target technical assistance to higher paying 
States. 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   i    E X E C U T I V E   S U M M A R Y  

OBJECTIVE 
To assess the extent to which State Medicaid programs vary in 
pharmacy reimbursement for the same type of prescription. 
BACKGROUND 
Medicaid prescription drug coverage is one of the most expensive 
and fastest growing health care expenditures.  In fiscal year (FY) 
2001, Medicaid expenditures on prescription drugs totaled 
approximately $20 billion, or 9 percent of the total Federal Medicaid 
budget. From 1997 to 2001, Federal Medicaid expenditures for 
prescription drugs grew at more than twice the rate of total 
Medicaid spending.  
The Centers for Medicare & Medicaid Services (CMS) sets 
maximum drug reimbursement regulations and provides guidelines 
within the State Medicaid Manual to ensure that the Federal 
Government acts as a prudent buyer of drugs.  Within these Federal 
parameters, each State determines its own pharmacy 
reimbursement formula(s). 
To assess the variation in drug reimbursement prices across State 
Medicaid agencies, we requested reimbursement data from all 
States for FY 2001, based on national drug codes, the unique drug 
identifiers used by the Medicaid program.  Our sample consists of 
28 national drug codes (referred to as 28 drugs).  We also obtained 
contextual information about States pharmacy reimbursement 
methodology for FY 2001.  Our analysis is based on the 42 States 
that responded to our data request. 
FINDINGS 
The highest paying States unit price ranged from 12 to 4,073 
percent more per drug than the lowest paying State for the 28 
drugs in our sample.   For each of the 28 drugs, we used as a 
benchmark the State that paid the lowest average annual unit 
price.  The difference between the highest and lowest paying States 
ranged by drug from 12 to 4,073 percent.    
On average, the highest paying State paid 477 percent more per 
drug than the lowest paying State for each of the 28 drugs in our 
sample.  States prices varied more for the 10 non-innovator 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   ii  E X E C U T I V E   S U M M A R Y  
(generic) drugs in our sample than the 18 innovator (brand name) 
drugs. 
For the 28 drugs sampled, on average, the highest paying State paid 
approximately $200 more per prescription than the lowest paying 
State. The reimbursement price differences per prescription ranged 
from a low of $6 for Combivent to a high of $1,244 for Ranitidine.  
The median price difference was $65.  While a few States ranked 
consistently high or low on all drugs, for most States, 
reimbursement did not follow a consistent pattern.  
Medicaid could have saved more than $86 million in FY 2001 if 
all States paid the same price as the lowest paying State for each 
of the 28 drugs in our sample.  These potential savings represent 
over 13 percent of the $653 million in total Medicaid funds spent for 
these 28 drugs in the 42 States in FY 2001.  The Federal share of 
the savings would be $50 million, while States share would be $36 
million.  For the 28 drugs in our sample, potential Medicaid savings 
per drug ranged from $141,000 for Zestril to $16.3 million for 
Depakote. 
For 9 of the 28 drugs, Medicaids potential savings exceeded 50 
percent of total expenditures.  In other words, for these nine drugs 
Medicaid expenditures could have been cut in half if all States had 
paid the same price as the lowest paying State for each drug.   
States drug prices are a product of multiple factors and vary 
even among States with the same pharmacy reimbursement 
formula.  All States reimburse pharmacies for drugs based on a 
general reimbursement formula established by CMS, but this 
formula allows significant State flexibility.  One component of the 
CMS reimbursement formula is the States estimated pharmacy 
acquisition cost.  The estimated pharmacy acquisition cost is often 
used as a proxy to gauge States prices.  A widespread assumption is 
that States with the same estimated acquisition cost formula pay 
similar prices.  However, in our sample of drugs, differences in 
States estimated acquisition cost formulas only partially explain 
price differences.  For instance, 15 States had the same estimated 
acquisition cost formula (average wholesale price minus 10 percent), 
but paid substantially different prices for the drugs in our sample. 
In addition to estimated acquisition cost, State reimbursement 
differences in defining usual and customary charge and setting 
State maximum allowable costs also affect States drug prices. 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   iii  E AAAEX XPPPE EPPPC CEEEU UNNNT TDDDI IIIIV VXXXE E~~~   AAAS SEE U UEEM MC M MUA ATR RIYVY  E    S U M M A R Y  
   
RECOMMENDATIONS 
CMS rules limiting Medicaid payments for drugs are intended to 
ensure that the Federal Government acts as prudent buyer of drugs.  
Our analysis found that the Federal drug reimbursement limits do 
not ensure prudent reimbursement for drugs under Medicaid. 
State price variation results from several factors, but fundamentally 
stems from States lack of access to pharmacies true acquisition 
costs.  States rely on various proxies to estimate pharmacy 
acquisition cost, but these proxies are not necessarily related to 
pharmacies actual costs.    
To ensure that the Federal Government pays for drugs more 
prudently under the Medicaid program, CMS should: 
1.  Share average manufacturer price data with States to ensure 
more accurate estimates of pharmacy acquisition cost. 
2.  Conduct further research on the factors that affect States drug 
prices to more effectively advise States on ways to set their 
reimbursement level. 
3.  Annually review the States drug prices in order to share 
comparative State prices and methods to reduce costs; and target 
drug reimbursement technical assistance to higher paying States. 
Agency Comments 
CMS provided comments on the draft report in which they stated 
their non-concurrence with the report due to concerns about data 
problems.  In general, CMS had concerns about the magnitude of 
the price variation and the fact that the prices paid by the highest-
paying States for certain drugs are above the Federal upper 
payment limits.  They requested that we validate the data with the 
States.  The full text of CMSs comments is included in Appendix G. 
We met with CMS staff to discuss and resolve their concerns.  We 
emphasized that we reported what States paid rather than what 
States should have paid.  We explained how we followed up with 
States with potentially aberrant prices to verify whether this was 
what the State actually paid. 
CMS staff agreed with us that this report raises serious issues that 
warrant attention.  CMS staff have indicated that they plan to 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  iv 
  follow up with States, particularly States with prices above upper 
payment limits. We plan to send State-specific results of our 
analysis to each State so that they can review their own Medicaid 
drug payments. We also plan to conduct a future review of State 
Medicaid drug prices.  We look forward to continued work with CMS 
to ensure the integrity of Medicaid drug payments. 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   v  T A B L E   O F   C O N T E N T S  

ABSTRACT  ...................................................... i

EXECUTIV  E SUMMARY ......................................... ii

INTRODUCTIO  N ................................................ 1

FINDIN  GS ....................................................... 8

Highest State paid up to 4,073 percent more than lowest State ....... 8 

Medicaid could have saved $86.7 million in FY 2001 ...................... 13 

States drug prices derive from multiple factors .............................. 16 

RECOMM  E  N  DATIO  N  S .......................................... 24

AGENCY COMMEN  TS .......................................... 26

APPENDIC  ES ................................................... 28

A: Sample of 28 Drugs ...................................................................... 28 

B: Primary Indications for Sample Drugs ....................................... 29 

C: Selected Characteristics of Sample Drugs .................................. 30 

D: Distribution of States Prices for Two Drugs .............................. 32 

E: Comparison of Dispensing Fees to States Prices ....................... 33 

F: Potential Savings by State...................................................34 
G: Agency Comments..............................................................35
ACKNO  WL  EDGMENTS .......................................... 37

END NOTES ..................................................... 38

  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   vi    I N T R O D U C T I O N  

OBJECTIVE 
To assess the extent to which State Medicaid programs vary in 
pharmacy reimbursement for the same type of prescription. 
BACKGROUND 
Medicaid Drug Expenditures 
All State Medicaid programs have elected to include prescription 
drug coverage, one of the most expensive Medicaid benefits.  In 
fiscal year (FY) 2001, Medicaid expenditures on prescription drugs 
totaled approximately $20 billion, representing 9 percent of the 
annual Medicaid budget.1  The Medicaid program is the largest 
payer for prescription drugs nationally, representing 14 percent of 
the drug market.2  The Federal Government contributes a matching 
percentage of State Medicaid outlays, ranging from 50 to 83 percent, 
depending on the States per capita income. 
Prescription drugs are the fastest growing health care expenditure.  
Nationally, total spending for prescription drugs rose from $48.2 
billion in 1992 to $141.8 billion in 2001.3  Similarly, Medicaid 
expenditures for prescription drugs grew at more than twice the 
rate of overall Medicaid spending from FYs 1997 to 2001.4   The 
Centers for Medicare & Medicaid Services (CMS) projects that 
Medicaid drug expenditures will continue to increase by an average 
of 12.7 percent per year through 2011.5 
These expected increases are significant in light of State budget 
constraints. In FY 2002, 40 States faced budget shortfalls that 
totaled nearly $40 billion.  The gap between State revenue and total 
spending was expected to widen to $58 billion during FY 2003.6  At 
the same time, total Medicaid expenditures have risen 13 percent.  
In a recent survey, 36 States identified prescription drug costs as 
the top Medicaid cost driver in FY 2001, and 12 additional States 
listed drugs as 1 of the top 3 expenditures. 7 
Medicaid Pharmacy Reimbursement  
Drug Cost.  Under section 1902(a)(30)(A) of the Social Security Act, 
CMS has the authority to set upper payment limits for services 
available under the Medicaid program.  For Medicaid, CMS sets 
maximum drug reimbursement limits to ensure that the Federal 
Government acts as a prudent buyer of drugs. 8  Within these 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   1  I N T R O D U C T I O N  
Federal parameters, each State determines its own pharmacy 
reimbursement formula(s). 
In general, States reimburse pharmacies for drugs at the lower of: 
(1) estimated [pharmacy] acquisition cost; or (2) the pharmacys 
usual and customary charge to the general public. 9  The estimated 
acquisition cost is the State Medicaid agencys best estimate of the 
price generally and currently paid by providers for the drug. 10 
CMS does not prescribe a method for calculating estimated 
acquisition cost; instead, each State establishes and specifies its 
own estimated acquisition cost formula in its Medicaid State plan.  
States also have flexibility to define their interpretation of a 
pharmacys usual and customary charge. 
Estimating pharmacy acquisition cost can present a challenge for 
States. Most often, States rely on published prices, including 
average wholesale price (AWP) and wholesaler acquisition cost, 
because they may not have access to the actual prices at which 
pharmacies purchase drugs.  States generally obtain these list 
prices from a national pricing compendium issued by First 
Databank, a private company.  However, numerous studies and 
audits by the Office of Inspector General (OIG) and other experts 
have found that these list prices, particularly AWP, overstate the 
prices pharmacies pay.  For this reason, CMS requires that States 
using AWP include a significant discount off this price for CMS to 
consider it an acceptable estimate of pharmacy acquisition cost. 11 
For certain multiple source drugs with a sufficient number of 
equivalent products and at least three suppliers, CMS sets specific 
Federal upper limit amounts.  Multiple source drugs include generic 
drugs and brand name drugs for which generic alternatives are 
available (i.e., the drugs patent has expired).  The Federal upper 
limit equals 150 percent of the lowest published price of the drug 
listed in national pricing compendia. 12   States may reimburse above 
the Federal upper limit price if the prescribing physician certifies 
that the brand name version of the drug is medically necessary. 
Additionally, some States establish their own maximum allowable 
costs for multiple source drugs at a rate below an established 
Federal upper limit or for drugs for which CMS has not set a 
Federal upper limit. In a 2002 OIG survey, 24 States identified 
their maximum allowable cost program as a successful drug cost 
containment effort. Conceptually, State maximum allowable cost 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   2  I N T R O D U C T I O N  
programs resemble the Federal upper limit program in that they 
establish maximum reimbursement amounts for groups of 
equivalent drugs, i.e., a brand name drug and its generic 
equivalents. 
In summary, State Medicaid programs reimburse pharmacies for 
drugs based upon the following upper limits: 
For multiple source drugs, reimbursement is the lowest of: (1) the 
States estimated acquisition cost calculation; (2) the pharmacys 
usual and customary charge; (3) Federal upper limit, if one has been 
established; or (4) the State maximum allowable cost, if one has 
been established. 
For single source drugs, reimbursement is the lower of: (1) the 
States estimated acquisition cost calculation; or (2) the pharmacys 
usual and customary charge. 
Dispensing Fees. In addition to reimbursing pharmacies for the cost 
of the drug (also known as the ingredient cost), States are required 
to determine reasonable dispensing fees. 13  This fee represents 
the charge for the professional services provided by a pharmacist 
when dispensing a prescription. 
Medicaid Drug Rebate Program  
In addition to setting reimbursement limits, the Medicaid program 
limits expenditures by obtaining rebates from drug manufacturers.  
Federal statute mandates that in order for their drugs to be 
reimbursed by Medicaid, drug manufacturers must generally enter 
into rebate agreements and pay quarterly rebates to the State 
Medicaid agencies.14  CMS calculates rebate amounts using a 
statutory formula based on average manufacturer price (AMP), 
defined as the average price paid by wholesalers for drugs 
distributed to the retail class of trade.  For innovator (brand name) 
drugs, this formula also includes a calculation based on best price, 
defined as the lowest price available from the manufacturer to any 
wholesaler, retailer, provider, health maintenance organization, 
nonprofit entity, or government entity, excluding any prices charged 
to a list of specified entities and an additional calculation based on 
an inflation factor.15 
Beneficiary Cost Sharing 
Federal law 42 U.S.C.  1396o(a)(3) allows States to require 
nominal co-payments from certain beneficiaries.  By law, States 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   3  I N T R O D U C T I O N  
cannot impose cost sharing requirements on particular populations, 
including children and pregnant women. 16   For those Medicaid 
beneficiaries subject to cost sharing requirements, co-payments may 
not exceed $3 per prescription. 17   Also, pharmacists may not 
withhold a drug from a beneficiary who cannot afford to pay the co 
payment. 18 
Coordination of Third Party Coverage 
Some Medicaid beneficiaries have an additional third party (i.e., 
non-Medicaid) source of coverage for prescription drugs.  In most 
cases, Medicaid is the payer of last resort.  This means that, in 
general, the third party bears primary responsibility for paying that 
beneficiarys claims.  If the Medicaid agency is aware of third party 
coverage, the agency must reject the claim.19   If the third party does 
not cover the full amount of the claim, then Medicaid may be 
responsible for part or all of the remaining balance. 
States use two basic methods for processing Medicaid pharmacy 
claims when a third party is liable. A State Medicaid agency may 
require the pharmacy to bill the third party first, and then the State 
pays only the portion of the claim (if any) which is not covered by 
the third party, up to the Medicaid reimbursement limit.  This is 
known as cost avoidance.   Or, a State Medicaid agency may pay 
the full amount that Medicaid reimburses for that claim, and then 
the State assumes the responsibility for recouping payment from 
the liable third party.  This method is known as pay and chase. 
Related Work by the Office of Inspector General 
OIG has issued a significant body of work related to Medicaid drug 
pricing. Numerous OIG reports have concluded that Medicaid pays 
more than several other Federal and private purchasers for a wide 
variety of drugs. Also, a 2002 OIG report Medicaid Pharmacy - 
Additional Analyses of the Actual Acquisition Cost of Prescription 
Drug Products (A-06-02-00041), found that the data upon which 
States base pharmacy reimbursement overstate pharmacy 
acquisition costs.  More specifically, AWP overstated acquisition 
costs of single source drugs by 17.2 percent, multisource brand 
name drugs (without Federal upper limits) by 24.4 percent, 
multisource generic drugs (without Federal upper limits) by 54.2 
percent, and all drugs with Federal upper limits by 72.1 percent. In 
these reports, OIG recommends that CMS review the current 
reimbursement methodology, work with States to find a method 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   4  I N T R O D U C T I O N  
that more accurately estimates pharmacy acquisition cost, and 
initiate a review of Federal Medicaid rebates. 
SCOPE AND METHODOLOGY 
This report is limited to Medicaid drug reimbursement prices for 
outpatient drugs purchased by the fee-for-service component of 
Medicaid.  We excluded drug prices negotiated by Medicaid 
managed care organizations.  This study is focused on the variation 
in the drug reimbursement States pay to outpatient pharmacies. 
Our drug cost calculations include only the reimbursement for the 
drug ingredient cost and exclude the dispensing fee.  Therefore, our 
comparison demonstrates the variation in the cost of the drug itself, 
distinct from differences in States reimbursement for pharmacy 
services. 
We excluded consideration of the Federal rebate for purposes of this 
analysis.a   States have flexibility in setting their own pharmacy 
reimbursement methodology; however, the Federal unit rebate 
amount for each drug is established by CMS and is the same for all 
States. While we recognize that the Federal rebate program is 
important to cost containment for all States, it is beyond the scope 
of this study. 
Sampling and Data Collection 
In Medicaid, drugs are identified and tracked by 11-digit national 
drug codes (NDCs).  NDCs identify unique formulations of each 
drug, including the manufacturer, strength, and package size.   
We defined our sampling frames as the top 200 NDCs ranked by 
total FY 2001 Medicaid expenditures for each of the 3 categories of 
drugs. These three drug categories are:  (1) single source drugs 
(brand name drugs with no generic equivalents), (2) innovator 
multiple source drugs (brand name drugs with generic equivalents), 
and (3) non-innovator multiple source drugs (generic drugs).  
From the sampling frame for each drug category, we randomly 
selected 10 NDCs.  We later excluded 2 of these NDCs (both were 
a Excluding Federal rebates does not affect the absolute price difference across States, but it makes our percent 
difference calculations more conservative.  For example, suppose State X reimburses $1.00 per unit for a drug, 
and State Y reimburses $0.50 per unit, and the unit rebate is $0.10.  The absolute price difference between 
States X and Y is $0.50 for both reimbursement ($1.00 - $0.50) and net price after rebate ($0.90 - $0.40).  
However, State X pays 100 percent more than State Y when comparing reimbursement price ($1.00 vs. $0.50), 
but 125 percent more than State Y when comparing net prices after rebate ($0.90 vs. $0.40). 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   5  I N T R O D U C T I O N  
innovator multiple source drugs) from our analysis because many 
States did not cover these 2 NDCs during FY 2001.  We will use the 
term 28 drugs to refer to the 28 NDCs included in our analysis.  
We analyzed the variation for these 28 selected drugs, but we 
cannot project the variation to the universe of Medicaid drugs.  The 
selected drugs are detailed in Appendix A.  Also, Appendix B lists 
the primary indication(s) for each drug.  
We requested reimbursement information for our sample of drugs 
from all 50 States and the District of Columbia for FY 2001.  We 
issued this request to both the Medicaid director and Medicaid 
pharmacy director in each State.  For each drug, we requested 
States total drug ingredient cost reimbursement and total units for 
each quarter of FY 2001 (October 2000 through September 2001).  
Forty-two States responded. 
We also surveyed each States Medicaid director and Medicaid 
pharmacy director to collect contextual information on States 
pharmacy reimbursement for FY 2001, including States:  (1) 
estimated acquisition cost formula(s); (2) sources of pricing data; (3) 
definition of usual and customary charge; (4) State maximum 
allowable costs; and (5) pharmacy dispensing fees. 
Analysis 
Though 42 States responded to our data request, some States could 
not provide data from all 4 quarters for all 28 drugs.  If a State 
could not provide complete data for 4 quarters of FY 2001 for a 
particular drug in our sample, we excluded that State from our 
analysis for that drug.  For 9 of the 28 drugs, we received complete 
data from all 42 responding States.  For 9 additional drugs, our 
analysis relied on 41 of the 42 States.  The drug for which the fewest 
States provided complete data was Zestril, for which we used data 
from 35 of the 42 States.  Appendix A lists the number of States for 
which we received complete data for each of the 28 drugs. 
We used the States average annual unit prices as the basis for 
measuring price variation and potential savings.  For each State, we 
calculated the FY 2001 average annual unit price for each drug by 
adding together the total reimbursement for each of the 4 quarters 
and dividing this by the sum of the total units for the 4 quarters. 
For each drug, we assessed variation in unit reimbursement prices 
across States in several ways.  Primarily, we measured the percent 
difference in average annual unit price between the highest paying 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   6  I N T R O D U C T I O N  
State and the lowest paying State for each drug.  We used the 
lowest paying State for each drug as a benchmark.  We also 
calculated the interquartile range, which is the difference between 
the prices paid by the States at the 25th and 75th percentile for 
each drug. Finally, we applied several graphical techniques, 
including scatterplots and stock market charts, to each drug to 
assess the distribution of State prices.  We used similar analyses to 
measure variation across drug categories. 
We measured the potential savings Medicaid could have achieved if 
all States reimbursed for each drug at the same price as the lowest 
paying State.  For each drug, we determined the difference in 
annual price per unit between the State with the lowest unit price 
and each of the other States.  We multiplied this unit price 
difference for each State by the total number of units that the State 
purchased in FY 2001. Our savings calculation is conservative 
because for each drug we only included savings for the States from 
which we received all 4 quarters of data for FY 2001.  For some 
drugs, savings are based on fewer than 42 States.   
Additionally, we assessed each States success at obtaining lower 
prices, relative to other States.  For each drug, the State which 
obtained the lowest unit price was ranked one.  We then 
evaluated States patterns of prices, relative to other States, to 
determine whether States systematically obtain lower or higher 
relative prices. 
Finally, we synthesized the descriptive information from our survey 
of States with the reimbursement data to explore how States 
differences in reimbursement methodologies and other factors may 
affect differences in average annual drug prices. 
Our review was conducted in accordance with the Quality 
Standards for Inspectionsissued by the Presidents Council on 
Integrity and Efficiency. 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   7  F I N D I N G S  

The highest paying States unit price ranged from 
For each of the 28 drugs in our 
12 to 4,073 percent more per drug than the lowest 
sample, we calculated the 
paying State for the 28 drugs in our sample. 
difference in annual unit price per 
drug between the lowest and 
highest paying States. For each drug, we used as a benchmark the 
State that paid the lowest average annual unit price.  The difference 
between the highest and lowest paying States ranged by drug from 
12 to 4,073 percent. On average, the highest paying State paid 477 
percent more per drug than the lowest paying State for the 28 drugs 
in our sample.  Median difference was 49 percent.   
The average difference between the highest and lowest paying 
States is considerably higher than the median difference because 
four drugs demonstrated a substantially higher level of variation 
than the rest of the sample.  For these 4 drugs, the highest paying 
State paid over 2,000 percent more than the price paid by the lowest 
State. For 18 of the 28 drugs in our sample, the highest paying   
State paid between 12 and 71 percent more than the price paid by 
the lowest paying State.  For the remaining 6 drugs, the highest 
paying State paid between 120 and 548 percent more than the price 
For 4 drugs, the highest 
of the lowest paying State.  Appendix C provides the percent price 
paying State paid over 2000 
percent more than the price  differences for each drug. 
of the lowest paying State	
Price variation decreases when measured by interquartile 
differences because this measurement does not include the States 
with the highest and lowest reimbursement prices.  However, a 
significant amount of variation remains, indicating that the States 
in the middle of the distribution also vary from each other. Table A 
provides the average, median, and range in percent differences 
between the highest and lowest paying States and between the 
States at the 25th percentile and at the 75th percentile. 
Table A. Measures of Percent Variation in States Unit Prices per Drug  
Percent Difference between  Percent Difference between 
Highest and Lowest States  Interquartile States 
Average  477%  28% 
Median  49%  6% 
Range  12% to 4073%  3% to 266% 
Source: OIG National Survey, 2002 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  8  F I N D I N G
 S  
On average, the highest paying State paid approximately $200 more per 
package than the lowest paying State for the 28 drugs. 
To calculate the reimbursement price difference per package, we 
multiplied the unit price difference by the number of units per 
package. The highest paying State paid an average of $197 more 
than the lowest paying State per package for the 28 drugs in our 
sample.  The price differences per package range from $6 for 
Combivent to $1,244 for Ranitidine HCl 1000.  The median price 
difference was $65. Table B displays the top five drugs by absolute 
price differences per package between the lowest and highest paying 
States. 
Table B. Drugs with the Greatest Absolute Price Difference per Package 
Lowest States Price  Highest States Price Price Difference 
Drug 
per Package  per Package  per Package 
Ranitidine HCl 1000  $51  $1,295  $1,244 
Atenolol   $17  $704  $687 
Prilosec  $3,221  $3,876  $654 
Ranitidine Tablets  $25  $648  $623 
Ranitidine HCl 500  $27  $648  $621 
Source: OIG National Survey, 2002 
Absolute price difference per package is a product of both the level 
of variation across States and the cost of the drug.  For example, 
Prilosec shows a difference of $654 between the highest and lowest 
paying States and is ranked third in the absolute dollar difference 
between the highest and lowest States. Because Prilosec is 
relatively expensive, this represents only a 20 percent difference in 
price.  Conversely, Albuterol Sulfate, which is relatively 
inexpensive, demonstrates a much lower absolute price difference 
per package ($7), but this represents a 227 percent difference 
between the highest and lowest State prices. 
States prices vary most for non-innovator multiple source drugs. 
Of the three drug categories, non-innovator multiple source drugs 
(generic drugs) demonstrated the widest percentage range of prices 
between the highest and lowest paying States.  Price variation 
ranged from 20 to 4,073 percent for the 10 non-innovator 
multisource drugs in our sample.  Innovator multisource drugs 
ranked second in percent differences between the highest and 
lowest States, and single source drugs demonstrated the least 
percent variation.  The median variation among the 10 non- 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  9  F I N D I N G S  
innovator multisource drugs was 374 percent, compared to 53 
percent for the 8 innovator multisource drugs and 18 percent for the 
10 single source drugs. Table C displays the range, average, and 
median percent differences in price for each of the three drug 
categories. 
Table C. Percent Differences between High and Low States by Drug Category 
Range of Percent Average Percent  Median Percent 
Drug Category 
Price Differences  Price Difference  Price Difference 
Single Source  12-71%  23%  18% 
Innovator Multisource  33-227%  102%  53% 
Non-innovator Multisource  20-4073%  1230%  374% 
Source: OIG National Survey, 2002 
This wide variation in reimbursement price for non-innovator 
multisource drugs is not limited to the difference between the 
highest and lowest of the 42 State prices.  If we exclude the States 
with the highest and lowest prices from our analysis, the non-
innovator multisource drugs still demonstrate the most variation in 
our sample, followed by the innovator multisource drugs, and then 
the single source drugs. The average difference between the State 
at the 25th percentile and the State at the 75th percentile (i.e., the 
interquartile range) was 63 percent for the 10 non-innovator 
multisource drugs.  In contrast, the interquartile range for 
innovator multisource and single source drugs averaged 14 percent 
and 4 percent, respectively. 
In addition to demonstrating greater percent variation, multiple 
source drugs (both non-innovator and innovator) display a different 
pattern of price variation than single source drugs.  When the 42 
States' prices are ordered from low to high for each drug, prices for 
the single source drugs in our sample tend to increase at a more 
consistent rate from the lowest State price to the highest State 
price.  In comparison, prices for multiple source drugs in our sample 
tend to increase more sharply from one State to the next for several 
States at the low and/or high ends of the price range.  Prices for the 
States in the middle of the price range, on the other hand, increase 
more gradually from State to State.  To illustrate these different 
patterns, Appendix D displays the price distributions for a single 
source and a multiple source drug. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  10  F I N D I N G S  
Many States do not pay consistently low or high prices across the 28 
drugs in our sample. 
To examine State patterns in drug prices, we ranked all States by  
average annual unit price for each drug for which they provided 
complete data.  A rank of "one" identifies the State that reimbursed 
at the lowest unit price.  Thus, the lower the State's rank, the lower 
its drug reimbursement prices.  We averaged each State's rank 
across all drugs for which they submitted data. 
Chart 1 below displays the high, low, and mean rank across all 28 
drugs for selected States and illustrates that several States 
reimbursed at high relative prices for some drugs and low prices for 
others.  For each State, the top of the line indicates the highest rank 
that State received for any of the drugs, the bottom of the lines 
represent the lowest rank, and the dot indicates the mean rank for 
that State. The longer the line, the greater the difference between a 
State's highest and lowest rank. For example, across the 28 drugs, 
Louisiana's ranks ranged from 3 to 42.  Missouri's prices ranged 
from being the lowest (a rank of one) for one drug to one of the 
highest for another drug. 
Chart 1. Highest, Lowest, and Mean Ranks for Selected States 
45 
40 
35 
30 
k  25 
n
Ra 20 
15 
10 
5 
0 
MI  TX  MD  AR  LA  IL  MO  UT  OH  NH  NM  NY  NJ 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  11  F I N D I N G
 S  
However, as Table D demonstrates, some States displayed 
consistent patterns in price ranks relative to other States, 
particularly when States' ranks are assessed by drug category.  
Michigan and Texas paid consistently low reimbursement prices 
relative to other States, while New Jersey and New York ranked 
consistently high.  Other States, such as Ohio and Nebraska, tended 
to vary in price rank depending on the type of drug.  Both of these 
States paid relatively high reimbursement prices for single source 
and multiple source brand name drugs but relatively low 
reimbursement prices for generic drugs compared to other States. 
Table D. Rank (out of 42 States) by Drug Category for Selected States 
Single Source  Innovator  Non-innovator 
State  All 28 drugs 
Drugs  Multisource Drugs  Multisource Drugs 
MI  1  1  1  3 
TX  2  4  2  1 
NY  41  39  40  40 
NJ  42  42  42  42 
OH  30  41  31  4 
NE  29  36  34  10 
Source: OIG National Survey, 2002 
States' reimbursement prices for the 28 drugs were not related to their 
dispensing fees to pharmacies. 
For the 28 drugs in our sample, States' dispensing fees were not 
related to their drug reimbursement prices, relative to other States.  
A State's total reimbursement to pharmacies for Medicaid 
prescriptions includes both the drug ingredient reimbursement to 
cover the cost of the drug itself, plus a dispensing fee to reimburse 
for the pharmacy's services.b  For each drug category, we ranked 
States from the lowest drug reimbursement prices to the highest 
and then tested whether States' ranks were related to their 
dispensing fees.c  We did not find that States with lower drug 
ingredient prices were compensating for their lower prices by paying 
higher dispensing fees.  Appendix E provides details of this analysis. 
b When States reimburse at the usual and customary charge, the State does not pay a separate dispensing fee. 
c This analysis is based upon the 33 States with a flat dispensing fee. Nine States with variable fees were excluded. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  12  F I N D I N G S  

Medicaid could have saved $86.7 million in FY 2001, 
For each drug, we determined the 
if all States paid the same price as the lowest 
difference in annual unit 
paying State for each of the 28 drugs in our sample  reimbursement price between the 
State with the lowest unit price 
and each of the other States.d  We multiplied this unit price 
difference for each State by the total number of units that the State 
paid for in FY 2001. We found that Medicaid could have saved 
$86.7 million in FY 2001 for the 28 drugs in our sample. This 
potential savings represents over 13 percent of the $653 million 
Medicaid spent for these 28 drugs in the 42 States.  The Federal 
share of the savings would have been $50 million, while States' 
share would have been over $36 million. 
Single source drugs could achieve the greatest potential savings of the 
three drug categories. 
In our sample, potential savings associated with the single source 
drugs far exceed the potential savings of both types of multiple 
source drugs in terms of absolute dollar amount.  Medicaid could 
have saved $52.2 million (60 percent of the total savings) on the 10 
single source drugs, followed by $25.5 million (30 percent) on the 10 
non-innovator multisource drugs, and $8.9 million (10 percent) for 
the 8 innovator multisource drugs in our sample. 
Decreasing the unit reimbursement prices of the single source drugs 
by even a small percentage would produce substantial savings 
because single source drugs are the most expensive and the most 
highly utilized drug category. In our sample, the 10 single source 
drugs account for 77 percent of the total expenditures on the 28 
drugs.  Table E provides drug expenditures and potential savings 
information for the three drug categories. 
d Our savings calculation is conservative because for each drug we only included savings for the States from 
which we received all 4 quarters of data for FY 2001.  For some drugs, savings are based on fewer than 42 
States. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  13  F I N D I N G S  
Table E.  FY 2001 Expenditures and Potential Savings by Drug Category 
Drug Category  FY 2001  Percent of  Potential  % of Total 
Expenditures  Total  Savings  Potential Savings 
Expenditures 
Single Source (10 drugs)  $504 million  77%  $52.2 million  60% 
Innovator Multisource (8 drugs)  $34 million  5%  $8.9 million  10% 
Non-innovator Multisource (10 drugs)  $116 million  18%  $25.5 million  30% 
Totals (28 drugs)  $654 million  100%  $86.7 million  100% 
Source: OIG National Survey, 2002 
Almost half of Medicaids potential savings would come from 5 of the 28 
drugs. 
In our sample of 28 drugs, potential Medicaid savings per drug 
ranged from $141,000 for Zestril to $16.3 million for Depakote. 
Depakote accounted for 19 percent of the total savings for the 28 
drugs. The median potential savings per drug are $2 million.  
Appendix F provides potential savings associated with each drug. 
Five of the 28 drugs produced almost half (49 percent) of the total 
potential savings. These drugs are Depakote, with $16.3 million in 
potential savings; Prilosec ($7.4 million); Lipitor ($6.9 million); 
Avonex Kit ($6.2 million); and Oxycontin ($5.8 million).  Potential 
savings from these 5 drugs total $42.5 million for FY 2001.  
Spending on these 5 drugs, which account for the highest 
expenditures in our sample, totaled $376.2 million, representing 
more than half of the total Medicaid expenditures for the 28 drugs 
in the 42 States in FY 2001.  Because these drugs are costly and 
highly utilized, any price reduction would have an important impact 
on Medicaid savings. 
Medicaid could have saved more than 50 percent on 9 of the 28 drugs. 
For 9 of the 28 drugs, Medicaids potential savings exceeded 50 
percent of total expenditures.  In other words, for these drugs 
Medicaid could have spent less than half of what was spent if all 
States had paid the same price as the lowest paying State. 
For instance, Medicaid could have spent 92 percent less than its FY 
2001 expenditures on Atenolol.  In FY 2001, the 42 States could 
have reimbursed pharmacies for the 8 million units of Atenolol for 
less than $135,000 instead of the $1.8 million actually paid. 
Michigan and Maryland each paid less than $20 per bottle for 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  14  F I N D I N G S  
Atenolol, while the average State reimbursement price was $274 per 
bottle.  One State paid over $700 per bottle for the exact same drug.  
Table F lists the top five drugs by savings as a percentage of 
expenditures. 
Table F. Top 5 Drugs by Savings as a Percentage of Expenditures in FY 2001 
Medicaid Could  Savings as Percent 
Drug  Medicaid Paid 
Have Paid  of Expenditures 
Atenolol Tablets  $1.8 million  $135,000  92% 
Ranitidine HCl 1000  $4.4 million  $506,000  89% 
Ranitidine HCl 500  $4.0 million  $522,000  87% 
Ranitidine Tablets  $3.6 million  $521,000  86% 
Trimox Capsules  $2.6 million  $807,000  69% 
Total for 5 drugs  $16.4 million  $2.5 million  85% 
Source: OIG National Survey, 2002 
Each States potential savings depends on the States unit prices and 
utilization. 
Savings calculations for each State are a product of the States unit 
price, relative to the lowest paying State, and the States utilization.  
The higher the States unit reimbursement price compared to the 
lowest paying State, the larger the per unit difference.  This difference 
per unit is then multiplied by the total units the State reimbursed. 
Therefore, the more units purchased, the greater potential savings 
that could be realized by reducing the States unit price. 
The potential Medicaid savings by State ranges from $8,100 for 
Arizona to $13 million for New York.  Potential savings from the 
median State is $1.1 million.  Table G displays the potential savings 
from the top five States.  These 5 States account for almost 42 percent 
of the total savings for the 42 States.  Appendix F provides the 
potential savings for every State.  
Table G.  States with the Greatest Potential Savings 
% of Total 
State    Potential Savings 
Potential Savings 
New York  $13.0 million  15% 
Ohio  $7.6 million  9% 
New Jersey  $5.6 million  7% 
North Carolina  $5.1 million  6% 
Illinois  $4.6 million  5% 
Total for 5 States  $35.9 million  42% 
Source: OIG National Survey, 2002 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  15  F I N D I N G S  
High utilization contributed to the high potential savings for the top 
two States. New York, the State with the highest potential savings, 
had the highest utilization of the 28 drugs in our sample.  Ohio 
could have generated the next highest savings, $7.6 million, and is 
ranked second in utilization of these drugs.   
Comparing Michigan and New Jersey demonstrates how relative 
reimbursement price also affects savings.  Michigan paid 
consistently low prices relative to other States, including paying the 
lowest price for 11 of the 28 drugs.  New Jersey paid consistently 
high prices relative to other States, including paying the highest 
price for 5 of the 28 drugs.  In FY 2001, New Jersey ranked 10th in 
utilization (almost 15 million units) for the drugs in our sample; 
Michigan ranked 12th (almost 14 million units).  However, New 
Jersey could produce the third highest savings, $5.6 million, while 
Michigans potential savings are only $547,000 (less than one-tenth 
of New Jerseys). Michigans savings rank 31 out of the 42 States. 
This substantial disparity in potential savings is a result of unit 
price differences between the two States.   
States drug prices derive from multiple factors 
and vary even among States with the same  States average unit drug prices are a 
pharmacy reimbursement formula  product of multiple factors.  These 
factors stem from States lack of 
access to pharmacies actual acquisition costs, which compels States 
to rely on proxies to estimate acquisition cost. We present 
information on how each factor could affect States drug prices, and 
where possible, demonstrate this effect within our sample of drugs.  
However, measurement of the relative impact of each factor on each 
States average annual price is beyond the scope of our data and this 
report. 
All States reimburse pharmacies for drugs based on the general 
upper payment limit formula established by CMS, but this formula 
allows significant State flexibility. In general, States reimburse at 
the lowest of: (1) estimated [pharmacy] acquisition cost; (2) the 
pharmacys usual and customary charge to the general public; (3) 
the Federal upper limit amount, if applicable; or (4) the State 
maximum allowable cost, if applicable. 
Additionally, there are factors beyond the drug reimbursement 
formula that can affect States reimbursement to pharmacies.  One 
is that States may impose nominal co-payments for prescription 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  16  F I N D I N G
 S  
drugs for certain Medicaid beneficiary populations.  In this case, the 
State pays the pharmacy according to its drug reimbursement 
formula, less the amount of the beneficiary co-payment.  Another 
factor is that States use different methods for processing claims 
when a third party is liable for payment.  These differences can 
affect States pharmacy reimbursement. 
Differences in States estimated acquisition cost formulas only partially 
explain price differences. 
Within broadly set Federal regulations and the State Medical 
Manual guidelines, each State is responsible for determining its 
own method to estimate pharmacy acquisition cost, since they do 
not have access to actual acquisition costs. Typically, States base 
estimated acquisition cost on average wholesale price (AWP) minus 
a discount. Six of our 42 States base estimated acquisition cost on 
wholesaler acquisition cost plus an additional percentage or a 
combination of AWP and wholesaler acquisition cost.  Most States 
apply one estimated acquisition cost formula to all drugs and all 
pharmacies. In FY 2001, 2 of our 42 States applied different 
estimated acquisition cost formulas to brand and generic drugs, and 
1 State used a different estimated acquisition cost for chain versus 
independent pharmacies.  
In FY 2001, the most common estimated acquisition cost formula, 
AWP minus 10 percent, was used by 15 of the 42 States in our 
sample.  States discount off AWP ranged from 5 percent to 16.5 
percent.  Six States used wholesaler acquisition cost plus a mark-up 
percentage ranging from 7 to 11 percent. 
A States estimated acquisition cost formula is often used as a proxy 
by which to gauge that States reimbursement prices, and it is 
usually assumed that States with the same estimated acquisition 
cost formula pay similar prices. However, for the 28 drugs in our 
sample, States with the same estimated acquisition cost formula 
paid substantially different prices. Among the 15 States with an 
estimated acquisition cost formula of AWP minus 10 percent, the 
highest paying State paid between 6 percent and 1,664 percent more 
for the 28 drugs in our sample.  For these 15 States, the highest 
paying State paid 187 percent more, on average, for the 28 drugs. 
The median percent difference was 26 percent. 
Comparing these percent differences among the 15 States with the 
same estimated acquisition cost formula to the price differences 
among all 42 States indicates that differences in estimated 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  17  F I N D I N G
 S  
acquisition cost formulas account for some of the variation in prices 
across States. These 15 States display less variation than the 
variation found among all 42 States. The 15 States averaged a price 
variation of 187 percent for the 28 drugs, while all 42 States 
averaged a price variation of 477 percent for the 28 drugs.  Table H 
displays the comparison between variation among the 15 States 
with an estimated acquisition cost formula of AWP minus 10 
percent to the variation among all 42 States for selected drugs. 
Table H.  Percent Price Variation for Selected Drugs among States with Same Estimated 
Acquisition Cost (EAC) Formula 
Price Variation for 15 States  Price Variation for All 42 
Drug 
with EAC=AWP-10%  States 
Prilosec  13%  20% 
Depakote  25%  71% 
Clotrimazole  49%  194% 
Albuterol Sulfate  103%  227% 
Atenolol  1664%  4073% 
Source: OIG National Survey, 2002 
In particular, States estimated acquisition cost formulas should 
explain most of the variation in State unit prices for single source 
drugs. Because single source drugs are not subject to Federal upper 
limits or State maximum allowable costs, the reimbursement price 
should reflect either the estimated acquisition cost or the usual and 
customary charge to the general public. 
However, for the 10 single source drugs in our sample, the price 
variation among the 15 States with estimated acquisition cost 
formulas of AWP minus 10 percent does not support this 
expectation.  Although there is less variation among the 15 States 
than among all 42 States, considerable variation remains.  Table I 
provides average and median differences between the highest and 
lowest paying States for the 10 single source drugs in our sample.   
Table I.  Percent Variation in Single Source Drug Prices for States with Same EAC 
Average Variation Average Variation Median Variation  Median Variation 
for 42 States  for 15 States  for 42 States  for 15 States 
23%  12%  18%  12% 
Source: OIG National Survey, 2002 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  18  F I N D I N G S  
Chart 2 below illustrates the extent to which the reimbursement 
prices of the 15 States with the same estimated acquisition cost 
formula are dispersed throughout the price distribution of all 42 
States. Each of the 42 States unit prices for Detrol (a single source 
drug) are arrayed from the lowest paying State to the highest.  The 
unit prices of the States with an estimated acquisition cost of AWP 
minus 10 are indicated by a white square, and all other States 
prices are indicated with a dark triangle.  As shown, Pennsylvania 
has an estimated acquisition cost of AWP minus 10 percent and 
paid the sixth lowest unit price, while Nebraska has the same 
estimated acquisition cost, yet paid the highest price of the 42 
States for this drug.e 
Chart 2. States' Unit Prices for Detrol 
Prices for States with EAC=AW P-10%- are labeled & indicated with a white square. 
All other States' prices indicated with a black triangle. 
$1.35 
$1.30 
$1.25 
$1.20 
$1.15 
$1.10 
PAME  NV  IN  SC  MT  VT  KYGA  ND  NCNY  KS NJ NE 
States differences in usual and customary charge also affect States 
average reimbursement prices. 
CMS rules require States to reimburse pharmacies for drugs at the 
pharmacys usual and customary charge to the public if this price is 
lower than the estimated acquisition cost, Federal upper limit, and 
State maximum allowable cost.  However, as part of their effort to 
more closely approximate actual acquistion costs, States define the 
usual and customary charge differently.  Definitions include the 
pharmacys charge to the cash-paying customer or the pharmacys 
charge to the patient group accounting for the largest number of 
non-Medicaid prescriptions. Many States exclude prices paid by 
e No States had a maximum allowable cost for this drug in FY 2001. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  19  F I N D I N G
 S  
third-party payers from usual and customary charges, while a few 
require pharmacies to include prices they accept from third-party 
payers as usual and customary charges. Because usual and 
customary charges are based on the prices the individual pharmacy 
charges, these amounts can vary among pharmacies within the 
same State.  Further, the extent to which States monitor and 
enforce pharmacies billing of usual and customary charges is 
uncertain. 
While it is difficult to measure the effect of differences in usual and 
customary charge definitions on States average prices, their impact 
may be significant.  One expert estimated that, nationally, roughly 
25 percent of all Medicaid drug claims are paid at the usual and 
customary charge. 20   Additional evidence suggests that the 
frequency with which drugs are purchased at the usual and 
customary charge varies across States. Massachusetts analyzed its 
Medicaid drug claims for the month of July 2002 and found it paid 
34 percent of all claims at the usual and customary charge. 21  In 
contrast, Vermont paid only 10 percent of its FY 2002 drug claims at 
the usual and customary charge. 22  Finally, Texas calculated its 
rate of claims paid at usual and customary charge to be 22 
percent.23 
States maximum allowable costs contribute to the price variation for 
multiple source drugs. 
States maximum allowable costs offer another reason why States 
reimbursement prices for multiple source drugs vary more than 
prices for single source drugs.  States determine for which multiple 
source drugs, if any, to set maximum allowable costs. States that 
set maximum allowable costs may pay lower prices for these drugs 
than States that base reimbursement exclusively on estimated 
acquisition cost formulas and usual and customary charge.  Twenty 
of the 42 States reported a maximum allowable cost for at least 1 
drug in our sample.  On average, the 20 States reported maximum 
allowable costs for 10 of the 18 multiple source drugs in our sample.  
For 8 of the 18 multiple source drugs in our sample, the lowest 
paying States set maximum allowable costs. The highest paying 
States had not set maximum allowable costs for any of the multiple 
source drugs.  
States vary considerably in the maximum allowable cost prices they 
set for the same drug.  For eight multiple source drugs, the highest 
reported maximum allowable cost was more than twice as expensive 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  20  F I N D I N G S  

as the lowest maximum allowable cost.  For example, in FY 2001, 
Oklahomas maximum allowable cost for Ranitidine was almost 
$0.38 per pill, a price 371 percent higher than Washingtons 
maximum allowable cost of $0.08 per pill for the same drug.f 
Finally, while a States maximum allowable cost generally acts as a 
ceiling price, States sometimes reimburse at prices above their 
maximum allowable cost for a particular pharmacy claim. A 
maximum allowable cost applies to a group of equivalent drugs (i.e., 
a brand name drug and its generic versions), and the maximum 
allowable cost amount is commonly based on the least expensive 
drug in the group.  If a physician certifies that a specific drug within 
a maximum allowable cost group is medically necessary, then a 
State may reimburse a greater amount for that drug based on its 
estimated acquisition cost formula or usual and customary charge. 
Cost sharing requirements and coordination of third party coverage can 
also affect States pharmacy reimbursement.  
Beyond drug reimbursement methodologies, differences in States 
cost sharing requirements can affect the variation in States 
pharmacy reimbursement.  States may require nominal co 
payments from beneficiaries that do not exceed $3 per prescription.  
For prescriptions with a cost sharing requirement, the State 
subtracts the amount of the beneficiary co-payment from its 
reimbursement to the pharmacy. 
The potential impact of co-payments on States average annual price 
per unit varies by drug. The maximum co-payment is $3 per 
prescription, so the effect on the unit price depends on the number 
of units per prescription.  In our sample, units per prescription 
ranged from 4 units, for which a $3 co-payment reduces a States 
unit price by $0.75/unit, up to 1,000 units, for which a $3 co 
payment reduces a States unit price by less than one penny 
($0.003).  These potential reductions in unit price can also be 
expressed as a percentage of the average unit price for each drug.  
Table J lists the absolute and percent reductions in unit price 
resulting from a $3 co-payment for a selection of drugs. 
f Our sample includes three national drug codes for Ranitidine.  These maximum allowable cost amounts are the 
same for all three. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  21    F I N D I N G S  
Table J.  Potential Reduction in Unit Price based on $3 Co-payment 
Potential Percent 
Units per  Potential Reduction  Average Unit
Drug  Reduction in 
Prescription  in Unit Price  Price 
Average Unit Price 
Prilosec  1000  $0.003  $3.62  0.1% 
Sandimmune  50  $0.060  $5.69  1.1% 
Depakote  100  $0.030  $0.80  3.7% 
Albuterol Sulfate  20  $0.150  $0.33  46.1% 
Source: OIG National Survey, 2002 
However, we cannot measure the extent to which co-payments contribute to 
the variation in average annual drug prices in our sample, because States 
do not deduct the co-payment amount when reimbursing claims for 
exempted beneficiaries. For each of the 28 drugs, we have data on total 
units purchased by each State but do not have data on what percentage of 
these units went to beneficiaries who are subject to cost sharing 
requirements.  
Additionally, differences in States processing of claims in which a third 
party is liable can impact pharmacy reimbursement.  Because States that 
use a cost avoidance method may only reimburse pharmacies for Medicaids 
liable portion of claim, their reimbursement data reflect only the amount for 
which Medicaid is responsible. In contrast, States that use a pay and chase 
method reimburse the pharmacy the full amount Medicaid reimburses for 
that claim, which is reflected in their reimbursement data.  Even if these 
States recoup payment from a third party, they do not necessarily update 
each specific drug claim to reflect the recoupment.  Further, a 2001 OIG 
report, Medicaid Recovery of Pharmacy Payments from Liable Third 
Parties (OEI-03-00-00030) found that in 1999, 32 States were at risk of 
losing over 80 percent of the pharmacy payments they tried to recover from 
third parties through the pay and chase method. 
We cannot measure the extent to which these different methods of 
pharmacy claims processing contribute to the variation in drug 
reimbursement for our sample of drugs.  We do not have data on what 
percentage of claims involved third party liability for each State for the 28 
drugs in our sample.  Using cost avoidance when a third party is liable 
could lower a States average reimbursement for a drug.  Michigan 
primarily used the cost avoidance method and ranked first overall in 
obtaining the lowest prices for the drugs in our sample.  However, New 
York also used cost avoidance and ranked 41 out of the 42 States for the 28  
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  22  F I N D I N G S  
drugs sampled.  Texas used the pay and chase method and achieved the 
second lowest prices overall for our sample of drugs. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  23      R E C  O M M E N D A T  I O N S  

In the State Medicaid Manual, CMS states that HHS rules [limiting 
Medicaid payments for drugs] are intended to ensure that the Federal 
Government acts as a prudent buyer of drugs under the Medicaid program.24 
Our analysis suggests that the Federal drug reimbursement limits do not 
ensure prudent buying of drugs by State Medicaid agencies. These limits 
may not achieve the goal of prudent expenditures for drugs, given the 
tremendous variability in the amounts States paid for the same set of drugs.  
If all States had reimbursed at the same price as the lowest State for each 
drug in our sample, the Medicaid program could have saved more than $86 
million in FY 2001.  Again, these potential savings derive from only 28 drugs 
for the 42 States that provided data. Overall, Medicaid covers almost 60,000 
National Drug Codes, using the same reimbursement methods that produced 
the vast price discrepancies for the 28 drugs in our sample. A clear example 
of concern is one States payment of $700 for a specific Medicaid prescription, 
while two other State Medicaid programs purchase the same prescription for 
less than $20. 
In addition to highlighting the variation in States drug reimbursement prices 
and the effect of this variation on Medicaid drug costs, this report provides a 
starting point for examining why States drug prices vary greatly.  Most 
examinations of Medicaid drug prices focus on States estimates of pharmacy 
acquisition cost.  However, our analysis demonstrates that differences in 
States estimated acquisition cost formulas only partially explain drug price 
differences and that several other factors affect States drug prices. 
Most importantly, the factors that drive variability in drug prices across 
States stem from States lack of access to pharmacies true acquisition costs.  
Because they lack information about such costs, States rely on estimated 
acquisition costs, usual and customary charges, and maximum allowable 
costs as proxies for pharmacies acquisition cost.  These proxies are deficient 
because they are not necessarily linked to the prices at which pharmacies 
purchase drugs. The wide variation in State Medicaid prices results from the 
deficiencies in these proxies for estimating pharmacies acquisition costs. 
CMS should share average manufacturer price data with States to ensure more 
accurate estimates of pharmacy acquisition cost. 
Currently, average manufacturer price data may represent the most accurate 
drug pricing data available to CMS. While pharmacies are not compelled to 
share their actual acquisition costs with CMS or the States, drug 
manufacturers are required to submit average manufacturer price data to 
CMS each quarter as part of the Medicaid rebate program. Average 
manufacturer price is statutorily-defined and is calculated from actual sales 
transactions between drug manufacturers and wholesalers. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  24  R E C O M M E N D A T I O N S  
Previously, OIG has recommended that CMS share average manufacturer 
price with the States to help improve their estimates of pharmacy acquisition 
cost.25   In response, CMS disagreed with the recommendation citing issues 
associated with average manufacturer price confidentiality.   
Further research is needed on the factors that affect States drug prices. 
If States continue to lack accurate price information, CMS should strengthen 
its work to improve States ability to optimally reimburse for drugs within the 
current Medicaid pharmacy reimbursement framework. 
To maximize their capacity to assist States, CMS should further examine the 
determinants of States drug prices, including (1) States estimated 
acquisition cost formulas, (2) usual and customary charges, and (3) maximum 
allowable cost limits. We recognize that CMS has initiated efforts to further 
understand the impact of State maximum allowable costs and the Federal 
upper limit program.  We support this effort and encourage CMS to apply the 
findings from this project and to expand its research on drug pricing and 
Medicaid reimbursement to include estimated acquisition cost and usual and 
customary charges.  By understanding how each of these factors affects 
States drug reimbursement, CMS can more effectively advise States on ways 
to set their reimbursement levels that help to ensure that the Federal 
Government pays for drugs more prudently under the Medicaid program. 
CMS should annually review the States drug prices and target technical 
assistance to States paying the highest reimbursements. 
To assess States relative success in drug reimbursement, CMS should 
conduct annual analyses of States prices for a specific sample of drugs using 
methods similar to those used in this report. States already submit the 
necessary reimbursement data to CMS.  Performing such analysis would 
allow CMS to target their technical assistance by prioritizing States that pay 
the highest drug reimbursement prices.  Technical assistance would include 
providing guidance to States on how to improve reimbursement 
methodologies, based on CMSs enhanced research, as detailed above; 
ensuring States are aware of how their reimbursement prices compare to 
other State Medicaid programs; and sharing successful reimbursement 
strategies from other States. 
Annual reviews of States drug reimbursement also enable CMS to monitor 
States improvement over time.  Further, State Medicaid reimbursement 
methods and the larger pharmaceutical marketplace are complex and 
dynamic.  Therefore, ongoing monitoring is essential for CMS to continually 
target and maximize its resources for improving States drug reimbursement 
under Medicaid. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  25  A G E N C Y   C O M M E N T S  

CMS provided comments on the draft report in which they stated that they 
do not concur with the report because of concerns about problems with the 
data.  CMS provided two specific examples that they considered to be 
problems in our report. In addition, CMS recommended that we validate 
the data with the States.  The text of CMSs comments is included in 
Appendix G. 
We do not believe that our report contains numerous errors and that either 
of the two examples CMS cited demonstrate errors or problems in our 
report. Therefore, we met with CMS staff to discuss these specific examples 
and any other concerns. 
The first example cited in CMSs comments was related to the price of a 
different package size of Prilosec than the one included in our review.  We 
have included additional language in the finding to clarify our calculation of 
prescription prices per package for each of the 28 NDCs in our review. 
The second example reflected more general concerns.  These concerns 
centered on the magnitude of the price variation that we reported and the 
prices paid by the highest-paying States for certain drugs.  As described in 
the report, reimbursement for drugs is subject to upper payment limits in 
which States must pay the lowest of:  (1) estimated [pharmacy] acquisition 
cost; (2) the pharmacys usual and customary charge to the general public; 
(3) the Federal upper limit amount, if applicable; or (4) the State maximum 
allowable cost, if applicable. For some drugs, the prices we report for the 
highest-paying States are higher than this upper limit formula would 
dictate.  This led CMS staff to question the accuracy of the data that States 
provided us.  This was the central issue in the second example that CMS 
cited in their comments, i.e., some States reimbursed at prices above the 
Federal upper limit. 
We agreed with CMS staff that some State prices are above the upper 
payment limit for certain drugs and that this is problematic.  We 
emphasized, however, that we are reporting what States paid rather than 
what States should have paid.  We described our process of reviewing all of 
the State-reported data, including the fact that we followed up with States 
whose prices appeared aberrantly high or low to verify whether this was 
what the State actually paid. 
Additionally, at the meeting CMS staff raised some technical 
considerations, including States methodology for excluding dispensing fees 
from ingredient reimbursement cost and States systems for ensuring that  
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  26  A G E N C Y   C O M M E N T S  
pharmacies bill for drugs correctly. We also discussed State differences in 
usual and customary charges, State maximum allowable costs, and third 
party liability, which are addressed in the report.  
We agree that all of these factors can affect the magnitude of State drug 
price variation.  In this inspection, we focused on measuring State drug 
price variation, and while we discussed potential causes of variation, 
measurement of cause was beyond our scope. We plan to send each State 
data comparing its Medicaid reimbursement prices to the other States 
prices for each of the 28 drugs.  We will suggest that each State review its 
Medicaid drug payments and the factors that affect its prices.  
In conclusion, this report raises serious issues concerning Medicaid 
prescription drug reimbursement that warrant attention and action.  We 
encourage CMS to implement all of our recommendations.  We also 
discussed with CMS staff our plans to conduct another review of State 
Medicaid drug prices in the future to determine whether the price variation 
we found for these 28 drugs in FY 2001 is an anomaly or if it is 
representative of an underlying problem.  We will work with CMS to 
address a variety of their outstanding concerns in that inspection.  We look 
forward to continued work with CMS toward our common goal of ensuring 
the integrity of prescription drug payments under the Medicaid program. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  27  A P P  E N D I X   A  

SAMPLE OF 28 DRU  GS 
Single Source Drugs (10) 
NDC  TRADE NAME  STRENGTH  UNITS  States with Complete Data 
00009454402  Detrol Tablets  2MG  60  42 
50458032050  Risperdal Tablets  2MG  500  41 
00002411660  Zyprexa Tablets  7.5MG  60  42 
00597001314  Combivent Aerosol Inhalation  103;18MCG;MCG  14.7  41 
59627000103  Avonex Kit Administration Pack  30MCG/VIL  4 (kits)  41 
00074621413  Depakote Tablets  250MG  100  42 
00006007468  Vioxx Tablet  12.5 MG  100  40 
00186074282  Prilosec Capsules Delayed Release  20 MG  1000  41 
00071015623  Lipitor Tablets  20 MG  90  42 
00087606010  Glucophage Tablets  500 MG  500  42 
Innovator Multiple Source Sample Drugs (8)*
NDC  TRADE NAME  STRENGTH  UNITS  States with Complete Data 
52544023528  Nor-QD  .35 MG  6 X 28  40 
00078011022  Sandimmune Oral Solution  100 MG/ML  50 ML  36 
59930157003  Clotrimazole Cream  1%  45G  39 
00310013034  Zestril Tablets  5MG  1000  35 
00032421001  Luvox  100 MG  100  41 
00310014510  Zestoretic Tablets  25;20 MG; MG  100  42 
59930163601  Normodyne  200 MG  100  39 
59930151504  Albuterol Sulfate  0.50%  20 ML  41 
Non-Innovator Multiple Source Sample Drugs (10) 
NDC  TRADE NAME  STRENGTH  UNITS  States with Complete Data 
55953054470  Ranitidine HCl  150 MG  500  41 
00228257809  Diltiazem CD Capsules  240 MG  90  41 
00003010960  Trimox Capsules  500 MG  500  42 
55953054480  Ranitidine HCl  150 MG  1000  39 
59011010510  Oxycontin Tablets Controlled  40 MG  100  42 
Release 
00378023110  Atenolol Tablets  50 MG  1000  42 
00555090201  Naltrexone Hydrochloride Tablets  50 MG  50  39 
00781188305  Ranitidine Tablets  150 MG  500  41 
00228271111  Isosorbide Mononitrate Tablets  60 MG  100  40 
00364047901  Methylphenidate Hydrochloride  10 MG  100  40 
* Two innovator multiple source drugs that were selected in our sampling were excluded from our analysis because many 
States did not purchase these drugs during FY 2001.  They are Nicoderm CQ (NDC 00766145020) and Actiq Lozenge 
(NDC 00074246524). 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  28  A P P E N D I X   B  
PRIMARY INDICATIONS FOR SAMPLE DRUGS 
The following table lists the primary indications, i.e., the primary 
conditions that the drugs are intended to treat, for each of the 28 drugs 
in our sample. 
DRUG  PRIMARY INDICATION(S) 
Albuterol Sulfate  bronchospasm 
Atenolol  hypertension and coronary heart disease 
Avonex  multiple sclerosis 
Clotrimazole   vaginal yeast infection 
Combivent  chronic obstructive pulmonary disease 
Depakote  bipolar disorder 
Detrol  overactive bladder 
Diltiazem CD   hypertension 
Glucophage  diabetes 
Isosorbide Mononitrate   angina 
Lipitor   high cholesterol 
Luvox  depression and obsessive compulsive disorder 
Methylphenidate Hydrochloride   attention deficit disorder and narcolepsy 
Naltrexone Hydrochloride  alcohol dependency 
Normodyne  hypertension 
Nor-QD  prevention of pregnancy 
Oxycontin   pain management 
duodenal ulcer, gastric ulcer, gastroesophageal reflux disease 
Prilosec 
(GERD), erosive esophagitis, pathological hypersecretory conditions 
duodenal ulcer, gastric ulcer, gastroesophageal reflux disease 
Ranitidine HCI 
(GERD), erosive esophagitis, pathological hypersecretory conditions 
Risperdal  schizophrenia and dementia 
Sandimmune  prevention of organ rejection following transplants 
Trimox   bacterial infection 
Vioxx  osteoarthritis, rheumatoid arthritis, acute pain, primary dysmenorrhea 
Zestoretic  hypertension 
Zestril  hypertension, heart failure, acute myocardial infarction 
Zyprexa   schizophrenia and bipolar disorder 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  29  A P P E N D I X   C  
SELECTED CHARACTERISTICS OF SAMPLE DRUGS 
Single Source Drugs 
Percent  FY 2001  Percent of Total  Percent of Total 
Percent Difference:  Potential 
Drug  Difference: High  Expenditures Expenditures Potential Savings 
Interquartile States  Savings 
and Low States  (42 States)  for 28 Drugs  for 28 Drugs 
Depakote  70.8%  4.2%  $66,876,204  10.2%  $16,284,584  18.8% 
Glucophage  21.0%  4.4%  $20,337,219  3.1%  $1,956,958  2.3% 
Avonex  20.4%  5.2%  $53,387,706  8.2%  $6,184,122  7.1% 
Prilosec  20.3%  4.8%  $62,221,082  9.5%  $7,367,148  8.5% 
Detrol  18.3%  3.1%  $38,415,841  5.9%  $2,800,316  3.2% 
Combivent  17.8%  4.7%  $47,000,368  7.2%  $3,544,345  4.1% 
Vioxx  16.8%  3.9%  $33,130,383  5.1%  $2,877,104  3.3% 
Risperdal  13.5%  2.6%  $23,967,520  3.7%  $1,645,946  1.9% 
Zyprexa  13.4%  2.6%  $48,570,362  7.4%  $2,712,454  3.1% 
Lipitor  12.1%  3.5%  $109,940,879  16.8%  $6,873,801  7.9% 
TOTAL  - - $503,847,564   77.1%  $52,246,778   60.2% 
Innovator Multiple Source Drugs 
Percent  FY 2001  Percent of Total  Percent of Total 
Percent Difference:  Potential 
Drug  Difference: High  Expenditures Expenditures for  Potential Savings 
Interquartile States  Savings 
and Low States  (42 States)  28 Drugs  for 28 Drugs 
Albuterol 
Sulfate  227.0%  52.5%  $3,696,609  0.6%  $1,869,895  2.2% 
Clotrimazole  194.4%  10.5%  $1,525,100  0.2%  $848,609  1.0% 
Normodyne  164.7%  20.9%  $2,222,774  0.3%  $1,172,316  1.4% 
Zestoretic  56.8%  5.9%  $5,379,487  0.8%  $1,415,040  1.6% 
Sandimmune  49.5%  5.9%  $2,069,395  0.32%  $544,578  0.6% 
Luvox  48.7%  4.1%  $15,608,090  2.4%  $2,581,956  3.0% 
Nor QD  42.6%  7.2%  $1,672,834  0.3%  $309,259  0.4% 
Zestril  33.3%  3.3%  $1,756,577  0.23%  $141,339  0.2% 
TOTAL  - - $33,930,866   5.2%  $8,882,992   10.4% 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  30  SELECTED CHARACTERISTICS OF SAMPLE DRUGS, CONTINUED 
Non-innovator Multiple Source Drugs 
Percent 
Percent  FY 2001  Percent of Total  Percent of Total 
Difference:  Potential 
Drug  Difference: High  Expenditures Expenditures Potential Savings 
Interquartile  Savings 
and Low States  (42 States)  for 28 Drugs  for 28 Drugs 
States 
Atenolol  4072.7%  266.3%  $1,780,532  0.3%  $1,645,525  1.9% 
Ranitidine Tablets  2495.5%  63.6%  $3,637,638  0.6%  $3,116,688  3.6% 
Ranitidine (500)  2459.9%  81.3%  $3,961,708  0.6%  $3,438,326  4.0% 
Ranitidine (1000)  2274.6%  111.9%  $4,382,270  0.7%  $3,876,220  4.5% 
Trimox  547.5%  32.5%  $2,615,314  0.4%  $1,807,883  2.1% 
Isosorbide 
Mononitrate  200.0%  39.7%  $3,693,750  0.6%  $2,045,719  2.4% 
Methylphenidate  120.1%  12.0%  $2,913,568  0.5%  $1,275,016  1.5% 
Diltiazem  67.6%  10.1%  $5,533,307  0.9%  $1,761,686  2.0% 
Naltrexone  43.6%  7.9%  $3,349,813  0.5%  $815,141  0.9% 
Oxycontin  20.5%  2.5%  $83,758,577  12.8%  $5,758,943  6.6% 
TOTAL  - - $115,626,477   17.9%  $25,541,147   29.5% 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   31    A P P E N D I X   D  
DISTRIBUTION OF STATES PRICES FOR LIPITOR AND CLOTRIMAZOLE 
Multiple source drugs (both non-innovator and innovator) tended to display 
a different pattern of price variation than single source drugs.  When the 
States prices are ordered from low to high, prices for the single source 
drugs generally increased from the lowest to highest State price at a more 
consistent rate than multiple source drugs.  Multiple source drugs tended to 
increase more sharply from one State to the next at the low and/or high 
ends of the price range, while prices of States in the middle of the range 
increased more gradually from State to State.  Comparing the States prices 
for Lipitor, a single source drug, to Clotrimazole, an innovator multiple 
source drug, illustrates this pattern. 
Distribution of States' Prices for Lipitor 
$2.95 
$2.90 
Unit  $2.85 
Price
$2.80 
$2.75 
$2.70 
$2.65 
$2.60 
$2.55 
0  5  10  15 20  25 30 35  40  45 
42 States, Ordered from Lowest to Highest Paying 
 Distribution of States' Prices for Clotrimazole 
$0.45 
$0.40 
Unit  $0.35 
Price
$0.30 
$0.25 
$0.20 
$0.15 
$0.10 
$0.05 
0  5  10 15 20 25 30  35 40 
39 States, Ordered from Lowest to Highest Paying 
  O EI -05-02-006 81  VARI AT ION  I N STAT E MEDIC AI D DRUG PRI CES   32  A P P E N D I X   E  

COMPARISON OF DISPENSING FEES TO STATES PRICES 
Though this study focuses on States reimbursement for the cost of the drug 
itself, we did collect information on the dispensing fees States paid to 
pharmacies during FY 2001.  Of the 42 States, 33 paid flat dispensing fees (e.g., 
Indiana paid $4.00 per prescription), and 9 paid variable dispensing fees.  For 
some of these States, variable dispensing fees vary with the price of the drug, 
such as Texas, which paid a flat fee plus an inventory management factor of 2 
percent of the drug cost.  Other States fees varied by pharmacy.  For example, 
Utah paid a higher fee to rural pharmacies than urban pharmacies, and 
Oregons fee varied by the volume of prescriptions that the pharmacy filled 
annually. We excluded the nine States with variable fees from our dispensing 
fee comparison. 
For the 33 States with flat fees, we explored whether the States that paid lower 
relative prices for the drugs in our sample compensated by paying higher 
dispensing fees.  We compared States dispensing fees to their ranks relative to 
other States.  The State with the lowest prices was ranked one.   We graphed 
these data points with State rank along the x-axis (independent variable) and 
State dispensing fee along the y-axis (dependent variable). 
If States that paid lower prices compensated pharmacies with higher dispensing 
fees, then we would expect the graph to show a negative slope, i.e., as the States 
ranks (and therefore prices) increased, the dispensing fee would decrease. In 
fact, as Chart X below displays, these comparisons demonstrated very little 
relationship at all. The best fit line is almost flat, which would indicate no 
relationship, and the slight slope is in a positive direction (slope = 0.0081).  
Further, the very small R2 (0.0153) indicates that any relationship between 
dispensing fee and relative drug prices for these 33 States is very weak. 
Relationship between States' Relative Drug Prices and Dispensing Fees 
$6.00 
$5.50 
$5.00 
e 
e $4.50 
F
g 
n
si $4.00 
n
e
p
s
Di $3.50 
y = 0.0081x + 3.9247 
$3.00 
R 2 = 0.0153 
$2.50 
$2.00 
0  5  10  15  20  25  30  35  40  45 
State Rank 
(1=State with lowest prices , 42=State with highest prices) 
  OEI-05-02-00681  VARIATI ON I N STATE MEDICAI D DRUG PRICES  33  A P P E N D I X   F  
POTENTIAL SAVINGS BY STATE 
Savings as Percent of States  States Savings as Percent of 
State  Potential Savings 
Expenditures on Sample Drugs  Total Potential Savings 
AK  $64,264   15.3%  0.1% 
AR  $854,018   12.2%  1.0% 
AZ  $8,096   16.7%  0.01% 
CO  $894,285   13.1%  1.0% 
CT  $1,368,736   12.2%  1.6% 
FL  $4,513,343   11.7%  5.2% 
GA  $3,355,312   14.8%  3.9% 
HI  $327,148   11.6%  0.4% 
ID  $531,284   13.7%  0.6% 
IL  $4,615,653   15.6%  5.3% 
IN  $2,037,517   12.7%  2.4% 
KS  $1,106,127   15.5%  1.3% 
KY  $2,986,066   17.2%  3.5% 
LA  $1,887,159   12.9%  2.2% 
MA  $2,278,094   7.6%  2.6% 
MD  $900,427   12.0%  1.0% 
ME  $844,402   9.9%  1.0% 
MI  $547,273   2.6%  0.6% 
MN  $924,362   8.6%  1.1% 
MO  $3,645,740   13.9%  4.2% 
MS  $2,484,232   16.7%  2.9% 
MT  $386,057   12.9%  0.5% 
NC  $5,090,788   15.6%  5.9% 
ND  $239,602   16.0%  0.3% 
NE  $880,540   15.9%  1.0% 
NH  $430,943   13.6%  0.5% 
NJ  $5,632,460   18.1%  6.5% 
NM  $326,577   16.6%  0.4% 
NV  $418,466   17.4%  0.5% 
NY  $13,017,331   16.7%  15.0% 
OH  $7,573,440   15.0%  8.7% 
OK  $1,098,092   16.2%  1.3% 
OR  $1,099,746   13.4%  1.3% 
PA  $3,091,889   12.4%  3.6% 
SC  $1,556,766   11.8%  1.8% 
SD  $221,419   12.9%  0.3% 
TX  $2,536,669   7.3%  2.9% 
UT  $549,730   14.0%  0.6% 
VT  $560,638   12.1%  0.7% 
WA  $4,288,644   11.3%  5.0% 
WV  $1,323,208   14.8%  1.5% 
WY  $174,374   14.5%  0.2% 
TOTAL  $86,670,918  - 100.4%* 
* Exceeds 100% due to rounding. 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  34  A P P E N D I X   G  

  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  35    OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  36    A C K N O W L E D   G M E N T S  

This report was prepared under the direction of William C. Moran, 
Regional Inspector General for Evaluation and Inspections in the 
Chicago Regional Office, and Natalie Coen, Deputy Regional 
Inspector General.  Other principal Office of Evaluation and 
Inspections staff who contributed include: 
Emily Melnick, Team Leader 
Erin Lemire, Lead Analyst 
Jennifer Gera, Intern 
Linda Frisch, Program Specialist  
Tricia Davis, Director, Medicare and Medicaid Branch  
Technical Assistance  
Barbara Tedesco, Mathematical Statistician 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  37    E N D   N O T E S  

1 This figure is based on data from Centers for Medicare & Medicaid Services, Center for Medicaid 
and State Operations, Financial Management Reports, Fiscal Year 2001.  Available at 
http://www.cms.gov/medicaid/mbes/ofs-64.asp 
2 Bruen, Brian.  States Strive to Limit Medicaid Expenditures for Prescribed Drugs.  Prepared for 
the Kaiser Commission on Medicaid and the Uninsured.  Washington, DC; February 2002   
3 Kreling, David H., David A. Mott, Joseph B. Wiederholt, Janet Lundy, Larry Levitt.  Prescription 
Drug Trends: A Chartbook Update.  Kaiser Family Foundation.  Washington, DC; November 
2001 
4 This figure is based on data from Centers for Medicare & Medicaid Services, Center for Medicaid 
and State Operations, Financial Management Reports, Fiscal Year (FY) 2001 and FY 1997.  Total 
Medicaid expenditures (minus drug expenditures) increased 31 percent from FYs 1997 to 2001; 
total Medicaid drug expenditures increased 94 percent during the same time period.  Data 
available at http://www.cms.gov/medicaid/mbes/ofs-64.asp 
5 Centers for Medicare & Medicaid Services, National Health Expenditure Projections 2001-2011.  
March 2002.  Available at http://cms.hhs.gov/statistics/nhe/default.asp 
6 Associated Press.  In Budget Crises, State Leaders Call for U.S. Aid.  New York Times, Final, 
Section A, Page 15, Column 1; July 25, 2002 
7 National Association of State Budget Officers.  Available at http://www.nasbo.org 
8 State Medicaid Manual, Chapter 6, Section 6305.  Available at 
http://www.cms.gov/manuals/pub45/pub_45.asp 
9 42 CFR  447.331 
10 42 CFR  447.301 
11 State Medicaid Manual, Chapter 6, Section 6305.  Available at 
http://www.cms.gov/manuals/pub45/pub_45.asp 
12 42 CFR  447.332 
13 State Medicaid Manual, Chapter 6, Section 6305.  Available at 
http://www.cms.gov/manuals/pub45/pub_45.asp
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  38  14 42 U.S.C.  1396r-8(a) 
15 42 U.S.C.  1396r-8 
16 42 U.S.C.  1396o(a)(2) 
17 42 CFR  447.54 
18 42 U.S.C.  1396o(e) 
19 42 CFR  433.139 
20 Conversation with Dr. Stephen Schondelmeyer, Director of the PRIME Institute at the University 
of Minnesota, August 6, 2002  
21 Reimbursement for Prescribed Drugs.  Report to the General Court.  Commonwealth of 
Massachusetts, Executive Office of Health and Human Services, Division of Health Care Finance 
and Policy.  October 3, 2002 
22 Maximum Allowable Cost Savings Report.  State of Vermont, Agency of Human Services.  
December 2, 2002  
23 Lawson K.A., Hong S.H., Johnsrud M.T., Skrepnek G.  An assessment of cost saving options for 
the Medicaid Vendor Drug Program.  The University of Texas College of Pharmacy, Austin, 
Texas. May 1995 
24 State Medicaid Manual, Chapter 6, Section 6305.  Available at 
http://www.cms.gov/manuals/pub45/pub_45.asp 
25 Office of Inspector General report Cost Containment of Medicaid HIV/AIDS Drug Expenditures,  
OEI-05-99-00611.  July 2001 
  OEI-05-02-00681  VARIATION IN STATE MEDICAID DRUG PRICES  39