Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

INSPECTOR GENERAL 

AUGUST 2003 

OEI-05-02-00080 

MEDICAID’S MENTAL HEALTH 

DRUG EXPENDITURES 
OFFICE OF INSPECTOR GENERAL

http://www.oig.hhs.gov/ 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, 

is to protect the integrity of the Department of Health and Human Services (HHS) programs, as well as 

the health and welfare of beneficiaries served by those programs. This statutory mission is carried out 

through a nationwide network of audits, investigations, and inspections conducted by the following 

operating components: 

Office of Audit Services 

The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit work done by others. Audits examine the 

performance of HHS programs and/or its grantees and contractors in carrying out their respective 

responsibilities and are intended to provide independent assessments of HHS programs and operations in 

order to reduce waste, abuse, and mismanagement and to promote economy and efficiency throughout the 

Department. 

Office of Evaluation and Inspections 

The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program 

evaluations (called inspections) that focus on issues of concern to the Department, the Congress, and the 

public. The findings and recommendations contained in the inspections reports generate rapid, accurate, 

and up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs. 

Office of Investigations 

The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of 

allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by 

providers. The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil 

monetary penalties. The OI also oversees State Medicaid fraud control units which investigate and 

prosecute fraud and patient abuse in the Medicaid program. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering 

advice and opinions on HHS programs and operations and providing all legal support in OIG’s internal 

operations. The OCIG imposes program exclusions and civil monetary penalties on health care providers 

and litigates those actions within the Department. The OCIG also represents OIG in the global settlement 

of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, 

develops model compliance plans, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
EXECUTIVE SUMMARY 

OBJECTIVE 

To measure the efficiency and economy of the Medicaid program as a purchaser of mental 

health drugs by comparing Medicaid to four other Federal payers. 

BACKGROUND 

Title XIX of the Social Security Act established Medicaid as a jointly-funded, Federal-State 

health insurance program. Medicaid plays a fundamental role in the provision of prescription 

drugs to over 42 million low-income and disabled beneficiaries, spending an estimated $20 

billion in 2001. 

In purchasing mental health drugs, as with all Medicaid expenditures, Title XIX requires States, 

as part of their State plan, to provide “methods and procedures” to assure that payments are 

“consistent with efficiency, economy, and quality of care.” The Centers for Medicare & 

Medicaid Services (CMS) exercises this control in two ways: by placing aggregate limits on 

pharmacy reimbursements and collecting statutorily-defined manufacturer rebates. 

Despite efforts to save program dollars, drug costs are the fastest growing component of 

Medicaid expenditures, growing an average annual rate of 20 percent compared to overall 

Medicaid expenditure growth of 9 percent from 1998 to 2000. According to a report issued 

by the United States Surgeon General, spending on drugs used to treat mental disorders are 

among the fastest rising costs for Medicaid. 

Of the $20 billion the Medicaid program spent on prescription drugs, mental health drugs 

represent an estimated 20 percent, or $4 billion. 

Methodology 

To assess the efficiency and economy of Medicaid’s drug expenditures, this inspection 

compared Medicaid’s average net costs for mental health drugs to four other Federallydiscounted prices: 1) Federal Ceiling Prices, 2) 340B Drug Discount Program ceiling prices, 3) 

Federal Supply Schedule prices, and 4) Big 4 (Department of Defense, Department of 

Veterans Affairs, Public Health Service and the Coast Guard) prices. These programs’ prices 

serve as criteria by which to assess the economy of Medicaid’s drug purchasing, without any 

judgement as to the appropriateness of different Federal drug purchasing mechanisms. 

Medicaid Mental Health Drugs i OEI-05-02-00080 
To calculate Medicaid’s net average price, we secured information on 25 mental health drugs 

from the 10 State Medicaid agencies with the largest reimbursement for prescription drugs. 

We obtained data on pharmacy payment and rebates for the first two quarters of Federal fiscal 

year 2001 (October 2000 - March 2001). The Department of Veterans Affairs and the CMS 

provided the Federal Ceiling Prices, the Federal Supply Schedule prices, the Big 4 prices, and 

340B ceiling prices. 

FINDINGS 

The 10 State Medicaid agencies reviewed paid more than other Government 

purchasers for the 25 mental health drugs reviewed 

Despite Federal and State measures to reduce prescription drug expenditures for the Medicaid 

program, the 10 State Medicaid agencies’ paid more than the other Federal prices reviewed. 

The complete range of differences between each program’s average price to Medicaid’s 

average net price is listed in the chart below. 

Average Percent Difference between Medicaid Net Prices 

and other Federal Drug Purchasers’ Prices, FY2001 

Federally-Mandated Drug Schedules 

Percent More Paid by 

Medicaid 

Federal Ceiling Prices 27% 

340B Ceiling Prices 13% 

Federal Drug Contract Prices 

Federal Supply Schedule Prices 11% 

Big 4 Prices 29% 

Source: OIG survey of State Medicaid drug expenditures 

As a result of price differences, the 10 State Medicaid agencies paid, on average, 

between $47 and $126 million more for the 25 mental health drugs than other 

Federal purchasers 

Medicaid would have saved $47 million if it had been able to pay prices equivalent to the 

Federal Supply Schedule prices and $126 million if it had paid prices equal to the Big 4 prices. 

In comparison to the Federal Ceiling Prices and the 340B ceiling prices, Medicaid would have 

saved $116 and $66 million, respectively, for the 25 drugs. The subgroup of nine antipsychotic 

drugs accounts for over half of the difference between Medicaid and the two ceiling pricing 

schedules. 

Medicaid Mental Health Drugs ii OEI-05-02-00080 
CONCLUSION 

To safeguard the Medicaid program from excessive payments and capitalize on potential 

savings, we encourage CMS to reconsider previous OIG recommendations. In past reports, 

the OIG has recommended that CMS work with States to pursue more efficient means of 

purchasing pharmaceuticals and initiate a review of the Medicaid rebate program. We also 

suggest that CMS share this report with the States. 

Medicaid Mental Health Drugs iii OEI-05-02-00080 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ...................................................... i

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

FINDINGS 

Compared to Other Federal Purchasers, Medicaid Paid More ....................... 6

Medicaid Paid Between $47 and $126 Million More .............................. 8

CONCLUSION ............................................................. 11

APPENDICES

A: Sampled Mental Health Drugs ........................................... 12 

B: Related Office of Inspector General Report Summaries ......................... 14 

C: Related Office of Inspector General Reports ................................ 16 

D: Endnotes ........................................................... 18 

ACKNOWLEDGMENTS .................................................... 19 

Medicaid Mental Health Drugs iv OEI-05-02-00080 
INTRODUCTION 

OBJECTIVE 

To measure the efficiency and economy of the Medicaid program as a purchaser of mental 

health drugs by comparing Medicaid to four other Federal payers. 

BACKGROUND 

Title XIX of the Social Security Act established Medicaid to be a jointly-funded, Federal-State 

health insurance program. Medicaid plays a fundamental role in the provision of prescription 

drugs to over 42 million low-income and disabled beneficiaries, spending an estimated $20 

billion in 2001.1 In fact, 12 percent of adults rely on Medicaid to cover their physical and 

mental health care needs. 

In purchasing mental health drugs, as with all Medicaid expenditures, Title XIX requires States, 

as part of their State plan, to provide “methods and procedures” to assure that payments are 

“consistent with efficiency, economy, and quality of care.”2 The Centers for Medicare & 

Medicaid Services (CMS) exercises this control in two ways. In 1987, CMS published a 

notice of the final rule (52 FR 28648) that limits Medicaid reimbursement to pharmacies. 

According to the rule, State payments to pharmacies are limited to the agency’s “best estimate 

of the price generally and currently paid [to wholesalers] by providers for the drug.” In 

addition, States are authorized to collect rebates from drug manufacturers for drug purchases 

made under the Medicaid program. 

Medicaid and Mental Health Drugs 

Overall expenditures for prescription drugs grew more than twice as fast as total Medicaid 

spending from fiscal years (FYs) 1998 to 2000. More specifically, expenditures for drugs 

used for the treatment of mental disorders are among the fastest-rising costs for Medicaid, 

currently representing an estimated 20 percent of Medicaid’s total payment for pharmaceuticals 

($4 billion).3 For 15 States, spending on mental health drugs exceeds 20 percent of the total 

Medicaid drug expenditures.4 

For some State Medicaid programs, the costs of treating mental disorders, such as 

schizophrenia and depression, have surpassed expenditures for medications to treat traditional 

high-cost ailments, such as high blood pressure, respiratory problems, and diabetes.5 Among 

the various categories of mental health drugs, spending on anti-psychotic medications is the 

highest, accounting for 11 percent of Medicaid’s total pharmacy costs for all drugs.6 

Antidepressants and anti-anxieties are also listed among the highest cost medications in 

Medicaid programs. 

Medicaid Mental Health Drugs 1 OEI-05-02-00080 
Related Work by the Office of Inspector General 

The Office of Inspector General (OIG) has issued a significant body of work related to 

Medicaid drug pricing, including such topics as reimbursement, rebates, and the accuracy of 

Average Wholesale Price. This report is part of the OIG’s continuing work focusing on 

Medicaid’s expenditures for specific classes of pharmaceuticals. In the report entitled “Cost 

Containment of Medicaid HIV/AIDS Drug Expenditures” (OEI-05-99-00611), OIG found 

that Medicaid pays up to 33 percent more than other Federal drug discount programs for 16 

antiretroviral drugs. Medicaid could have saved $102 million in Federal/State funds in fiscal 

year 2000, if the 10 sampled States had purchased the 16 antiretrovirals at Federal Ceiling 

Prices. Based on these findings, OIG recommended that CMS review the current 

reimbursement methodology and work with States to find a method that more accurately 

estimates pharmacy acquisition cost. Additionally, OIG recommended that CMS initiate a 

review of Medicaid rebates. See Appendices B and C for a more complete list of related OIG 

reports. 

Medicaid Mental Health Drugs 2 OEI-05-02-00080 
OBJECTIVE, SCOPE AND METHODOLOGY 

Objective and Scope 

The objective of this report was to measure the efficiency and economy of Medicaid’s mental 

health drug purchases. To do this, we compared Medicaid’s prices for mental health drugs to 

those of four other Federal pricing schedules also designed to limit the Government’s payments 

for prescription drugs. In addition to Medicaid’s cost containment measures, Federal payments 

for outpatient drugs are contained through: 1) Federal Ceiling Prices (FCP), 2) 340B Drug 

Discount Program ceiling prices, 3) Federal Supply Schedule prices (FSS), and 4) Big 4 

(Department of Defense (DoD), Department of Veterans Affairs (VA), Public Health Service 

(PHS), and the Coast Guard) prices. Table A illustrates how each of the discounts operate. 

Table A: Federal Discount Formulas 

Drug Purchasing Program Eligible Purchasers Discount Mechanism 

Medicaid State Medicaid Agencies 

!Aggregate limits on 

pharmacy reimbursement 

!Approximately 15.1% off 

manufacturer prices 

Federal Ceiling Prices the Big 4 agencies 

(DoD, VA, PHS, and Coast 

Guard) 

At least 24% off manufacturer 

prices 

340B Drug Discount Program certain Federally-qualified 

groups and grantees 

Approximately 15.1% off 

manufacturer prices 

Federal Supply Schedule specified agencies Contracts negotiated with 

manufacturers capped by 

“most favorable customer 

prices” 

Big 4 prices 

(Represents the 4 agencies’ 

“actual” price) 

Big 4 agencies Contracts negotiated with 

manufacturers capped by the 

Federal Ceiling Prices, but the 

lowest of several possible 

prices including the FSS 

The four Federal pricing mechanisms used in our comparisons offer a robust picture of the 

prices available across Federal programs. Comparing Medicaid prices to theoretical upper 

limits represented by the FCP and the 340B ceiling prices provided a means to assess 

Medicaid in relation to other programs with statutorily-defined manufacturer discounts. 

Comparing Medicaid to FSS and the Big 4 provided an opportunity to evaluate the actual 

prices paid by Medicaid to the actual negotiated prices paid by other Federal agencies. 

Medicaid Mental Health Drugs 3 OEI-05-02-00080 
In this inspection, we focused on differences in drug acquisition costs. For Medicaid, we 

defined acquisition costs as the net costs to Medicaid for mental health drugs. To calculate this, 

we subtracted the manufacturer rebates Medicaid received from the reimbursement rates 

Medicaid paid to pharmacies. For the other Federal prices used as points of comparison, drug 

acquisition cost equals the discounted price they pay for the drug. 

We did not attempt to factor in the cost of administrative overhead, drug distribution, and 

storage expenses. These expenses differ considerably depending on the drug purchasing and 

distribution systems employed by various pharmaceutical purchasers. Including these costs in 

our comparisons would result in a discussion of the cost-effectiveness of particular purchasing 

and distribution systems, and a discussion of that magnitude is beyond the scope of this report. 

Methodology 

Based on data from the National Pharmaceutical Council’s 1999 guide to State pharmaceutical 

benefits, we purposively selected State Medicaid agencies representing the top 10 States in 

terms of the highest amount of Medicaid reimbursement for prescription drugs. The States are: 

California, New York, Florida, Texas, Ohio, Illinois, Pennsylvania, Massachusetts, North 

Carolina, and New Jersey. These 10 States accounted for 58 percent of the total Medicaid 

drug payment amount ($7.9 billion out of $13.7 billion). 

We identified mental health drug classes using the Food and Drug Administration (FDA) list of 

therapeutic classes. We examined three of the four FDA-classified groups of mental health 

drugs: anti-anxiety, antidepressant, and antipsychotic/anti-maniac. We did not look at the 

fourth class, sedatives/hypnotics, because most of the drugs in this category are prescribed as 

sleep aids rather than for mental disorders. From each of these three classes, we selected the 

10 National Drug Codes (NDCs)1 with the greatest total national reimbursement, including all 

doses and package sizes of each NDC, based on an analysis of the calendar year 2000 Drug 

Utilization Files. After discovering generic versions were available for 5 of the NDCs2, our net 

sample was 25 brand-name drugs, representing 63 percent of the total national Medicaid 

payment for the 3 categories of mental health drugs in 2000. 

To gather data on State Medicaid agencies’ actual expenditures, we collected fee-for-service 

pricing data from each of the 10 sampled States in November 2001. The States reported their 

drug reimbursements, rebates and dispensing fees for the first 2 quarters of 

1 Each drug manufactured in the United States has a unique National Drug Code (NDC) which identifies the 

drug’s manufacturer, product dosage form, and packet size. 

2 Clozaril 100 mg, Wellbutrin 150 mg, and Xanax .5 mg, 1 mg, 2 mg 

Medicaid Mental Health Drugs 4 OEI-05-02-00080 
Federal fiscal year 2001 (October 2000 - March 2001). Due to a variety of data issues 

regarding the rebates, we assumed 100 percent collection of rebates for all 10 States. This 

estimation consisted of multiplying each State’s total units by the Medicaid unit rebate amount. 

The State of California negotiated additional rebate amounts with the pharmaceutical 

manufacturers of each of the drugs in our sample. Therefore, to approximate California’s net 

cost, we subtracted an additional amount using a rough estimate of the rebate formula, per the 

State’s direction. The State did not submit any pricing data relating to the specific calculation 

or net amount of the supplemental rebates, as this information is proprietary. 

In addition to the pricing information, we conducted telephone interviews with the 10 State 

Medicaid pharmacy directors. We interviewed the directors to gain further understanding of 

State-specific program operations and to explore any cost containment efforts surrounding 

mental health drugs. The interviews were conducted between November 2001, and January 

2002. 

We also gathered information regarding pharmaceutical pricing from CMS and the Department 

of Veterans Affairs (VA). The CMS supplied us with the Average Manufacturer’s Prices, the 

Best Prices, the Medicaid Unit Rebate Amounts, and the 340B ceiling prices. The VA 

provided us with data on FCP and FSS contract prices. 

To represent Medicaid’s average net price, we calculated an average unit price per drug, per 

State for the two quarters worth of data collected. Each State’s average unit price per drug 

was then averaged to represent the average unit price Medicaid paid for each of the 25 drugs. 

We used this average per drug unit price as the point of comparison to the unit price per drug 

for the other Governmental programs. We also calculated and utilized average FCPs because 

our study spanned a time period in which the FCP was refigured. The median difference 

between the calculated average FCP and any given FCP for the 25 drugs is 2 cents. 

This report reveals no specific drug pricing information because of the proprietary nature of this 

data. Toward this end, most estimates are averages and all estimates have been rounded. All 

savings estimates based on this information have been aggregated and rounded down for 

conservative estimates. 

We conducted our review in accordance with the Quality Standards for Inspections issued 

by the President’s Council on Integrity and Efficiency. 

Medicaid Mental Health Drugs 5 OEI-05-02-00080 
FINDINGS 

To measure Medicaid’s efficiency as a Government purchaser of pharmaceuticals, this study

compared 10 State Medicaid programs’ net costs for 25 mental health drugs to four other

Federal pricing schedules. Our review revealed that Medicaid’s net costs for the 

25 mental health drugs were the highest among all of the Government purchasers. Medicaid

could have saved between $47 and $126 million, on average, if they had been able to achieve

the lower prices paid by the other Federal purchasers for these 25 mental health drugs. 

The 10 State Medicaid agencies paid more than other 

Government purchasers for the 25 mental health drugs 

reviewed 

Despite Federal and State measures to reduce prescription drug expenditures for the Medicaid 

program, the 10 State Medicaid agencies’ average net price was between 11 and 29 percent 

more for the 25 sampled drugs than the other Federal programs. Table B demonstrates the 

complete range of differences between each programs’ average price and Medicaid’s average 

net price. See Appendix A for a breakdown of the percent differences between Medicaid and 

each of the other Federal purchasers by drug. 

Table B: Average Difference Between Medicaid Prices and Other Federal Prices 

Federally-Mandated Drug Schedules Percent More Paid by Medicaid 

Federal Ceiling Prices 27% 

340B Ceiling Prices 13% 

Federal Drug Contract Prices 

Federal Supply Schedule Prices 11% 

Big 4 Prices 29% 

Source: OIG survey of State Medicaid drug expenditures 

Medicaid pays more than other programs with statutorily-defined discounts 

On average, the net cost to the Medicaid program for the 25 mental health drugs reviewed was 

13 percent higher than the 340B ceiling prices, ranging from 9 to 28 percent. Medicaid paid an 

average 26 cents more per pill than the 340B ceiling price. The difference ranged from 6 cents 

more per pill for Buspar (5 mg, 500 units) to 65 cents more for Zyprexa (10 mg, 60 units). 

Medicaid Mental Health Drugs 6 OEI-05-02-00080 
On average, Medicaid paid 27 percent more than the FCP. The differences between 

Medicaid’s average net price and the FCP ranged from Medicaid paying 7 percent more for 

Buspar (10 mg, 500 units) to 50 percent more for Effexor (75 mg, 100 units). For over half of 

the sampled drugs, Medicaid paid at least 25 percent more than the FCP. Translated into 

actual dollar differences, Medicaid paid 48 cents more, on average, than the FCP. This 

difference ranged from 4 cents more per pill for Buspar (5 mg, 500 units) and $1.30 more for 

Zyprexa (10 mg, 60 units). 

It is important to remember that these two pricing schedules - the FCP and the 340B - are 

computed ceiling prices. The actual prices paid by entities covered by these programs can be, 

and typically are, below the mandated ceiling prices. For example, the Big 4 prices represent 

the actual prices paid by agencies benefiting from the FCP. When Medicaid’s prices are 

compared to the theoretical upper limit set by the FCPs, there is a 27 percent gap. However, 

this discrepancy grows to 29 percent when Medicaid’s prices are compared to the actual 

prices paid by the agencies benefitting from the FCPs. 

Medicaid also pays more in comparison to Federally-contracted prices 

In addition to comparing Medicaid’s net prices to other statutorily-defined prices, we 

compared Medicaid’s prices to the Federally-contracted prices of the FSS. This comparison 

involved both direct FSS prices as well as the prices actually paid by the 

Big 4 (VA, DOD, PHS and Coast Guard). 

Medicaid’s net cost, on average, was 11 percent higher than the FSS prices. This translates 

into an average of 23 cents more per pill. Overall, Medicaid paid more for all the drugs in the 

sample except the four versions of Risperdal (1 mg, 2 mg, 3 mg, and 4 mg). In these four 

instances, the 10 State Medicaid agencies paid an average of 13 percent less than the FSS 

contract prices, or 47 cents less per pill. With the exception of Risperdal, State Medicaid 

agencies paid between 1 cent more to $1.02 more per pill than the FSS, averaging 36 cents 

more per pill than the FSS contract. 

Comparing Medicaid’s average net prices to the Big 4 prices, we found that Medicaid’s price 

was 29 percent higher. Medicaid’s prices ranged from 6 percent to 67 percent higher than the 

prices paid by the Big 4. For 4 of the drugs, Medicaid paid approximately 50 percent more 

than the Big 4 prices. On average, States paid anywhere from 4 cents to $1.28 more per pill 

than the Big 4 agencies, averaging 51 cents more per pill. 

Medicaid Mental Health Drugs 7 OEI-05-02-00080 
As a result of price differences, the 10 State Medicaid 

agencies paid, on average, between $47 and $126 million 

more than other Federal purchasers for the 25 mental health 

drugs 

The 10 State Medicaid agencies would have saved, on average, between $47 and $126 million 

during the first 2 quarters of FY 2001 if they were able to obtain the lower prices of the other 

Federal drug purchasers for the 25 mental health drugs. The States would have saved a total of 

$116 million in the 2 quarters if their drug prices equalled the FCPs. This savings represents 

approximately 20 percent of the 10 States’ net costs for this time period. The Federal share of 

this savings is over $62 million. The 10 States would also have saved over $66 million if their 

prices for the 25 mental health drugs had equalled the 340B ceiling price. 

We additionally analyzed the potential savings for the Medicaid program if they were able to 

obtain prices comparable to FSS and Big 4 prices. While State Medicaid agencies do not 

currently negotiate directly with pharmaceutical manufacturers, these comparisons demonstrate 

the potential savings negotiations might be able to offer the Medicaid program. In fact, faced 

with dramatic increases in drug prices, more than 20 States are exploring the creation of 

purchasing coalitions with the intention of wielding aggregate purchasing power to negotiate 

lower prices.7 

The difference between FSS prices and Medicaid prices translates into potential Medicaid 

savings of $47 million semiannually. If the 10 State Medicaid agencies received prices similar 

to those negotiated for the Big 4, they would have saved $126 million during the same time 

period. Table C illustrates the potential savings in comparison to each Federal pricing program. 

Table C: Average Medicaid Savings 

Federally-Mandated Drug Schedules Savings (millions) 

Federal Ceiling Prices $116 

340B Ceiling Prices $66 

Federal Drug Contract Prices 

Federal Supply Schedule Prices $47 

Big 4 Prices $126 

Source: OIG survey of State Medicaid drug expenditures 

Medicaid Mental Health Drugs 8 OEI-05-02-00080 
The nine antipsychotic drugs reviewed constitute more than half of the potential 

savings between Medicaid and the other ceiling prices 

The 25 mental health drugs in our sample can be broken down into three drug classes: antianxieties, antidepressants, and antipsychotics. The savings potential for the anti-psychotic 

drugs far exceeds the saving potential for the other two classes of drugs. The savings for the 9 

drugs in this class represents 68 percent of the total the 10 States would save if their prices 

equalled FCP and 58 percent of the total if the States’ prices equalled the 340B ceiling price. 

Table D illustrates Medicaid’s average unit difference and savings potential by class. 

Table D: Medicaid’s Average Unit Difference and Savings Potential by Drug Classification 

Drug Class Unit 

Difference to 

FCP 

Savings 

Estimate 

Unit Difference 

to 340B 

Savings 

Estimate 

antipsychotic 79 cents $79 M 37 cents $38 M 

antidepressant 37 cents $31 M 23 cents $22 M 

anti-anxiety 21 cents $5 M 16 cents $5 M 

Source: OIG survey of State Medicaid drug figures, all expenditures have been rounded down 

The antipsychotics in our sample represent the greatest savings because of their higher costs 

and their higher utilization than drugs from the other classes. In fact, the 5 drugs with the 

greatest gap in unit price between Medicaid and the FCP are all antipsychotics: Zyprexa (10 

mg), Risperdal (4 mg), Seroquel (200 mg), Zyprexa (5 mg), and Zyprexa (2.5 mg). Medicaid 

would have saved $60 million semiannually if the net prices for just these 5 antipsychotics 

equalled the FCP, accounting for 52 percent of the total savings estimated for all 25 drugs in 

our sample. Antipsychotics are also heavily prescribed. In fact, just 2 of these antipsychotics 

represent almost 20 percent of all of the prescriptions for the 10 States. 

Our analysis specifies that one drug, Zyprexa (10 mg), contributes significantly to the high cost 

and utilization of antipsychotics. Medicaid paid $1.30 more than the FCP for Zyprexa (10 mg), 

compared to 72 cents more, on average, for the other antipsychotics. Zyprexa (10 mg) also 

leads in savings for the Medicaid program when prices are compared to the 340B, FSS, and 

Big 4 price. Further, the number of prescriptions dispensed for Zyprexa (10 mg) lead all other 

NDCs sampled by far with 371,823 prescriptions filled in 6 months. The drug with the second 

highest number of prescriptions is Risperdal (1 mg), but it falls behind Zyprexa (10 mg) by a 

significant 105,000 bottles with 267,247 prescriptions filled. Because of this, Zyprexa (10 mg) 

Medicaid Mental Health Drugs 9 OEI-05-02-00080 
is the top drug for savings for all 10 States and all 25 drugs at $58 million a year compared to 

the FCP and $14 million a year compared to the 340B price. 

Antipsychotics represent the largest potential for savings in relation to the other drug classes, 

and also comprise a significant portion of the total Medicaid drug budget. In FY 2001, the 10 

State Medicaid agencies in our sample spent $562 million on all 25 drugs selected, 67 percent 

of that expenditure, $378 million, purchased the 9 antipsychotics represented in our sample. 

These same nine antipsychotics represent 4 percent of the $20 billion Medicaid spent on all 

prescription drugs for FY 2001. 

The rapid growth in expenditures for antipsychotics has raised concerns in the State Medicaid 

programs as they struggle to contain program costs. States are concerned with finding 

strategies for maximizing cost-effectiveness while maintaining current access. Since Medicaid 

is the main provider of care for persons with schizophrenia, an illness that typically requires 

long-term drug therapy with these drugs, consistent, if not increasing, demand seems likely. 

Program savings through reducing drug costs represent a powerful means of maintaining current 

levels of service in the face of tightening budgets. For example, saving $79 million in drug 

acquisition costs for antipsychotics could help avoid restricting coverage of these crucial drugs. 

Alternate cost containment strategies, such as preferred drug lists and prior authorization, often 

exempt mental health drugs, making price containment strategies even more crucial for this set 

of drugs. 

Medicaid Mental Health Drugs 10 OEI-05-02-00080 
CONCLUSION 

The law directs the Medicaid program to establish payment methods that are efficient and 

economical. We found that Medicaid agencies in 10 States spent between $47 and 

$126 million more for 25 mental health drugs in 6 months than they would have had they 

obtained the lower prices used by the other Federal programs reviewed. 

To safeguard the Medicaid program from excessive payments for mental health drugs and 

capitalize on potential savings, we encourage CMS to reconsider the OIG recommendations 

made in previous reports. While these past reports focus on reducing Medicaid’s costs for 

various classes of drugs, the analysis of each demonstrates the need for CMS to address the 

broader issues Medicaid faces in purchasing all drugs. For a listing of these reports, please 

refer to Appendices B and C. Given that this report provides further evidence of the problems 

plaguing the Medicaid prescription drug benefit program, it supports recommendations 

previously set forth by the OIG which have not yet been implemented. We also suggest that 

CMS share this report with the States. 

In particular, we continue to believe that CMS should implement the recommendations outlined 

in our report entitled, “Cost Containment of Medicaid HIV/AIDS Drug Expenditures” (OEI05-99-00611). These recommendations are summarized below. For each of the 

recommendations, we offer CMS options for implementation, which are listed in Appendix B. 

< CMS should review the current reimbursement methodology and work with States to 

find a method that more accurately estimates pharmacy acquisition cost. 

<  CMS should initiate a review of Medicaid rebates. 

Medicaid Mental Health Drugs 11 OEI-05-02-00080 
APPENDIX A 

Sampled Mental Health Drugs

Anti-Anxieties 

Drug Name NDC Medicaid/340B 

Difference 

Medicaid/FCP 

Difference 

Medicaid/ Big4 

Difference 

Medicaid/FSS 

Difference 

Buspar 00087081841 22% 12% 11% 11% 

Buspar 00087081844 17% 11% 11% 11% 

Buspar 00087081941 23% 8% 7% 7% 

Buspar 00087081944 18% 7% 7% 7% 

Buspar 00087082232 14% 28% 28% 28% 

Buspar 00087082233 12% 28% 27% 27% 

Buspar 00087082481 13% 28% 28% 28% 

Antidepressants 

Drug Name NDC Medicaid/340B 

Difference 

Medicaid/FCP 

Difference 

Medicaid/ Big4 

Difference 

Medicaid/FSS 

Difference 

Prozac 00777310502 28% 11% 23% .6% 

Zoloft 00049490066 15% 37% 55% 38% 

Zoloft 00049491066 14% 36% 54% 36% 

Celexa 00456402001 13% 32% 67% 35% 

Paxil 00029321013 14% 22% 22% 22% 

Paxil 00029321113 15% 22% 30% 30% 

Paxil 00029321213 15% 25% 34% 34% 

Effexor XR 00008083301 9% 50% 50% 50% 

Remeron 00052010530 20% 30% 31% 31% 

Medicaid Mental Health Drugs 12 OEI-05-02-00080 
Antipsychotics 

Drug Name NDC Medicaid/340B 

Difference 

Medicaid/FCP 

Difference 

Medicaid/ Big4 

Difference 

Medicaid/FSS 

Difference 

Zyprexa 00002411260 11% 26% 26% 10% 

Zyprexa 00002411560 10% 27% 27% 10% 

Zyprexa 00002411760 10% 24% 24% 8% 

Risperdal 50458030006 12% 19% 19% -17% 

Risperdal 50458032006 12% 21% 20% -16% 

Risperdal 50458033006 11% 28% 27% -11% 

Risperdal 50458035006 11% 26% 25% -10% 

Seroquel 00310027110 11% 41% 42% 42% 

Seroquel 00310027210 10% 39% 41% 41% 

Medicaid Mental Health Drugs 13 OEI-05-02-00080 
APPENDIX B 

Related Office of Inspector General Report Summaries

“Cost Containment of Medicaid HIV/AIDS Drug Expenditures” (OEI-05-99-00611) 

Findings Recommendations 

Medicaid pays up to 33 percent more than other 

Federal Government drug discount programs for 

HIV/AIDS Drugs. 

For the 16 HIV/AIDS drugs examined, CMS should 

review the current reimbursement methodology and 

work with States to find a method that more accurately 

estimates pharmacy acquisition cost. 

< Option 1: 

Medicaid from Average Wholesale Price 

manipulations, or 

< Option 2: 

acquisition cost for the States based upon the 

Average Manufacturers Price, or 

< Option 3: Share Average Manufacturer Price 

data with States so that they can accurately 

set Medicaid reimbursement amounts. 

Differences in Federal drug pricing formulas are 

partially responsible for cost discrepancies. 

CMS should initiate a review of the Medicaid rebates 

for the 16 HIV/AIDS drugs examined. Two options 

include increasing the rebate percentage off AMP or 

basing the rebates on AWP. 

< Option 1: Increase the rebate percentage off 

of Average Manufacturer Price, or 

< Option 2: Base the rebates on Average 

Wholesale Price rather than Average 

Manufacturer Price so that it is linked to the 

reimbursement methodology. 

Develop safeguards to protect 

Create national estimated 

State reimbursement formulas affect the magnitude of 

the gap between Medicaid and other Government drug 

purchasers. 

Medicaid could have saved $102 million if the 10 

sampled States purchased the 16 antiretrovirals at 

Federal Ceiling prices. 

Medicaid Mental Health Drugs 14 OEI-05-02-00080 
“Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand 

Name Drugs” (A-06-00-00023) & Review of Pharmacy Acquisition Costs for Drugs 

Reimbursed Under the Medicaid Prescription Drug Program of ________” (A-06-01-00001 

through A-06-01-00008) 

(This nationwide audit resulted in 8 separate, State-specific reports. The States are: TX, FL, WI, 

CO, MO, WA, WV, IN) 

Findings Recommendations 

The actual acquisition cost for brand name drugs is 

estimated to be a national average of 21.84 percent 

below AWP. 

CMS should require the States to bring pharmacy 

reimbursement more in line with the actual acquisition 

cost of these drugs being realized by pharmacies. 

If reimbursement had been based on the estimates of 

this report, Medicaid could have saved $1.08 billion for 

100 drugs in calendar year 1999. 

Medicaid Mental Health Drugs 15 OEI-05-02-00080 
APPENDIX C 

Related Office of Inspector General Reports

“Cost Containment of Medicaid’s HIV/AIDS Drug Expenditures” (OEI-05-99-00611) 

“Medicare Reimbursement of Albuterol” (OEI-03-00-00311) 

“Medicare Reimbursement of End Stage Renal Disease Drugs” (OEI-03-00-00020) 

“Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products” 

(A-06-01-00053) 

“Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products” 

(A-06-97-00011) 

“Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand Name Drugs” 

(A-06-00-00023) 

Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid Prescription 

Drug Program of _______ (all included in the 2001 reports) 

Texas Health and Human Services Commission (A-06-01-00001) 

Florida Agency for Health Care Administration (A-06-01-00002) 

Wisconsin Department of Health and Family Services (A-06-01-00003) 

Colorado Department of Health Care Policy and Financing (A-06-01-00004) 

Montana Department of Public Health and Human Services (A-06-01-00005) 

Washington Department of Social and Health Services (A-06-01-00006) 

West Virginia Department of Health and Human Services (A-06-01-00007) 

Indiana Family and Social Services Administration (A-06-01-00008) 

“Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand Name Drugs” 

(A-06-96-00030) 

Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid Prescription 

Drug Program of _______ (all included in the 1996 review) 

California Department of Health Services” (A-06-95-00062) 

Montana Department of Public Health and Human Services” (A-06-95-00068) 

Florida Agency for Health Care Administration” (A-06-95-00065) 

North Carolina Department of Human Resources” (A-06-95-00071) 

Delaware Department of Health and Social Services” (A-06-95-00063) 

Virginia Department of Medical Assistance” (A-06-95-00072) 

Medicaid Mental Health Drugs 16 OEI-05-02-00080 
New Jersey Department of Human Services” (A-06-95-00070)

Nebraska Department of Social Services” (A-06-95-00069)

Missouri Department of Social Services” (A-06-95-00067)

District of Columbia Department of Human Services” (A-06-95-00064)

Maryland Department of Health and Mental Hygiene” (A-06-95-00066)

“Excessive Medicare Payments for Prescription Drugs” (OEI-03-97-00290) 

“Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and Reimbursement 

for Medicaid Drugs” (A-06-97-00052) 

“Medicaid Managed Care and HIV/AIDS” (OEI-05-97-00210) 

“Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide Additional 

Guidance to Drug Manufacturers to Better Implement the Program” (A-06-91-00092) 

“Medicaid Drug Rebates: Inaccurate Reporting of Medicaid Drug Data by Pharmacies” 

(A-06-91-00056) 

“Medicaid Drug Rebates: Improvements Needed in the Health Care Financing Administration’s 

Procedures to implement the Medicaid Drug Rebate Program” (A-06-91-00102) 

Medicaid Mental Health Drugs 17 OEI-05-02-00080 
APPENDIX D 

Endnotes

1. Centers for Medicare & Medicaid Services, Health Care Industry Market Update: 

Pharmaceuticals. January 10, 2003. 

2. Section 1902(a)(30)(A) of the Social Security Act. 

3. U.S. Department of Health and Human Services. (1999). Mental Health: A Report of the 

Surgeon General. Washington, DC & Centers for Medicare & Medicaid Services. (2000). 

State Drug Utilization Data. 

4. "Pharmaceutical Benefits Under State Medical Assistance Programs", 1999 National 

Pharmaceutical Council. The 15 States are: ID, IN, IA, ME, MD, MA, MN, NH, ND, OR, 

RI, UT, VT, WA, WI. 

5. Mental Illness Drugs Top State List. (2001, February 9). The Dallas Morning News. 

6. Centers for Medicare & Medicaid Services. (2000). State Drug Utilization Data. 

7. National Council of State Legislatures. 2002 Prescription Drug Discount, Bulk Purchasing & 

Price-Related Legislation. www.ncls.org/programs/health/drugdisc02.htm,. 

Medicaid Mental Health Drugs 18 OEI-05-02-00080 
ACKNOWLEDGMENTS 

This report was prepared under the direction of William C. Moran, Regional Inspector General for 

Evaluation and Inspections in Chicago and Natalie Coen, Deputy Regional Inspector General. Other 

principal Office of Evaluation and Inspections staff who contributed include: 

Ann Maxwell, Project Leader Genevieve Nowolinski, Program Specialist 

Madeline Carpinelli, Program Analyst 

For information or copies of this report, please contact

the Office of Inspector General’s 

Public Affairs office at (202) 619-1343

Reports are also available on the World Wide Web at our home page address:

http://www.oig.hhs.gov/ 

Medicaid Mental Health Drugs 19 OEI-05-02-00080