Report Template Update = 04-30-05_rev.12 

Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

GENERIC DRUG UTILIZATION IN 


STATE MEDICAID PROGRAMS


Daniel R. Levinson


Inspector General 


July 2006


OEI-05-05-00360

Report Template Update = 04-30-05_rev.12 

Office of Inspector General 
 http://oig.hhs.gov 

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

as amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components: 

Office of Audit Services 

The 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. These assessments help reduce waste, 

abuse, and mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on 

significant issues. Specifically, these evaluations focus on preventing fraud, waste, or 

abuse and promoting economy, efficiency, and effectiveness in departmental programs. 

To promote impact, the reports also present practical recommendations for improving 

program operations. 

Office of Investigations 

The 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. 

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. OCIG imposes program exclusions and civil 

monetary penalties on health care providers and litigates those actions within HHS. 

OCIG also represents OIG in the global settlement of cases arising under the Civil False 

Claims Act, develops and monitors corporate integrity agreements, develops compliance 

program guidances, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
Δ EXECUTIVE SUMMAR Y 

OBJECTIVE 

To determine the extent of generic drug utilization in State Medicaid 

programs during 2004. 

BACKGROUND 

Medicaid is a jointly funded Federal and State health insurance 

program for certain low income and medically needy persons. 

Prescription drug costs are one of the largest and fastest growing 

Medicaid expenditures, totaling more than $34 billion in fiscal 

year 2003. 

Rising Medicaid costs have bolstered Federal support for using generic 

drugs to contain Medicaid prescription drug expenditures. A generic 

drug is chemically identical to its brand name counterpart, with the 

same therapeutic effect and the same risk-benefit profile. Generic 

drugs are, on average, 63 percent less expensive than brand name 

drugs. 

The Centers for Medicare & Medicaid Services (CMS) has encouraged 

generic drug substitution (i.e., substituting a generic drug for its brand 

name equivalent) as a safe and effective way for States to increase 

generic drug utilization and reduce costs. Many States have 

implemented policies to encourage generic substitution in their State 

Medicaid programs. 

Generic substitution is not possible when a provider prescribes a single 

source drug (i.e., a drug that has no generic equivalent). While single 

source drugs are the only available treatment for some conditions, other 

conditions are treatable with a number of drugs, some of which have 

generic equivalents and some of which do not. Some States and private 

insurers encourage health care providers to prescribe drugs with generic 

equivalents rather than single source drugs, which tend to be newer and 

more expensive. 

The overall level of generic drug utilization is determined both by the 

frequency of generic substitution at the pharmacy counter and by 

physician prescribing patterns. Therefore, in addition to assessing 

overall generic drug utilization (i.e., the percentage of all prescriptions 

that were generics), this study calculated the following indicators that 

contributed to overall generic utilization: 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S i 
EXE CUTIVE S U MMAR Y

1. Generic substitution rate: the percentage of all prescriptions for 

multisource drugs (i.e., drugs that have a generic substitute) that 

were dispensed as generics. 

2. Single source prescribing rate: the percentage of all prescriptions 

that were written for single source drugs (i.e., drugs that have no 

generic version). 

FINDINGS 

On average, generics were dispensed 89 percent of the time when 

generic substitutes were available. The “generic substitution rate” 

measures how often generics are dispensed when generic substitutes 

are available. Across all States, both the median and the average 

generic substitution rates were 89 percent. Twenty-three States had 

generic substitution rates at or above 90 percent. This compares 

favorably with a 90 percent private sector benchmark. 

Overall, generic substitution rates were similar across States. However, 

States showed substantial variation in their generic substitution rates 

within certain therapeutic classes (i.e., groups of drugs that treat the 

same medical condition). For example, the generic substitution rate for 

anticoagulant drugs (blood thinners) ranged from 27 percent in one 

State to 100 percent in another. 

On average, 41 percent of prescriptions were written for drugs that 

have no generic substitutes. Single source drugs have no generic 

substitutes. Therefore, the proportion of prescriptions that are written 

for them (i.e., the single source prescribing rate) limits States’ 

opportunities for generic drug utilization. 

On average, single source drugs comprised 41 percent of all prescriptions 

filled. Thus, for this 41 percent of prescriptions, there was no opportunity 

to dispense a generic drug. Across State Medicaid programs, the single 

source prescribing rate ranged from 34 percent to 50 percent. 

On average, 54 percent of all drugs dispensed were generics. The 

“generic utilization rate” is the percentage of all prescriptions dispensed 

that were generics. Across all States, both the median and the average 

generic utilization rates were 54 percent. By State, generic utilization 

rates varied from 44 percent to 61 percent. To place these rates in 

context, trade publications report 2004 generic utilization rates of 

approximately 48 percent to 52 percent for many private pharmacy benefit 

organizations and health plans. 

OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S ii 
EXE CUTIVE S U MMAR Y

Variation in generic utilization was primarily explained by variation in 

single source prescribing. Generic drug utilization is affected both by 

generic drug substitution and by physician prescribing patterns. 

However, because generic substitution was both high and consistent 

across States, single source prescribing was the primary explanation for 

differences in generic drug utilization overall. Generic utilization was 

highest in States where single source prescribing was lowest. 

CONCLUSION 

We found that overall, State Medicaid programs demonstrated high 

generic drug utilization in 2004. On average, 54 percent of all 

prescriptions dispensed were generics, a figure that compares favorably 

to rates reported in the private sector. 

On average, generics were dispensed 89 percent of the time when 

generic substitutes were available. The high levels of generic 

substitution that we found for many Medicaid programs suggest that 

many States may have already achieved most of the growth in generic 

utilization possible through increasing generic substitution. However, 

certain therapeutic classes show substantial variation in States’ generic 

substitution rates, and thus, greater potential for gains in States with 

lower rates in these classes. 

To achieve significant increases in generic drug utilization, it is 

important to recognize that single source drug prescribing caps the level 

of generic drug utilization that a State Medicaid program can attain. 

States may realize greater gains by encouraging the prescribing of 

multisource drugs, which have generic equivalents, through counterdetailing, step therapy requirements, or other means. However, such 

efforts must be undertaken with caution to ensure that patients 

maintain access to appropriate treatment. 

In light of these findings, we suggest that CMS consider the following: 

o For States seeking to further increase generic substitution, CMS 

could assist States in identifying and targeting their efforts to 

promote generics in therapeutic classes wherein their State rate is 

substantially lower than other States and opportunities for gains 

are greatest. 

o For States seeking more substantial gains in generic utilization, 

CMS could offer information and technical assistance in shifting 

utilization from single source to multisource drugs in a clinically 

OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S iii 
EXE CUTIVE S U MMAR Y 

responsible manner. In particular, CMS has developed expertise in 

the therapeutic interchangeability of drugs through Medicare’s 

oversight of Part D formularies. Such expertise would be a valuable 

resource for States that desire assistance in developing policies to 

influence prescribing patterns while ensuring that beneficiaries 

maintain access to appropriate treatment. 

AGENCY COMMENTS 

In its comments, CMS indicated that it strongly encourages the 

dispensing of generic drugs. As OIG noted in our report, drug 

manufacturer rebates may occasionally provide States with better 

prices on some brand name drugs than on generics. CMS suggested 

that this could account for lower generic utilization rates for certain 

therapeutic classes in some States. In response to our suggestions, 

CMS stated that it will share this report with States and encourage 

State Medicaid agencies to review their generic drug use by therapeutic 

class. Finally, CMS indicated its willingness to share its expertise on 

therapeutic interchangeability with States but noted that States also 

have other qualified sources of this information. 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S iv 
i 

Δ T ABLE OF CONTENTS 

EXECUTIVE SUMMARY ....................................

INTR O D U C T I ON ........................................... 1

FINDI NGS ................................................. 7

Generics dispensed in 89 percent of cases where 

 a generic exists ......................................... 7

Single source drugs comprised 41 percent of prescriptions ....... 8

Of all drugs dispensed, 54 percent were generics .............. 9

CON C L U SION ............................................ 11

 Agency Comments ..................................... 12

ENDN OTE S ............................................... 13

APPENDIXES ............................................. 17

A: Key Terms ......................................... 17

B: Generic Drug Utilization Indicators by State.............. 19

C: Analysis of the Impact on Medicaid Generic Drug Utilization 

 of Dual Eligibles’ 2006 Shift to Medicare ................. 21

D: Agency Comments................................... 22

ACKN O W LEDGMENTS .................................... 23

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 
Δ INTRODU C TION 

OBJECTIVE 

To determine the extent of generic drug utilization in State Medicaid 

programs during 2004. 

BACKGROUND 

Medicaid Prescription Drug Coverage 

Medicaid is a jointly funded Federal and State health insurance 

program for certain low-income and medically needy persons. 

Individual States establish eligibility requirements, benefit packages, 

and payment rates for their Medicaid programs under broad Federal 

standards administered by the Centers for Medicare & Medicaid 

Services (CMS). Medicaid requires that States provide basic services to 

beneficiaries to receive Federal matching funds. States may also receive 

Federal funding if they provide other optional services. 

All State Medicaid programs have elected to include prescription drug 

coverage. States are constrained by Federal law and regulation from 

implementing certain drug cost containment tools that are available to 

private health plans. Most significantly, Medicaid must cover all drugs, 

brand and generic, whose manufacturers have entered into Medicaid 

Rebate Agreements (with a few specific exceptions).1 

Medicaid Prescription Drug Expenditures 

Prescription drug coverage is one of the largest and fastest growing 

Medicaid expenditures. In fiscal year 2003, Medicaid spent more than 

$34 billion on prescription drugs.2 Medicaid prescription drug costs 

doubled between 1998 and 2002, rising from less than 8 percent to over 

11 percent of the total Medicaid budget.3 From 2000 to 2002 alone, 

prescription drug expenditures in fee-for-service Medicaid programs 

grew faster than expenditures in any other Medicaid service category, 

averaging an 18.8 percent increase per year.4 As a result of rising costs, 

States currently devote over one-fifth of their budgets to Medicaid 

spending.5 

Approximately 6 million beneficiaries are eligible for both Medicaid and 

Medicare (dual eligibles).6 This population represents about 15 percent 

of all Medicaid beneficiaries.7 On January 1, 2006, prescription drug 

coverage for these beneficiaries transferred from Medicaid to Medicare.8 

This shift may affect Medicaid drug utilization patterns and 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 1 
INTROD UCT ION 

expenditures, given dual eligibles’ extensive utilization of prescription 

drugs. However, Medicaid will continue to be responsible for 45 million 

nondually eligible beneficiaries. 

Generic Drugs 

A generic drug is chemically identical to its brand name counterpart, 

with the same therapeutic effect and the same risk-benefit profile. To 

be approved by the Food and Drug Administration (FDA), a generic 

drug must contain the same amount(s) of the same active ingredient(s) 

as the brand name product.9 (For a detailed definition of this and other 

key terms, please see Appendix A.) The generic drug must also be the 

same strength, be available in the same dosage, have the same route of 

administration, and have essentially the same labeling as the brand 

name drug. Generic drug manufacturing and packaging facilities are 

held to the same safety and quality standards as those of brand name 

drugs. 

Potential Savings from Increasing Generic Drug Utilization 

Generic drugs are much less expensive than brand name drugs. In 

2003, the average brand name prescription cost $83.66, while the 

average generic prescription cost $30.58, a 63 percent difference.10 

Rising Medicaid costs have bolstered Federal support for using generic 

drugs to contain Medicaid prescription drug expenditures.11 During 

congressional hearings on Medicaid prescription drug reimbursement 

held in December 2004, the Chairman of the Committee on Energy and 

Commerce stated that “. . . generic drugs have a critical role to play in 

containing soaring drug costs.”12 Congress has also indicated its 

interest in using generic drugs to control costs; the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 

includes provisions to promote generics in the new Medicare 

prescription drug benefit. 

Pursuant to Federal law and regulation, States retain some flexibility in 

containing Medicaid drug costs through encouraging a shift from brand 

name to generic drug utilization. States can achieve this shift by 

encouraging pharmacies to dispense generics when possible and by 

encouraging doctors to prescribe multisource drugs (i.e., drugs with 

generic equivalents) when clinically indicated. 

Forty-one State Medicaid programs have “mandatory generic 

substitution” policies, which require that generic drugs be dispensed 

whenever a generic version of the drug is available.13 However, many 

States allow physicians to override mandatory generic substitution by 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 2 
INTROD UCT ION

indicating “Dispense as Written” and/or “Brand Medically Necessary” on 

the prescription. A few States require physicians or pharmacists to take 

additional steps to override the substitution, such as obtaining prior 

authorization from the Medicaid program and/or citing a specific 

medical necessity for the brand (such as allergy to an inactive 

ingredient in the generic) before the brand name drug can be dispensed. 

Some State Medicaid programs have taken other measures to encourage 

generic drug utilization. These include placing generics on the 

preferred drug list, setting higher copayments for brand name drugs, 

paying higher pharmacy dispensing fees for generic drugs, requiring 

beneficiaries to try a generic drug for their condition before covering a 

brand name drug (“step therapy”), and educating health care providers 

about use of generic drugs (“counter-detailing”).14 

Generic Drug Substitution 

“Generic substitution” means dispensing a generic drug instead of its 

brand name equivalent. Generic substitution is only possible when a 

health care provider prescribes a multisource drug (i.e., a drug with a 

generic equivalent). Generic substitution occurs when a physician 

prescribes the generic version of a multisource drug rather than its 

brand name equivalent, or when a pharmacist is presented with a 

prescription for a multisource brand name drug and dispenses the 

generic version instead.15 

Theoretically, States should be able to achieve high generic substitution 

rates, because generic drugs are chemically and therapeutically 

equivalent to their brand name counterparts. There are situations in 

which generic substitution is not possible, but these circumstances are 

rare. For example, a small percentage of patients may medically 

require the brand name version of a drug if they are allergic to an 

inactive ingredient such as a dye or binder found in the generic version. 

Additionally, disruptions in the supply chain may mean that a 

pharmacy occasionally does not have the generic version of a drug in 

stock and must dispense the brand name.16 Despite these potential 

barriers, generic substitution rates above 90 percent have been reported 

by private health plans.17 

Generic substitution is an attractive option for cost containment, 

because it can save money without adversely affecting beneficiaries’ 

health. CMS encourages generic substitution as a safe and effective 

strategy by which States may lower Medicaid drug costs, noting the 

90 percent substitution rates achieved in some private health plans.18 

OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 3 
INTROD UCT ION 

While generic substitution generally achieves savings, it may not save 

money in all circumstances. Medicaid’s net drug payments are based on 

reimbursement to pharmacies, minus rebates from drug manufacturers. 

Shifting from brand name to generic drugs will almost always lower 

Medicaid reimbursements because generic drugs are generally much 

less expensive than brand name drugs. However, States usually receive 

higher Medicaid rebates for brand name drugs than for generic drugs. 

In some cases, it is possible that the higher Medicaid rebate could lead 

to a lower net payment for a brand name drug than for its generic 

equivalent. 

Single Source Drug Prescribing 

The rate at which single source drugs (i.e., drugs with no generic 

equivalents) are prescribed in a State depends on a number of factors. 

These include prescriber habits, patient demand for newer or highly 

advertised drugs, and therapeutic advances associated with newer 

drugs. For some conditions, single source drugs are the only available 

treatment. However, other conditions are treatable with a number of 

different drugs, some of which have generic equivalents and some of 

which do not. For some patients, only one prescription drug option is 

appropriate, but for other patients, a variety of drugs may work equally 

well. In those instances, some States and private insurers encourage 

health care providers to prescribe drugs with generic equivalents rather 

than single source drugs, which tend to be newer and more expensive. 

SCOPE AND METHODOLOGY 

Scope 

This study focused on analyzing States’ patterns of generic drug 

utilization rather than describing States’ policies. Detailed information 

on State Medicaid policies, including policies that encourage generic 

utilization, is available from multiple sources. Further, we did not test 

for evidence of causal links between State policies and patterns of 

generic drug utilization. Generic drug utilization is influenced by 

numerous factors in addition to State Medicaid policies, and we had no 

means of controlling for those factors to identify the effects of the 

policies themselves. 

Instead, by calculating indicators of generic utilization and 

benchmarking States against one another, this study explored the 

potential avenues for increasing generic drug utilization. We did not 

make any clinical assessments as to what rates of generic substitution, 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 4 
INTROD UCT ION

single source drug prescribing, or overall generic utilization are 

desirable or appropriate. 

Methodology 

In this study, we analyzed the population of national drug codes (NDC) 

for drugs purchased by State Medicaid programs through fee-for-service 

in 2004. To do so, we used utilization data from the Medicaid Drug 

Rebate (MDR) program and drug product data from First DataBank. 

The MDR data do not include utilization for drugs purchased by 

managed care organizations or pharmacy benefit managers under 

contract with State Medicaid agencies. The data also do not include 

utilization for drugs purchased from entities that receive the 340B 

discount.19 Drug utilization data were not available for the State of 

Arizona because it did not participate in the MDR program. 

Because the populations that use prescription drugs most heavily, as 

well as pharmacy benefits as a whole, are frequently excluded from 

Medicaid managed care, the fee-for-service population accounts for the 

majority of Medicaid prescriptions.20 

Measuring Generic Utilization 

For each State (including the District of Columbia, herein referred to as 

a State), we calculated the overall rate of generic drug utilization by 

dividing the total number of generic drug prescriptions by the total of all 

prescriptions. We also calculated the following two indicators that 

contribute to overall utilization: 

1. Generic substitution rate: we divided the number of generic drug 

prescriptions by the total of all multisource prescriptions (both 

generic and multisource brand). We considered a drug substitutable 

if it has an FDA A-rated generic equivalent available.21 

2. Single source prescribing rate: we divided the total of all single 

source prescriptions by the total of all prescriptions. 

To determine whether the shift of dual eligibles from Medicaid to 

Medicare drug coverage will likely affect Medicaid generic utilization 

patterns, we repeated our calculation of the generic substitution rate, 

single source prescribing rate, and generic utilization rate with dual 

eligibles excluded from the analysis. We estimated the proportion of 

prescriptions for each NDC that were dispensed to dual eligibles using 

2003 Medicaid Statistical Information System data (the most recent 

available). See Appendix C for our analysis of the impact on Medicaid 

OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 5 
INTROD UCT ION 

generic drug utilization of the dually eligible population’s shift to 

Medicare. 

Comparing Patterns of Generic Utilization 

To compare generic drug utilization among State Medicaid programs, 

we calculated the mean, median, standard deviation, and range for each 

indicator. 

Standards 

This study was conducted in accordance with “Quality Standards for 

Inspections” issued by the President’s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 6 
ΔF I NDING S 

 FINDINGS 

On average, generics were dispensed 89 percent 

of the time when generic substitutes were 

available 

The “generic substitution rate” 

measures how often generics are 

dispensed when generic substitutes 

are available. CMS has encouraged 

State Medicaid programs to increase generic substitution, noting that 

some private health plans have achieved rates of over 90 percent.22 

Overall, Medicaid was close to achieving this private sector benchmark 

in 2004. Across all States, both the median and the average generic 

substitution rates were 89 percent. Twenty-three States had generic 

substitution rates at or above 90 percent. Appendix B displays the 

generic substitution rate for each State Medicaid program. 

We found no evidence that generic substitution will change 

substantially due to the 2006 transfer of dual eligibles from Medicaid to 

Medicare drug coverage. Excluding dual eligibles from the analysis 

produced an average generic substitution rate of 88 percent for nondual 

eligibles, just 1 percentage point lower than the overall average. 

Appendix C provides additional analysis of the impact on Medicaid 

generic drug utilization of the dually eligible population’s shift to 

Medicare. 

Generally, generic substitution rates were similar across States 

Across States, Medicaid programs did not demonstrate substantial 

variation in their levels of generic substitution. The lowest State rate 

was 83 percent, 9 percentage points below the highest State rate of 

92 percent. However, the majority of States were clustered tightly 

around the median substitution rate of 89 percent. For example, 

substitution rates for the middle 80 percent of States all fell within a 

4 point range, from 87 percent to 91 percent. 

However, States’ generic substitution rates varied within certain therapeutic 

classes of drugs 

Within certain therapeutic classes (i.e., groups of drugs that treat the 

same medical condition), some State Medicaid programs achieved 

substantially higher generic substitution rates than others. For 

example, the generic substitution rate for anticoagulant drugs (blood 

thinners) ranged from 27 percent in one State to 100 percent in another. 

For other therapeutic classes, States demonstrated greater consistency 

in their generic substitution rates. For example, generic substitution 

rates for narcotic analgesics (pain relievers) ranged from 95 percent to 

100 percent across the States. Table 1 presents the minimum and 

maximum generic substitution rates across States for selected 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 7 
F I NDING S 

therapeutic classes, as well as the total 2004 Medicaid reimbursement 

for multisource drugs in each class to provide an overview of fiscal 

significance. 

Table 1: Substitution Rates and Reimbursement Across State Medicaid Programs 

for Selected Therapeutic Classes in 2004 

Therapeutic Class Minimum Maximum Percentage 

Point Difference 

Medicaid 

Reimbursement* 

Narcotic analgesics 95% 100% 5 $712,000,000 

PsychostimulantsAntidepressants 61% 89% 28 $616,000,000 

Anticonvulsants 80% 99% 19 $570,000,000 

Diabetic therapy 63% 91% 28 $396,000,000 

Antiulcer/gastrointestinal 

preparations 69% 99% 30 $302,000,000 

Antiarthritics 86% 100% 14 $264,000,000 

Anticoagulants 27% 100% 73 $187,000,000 

Bronchial dilators 31% 78% 47 $154,000,000 

Antinauseants 93% 100% 7 $130,000,000 

Systemic contraceptives 4% 79% 75 $98,000,000 

*Rounded to the nearest million. Includes reimbursement only for multisource drugs in each therapeutic class. 

Source: Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 

On average, 41 percent of prescriptions were 

written for drugs that have no 

generic substitutes 

Single source drugs have no 

generic substitutes. When a 

single source drug is prescribed, 

a generic drug cannot be 

dispensed. Therefore, the proportion of prescriptions that are written 

for single source drugs (i.e., the single source prescribing rate) limits 

States’ opportunities to utilize generic drugs. 

On average, single source drugs comprised 41 percent of all 

prescriptions filled. Thus, for this 41 percent of prescriptions, there was 

no opportunity to dispense a generic drug. 

OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 8 
F I NDING S 

Levels of single source drug prescribing varied across States 

Across State Medicaid programs, the single source prescribing rate 

ranged from a high of 50 percent (New Jersey) to a low of 34 percent 

(Washington and Hawaii). Consequently, there were substantially 

fewer opportunities to dispense generic drugs in some States than in 

others. Many factors may affect single source drug prescribing, 

including patient mix, prescriber habits, advances in certain drug 

treatments, and patient demand for newer or highly advertised drugs. 

Appendix B provides the single source prescribing rate for each State. 

The “generic utilization rate” is the On average, 54 percent of all drugs dispensed percentage of all prescriptions were generics dispensed that were generics. Across 

all States, both the median and the average generic utilization rates 

were 54 percent. To place these numbers in context, trade publications 

report 2004 generic utilization rates of approximately 48 percent to 

52 percent for many private pharmacy benefit organizations and health 

plans.23 

State Medicaid programs varied in their generic utilization. The 

highest State rate (61 percent) was 17 percentage points higher than 

the lowest State rate (44 percent). In four States, 60 percent or more of 

all drugs dispensed were generics. By comparison, in eight States less 

than half of all drugs dispensed were generics. Appendix B provides the 

generic utilization rate for each State. 

Variation in generic utilization was primarily explained by variation in single 

source drug prescribing 

Generic drug utilization is affected both by generic drug substitution 

and by physician prescribing patterns. However, because there was 

little variation in generic substitution, it did not play a major role in 

explaining differences between States in overall utilization. For 

example, 17 States had generic substitution rates of 90 percent. 

However, generic utilization in those States ranged from 48 percent to 

61 percent. 

In contrast, the relationship between generic utilization and single 

source prescribing was strong. Generic utilization was highest in States 

where single source prescribing was lowest. For example, of all 

50 States reviewed, Washington had the highest generic utilization 

(State rate was 61 percent) and the lowest single source prescribing 

(34 percent). Conversely, New Jersey had both the lowest generic 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 9 
States' 2004 Generic Utilization Rates

F I NDING S 

utilization (State rate was 44 percent) and the highest single source 

prescribing (50 percent). 

Chart 1 displays 2004 generic utilization and single source prescribing 

data from the 50 States. 

65% 

60% 

States’ 

2004 

Generic 55% 

Utilization 

Rates 

50% 

45% 

40% 

Chart 1: State Medicaid Programs’ Generic Utilization Rates 

vs. Single Source Drug Prescribing Rates in 2004 

30% 35% 40% 45% 50% 55% 

States' 2004 Single Source Prescribing Rates 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 10 
Δ CONCLUSION 

We found that, overall, State Medicaid programs demonstrated high 

generic drug utilization in 2004. On average, 54 percent of all prescriptions 

filled were generics. To place this rate in context, trade publications 

report 2004 generic utilization rates of 48 percent to 52 percent for 

many private pharmacy benefit organizations and health plans.24 

On average, generics were dispensed 89 percent of the time when 

generic substitutes were available. Twenty-three States had generic 

substitution rates at or above 90 percent, comparing favorably with the 

90 percent private sector benchmark noted by CMS. The high levels of 

generic substitution that we found for many Medicaid programs suggest 

that many States may have already achieved most of the growth in 

generic utilization possible through increasing generic substitution. 

Still, some States, particularly those with substitution rates below the 

median, may wish to consider taking additional measures to increase 

generic substitution. Certain therapeutic classes show substantial 

variation in States’ generic substitution rates, and thus, greater 

potential for gains in States with lower rates in those classes. 

To achieve significant increases in generic drug utilization, it is 

important to recognize that single source drug prescribing caps the level 

of generic drug utilization a State Medicaid program can attain. States 

may realize greater gains by encouraging the prescribing of multisource 

drugs, which have generic equivalents, through counter-detailing, step 

therapy requirements, or other means. However, such efforts must be 

undertaken with caution to ensure that patients maintain access to 

appropriate treatment. 

In light of these findings, we suggest that CMS consider the following: 

o For States seeking to further increase generic substitution, CMS could 

assist States in identifying and targeting their efforts to promote 

generics in therapeutic classes wherein their State rate is 

substantially lower than other States and opportunities for gains are 

greatest. 

o For States seeking more substantial gains in generic utilization, 

CMS could offer information and technical assistance in shifting 

utilization from single source to multisource drugs in a clinically 

responsible manner. In particular, CMS has developed expertise in 

the therapeutic interchangeability of drugs through Medicare’s 

oversight of Part D formularies. Such expertise would be a valuable 

resource for States that desire assistance in developing policies to 

influence prescribing patterns. 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 11 
C O NCL USIO N 

AGENCY COMMENTS 

In its comments, CMS indicated that it strongly encourages the 

dispensing of generic drugs. As OIG noted in our report, drug 

manufacturer rebates may occasionally provide States with better 

prices on some brand name drugs than on generics. CMS suggested 

that this could account for lower generic utilization rates for certain 

therapeutic classes in some States. In response to our suggestions, 

CMS stated that it will share this report with States and encourage 

State Medicaid agencies to review their generic drug use by therapeutic 

class. Finally, CMS indicated its willingness to share its expertise on 

therapeutic interchangeability with States but noted that States also 

have other qualified sources of this information. 

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

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Δ ENDNOTE S 

1 These exceptions include: agents when used to promote fertility; 

agents when used for cosmetic purposes or hair growth; agents when 

used for the symptomatic relief of cough and colds; prescription vitamins 

and mineral products, except prenatal vitamins and fluoride 

preparations; nonprescription drugs; barbiturates; and benzodiazepines. 

42 U.S.C. § 1396r-8(d)(2). 

2 Testimony of Dennis Smith, Director, Center for Medicaid and State 

Operations, Centers for Medicare & Medicaid Services, before the House 

Energy and Commerce Subcommittee on Oversight and Investigations, 

December 7, 2004. Available online at 

new.cms.hhs.gov/apps/media/press/testimony.asp?Counter=1278. 

Accessed January 18, 2006. 

3 Bruen, Brian and Ghosh, Arunabh. Kaiser Commission on Medicaid 

and the Uninsured. “Medicaid Prescription Drug Spending and Use,” 

page 3. June 2004. 

4 Ibid. 

5 National Governor’s Association and National Association of State 

Budget Officers. “Fiscal Survey of States,” page 3. June 2005. 

6 Centers for Medicare & Medicaid Services. “A Strategy for 

Transitioning Dual Eligibles from Medicaid to Medicare Drug Coverage.” 

May 2, 2005. Available online at 

www.cms.hhs.gov/medicarereform/strategyforduals.pdf. 

7 Centers for Medicare & Medicaid Services. “2003 CMS Statistics.” 

Available online at www.cms.hhs.gov/researchers/pubs/03cmsstats.pdf. 

8 Centers for Medicare & Medicaid Services. “A Strategy for 

Transitioning Dual Eligibles from Medicaid to Medicare Drug Coverage.” 

May 2, 2005. Available online at 

www.cms.hhs.gov/medicarereform/strategyforduals.pdf. 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 13 
9 Food and Drug Administration. “What are Generic Drugs?” 

Available online at www.fda.gov/cder/ogd/#Introduction. Accessed 

January 18, 2006. 

10 National Association of Chain Drug Stores. “Issue Brief: Retail 

Prescription Prices for Generic Drugs.” October 2004. Available at 

www.nacds.org/user-assets/pdfs/gov_affairs/issuebriefs/. 

11 For example: Centers for Medicare & Medicaid Services. “Safe and 

Effective Approaches to Lowering Prescription Drug Costs: Best 

Practices Among State Medicaid Drug Programs.” September 9, 2004. 

Also, “Medicaid Prescription Drug Reimbursement: Why the 

Government Pays Too Much, 2004”: Hearing Before the Subcommittee 

on Oversight and Investigations of the Senate Committee on Energy and 

Commerce, 108th Congress, 2nd Session. 

12 “Medicaid Prescription Drug Reimbursement: Why the Government 

Pays Too Much, 2004”: Hearing Before the Subcommittee on Oversight 

and Investigations of the Senate Committee on Energy and Commerce, 

108th Congress, 2nd Session. 

13 National Pharmaceutical Council. Pharmaceutical Benefits Under 

State Medical Assistance Programs, 2003. 

14 National Pharmaceutical Council. Pharmaceutical Benefits Under 

State Medical Assistance Programs, 2003. 

Crowley, Jeffrey; Ashner, Deb; Elam, Linda. Kaiser Commission on 

Medicaid and the Uninsured. Medicaid Outpatient Prescription Drug 

Benefits: Findings from a National Survey, 2003. December 2003. 

Page iv. 

Centers for Medicare & Medicaid Services. Medicaid Prescription 

Reimbursement by State – Quarter Ending March 2005. Available online 

at www.cms.gov/meidcaid/drugs/pre0305.pdf. Accessed August 22, 2005. 

15 In some States, pharmacists must inform and/or obtain the 

consumer’s permission to make this substitution. Additionally, such 

substitution at the pharmacy counter may be requested by the consumer 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 14 
in order to save money on copays, coinsurance, or out-of-pocket drug 

costs. 

16 Food and Drug Administration. “Drug Shortages.” Available online 

at www.fda.gov/cder/drug/shortages. Accessed August 18, 2005. 

17 Centers for Medicare & Medicaid Services. “Safe and Effective 

Approaches to Lowering Prescription Drug Costs: Best Practices Among 

State Medicaid Drug Programs.” September 9, 2004. 

18 Ibid. 

19 The 340B Drug Discount Program is a Federal discount program that 

requires pharmaceutical manufacturers to lower outpatient drug prices 

for qualified Federal grantees including Community Health Centers and 

Disproportionate Share Hospitals. 

20 Centers for Medicare & Medicaid Services. Statistical Compendium: 

Medicaid Pharmacy Benefit Use and Reimbursement in 1999. Exhibit 3. 

21 Generic drugs that receive an A rating have been found by FDA to be 

pharmaceutically and therapeutically equivalent to the brand name 

product. All A-rated products either have no known or suspected 

bioequivalence problems (codes AA, AN, AO, AP, and AT), or any 

suspected bioequivalence problems have been resolved with in vivo or in 

vitro evidence (code AB). 

Food and Drug Administration, The Orange Book, page xii. Available 

online at www.fda.gov/cder/orange/obannual.pdf. Accessed February 9, 

2006. 

22 Centers for Medicare & Medicaid Services. “Safe and Effective 

Approaches to Lowering Prescription Drug Costs: Best Practices Among 

State Medicaid Drug Programs.” September 9, 2004. 

23 Managed Care Week. “Some Insurers Say Pharmacy Costs Could 

Help Drive Medical Cost Growth in 2004.” May 24, 2004. Available 

online at 

www.aishealth.com/ManagedCare/GenBus/MCWSomeInsure.html. 

 OE I-05-05-00 360 GENER IC DR U G UT I L I Z AT I ON IN S TAT E ME D I C A I D P R O GRAM S 15 
PharmaCare. “Press Release: Advantage Health Solutions and 

PharmaCare Partnership Results in Proven Cost Savings.” October 13, 

2004. Available online at www.pharmacare.com/corporate/news_info.jsp. 

Drug Benefit News. “Continued Increases in Generic Utilization Mean 

Big Savings.” October 15, 2004. Available online at 

www.aishealth.com/DrugCosts/DBNGeneric.html. 

Raymond James Associates, Inc. “CaremarkRX.” Available online at 

www.raymondjames.com/pdfs/company/cmx080405c_1636.pdf. 

Samalonis, Lisa B. Drug Topics. “Generic Drug Use Varies Widely by 

State.” April 1, 2005. Available online at 

www.drugtopics.com/drugtopics/articleDetail.jsp?id=152728. 

24 Ibid. 

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ΔAPP E N D I X ~ A 

 APPENDIX ~ A 

KEY TERMS 

Single source drug: A brand name drug with no generic equivalent. 

Multisource brand drug: A brand name drug with at least one generic 

equivalent. Medicaid’s technical term for these drugs is “innovator 

multiple-source” drugs. 

Generic drug: A drug that is a chemical copy of a brand name drug. 

Medicaid’s technical term for these drugs is “non-innovator multiplesource” drugs. All generic drugs are considered multisource drugs, since 

a brand version was available first. 

Generic utilization rate: The percentage of all prescriptions filled that 

were generics. 

Generic substitution: Substituting a generic drug for its brand name 

equivalent. 

Generic substitution rate: The percentage of prescriptions for all 

multisource drugs (both multisource brand and generic) that are 

dispensed as generics. This indicator measures how often a generic is 

dispensed when a generic version of the prescribed drug exists. It is 

sometimes referred to as the generic “penetration” or “efficiency” rate. 

Single source drug prescribing rate: The percentage of all prescriptions 

that are written for single source drugs. This indicator measures how 

often providers write a prescription for a drug that has no generic 

equivalent. 

Therapeutic substitution: Substituting one drug for another that is 

chemically different but treats the same medical condition. 

Active ingredient: A substance in a drug that gives the drug its 

pharmaceutical effect. A multisource brand name drug and its generic 

equivalent(s) share the same active ingredient. 

Inactive ingredient: A substance in a drug that does not impact its 

pharmaceutical effect, such as dyes or fillers. A multisource brand 

name drug and its generic equivalent(s) may have different inactive 

ingredients. 

Therapeutic class: A group of drugs that treat the same medical 

condition. 

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APP E N D I X ~ A 

National drug code (NDC): A unique numeric identifier for each drug 

that includes information about the manufacturer, strength, dosage, 

and package size. 

Step therapy: A cost control mechanism that requires patients to try a 

less expensive (often generic) drug for their condition before a more 

expensive (often brand name) drug will be covered. 

Counter-detailing: Educational outreach to health care providers. 

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Δ APPENDIX ~ B 

GENERIC DRUG UTILIZATION INDICATORS BY STATE 

Table 2 presents the following rates for each State Medicaid program. 

o Generic substitution rate: the percentage of all prescriptions for 

drugs with generic equivalents that were dispensed as generics. 

o Single source prescribing rate: the percentage of all prescriptions 

that were for single source drugs, which have no generic equivalent. 

o Generic utilization rate: the percentage of all prescriptions filled 

that were generics. 

Table 2: Generic Drug Utilization in State Medicaid Programs, 2004 

State Generic 

Substitution Rate 

Single Source 

Prescribing Rate 

Generic 

Utilization Rate 

Alabama 90% 35% 61% 

Alaska 85% 48% 46% 

Arkansas 88% 44% 52% 

California 83% 46% 50% 

Colorado 89% 40% 55% 

Connecticut 90% 46% 49% 

Delaware 89% 46% 49% 

District of Columbia 91% 44% 52% 

Florida 92% 45% 51% 

Georgia 89% 43% 52% 

Hawaii 92% 34% 60% 

Idaho 89% 46% 49% 

Illinois 89% 36% 59% 

Indiana 90% 36% 59% 

Iowa 89% 39% 57% 

Kansas 90% 42% 53% 

Kentucky 90% 37% 59% 

Louisiana 89% 43% 52% 

Maine 84% 42% 53% 

Maryland 90% 47% 48% 

Massachusetts 90% 38% 58% 

Michigan 90% 40% 55% 

Minnesota 91% 39% 56% 

Mississippi 90% 43% 52% 

Missouri 90% 38% 56% 

Source: Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 

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APP E N D I X ~ B 

Generic Drug Utilization in State Medicaid Programs, 2004 Continued

State Generic 

Substitution Rate 

Single Source 

Prescribing Rate 

Generic 

Utilization Rate 

Montana 88% 40% 56% 

Nebraska 89% 36% 59% 

New Hampshire 88% 39% 56% 

New Jersey 89% 50% 44% 

New Mexico 86% 36% 58% 

New York 87% 45% 50% 

Nevada 90% 41% 54% 

North Carolina 88% 45% 49% 

North Dakota 88% 41% 53% 

Ohio 87% 42% 54% 

Oklahoma 90% 37% 58% 

Oregon 90% 35% 60% 

Pennsylvania 88% 43% 51% 

Rhode Island 91% 43% 52% 

South Carolina 89% 45% 49% 

South Dakota 88% 45% 50% 

Tennessee 90% 39% 56% 

Texas 90% 40% 55% 

Utah 89% 39% 56% 

Vermont 91% 43% 51% 

Virginia 88% 39% 56% 

Washington 90% 34% 61% 

West Virginia 89% 39% 55% 

Wisconsin 90% 39% 56% 

Wyoming 87% 45% 51% 

Source: Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 

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Δ APPENDIX ~ C 

ANALYSIS OF THE IMPACT ON MEDICAID GENERIC DRUG 

UTILIZATION OF DUAL ELIGIBLES’ 2006 SHIFT TO MEDICARE 

In 2006, dual eligibles began receiving prescription drug coverage 

through Medicare. Dual eligibles made up approximately 15 percent of 

Medicaid beneficiaries in 2004, and their transfer from Medicaid to 

Medicare will affect Medicaid’s overall prescription drug expenditures. 

However, excluding dual eligibles from our analysis made little 

difference in patterns of generic drug utilization. Table 3 displays 2004 

average generic substitution, single source prescribing, and generic 

utilization rates for all Medicaid beneficiaries and for nondually eligible 

beneficiaries. 

Table 3: 2004 Indicators of Generic Drug Utilization: 

All Medicaid Beneficiaries vs. Nondually Eligible Beneficiaries 

Generic Single Source Generic 

Substitution Rate Prescribing Rate Utilization Rate 

All Medicaid Beneficiaries 89% 41% 54% 

Nondually Eligible Beneficiaries 88% 43% 53% 

Percentage Point Difference (-1) +2 (-1) 

Source: Office of Inspector General analysis of 2004 State Medicaid drug utilization data, 2006. 

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Δ APPENDIX ~ D APPENDIX ~ D 

AGENCY COMMENTS

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Δ ACKNOWLEDGMENTS 

This report was prepared under the direction of Ann Maxwell, Regional 

Inspector General for Evaluation and Inspections in the Chicago 

regional office. Other principal Office of Evaluation and Inspections 

staff who contributed include: 

Erin Lemire, Project Leader 

Louise Schoggen, Lead Analyst 

Mark Stiglitz, Program Analyst 

Tom Komaniecki, Senior Program Analyst 

Linda Boone Abbott, Program Specialist 

Tricia Davis, Director, Medicare and Medicaid Branch 

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