Department of Health and Human Services 


OFFICE OF 

INSPECTOR GENERAL 

VARIATION IN STATE MEDICAID 


DRUG PRICES


Inspector General 

September 2004 

OEI-05-02-00681 

ABSTRACT 

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 State’s 

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. 

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 EXECUTIVE SUMMARY 

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 State’s 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 

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EXECUTIVE SUMMARY 

(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, Medicaid’s 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 State’s estimated pharmacy 

acquisition cost. The estimated pharmacy acquisition cost is often 

used as a proxy to gauge State’s 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. 

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APPENDIX~AEE APPENDIX~A APPENDIX~AEECUTIVE SUMMARY EXECUTIVE SUMMARY 

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 highestpaying 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 CMS’s 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 

EXECUTIVE SUMMARY 
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. 

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TABLE OF CONTENTS 

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

E X E C U T I V E S U M M A R Y ......................................... ii

I N T R O D U C T I O N ................................................ 1

F I N D I N G S ....................................................... 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 

R E C O M M E N D A T I O N S .......................................... 24

A G E N C Y C O M M E N T S .......................................... 26

A P P E N D I C E S ................................................... 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

A C K N O W L E D G M E N T S .......................................... 37

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

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 INTRODUCTION 

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 State’s 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 

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INTRODUCTION 

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 pharmacy’s 

usual and customary charge to the general public. 9 The estimated 

acquisition cost is the State Medicaid agency’s 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 

pharmacy’s 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 drug’s 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 

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INTRODUCTION 

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 

State’s estimated acquisition cost calculation; (2) the pharmacy’s 

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 

State’s estimated acquisition cost calculation; or (2) the pharmacy’s 

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 

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INTRODUCTION 

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 copayment. 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 

beneficiary’s 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 

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INTRODUCTION 

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). 

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INTRODUCTION 

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 State’s 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 

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INTRODUCTION 

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 State’s 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 

Standar s for Inspecti d ons issued by the President’s Council on 

Integrity and Efficiency. 

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FINDINGS 

The highest paying State’s 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 

For 4 drugs, the highest paying State paid between 120 and 548 percent more than the price 

paying State paid over 2000 of the lowest paying State. Appendix C provides the percent price 

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 

Highest and Lowest States 

Percent Difference between 

Interquartile States 

Average 477% 28% 

Median 49% 6% 

Range 12% to 4073% 3% to 266% 

Source: OIG National Survey, 2002 

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FINDING 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 

Drug Lowest State’s Price 

per Package 

Highest State’s Price

per Package 

Price Difference 

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- 

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FINDINGS 

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 

Drug Category Range of Percent

Price Differences 

Average Percent 

Price Difference 

Median Percent 

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 noninnovator 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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 10 
FINDINGS 

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. 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

IL UT OH NH NM NY NJ 

Chart 1. Highest, Lowest, and Mean Ranks for Selected States 

MI TX MD AR LA MO 

Rank 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 11 
FINDING 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 

State All 28 drugs Single Source 

Drugs 

Innovator 

Multisource Drugs 

Non-innovator 

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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 12 
FINDINGS 

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. 

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FINDINGS 

Table E. FY 2001 Expenditures and Potential Savings by Drug Category 

Drug Category FY 2001 

Expenditures 

Percent of 

Total 

Expenditures 

Potential 

Savings 

% of Total 

Potential Savings 

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 Medicaid’s 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, Medicaid’s 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 

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FINDINGS 

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 

Drug Medicaid Paid Medicaid Could 

Have Paid 

Savings as Percent 

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 State’s potential savings depends on the State’s unit prices and 

utilization. 

Savings calculations for each State are a product of the State’s unit 

price, relative to the lowest paying State, and the State’s utilization. 

The higher the State’s 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 State’s 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 

State Potential Savings % of Total 

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 

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FINDINGS 

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 

Michigan’s potential savings are only $547,000 (less than one-tenth 

of New Jersey’s). Michigan’s 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 

State’s 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 

pharmacy’s 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 16 
FINDING 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 State’s estimated acquisition cost formula is often used as a proxy 

by which to gauge that State’s 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 17 
FINDING 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 

Drug Price Variation for 15 States 

with EAC=AWP-10% 

Price Variation for All 42 

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

for 42 States 

Average Variation

for 15 States 

Median Variation 

for 42 States 

Median Variation 

for 15 States 

23% 12% 18% 12% 

Source: OIG National Survey, 2002 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 18 
FINDINGS 

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 

i l i i

All i i i i

Pr ces for States with EAC=AW P-10%- are abeled & ndicated with a wh te square. 

 other States' pr ces ndicated w th a black tr angle. 

$1.10 

$1.15 

$1.20 

$1.25 

$1.30 

$1.35 

PAME NV IN SC MT VT KY GA ND NC NY 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 

pharmacy’s 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 

pharmacy’s charge to the cash-paying customer or the pharmacy’s 

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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 19 
FINDING 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 20 
FINDINGS 

as the lowest maximum allowable cost. For example, in FY 2001, 

Oklahoma’s maximum allowable cost for Ranitidine was almost 

$0.38 per pill, a price 371 percent higher than Washington’s 

maximum allowable cost of $0.08 per pill for the same drug.f 

Finally, while a State’s 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” copayments 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 State’s 

unit price by $0.75/unit, up to 1,000 units, for which a $3 copayment reduces a State’s 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. 

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 FINDINGS 

Table J. Potential Reduction in Unit Price based on $3 Co-payment 

Drug Units per 

Prescription 

Potential Reduction 

in Unit Price 

Average Unit

Price 

Potential Percent 

Reduction in 

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 Medicaid’s 

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 State’s 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 22 
FINDINGS 

drugs sampled. Texas used the pay and chase method and achieved the 

second lowest prices overall for our sample of drugs. 

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 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 State’s 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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 24 
RECOMMENDATIONS 

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 CMS’s 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. 

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AGENCY COMMENTS 

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 CMS’s 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 CMS’s 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 pharmacy’s 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 26 
AGENCY COMMENTS 

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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 27 
A P P E N D I X A 

S A M P L E O F 2 8 D R U G S 

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 

Release 

40 MG 100 42 

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). 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 28 
APPENDIX 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 

Prilosec duodenal ulcer, gastric ulcer, gastroesophageal reflux disease 

(GERD), erosive esophagitis, pathological hypersecretory conditions 

Ranitidine HCI duodenal ulcer, gastric ulcer, gastroesophageal reflux disease 

(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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 29 
APPENDIX C 

SELECTED CHARACTERISTICS OF SAMPLE DRUGS 

Single Source Drugs 

Drug 

Percent 

Difference: High 

and Low States 

Percent Difference: 

Interquartile States 

FY 2001 

Expenditures

(42 States) 

Percent of Total 

Expenditures

for 28 Drugs 

Potential 

Savings 

Percent of Total 

Potential Savings 

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 

Drug 

Percent 

Difference: High 

and Low States 

Percent Difference: 

Interquartile States 

FY 2001 

Expenditures

(42 States) 

Percent of Total 

Expenditures for 

28 Drugs 

Potential 

Savings 

Percent of Total 

Potential Savings 

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% 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 30 
SELECTED CHARACTERISTICS OF SAMPLE DRUGS, CONTINUED 

Non-innovator Multiple Source Drugs 

Drug 

Percent 

Difference: High 

and Low States 

Percent 

Difference: 

Interquartile 

States 

FY 2001 

Expenditures

(42 States) 

Percent of Total 

Expenditures

for 28 Drugs 

Potential 

Savings 

Percent of Total 

Potential Savings 

for 28 Drugs 

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 E I-05-02-00 6 8 1 VA R I A T I O N I N S T A T E ME D I C A I D DRUG P R I C E S 31 
 APPENDIX 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 

Unit 

Price

$2.95 

$2.90 

$2.85 

$2.80 

$2.75 

$2.70 

$2.65 

$2.60 

$2.55 

0 5 

$0.45 

$0.40 

Unit $0.35 

Price

$0.30 

$0.25 

$0.20 

$0.15 

$0.10 

$0.05 

0 

10 15 20 25 30 35 40 

42 States, Ordered from Lowest to Highest Paying 

 Distribution of States' Prices for Clotrimazole 

5 10 15 20 25 30 35 40 

39 States, Ordered from Lowest to Highest Paying 

 O E I-05-02-00 6 8 1 VA R I A T I O N I N S T A T E ME D I C A I D DRUG P R I C E S 32 

45 
APPENDIX 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 

Oregon’s 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 

R 2

Di

y = 0.0081x + 3.9247 

 = 0.0153 

$2.00 

$2.50 

$3.00 

$3.50 

$4.00 

$4.50 

$5.00 

$5.50 

$6.00 

spensing Fee 

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 VA R I A T I O N I N S TATE ME D I C A I D DRUG P RICES 33 
APPENDIX F 

POTENTIAL SAVINGS BY STATE 

State Potential Savings Savings as Percent of State’s 

Expenditures on Sample Drugs 

State’s Savings as Percent of 

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. 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 34 
APPENDIX G 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 35 
 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 37 
2001 

 END NOTES 

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 

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

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 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 

 O E I - 0 5 - 0 2 - 0 0 6 8 1 VARIATION IN S TATE MEDICAID DRUG P RICES 39