Department of Health and Human Services 


OFFICE OF 

INSPECTOR GENERAL 

ADDITION OF QUALIFIED DRUGS


TO THE MEDICAID FEDERAL 


UPPER LIMIT LIST 


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 Investiga ions t

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. 
∆ ABSTRACT 


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. 

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∆ 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 Manual and 

on its Web site. 

In February 2004, the Office of Inspector General (OIG) issued a report 

entitled Omission of D ugs from the Federal Upper Limit Li r st 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 CMS’s 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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EXECUTIVE SUMMARY

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 

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EXECUTIVE SUMMARY 

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 OIG’s methodology and the subsequent savings 

estimates. 

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∆ T A B L E O F C O N T E N T S 

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

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

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

FINDINGS

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 State’s 

reimbursement for a drug not exceed the lower of its estimated 

acquisition cost plus a reasonable dispensing fee or the provider’s 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 

drug’s 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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INTRODUCTION 

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 provider’s 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 multiplesource 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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INTROD UCTION 

versions. The FDA identifies equivalent drugs in its publication 

A p oved Drug Pr uct r p r od s with The apeutic Equivalence Evaluations. 

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 provider’s 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. 

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INTROD UCTION 

Related Work by the Office of Inspector General 

In February 2004, the Office of Inspector General (OIG) issued a report 

entitled Omission of D ugs from the Federal Upper Limit Li r st 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 firsttime 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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INTROD UCTION

the three-supplier criterion, we obtained data from the Re o TM f r d Bo k o

Windows® CD-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 Bo ko . In total, 109 of the firsttime 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). 

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∆ FINDINGS 


The CMS did not consistently add 

qualified drugs to the Federal upper 

The CMS does not consistently add qualified 

drugs to the Federal upper limit list in a timely 

manner limit list in a timely manner during 

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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FINDING 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 CMS’s 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 CMS’s 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 CMS’s 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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FINDINGS 

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 

Between 2001 and 2003, only 27 of 

the 109 reviewed drugs were 

associated with potential losses 

caused by products not being 

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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FINDING 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 R d Book e listed 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. 

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FINDINGS ∆ 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 OIG’s 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 

Re o d Bo k, and (2) verifying that the drug is actually available in the 

market by contacting manufacturers and suppliers. 

The full text of CMS’s comments is presented in Appendix D. 

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RECOMMENDATION 

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 CMS’s efforts will 

alleviate the problems identified in this report. 

In response to CMS’s 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, CMS’s interpretation would potentially allow for more 

instances where a product would be placed on the Federal upper limit 

list. The OIG’s 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 CMS’s 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. 

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∆ APPENDIX ~ A 

Complete List of 109 Reviewed Drugs 

Drug Unit Strength 

3 A-rated

 Date 

Acetaminophen; Butalbital; Caffeine; 

Codeine Capsule; Oral 325MG;50MG;40MG;30MG 22-Aug-01 

Amcinonide Cream; Topical 0.10% 31-May-02 

Ammonium Lactate Cream; Topical 12% 10-Apr-03 

Amoxicillin Suspension; Oral 400MG/5ML 4-Dec-02 

Amoxicillin Suspension; Oral 200MG/5ML 4-Dec-02 

Amoxicillin; Clavulanate Potassium Tablet; Oral 875MG;125MG 17-Sep-02 

Amoxicillin; Clavulanate Potassium Tablet; Oral 500MG;125MG 30-Oct-02 

Amoxicillin; Clavulanate Potassium Suspension; Oral 200MG/5ML;28.5MG/5ML 16-Dec-02 

Amoxicillin; Clavulanate Potassium Suspension; Oral 400MG/5ML;57MG/5ML 16-Dec-02 

Amoxicillin; Clavulanate Potassium Chewable Tablet; Oral 200MG;28.5MG 3-Dec-03 

Amoxicillin; Clavulanate Potassium Chewable Tablet; Oral 400MG;57MG 3-Dec-03 

Betamethasone Diproprionate Augmented Gel; Topical 0.05% 2-Dec-03 

Betamethasone Diproprionate Augmented Cream; Topical 0.05% 9-Dec-03 

Betamethasone Diproprionate; 

Clotrimazole Cream; Topical 0.05% 5-Jun-01 

Bupropion Hydrochloride ER Tablet; Oral 150MG 22-Mar-04 

Buspirone Hydrochloride Tablet; Oral 5MG 27-Feb-02 

Buspirone Hydrochloride Tablet; Oral 10MG 27-Feb-02 

Buspirone Hydrochloride Tablet; Oral 15MG 27-Feb-02 

Buspirone Hydrochloride Tablet; Oral 30MG 25-Mar-04 

Butorphanol Tartrate Nasal Spray 1MG/SPRAY 12-Mar-02 

Cefaclor ER Tablet; Oral 500MG 4-Sep-02 

Cefuroxime Axetil Tablet; Oral 250MG 2-Oct-02 

Cefuroxime Axetil Tablet; Oral 500MG 2-Oct-02 

Clindamycin Hydrochloride Capsule; Oral 300MG 18-Mar-03 

Econazole Nitrate Cream; Topical 1% 26-Nov-02 

Ethinyl Estradiol; Norethindrone 

Acetate Tablet; Oral 0.03MG;1.5MG 18-Sep-03 

Ethinyl Estradiol; Norethindrone 

Acetate Tablet; Oral 0.02MG;1MG 18-Sep-03 

Ethinyl Estradiol; Norgestimate Tablet; Oral 0.035MG;0.25MG 9-Jan-04 

Ethinyl Estradiol; Norgestimate Tablet; Oral 

0.035MG,0.035MG,0.035MG 

;0.18MG,0.215MG,0.025MG 26-Mar-04 

Famotidine Tablet; Oral 20MG 16-Apr-01 

Famotidine Tablet; Oral 40MG 16-Apr-01 

Flecainide Acetate Tablet; Oral 100MG 28-Oct-02 

Flecainide Acetate Tablet; Oral 150MG 28-Oct-02 

Flecainide Acetate Tablet; Oral 50MG 28-Oct-02 

Fludrocortisone Acetate Tablet; Oral 0.1MG 21-Jan-03 

Fluoxetine Hydrochloride Capsule; Oral 10MG 29-Jan-02 

Fluoxetine Hydrochloride Capsule; Oral 20MG 29-Jan-02 

Fluoxetine Hydrochloride Capsule; Oral 40MG 29-Jan-02 

3 Supplier 

Date 

01-Oct-01 

1-Jul-02 

1-Jul-03 

1-Jan-03 

1-Apr-03 

1-Oct-02 

1-Jan-03 

1-Jan-03 

1-Jan-03 

1-Jan-04 

1-Jan-04 

1-Jan-04 

1-Jan-04 

01-Jul-01 

1-Apr-04 

01-Apr-02 

01-Apr-02 

01-Apr-02 

01-Apr-04 

01-Apr-02 

1-Oct-02 

1-Jan-03 

1-Jan-03 

01-Apr-03 

1-Jan-03 

1-Oct-03 

1-Jan-04 

1-Apr-04 

1-Apr-04 

01-Jul-01 

01-Jul-01 

01-Jan-03 

01-Jan-03 

01-Jan-03 

1-Apr-03 

01-Apr-02 

01-Apr-02 

01-Apr-02 

Federal Upper 

Limit Date 

01-Dec-02 

01-Dec-02 

01-Dec-02 

20-Nov-01 

20-Nov-01 

01-Dec-02 

01-Dec-02 

01-Dec-02 

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APPENDIX~A 

Drug 

Fluoxetine Hydrochloride 

Fluoxetine Hydrochloride 

Fosinopril Sodium 

Fosinopril Sodium 

Fosinopril Sodium 

Hydrocodone Bitartrate; Ibuprofen 

Ipratropium Bromide 

Ipratropium Bromide 

Isotretinoin

Isotretinoin

Isotretinoin

Lidocaine; Prilocaine 

Lisinopril 

Lithium Carbonate 

Lithium Carbonate 

Lovastatin 

Lovastatin 

Lovastatin 

Mefloquine Hydrochloride 

Megestrol Acetate 

Metformin Hydrochloride 

Metformin Hydrochloride 

Metformin Hydrochloride 

Metolazone

Metolazone

Metolazone

Midodrine Hydrochloride 

Mirtazapine 

Mirtazapine 

Mirtazapine 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mixed Salts (Amphetamine) 

Mometasone Furoate 

Mupirocin 

Nizatidine 

Unit 

Solution, Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Nasal Spray 

Nasal Spray 

 Capsule; Oral 

 Capsule; Oral 

 Capsule; Oral 

Cream; Topical 

Tablet; Oral 

ER Tablet; Oral 

ER Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Suspension; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

 Tablet; Oral 

 Tablet; Oral 

 Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Ointment; Topical 

Ointment; Topical 

Capsule; Oral 

Strength 

20MG/5ML 

10MG 

10MG 

20MG 

40MG 

7.5MG;200MG 

0.021MG/SPRAY 

0.042MG/SPRAY 

10MG 

20MG 

40MG 

2.5%;2.5% 

30MG 

300MG 

450MG 

10MG 

20MG 

40MG 

250MG 

40MG/ML 

500MG 

850MG 

1GM 

2.5MG 

10MG 

5MG 

5MG 

15MG 

30MG 

45MG 

2.5MG 

1.25MG 

5MG 

7.5MG 

1.875MG 

3.125MG 

3.75MG 

0.10% 

2% 

150MG 

3 A-rated

 Date 

29-Jan-02 

29-Jan-02 

23-Apr-04 

23-Apr-04 

23-Apr-04 

31-Dec-03 

31-Mar-03 

31-Mar-03 

24-Dec-02 

24-Dec-02 

24-Dec-02 

27-Aug-03 

1-Jul-02 

21-Apr-03 

21-Aug-03 

17-Dec-01 

17-Dec-01 

17-Dec-01 

29-Dec-03 

15-Feb-02 

24-Jan-02 

24-Jan-02 

24-Jan-02 

23-Dec-03 

24-Dec-03 

1-Mar-04 

11-Sep-03 

19-Jun-03 

19-Jun-03 

19-Jun-03 

14-Jun-02 

19-Jun-02 

14-Jun-02 

14-Jun-02 

9-Sep-03 

9-Sep-03 

9-Sep-03 

14-Nov-03 

7-Nov-03 

5-Jul-02 

3 Supplier 

Date 

01-Apr-02 

01-Apr-02 

1-Jul-04 

1-Jul-04 

1-Jul-04 

1-Jan-04 

1-Jul-03 

1-Jul-03 

1-Jan-03 

1-Jan-03 

1-Jan-03 

1-Oct-03 

1-Oct-02 

1-Jul-03 

1-Oct-03 

01-Jan-02 

01-Jan-02 

01-Jan-02 

1-Jan-04 

01-Apr-02 

1-Apr-02 

1-Apr-02 

1-Apr-02 

1-Jan-04 

1-Apr-04 

1-Apr-04 

1-Jan-04 

1-Oct-03 

1-Oct-03 

1-Oct-03 

1-Jul-02 

1-Jul-02 

1-Oct-02 

1-Oct-02 

1-Apr-04 

1-Apr-04 

1-Apr-04 

1-Jan-04 

1-Jan-04 

1-Oct-02 

Federal Upper 

Limit Date 

01-Dec-02 

01-Dec-02 

11-Mar-03 

01-Dec-02 

01-Dec-02 

01-Dec-02 

18-Mar-04 

18-Mar-04 

11-Mar-03 

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APPENDIX~A 

Drug 

Nizatidine 

Ofloxacin 

Ofloxacin 

Ofloxacin 

Omeprazole 

Omeprazole 

Oxaprozin 

Paroxetine Hydrochloride 

Paroxetine Hydrochloride 

Paroxetine Hydrochloride 

Paroxetine Hydrochloride 

Pergolide Mesylate 

Pergolide Mesylate 

Pergolide Mesylate 

Prednisolone Sodium Phosphate 

Promethazine Hydrochloride 

Propafenone Hydrochloride 

Rimantidine Hydrochloride 

Sotatol Hydrochloride 

Sotatol Hydrochloride 

Sotatol Hydrochloride 

Tamoxifen Citrate 

Tamoxifen Citrate 

Tizanidine Hydrochloride 

Tizanidine Hydrochloride 

Torsemide 

Torsemide 

Torsemide 

Torsemide 

Tramadol Hydrochloride 

Trimethobenzamide Hydrochloride 

Unit 

Capsule; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

DR Capsule; Oral 

DR Capsule; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Solution; Oral 

Suppository; Rectal 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Tablet; Oral 

Capsule; Oral 

Strength 

300MG 

200MG 

300MG 

400MG 

20MG 

10MG 

600MG 

10MG 

20MG 

30MG 

40MG 

.05 MG 

.25MG 

1MG 

5MG/5ML 

12.5MG 

300MG 

100MG 

120MG 

160MG 

80MG 

10MG 

20MG 

2MG 

4MG 

100MG 

10MG 

20MG 

5MG 

50MG 

300MG 

3 A-rated

 Date 

5-Jul-02 

2-Sep-03 

2-Sep-03 

2-Sep-03 

1-Nov-02 

1-Nov-02 

31-Jan-01 

8-Mar-04 

8-Mar-04 

8-Mar-04 

8-Mar-04 

4-Sep-03 

4-Sep-03 

4-Sep-03 

23-Dec-02 

11-Apr-03 

7-Feb-02 

30-Aug-02 

8-Apr-04 

8-Apr-04 

8-Apr-04 

20-Feb-03 

20-Feb-03 

3-Jul-02 

3-Jul-02 

27-May-03 

27-May-03 

27-May-03 

27-May-03 

19-Jun-02 

28-Aug-03 

3 Supplier 

Date 

1-Oct-02 

1-Oct-03 

1-Oct-03 

1-Oct-03 

1-Jan-03 

1-Oct-03 

01-Apr-01 

1-Apr-04 

1-Apr-04 

1-Apr-04 

1-Apr-04 

1-Jan-04 

1-Jan-04 

1-Jan-04 

1-Jan-03 

1-Jul-03 

01-Apr-02 

01-Oct-02 

1-Jul-04 

1-Jul-04 

1-Jul-04 

1-Apr-03 

1-Apr-03 

1-Oct-02 

1-Oct-02 

1-Jul-03 

1-Jul-03 

1-Jul-03 

1-Jul-03 

1-Jul-02 

1-Oct-03 

Federal Upper 

Limit Date 

11-Mar-03 

01-Dec-02 

27-Jun-04 

27-Jun-04 

27-Jun-04 

11-Mar-03 

11-Mar-03 

11-Mar-03 

Sources: FDA Web site, Red Book, Federal upper limit list 

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∆ APPENDIX ~ B 

Estimated Losses to Medicaid 

Drug 

Fluoxetine HCL 

Buspirone HCL 

Metformin HCl 

Famotidine 

Buspirone HCL 

Tramadol HCl 

Metformin HCl 

Fluoxetine HCL 

Metformin HCl 

Fluoxetine HCL 

Fluoxetine HCL 

Tamoxifen Citrate 

Oxaprozin 

Buspirone HCL 

Famotidine 

Fluoxetine HCL 

Mirtazapine 

Nizatidine 

Tamoxifen Citrate 

Mirtazapine 

Flecainide Acetate 

Mirtazapine 

Flecainide Acetate 

Flecainide Acetate 

Lisinopril 

Nizatidine 

Rimantidine HCL 

TOTAL 

Strength 

20 MG 

15 MG 

1 GM 

20 MG 

10 MG 

50 MG 

850 MG 

10 MG 

500 MG 

40 MG 

10 MG 

10 MG 

600 MG 

5 MG 

40 MG 

20 MG/5 ML 

30 MG 

150 MG 

20 MG 

45 MG 

50 MG 

15 MG 

100 MG 

150 MG 

30 MG 

300 MG 

100 MG 

Form 

Capsule 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Capsule 

Tablet 

Capsule 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Solution 

Tablet 

Capsule 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Tablet 

Capsule 

Tablet 

Quarters 

Delay 

2 

2 

7 

1 

2 

2 

7 

2 

7 

2 

2 

3 

6 

2 

1 

2 

1 

1 

3 

1 

3 

1 

3 

3 

1 

1 

1 

Potential 

Losses 

$56,697,780 

$23,261,047 

$16,011,279 

$11,487,628 

$10,536,672 

$9,632,958 

$8,893,822 

$6,404,089 

$4,922,364 

$4,015,053 

$3,276,601 

$2,285,933 

$2,184,381 

$2,163,399 

$1,601,892 

$1,299,147 

$572,887 

$448,501 

$444,140 

$413,550 

$339,654 

$254,751 

$148,689 

$115,875 

$32,077 

$20,014 

$829 

$167,465,012 

Sources: FDA Web site, Red Book, Federal upper limit list 

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∆ APPENDIX ~ 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 Win ows® d CD-ROM, a national drug compendium published

quarterly by Micromedex (hereinafter, referred to as Re k d Boo ). 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 Re o d Bo k. 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. 

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APPENDIX~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 Re o d Bo k and 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 R d B e ook. 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 Bo ko . 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 Bo ko were 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. 

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APPENDIX~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 CMS’s 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 State’s 

reimbursement for the drug only, we: 

(1) calculated the total amount paid in dispensing fees for the drug by 

multiplying the State’s 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 

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APPENDIX~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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∆ APPENDIX ~ D 

 O E I - 0 3 - 0 4 - 0 0 3 2 0 ADDITION OF E LIGIBLE DRUGS TO THE MEDICAID F EDERAL UPPER L IMIT L IST 20 
 O E I - 0 3 - 0 4 - 0 0 3 2 0 ADDITION OF E LIGIBLE DRUGS TO THE MEDICAID F EDERAL UPPER L IMIT L IST 21 
∆ ACKNOWLEDGMENTS 


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, Pr ect L ad oj e er 

Tricia Davis, Director, Medicare and Medicaid Branch 

 O E I - 0 3 - 0 4 - 0 0 3 2 0 ADDITION OF E LIGIBLE DRUGS TO THE MEDICAID F EDERAL UPPER L IMIT L IST 22