GAO-07-239R Medicaid Federal Upper Limits 

United States Government Accountability Office

Washington, DC 20548 

December 22, 2006 

The Honorable Joe Barton 

Chairman 

Committee on Energy and Commerce 

House of Representatives 

Subject: Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper 

Limits for Reimbursement Compared with Retail Pharmacy Acquisition 

Costs

Dear Mr. Chairman: 

Spending on outpatient prescription drugs in Medicaid—the joint federal-state 

program that finances medical services for certain low-income adults and children—

has accounted for a substantial and growing share of Medicaid expenditures.1

Medicaid’s total spending on outpatient prescription drugs grew from $4.6 billion in 

fiscal year 1990 to $40 billion in fiscal year 2004—or from 7.0 to 14.2 percent of 

Medicaid’s total expenditures for medical care. State Medicaid programs do not 

directly purchase prescription drugs; instead, they reimburse retail pharmacies for 

covered outpatient prescription drugs dispensed to Medicaid beneficiaries.2

 For some 

outpatient multiple-source prescription drugs, state Medicaid programs may only 

receive federal matching funds for reimbursements up to a maximum amount known 

as a federal upper limit (FUL).3,4

 Required by law as a cost-containment strategy, 

FULs are calculated as 150 percent of the lowest price for a drug, from among the 

 

1

Medicaid consists of 56 distinct programs created within broad federal guidelines and administered by 

state Medicaid agencies. The 56 Medicaid programs include one for each of the 50 states; the District 

of Columbia; Puerto Rico; and the U.S. territories of American Samoa, Guam, Northern Mariana 

Islands, and the Virgin Islands. Hereafter in this report, we use “state Medicaid programs” to refer to 

these 56 programs. 

2

Retail pharmacies are licensed nonwholesale pharmacies that are open to the public. 

3

FULs must be established for each multiple source drug for which there are three or more 

therapeutically equivalent drug products. 42 U.S.C. § 1396r-8(e)(4) (2000). Therapeutically equivalent 

drug products can be substituted with the full expectation that they will produce the same clinical 

effect as the prescribed drug. 

4

By regulation, FULs apply to multiple-source prescription drugs that the Food and Drug 

Administration considers to have at least three therapeutically equivalent versions and at least three 

manufacturers or suppliers. 42 C.F.R. § 447.301 and 447.332 (2005). 
2 GAO-07-239R Medicaid Federal Upper Limits

 

prices published nationally in three drug pricing compendia.5 State Medicaid 

programs have the authority to determine their own reimbursements to retail 

pharmacies6

 for covered outpatient multiple-source prescription drugs, as long as 

those reimbursements do not exceed established FULs in the aggregate. 

The Deficit Reduction Act of 2005 (DRA) included provisions that changed the 

methodology for calculating FULs.7

 Beginning January 1, 2007, a drug’s FUL will be 

based on the average manufacturer price (AMP). AMP represents the average of 

prices paid to manufacturers by wholesalers for a drug distributed to the retail 

pharmacy class of trade, including retail pharmacies, and is typically less than any of 

a drug’s published prices in the three pricing compendia. Each therapeutically 

equivalent version of a multiple-source drug has an AMP, and beginning January 1, 

2007, a drug’s FUL will be calculated as 250 percent of the lowest AMP from among a 

drug’s therapeutically equivalent versions. The Congressional Budget Office 

estimated that when implemented, AMP-based FULs could reduce total Medicaid 

spending for prescription drugs by $3.6 billion from 2007 to 2010 and by about 

$11.8 billion from 2007 to 2015.8

Though representing a potential cost saving measure for Medicaid, the change in FUL 

calculation methodology—using AMP instead of the lowest published price—has 

raised concerns among retail pharmacies serving Medicaid beneficiaries. Drug 

manufacturers are required to report AMP data on their drugs to CMS. Because these 

data are not publicly available, retail pharmacies cannot determine what the 

relationship will be between AMP-based FULs and the prices the pharmacies pay to 

acquire these drugs.9

Because of your interest in the potential effects of the AMP-based FULs on retail 

pharmacies, you requested information on how AMP-based FULs will compare with 

retail pharmacy acquisition costs. We estimated what the AMP-based FULs would 

have been if they had applied in 2006 and compared them with average retail 

pharmacy acquisition costs from 2006 for frequently used and high expenditure 

multiple-source outpatient prescription drugs in Medicaid. 

5

The Centers for Medicare & Medicaid Services (CMS), the agency that oversees Medicaid, identifies 

which drugs are subject to FULs. The Deficit Reduction Act of 2005 also included additional provisions 

relating to Medicaid reimbursement of outpatient prescription drugs. 

6

Many state Medicaid programs require retail pharmacies to dispense the lower cost therapeutically 

equivalent version of a drug to Medicaid beneficiaries when one is available. Under these mandatory 

generic substitution policies, the higher cost version of the drug remains available to beneficiaries if 

the prescribing physician receives prior authorization. In cases when retail pharmacies are authorized 

to dispense the higher cost version of the drug, the FUL does not apply. 

7

Pub. L. No. 109-171, § 6001, 120 Stat. 4, 54-59 (2006) (to be codified at 42 U.S.C. § 1396r-8). 

8

Congressional Budget Office Cost Estimate. S. 1932, Deficit Reduction Act of 2005. January 27, 2006. 

9

The price a retail pharmacy pays to acquire a drug from a manufacturer or wholesaler is known as a 

pharmacy’s drug acquisition cost. 
3 GAO-07-239R Medicaid Federal Upper Limits

 

To estimate the AMP-based FULs and compare them with average retail pharmacy 

acquisition costs, we used first quarter 2006 Medicaid utilization data10 to select a 

sample of multiple-source outpatient prescription drugs subject to Medicaid FULs. To 

develop our sample, we identified the 50 drugs that were the most frequently used—

that is, represented 53 percent of the outpatient prescription drugs subject to FULs 

and dispensed to Medicaid beneficiaries in the first quarter of 2006—and the 50 drugs 

that were the highest expenditure—that is, accounted for 56 percent of Medicaid 

spending on outpatient prescription drugs subject to FULs in the first quarter of 

2006,11 with some drugs overlapping the two categories. Our resulting sample 

contained 77 multiple-source outpatient prescription drugs, which comprised 

27 frequently used prescription drugs in Medicaid, 27 high expenditure prescription 

drugs in Medicaid, and 23 prescription drugs that overlapped both categories. 

We obtained AMP data from the Centers for Medicare & Medicaid Services (CMS), 

which requires manufacturers to report AMP data within 30 days of the end of every 

calendar quarter. We obtained the average retail pharmacy acquisition cost data for 

the first quarter of 2006 from IMS Health, which obtains these data on sales 

transactions from approximately 100 manufacturers and over 300 distribution 

centers, including drug wholesalers and chain warehouses. These manufacturers and 

distribution centers are responsible for over 85 percent of total market dollar volume. 

IMS Health projects these data to represent national average acquisition costs for 

each drug in our sample in the first quarter of 2006.12 The average pharmacy 

acquisition cost data that we obtained from IMS Health may be greater than actual 

acquisition costs because these data do not account for rebates that pharmacies may 

receive from wholesalers or manufacturers.13

For each of the 77 drugs in our sample, we estimated what the AMP-based FULs 

would have been had they applied in 2006. Using AMP data from the first quarter of 

2006, we followed DRA provisions and selected the lowest AMP for each group of 

therapeutically equivalent versions and multiplied those AMPs by 250 percent. We did 

not exclude any outlier AMP data in order to be consistent with how CMS officials 

told us they will be implementing DRA provisions beginning January 1, 2007. We 

10Medicaid utilization data reported to CMS include information on the total number of units and dollar 

amount for which state Medicaid programs reimbursed retail pharmacies for covered drugs dispensed 

to Medicaid beneficiaries. As of July 2006, when we selected our sample, utilization data from Iowa, 

Minnesota, New Jersey, and Rhode Island were not included because these states had not reported 

their Medicaid utilization data for the first quarter of 2006. 

11In ranking drugs by their share of Medicaid expenditures for multiple-source outpatient prescription 

drugs in the first quarter of 2006, we excluded any dispensing fees paid to pharmacies as a part of state 

reimbursement formulas. Each state pays pharmacies, for each prescription dispensed, a professional 

dispensing fee intended to cover the pharmacy’s labor and overhead costs, such as pharmacists’ 

salaries, drug packaging, rent, and utilities. 

12For any given drug, the acquisition costs of individual pharmacies may be higher or lower than the 

national average. 

13These rebates may vary as retail pharmacies negotiate their rebates based on various factors, 

including the type of drug, manufacturer, and volume of purchases. In addition, they can negotiate 

rebates on a manufacturer’s entire line of products rather than on a per-drug basis. 
4 GAO-07-239R Medicaid Federal Upper Limits

 

compared these estimated AMP-based FULs with average retail pharmacy acquisition 

cost data from the first quarter of 2006 for the 77 drugs in our entire sample and for 

each of the three categories of drugs our sample comprises—the frequently used 

drugs, the high expenditure drugs, and the drugs that overlapped both categories.14 In 

order to assess the extent to which AMP-based FULs are likely to vary over time, we 

also examined the variation in lowest AMPs for the drugs in our sample from the 

third quarter of 2005 through the third quarter of 2006. We determined that the data 

used were sufficiently reliable for our purposes. For more detail on our scope and 

methodology, see enclosure I. The list of 77 drugs we reviewed is included in 

enclosure II. We performed our work from July 2006 through November 2006 in 

accordance with generally accepted government auditing standards. 

Results in Brief 

The AMP-based FULs we estimated using AMP data from first quarter 2006 were 

lower than average retail pharmacy acquisition costs from the same period for 59 of 

the 77 drugs in our sample. For our entire sample of 77 multiple-source outpatient 

prescription drugs, we found that these estimated AMP-based FULs were, on average, 

36 percent lower than average retail pharmacy acquisition costs for the first quarter 

of 2006. The extent to which the AMP-based FULs were lower than average retail 

pharmacy acquisition costs differed for high expenditure drugs compared with the 

frequently used drugs and the drugs that overlapped both categories. In particular, 

the estimated AMP-based FULs were, on average, 65 percent lower than average 

retail pharmacy acquisition costs for the 27 high expenditure drugs in our sample and 

15 percent lower, on average, for the 27 frequently used drugs in our sample. For the 

23 drugs that overlapped both categories of drugs, the estimated AMP-based FULs 

were, on average, 28 percent lower than the average retail pharmacy acquisition 

costs. In addition, we also found that the lowest AMPs for the 77 drugs in our sample 

varied notably from quarter to quarter. Despite this variation, when we estimated 

what the AMP-based FULs would have been using several quarters of historical AMP 

data, these estimated FULs were also, on average, lower than average retail pharmacy 

acquisition costs from the first quarter of 2006. 

Though the difference between AMP-based FULs and retail pharmacy acquisition 

costs was in some cases sizable, the extent of this difference may change because of 

several factors, including the quarter-to-quarter variation in AMPs used to set FULs as 

well as the presence of rebates that retail pharmacies may obtain from drug 

manufacturers and wholesalers. To the extent that the utilization of multiple-source 

outpatient prescription drugs by retail pharmacies remains similar in 2007 and later 

to the utilization patterns captured in our sample of drugs for the first quarter of 2006, 

the gap between estimated first quarter 2006 AMP-based FULs and pharmacy 

acquisition costs could persist, once the AMP-based FULs are implemented in 2007. 

However, to the extent that the cost-containment measures of the AMP-based FULs 

influence pharmacies to acquire lower cost therapeutically equivalent versions of 

drugs or negotiate lower prices from manufacturers and wholesalers, the gap 

between AMP-based FULs and acquisition costs could be narrowed or offset. 

14In our comparison of the AMP-based FULs and retail pharmacy acquisition costs, we did not consider 

dispensing fees. 
5 GAO-07-239R Medicaid Federal Upper Limits

In reviewing a draft of this report, CMS disagreed with our finding that the AMPbased FULs were lower than the average retail pharmacy acquisition costs for most 

of the 77 drugs in our sample. In particular, CMS had significant concerns with our 

estimates of both pharmacy acquisition costs and AMP-based FULs and stated that 

our findings had not accounted for changes in these two variables that are likely to 

take place after DRA provisions are implemented in January 2007. In our view, we 

used the most complete, accurate data sources available at the time of our analysis 

for our purposes—to estimate both retail pharmacy acquisition costs and AMP-based 

FULs, had the latter applied in the first quarter of 2006. Furthermore, in our draft 

report we identified the limitations of the data sources used in our estimates and 

acknowledged that the difference between retail pharmacy acquisition costs and 

AMP-based FULs could change following implementation of DRA provisions in 2007. 

Only after AMP-based FULs are implemented in 2007 will there be an opportunity to 

determine the extent to which these FULs facilitate both cost-effective Medicaid drug 

expenditures and adequate reimbursement for retail pharmacies. 

Background 

Medicaid is a joint federal-state entitlement program that finances medical services 

for certain low-income adults and children.15 While federal guidelines require that all 

state Medicaid programs offer certain basic benefits, each state Medicaid program 

determines the extent to which it will cover optional benefits. Outpatient prescription 

drug coverage is an optional benefit that all state Medicaid programs have elected to 

include in their Medicaid benefit packages. State Medicaid programs do not directly 

purchase drugs; instead they reimburse retail pharmacies for covered outpatient 

prescription drugs dispensed to Medicaid beneficiaries. For some outpatient multiplesource prescription drugs, state Medicaid programs may only receive federal 

matching funds for reimbursements up to a maximum amount known as a FUL. 

Medicaid Federal Upper Limits

FULs were first established in 1987 as a cost-containment strategy in an effort to limit 

the amount that Medicaid could reimburse retail pharmacies for certain multiplesource outpatient prescription drugs.16 FULs have been established for multiplesource drugs that have at least three manufacturers or suppliers and CMS publishes a 

list of drugs that have FULs in the State Medicaid Manual.17 FULs are expressed on a 

 

15Within guidelines established by federal statutes, regulations, and policies, each state (1) establishes 

its own eligibility standards; (2) determines the type, amount, duration, and scope of services; (3) sets 

the rate of payment for services; and (4) administers its own program. 

1652 Fed. Reg. 28,648 (July 31, 1987). Legislation was enacted in 1990 making the application of FULs a 

statutory requirement. (Pub. L. No. 101-508, sec. 4401(a)(3), § 1927(f)(2), 104 Stat. 1388, 1388-143 (to be 

codified, as amended by DRA § 6001(a)(1)–(2), 120 Stat. 54-55, at 42 U.S.C. § 1396r-8(e)(4)). 

17In addition, FULs are only established when multiple-source drugs are listed as “A” rated-drug 

products—that is, that the Food and Drug Administration (FDA) considers to be therapeutically 

equivalent to other pharmaceutically equivalent products—in FDA’s publication, Approved Drug 

Products with Therapeutic Equivalence Evaluations. This list is commonly known as the Orange 

Book and identifies drug products approved on the basis of safety and effectiveness by FDA. 
6 GAO-07-239R Medicaid Federal Upper Limits

 

per-unit basis—for example, per tablet. As of first quarter 2006, the list included more 

than 500 multiple-source drugs.18

CMS determines the FUL for a multiple-source outpatient prescription drug by 

grouping a drug’s therapeutically equivalent versions together and setting a FUL for 

each group. Each of a drug’s therapeutically equivalent versions has several 

published prices associated with it, including the average wholesale price (AWP),19

wholesale acquisition cost (WAC),20 and direct price (DP).21 All of these prices are 

published in each of the three national drug pricing compendia—First DataBank, 

Medi-Span, and Red Book—which use different methods for determining these 

published prices. The lowest published price for a FUL group—that is, a drug—may 

be any one of these three prices, and this can vary depending on the FUL group. Until 

provisions in DRA take effect January 1, 2007, CMS sets a FUL by identifying a drug’s 

therapeutic equivalent with the lowest price—either AWP, WAC, or DP—in any of the 

three national drug pricing compendia, and multiplying that price by 150 percent. 

A state’s total reimbursements for Medicaid prescription drugs subject to FULs must 

not exceed, in the aggregate, the payment levels established by the FULs over a year. 

States may exceed the FUL for an individual prescription drug as long as their 

aggregate expenditures for all prescription drugs subject to FULs do not exceed the 

amounts that are calculated using the rate established by the FUL. 

State Medicaid programs consider several methods for reimbursing pharmacies for 

multiple-source prescription drugs. In general, states base their Medicaid 

reimbursements to a retail pharmacy for a covered outpatient prescription drug on 

the lowest of the following: a state’s best estimate of retail pharmacies’ acquisition 

costs for the drug;22 the usual and customary charge of the retail pharmacy that 

dispensed the drug;23 the FUL for the drug, if applicable; or the state’s maximum 

allowable cost (MAC) for the drug,24 if applicable. When the FUL for a drug is not the 

18Transmittal No. 37, Federal Upper Limit Drug List, November 20, 2001. Federal Upper Limit (FUL) 

Changes to Transmittal No. 37, June 23, 2006. 

19AWP is the average of the list prices that the manufacturer suggests wholesalers charge pharmacies. 

20WAC is the manufacturer’s list price for wholesalers or other direct purchasers before any rebates, 

discounts, allowances, or other price concessions. 

21DP as published by First DataBank represents the manufacturer’s published catalog or list price for a 

drug product to nonwholesalers. DP does not represent actual transaction prices and does not include 

prompt pay or other discounts, rebates, or reductions. 

22States may establish their own methodologies for estimating retail pharmacies’ drug acquisition 

costs. Most states in the first quarter of 2006 chose to estimate these costs by taking a percentage 

discount from the AWP. 

23The usual and customary charge for a drug is the full retail price that individuals without prescription 

drug coverage pay when purchasing drugs at a retail pharmacy. 

24States that administer MACs publish lists of selected multiple-source drugs with the maximum price 

at which the state will reimburse for those medications. Pharmacies generally do not receive payments 

that are higher than the MAC price. The MAC lists differ from the FUL list, as states have more 
7 GAO-07-239R Medicaid Federal Upper Limits

lowest of these four amounts, Medicaid typically reimburses pharmacies at a rate 

lower than the FUL. 

Deficit Reduction Act of 2005 and Medicaid FULs

DRA modified the methodology used to set FULs for certain multiple-source 

outpatient prescription drugs for Medicaid.25 Rather than 150 percent of the lowest 

published price of the therapeutically equivalent versions, starting January 1, 2007, 

DRA required that CMS calculate FULs as 250 percent of the lowest AMP among a 

drug’s therapeutically equivalent versions. AMP data are collected by CMS and are 

not publicly available. (Fig. 1 illustrates how Medicaid FULs are calculated before 

and after DRA provisions take effect January 1, 2007.) 

 

discretion in determining what drugs to include on their MAC lists. Generally, state MAC lists include 

more drugs, and establish lower reimbursement prices, than the FUL list. As of first quarter 2006, 43 

states administer MACs. 

25DRA § 6001,120 Stat. 54-59. 
8 GAO-07-239R Medicaid Federal Upper Limits

Figure 1: Illustration of FUL Methodology Before and After January 1, 2007

Source: GAO.

FUL before January 1, 2007:

WAC

0.41

0.40

0.39

DP 

0.59

0.60

0.62

AWP

1.10

0.97

1.06

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 3: Drug X (¢ per unit)

WAC

0.40

0.38

0.36

DP 

0.58

0.56

0.59

AWP

1.00

0.99

0.98

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 2: Drug X (¢ per unit)

WAC

0.35

0.37

0.39

DP 

0.45

0.52

0.58

 AWP

0.99

0.91

0.95

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 1: Drug X (¢ per unit)

0.35¢ per unit x 150% = 0.525¢ per unit

0.35

0.3

0

endi

FUL after January 1, 2007:

AMP

0.25

0.15

0.22

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

CMSf: Drug X (¢ per unit) 0.15¢ per unit x 250% = 0.375¢ per unit

0.15

¢

¢

¢

¢

bc d

e

a

Note: The drug pricing compendia in fig.1 are published by First DataBank, Medi-Span, and Red Book. 

a

FUL is the federal upper limit for reimbursement of certain Medicaid outpatient prescription drugs. 

b

WAC is the manufacturer’s list price for wholesalers or other direct purchasers before any rebates, discounts, allowances, or 

other price concessions. 

c

DP as published by First DataBank represents the manufacturer’s published catalog or list price for a drug product to

nonwholesalers. DP does not represent actual transaction prices and does not include prompt pay or other discounts, rebates, 

or reductions. 

d

AWP is the average of the list prices that the manufacturer suggests wholesalers charge pharmacies. 

e

AMP represents the average of prices paid to manufacturers by wholesalers for a drug distributed to the retail pharmacy class 

of trade, including retail pharmacies. 

f

CMS is the agency that oversees Medicaid. 

DRA included additional provisions relating to prescription drugs. One provision 

changed the criteria under which FULs must be established. Until January 1, 2007, 

FULs must be established for multiple-source drugs for which there are three or more 

therapeutically equivalent products.26 Beginning on January 1, 2007, the DRA provides 

that FULs be established for multiple-source drugs for which there are at least two 

therapeutically equivalent products.27 DRA also mandated several changes relating to 

 2642 U.S.C. § 1396r-8(e)(4) (2000). 

27DRA § 6001(a)(1), 120 Stat. 54 (to be codified at 42 U.S.C. § 1396r-8(e)(4)). 
9 GAO-07-239R Medicaid Federal Upper Limits

the AMP. For example, DRA required that prompt payment discounts be excluded 

when manufacturers calculate AMP. DRA also required the Secretary of Health and 

Human Services to make manufacturers’ reported AMP data available on a monthly 

basis to states, and to post those amounts on a Web site accessible to the public 

beginning July 2006.28 These requirements were established in order to give states 

pricing information that was not previously available to consider in setting 

reimbursement amounts. 

Estimated AMP-Based FULS Were Lower Than Average Pharmacy 

Acquisition Costs for Most Drugs in our Sample 

For most of the 77 drugs in our sample, the AMP-based FULs we estimated using 

AMP data from the first quarter of 2006 were lower than average retail pharmacy 

acquisition costs for the same period. In particular, the percentage difference 

between the estimated AMP-based FULs and average retail pharmacy acquisition 

costs was more pronounced for high expenditure drugs than it was for frequently 

used drugs. Though lowest AMPs can vary notably from quarter to quarter, when we 

estimated what AMP-based FULs would have been using several quarters of AMP 

data we found that that these estimated FULs were also lower than average retail 

pharmacy acquisition costs for most of the drugs—and in particular the high 

expenditure drugs—in our sample. Furthermore, the difference between AMP-based 

FULs and retail pharmacy acquisition costs could change following the 

implementation of DRA provisions in January 2007, to the extent that retail 

pharmacies acquire lower cost therapeutically equivalent versions of drugs or 

negotiate lower prices from manufacturers and wholesalers. 

Based on First Quarter 2006 Data, AMP-Based FULs Were Lower Than Average 

Acquisition Costs, with Difference Most Pronounced for High Expenditure Drugs

The AMP-based FULs we estimated using first quarter 2006 AMP data were lower 

than the average retail pharmacy acquisition costs for the same period for most—59 

out of 77—of the drugs in our sample. The estimated AMP-based FULs were, on 

average, 36 percent lower than average retail pharmacy acquisition costs for our 

entire sample of drugs.29 Further, for 43 of the 77 drugs, we found that the estimated 

AMP-based FULs fell below the lowest acquisition cost available to retail pharmacies. 

While the estimated AMP-based FULs were lower than average retail pharmacy 

acquisition costs for our entire sample of drugs, this difference was most pronounced 

for the 27 high expenditure drugs, compared with the 27 frequently used drugs and 

with the 23 drugs that were both high expenditure and frequently used in our sample. 

 

28While CMS released AMP data to states starting in July of 2006, the implementation of the provision 

requiring AMP data to be posted on a publicly available Web site has been delayed until January 1, 

2007. 

29Excluding statistical outliers from our analysis resulted in a less than 1 percent change in the average 

percent difference between average retail pharmacy acquisition costs and estimate AMP-based FULs. 
10 GAO-07-239R Medicaid Federal Upper Limits

High Expenditure Drugs 

For 26 of the 27 high expenditure drugs in our sample, the AMP-based FULs we 

estimated using first quarter 2006 data were lower than the average retail pharmacy 

acquisition costs for this period (see fig. 2). The estimated FULs for these 27 drugs 

were, on average, 65 percent lower than average retail pharmacy acquisition costs.30

We also found that for 21 of the 27 high expenditure drugs, the estimated AMP-based 

FULs fell below the lowest acquisition cost available to retail pharmacies. 

Figure 2: Comparison of Estimated AMP-Based FULs and Average Retail Pharmacy Acquisition Costs 

for 27 High Expenditure Outpatient Drugs in Medicaid, First Quarter 2006 

-100

-80

-60

-40

-20

0

20

40

Percentage difference

Source: GAO analysis of AMP data from CMS and average retail pharmacy acquisition cost data from IMS Health.

High expenditure drugs

The estimated AMP-based FULs for

these 26 drugs were lower than the

average retail pharmacy acquisition costs.

The estimated AMP-based FUL for

this drug was higher than the average

retail pharmacy acquisition cost.

Frequently Used Drugs 

For 17 of the 27 frequently used drugs in our sample, the AMP-based FULs we 

estimated using first quarter 2006 data were lower than the average retail pharmacy 

acquisition costs for this period (see fig. 3). For these 27 frequently used drugs, the 

estimated AMP-based FULs were, on average, 15 percent lower than average retail 

pharmacy acquisition costs.31 We also found that for 11 of the 27 frequently used 

drugs, the estimated AMP-based FULs fell below the lowest acquisition cost available 

to retail pharmacies. 

 30In the first quarter of 2006 the average acquisition cost per unit for the 27 high expenditure drugs in 

our sample was $0.49. 

31In contrast with the average acquisition cost per unit for the 27 high expenditure drugs in our 

sample—$0.49—the average acquisition cost per unit for the 27 frequently used drugs was $0.05 in the 

first quarter of 2006. 
11 GAO-07-239R Medicaid Federal Upper Limits

Figure 3: Comparison of Estimated AMP-Based FULs and Average Retail Pharmacy Acquisition Costs 

for 27 Frequently Used Outpatient Drugs in Medicaid, First Quarter 2006

a

One drug had an estimated AMP-based FUL the same as the average retail pharmacy acquisition cost. 

High Expenditure and Frequently Used Drugs 

For 16 of the 23 drugs that were both high expenditure as well as frequently used, the 

AMP-based FULs we estimated using first quarter 2006 AMP data were lower than the 

average retail pharmacy acquisition costs for this period (see fig. 4). Further, the 

estimated AMP-based FULs for the 23 drugs were, on average, 28 percent lower than 

average retail pharmacy acquisition costs.32 We also found that for 11 of these 23 

drugs the estimated AMP-based FULs fell below the lowest acquisition costs available 

to retail pharmacies. 

 32For the 23 high expenditure and frequently used drugs, the average acquisition cost per unit was

$0.08. 
12 GAO-07-239R Medicaid Federal Upper Limits

Figure 4: Comparison of AMP-Based FULs and Average Retail Pharmacy Acquisition Costs for 23

Outpatient Drugs That Were Both High Expenditure and Frequently Used in Medicaid, First Quarter 2006 

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

140

Percentage difference

Source: GAO analysis of AMP data from CMS and average retail pharmacy acquisition cost data from IMS Health.

High expenditure and frequently used drugs

The estimated AMP-based FULs

for these 16 drugs were lower than

the average retail pharmacy acquisition costs.

The estimated AMP-based FULs

for these 7 drugs were higher

than the average retail pharmacy

acquisition costs.

Though Lowest AMPs Can Vary Over Time, AMP-Based FULs Estimated for Several 

Quarters Were Also Lower Than Acquisition Costs

Our comparison of estimated AMP-based FULs and average retail pharmacy 

acquisition costs involves AMP data that can vary notably from quarter to quarter. In 

particular, we found variation in the lowest AMPs—which will set AMP-based FULs, 

beginning January 1, 2007—for the 77 drugs in our sample. For example, from the 

first of quarter 2006 through the second quarter of 2006, 

• 36 of the 77 drugs had a median increase of 33 percent in their lowest AMPs; 

• 11 of the 77 drugs had no change in their lowest AMPs; and 

• 30 of the 77 drugs had a median decrease of 33 percent in their lowest AMPs. 

Similarly, the lowest AMPs for the 77 drugs in our sample varied from quarter to 

quarter over the period covering the third quarter of 2005 through the third quarter of 

2006. Despite this variation in lowest AMP values, when we estimated what AMPbased FULs would have been in each of several quarters—namely, the fourth quarter 

of 2005 through the second quarter of 2006—we found that the estimated FULs for 

each of these quarters were also lower, on average, than average retail pharmacy 

acquisition costs from the first quarter of 2006.33 Even if we made the comparison

using the quarter—from among the fourth quarter of 2005 through the second quarter 

of 2006—in which each drug’s estimated AMP-based FUL was the highest, the 

 33This analysis assumes that first quarter 2006 acquisition costs are a valid proxy for acquisition costs 

in the fourth quarter of 2005 and the second quarter of 2006. 
13 GAO-07-239R Medicaid Federal Upper Limits

estimated AMP-based FULs for 49 of the 77 drugs remained lower than first quarter 

2006 average retail pharmacy acquisition costs. Across our entire sample of 77 

prescription drugs, the estimated AMP-based FULs were 12 percent lower, on 

average, than the average retail pharmacy acquisition costs from the first quarter of 

2006. This analysis also showed differences across the three groups of drugs in our 

sample: 

• For the high expenditure drugs, AMP-based FULs for 24 out of 27 drugs remained 

lower than average retail pharmacy acquisition costs. Across this group of drugs, 

the estimated AMP-based FULs were 41 percent lower, on average, than the 

average retail pharmacy acquisition costs from the first quarter of 2006. 

• For frequently used drugs, AMP-based FULs for 10 out of 27 drugs remained lower 

than average retail pharmacy acquisition costs. Across this group of drugs, the 

estimated AMP-based FULs were 11 percent higher, on average, than the average 

retail pharmacy acquisition costs from the first quarter of 2006. 

• For the high expenditure and frequently used drugs, AMP-based FULs for 15 out of 

27 drugs remained lower than average retail pharmacy acquisition costs. Across 

this group of drugs, the estimated AMP-based FULs were 4 percent lower, on 

average, than the average retail pharmacy acquisition costs from the first quarter 

of 2006. 

Difference between AMP-Based FULs and Retail Pharmacy Acquisition Costs Could 

Change Following Implementation of DRA Provisions in 2007

Though the difference between AMP-based FULs and retail pharmacy acquisition 

costs in the first quarter of 2006 was in some cases sizable—on average 65 percent for 

the high expenditure drugs in our sample—it is important to recognize that the extent 

of this difference may change, because of several factors. These factors include the 

quarter-to-quarter variation in the AMPs used to set FULs, the DRA-required change 

in the definition of AMP that excludes prompt payment discounts from the 

calculation of AMPs, which may increase AMPs, and the presence of rebates that 

retail pharmacies may obtain from drug manufacturers and wholesalers that may 

lower retail pharmacy acquisition costs. In addition, because FULs apply to state 

Medicaid program aggregate expenditures for relevant outpatient multiple-source 

drugs in a year, states may reimburse for some drugs in excess of the FULs as long as 

these higher reimbursements are offset by others that are below the FULs. 

Furthermore, the difference we found between AMP-based FULs and retail pharmacy 

acquisition costs also reflects the particular multiple-source outpatient prescription 

drugs pharmacies purchased and dispensed to Medicaid beneficiaries in the first 

quarter of 2006. To the extent that in 2007 and in future years this utilization remains 

similar to the utilization captured in our sample of drugs for the first quarter of 2006, 

the gap we found could persist. However, to the extent that the cost-containment 

measures of the AMP-based FULs influence retail pharmacies to acquire lower cost 

therapeutically equivalent versions of drugs or negotiate lower prices from 

manufacturers and wholesalers, the gap between AMP-based FULs and acquisition 

costs could be narrowed or offset. Only after AMP-based FULs are implemented in 
14 GAO-07-239R Medicaid Federal Upper Limits

2007 will there be an opportunity to determine the extent to which these FULs are 

facilitating both cost-effective Medicaid drug expenditures and adequate 

reimbursements for retail pharmacies. 

Agency and Other External Comments 

CMS reviewed a draft of this report and provided written comments, which are 

reproduced in enclosure III. CMS disagreed with our finding that the AMP-based 

FULs were lower than the average retail pharmacy acquisition costs for most of the 

77 drugs in our sample. In particular, CMS had significant concerns with our 

estimates of both pharmacy acquisition costs and AMP-based FULs and stated that 

our findings had not accounted for changes in these two variables that are likely to 

take place after DRA provisions are implemented in January 2007. In our view, we 

used the most complete, accurate data sources available at the time of our analysis 

for our purposes—to estimate both retail pharmacy acquisition costs and AMP-based 

FULs, had the latter applied in the first quarter of 2006. Furthermore, in our draft 

report we identified the limitations of the data sources used in our estimates and 

acknowledged that the difference between retail pharmacy acquisition costs and 

AMP-based FULs could change following implementation of DRA provisions in 2007. 

In its written comments, CMS raised issues regarding our estimates of retail 

pharmacy acquisition costs, our estimates of AMP-based FULs, and our discussion of 

the impact of DRA provisions: 

Our Estimates of Retail Pharmacy Acquisition Costs 

CMS stated that our draft report did not provide source documents or 

evidence of how IMS Health arrived at the acquisition costs used in our 

comparison. Our draft report explained that IMS Health collects acquisition 

cost data from actual sales transactions from manufacturers and distribution 

centers, which represent over 85 percent of total market dollar volume, and 

projects these data to represent national average acquisition costs. We could 

not provide CMS with the acquisition cost data used in our analysis because, 

while they are commercially available, they are proprietary. Specifically, our 

data use agreement with IMS Health prohibits us from releasing its data to 

third parties, such as CMS. 

CMS also questioned the validity of our estimation of retail pharmacy 

acquisition costs because we did not account for the rebates retail pharmacies 

may receive from wholesalers and manufacturers. In our draft report we 

stated that the IMS Health data did not account for such rebates, and we 

identified this as a limitation of our analysis. However, as CMS officials 

acknowledged to us, there are no known data sources of pharmacy acquisition 

costs of multiple-source outpatient prescription drugs that account for 

rebates. Identifying rebates is difficult because retail pharmacies negotiate 

their rebates based on various factors and can negotiate rebates on a 

manufacturer’s entire line of products rather than on a per-drug basis. We have 

amended our report to clarify these issues. 
15 GAO-07-239R Medicaid Federal Upper Limits

 

Our Estimates of AMP-Based FULs 

CMS stated that in estimating the AMP-based FULs for our analysis we did not 

exclude outlier AMP data. According to CMS, excluding outlier AMP data 

could have “significantly” raised our estimates of AMP-based FULs for many 

multiple-source outpatient prescription drugs. As we stated in our draft report, 

we did not exclude outlier AMP data from our analysis because, during the 

course of our work, CMS officials indicated that they would not exclude any 

outlier AMP data when they begin calculating AMP-based FULs in January 

2007. To be consistent with the methodology CMS indicated the agency will 

use when implementing DRA provisions, we did not exclude outlier data from 

our estimates of AMP-based FULs. However, in their comments, CMS 

indicated that they intend to address outlier AMP data, as appropriate, in 

calculating the AMP-based FULs. 

During the course of our work we identified outliers in the AMP data 

underlying the FULs for several drugs in our analysis. However, excluding 

these outliers did not significantly reduce the gap we found between the 

estimated AMP-based FULs and retail pharmacy acquisition costs. We have 

amended our report to include this information. We agree with CMS’s revised 

approach to publish clear criteria for (1) identifying and excluding outliers 

from the AMP data that underlie each FUL group and (2) identifying which 

therapeutically equivalent versions of each drug are nationally available and 

should thereby be considered when setting the FUL.34

Potential Impact of DRA on Retail Pharmacy Acquisition Costs and AMPBased FULs 

CMS stated that our analysis did not account for several ways in which DRA 

may affect retail pharmacy acquisition costs and the AMP-based FULs. CMS 

suggested that our estimation of retail pharmacy acquisition costs will likely 

not reflect such costs after the implementation of DRA provisions in January 

2007. CMS expects that the AMP-based FULs implemented as a result of DRA 

will drive retail pharmacies to fill more Medicaid prescriptions with lower cost 

versions of multiple-source outpatient prescription drugs—thereby reducing 

these pharmacies’ acquisition costs. In CMS’s view, our study erroneously 

assumed that pharmacies’ utilization of multiple-source outpatient 

prescription drugs—and therefore pharmacy acquisition costs—will remain 

unchanged after the implementation of DRA. While we estimated average 

pharmacy acquisition costs for the multiple-source outpatient prescription 

drugs in our sample using utilization and cost data from the first quarter of 

2006, we also acknowledged in our draft report that retail pharmacies could 

change their utilization of multiple-source outpatient prescription drugs in 

2007 and later to lower their acquisition costs. Specifically, our draft report 

stated that “to the extent that the cost-containment measures of the AMP34In a media release dated December 15, 2006, CMS indicated that it will publish in the Federal Register 

a proposed rule to implement provisions of the Deficit Reduction Act of 2005 that highlights proposed 

changes in the payment for certain drugs in the Medicaid program. See 

http://www.cms.hhs.gov/apps/media/fact_sheet.asp (December 15, 2006). 
16 GAO-07-239R Medicaid Federal Upper Limits

 

based FULs influence pharmacies to acquire lower cost therapeutically 

equivalent versions of drugs or negotiate lower prices from manufacturers and 

wholesalers, the gap between AMP-based FULs and acquisition costs could be 

narrowed or offset.” 

CMS also pointed out that our study did not include an analysis of how retail 

pharmacies could mitigate the effects of AMP-based FULs by filling more 

Medicaid prescriptions with lower cost versions of multiple-source outpatient 

prescription drugs. However, as part of our analysis, we compared estimated 

AMP-based FULs to the lowest available acquisition cost for each of the 

multiple-source outpatient prescription drugs in our sample. As we reported in 

our draft, for most the drugs in our sample—43 of 77—the estimated AMPbased FUL fell below the lowest acquisition cost available to retail 

pharmacies. 

CMS had concerns that in estimating the AMP-based FULs we used AMP data 

that included customary prompt payment discounts, even though DRA 

requires their exclusion from AMP beginning in 2007. According to CMS, 

prompt payment discounts decrease AMPs, and so using AMP data that 

include such discounts will decrease AMP-based FULs. In our view, the impact 

of excluding prompt payment discounts from the AMP data we used to 

estimate AMP-based FULs is unclear. In our previous work, we have found 

that prompt payment discounts are, on average, 2 percent of the sales 

transactions to which they apply.35 However, we have also reported that 

manufacturers vary in the purchasers to whom they offer prompt payment 

discounts and whether they include these discounts in their calculations of 

AMP. Therefore, attempting to account for prompt payment discounts for all 

of the multiple-source outpatient prescription drugs in our analysis would 

have, in some cases, overstated the impact of these discounts on our estimates 

of AMP-based FULs. We agree with CMS that the changes in the definition of 

AMP as required by DRA will likely increase AMP-based FULs. However, our 

previous work suggests that excluding prompt payment discounts from the 

calculation of AMP-based FULs would not have offset the gap we reported 

between retail pharmacy acquisition costs and estimated AMP-based FULs. In 

our report, we have clarified the issue of prompt payment discounts and its 

impact on our analysis. 

In addition to their concerns related to the estimates used in our draft report, CMS 

noted that our analysis did not address existing state cost containment efforts, such 

as MAC programs, to reduce Medicaid reimbursements for outpatient prescriptions 

drugs. While the relationship between AMP-based FULs and state Medicaid cost 

containment efforts is a valid comparison, the issue was beyond the scope of our 

report, which compared estimated AMP-based FULs to retail pharmacy acquisition 

costs. 

35See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates 

Paid to States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005). 
17 GAO-07-239R Medicaid Federal Upper Limits

Finally, we agree with CMS that changing the basis of the FUL from the AWP to the 

AMP was a step in the right direction towards achieving savings for the federal 

government on Medicaid expenditures for multiple-source outpatient prescription 

drugs. However, these savings should be achieved while ensuring that 

reimbursements to retail pharmacies are adequate to provide Medicaid beneficiaries 

access to multiple-source outpatient prescription drugs. As we stated in our draft 

report, only after AMP-based FULs are implemented in 2007 will there be an 

opportunity to determine the extent to which these FULs facilitate both cost effective 

Medicaid drug expenditures and adequate reimbursement for retail pharmacies. 

CMS also provided technical comments that we incorporated as appropriate. 

- - - - - 

As agreed with your office, unless you publicly announce its contents earlier, we plan 

no further distribution of this report until 30 days after its date. We will then send 

copies of this report to the Administrator of CMS and other interested parties. The 

report will also be available at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at 

(202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs can be found on the last page of this report. GAO staff 

who made major contributions to this report are listed in enclosure IV. 

Sincerely yours, 

John E. Dicken 

Director, Health Care 

Enclosures—4 
Enclosure I Enclosure I 

18 GAO-07-239R Medicaid Federal Upper Limits 

 

Scope and Methodology 

To examine the relationship between the Medicaid federal upper limits (FUL) 

estimated using first quarter 2006 average manufacturer price (AMP) data and the 

average retail pharmacy acquisition cost for frequently used and high expenditure 

drugs in Medicaid, we used first quarter 2006 Medicaid utilization data from the 

Centers for Medicare & Medicaid Services (CMS)36 to select the 50 most frequently 

used and the 50 highest expenditure multiple-source outpatient prescription drugs in 

Medicaid subject to FULs.37 Combined, these two lists comprised a sample of 77 

unique drugs representing 53 percent of Medicaid prescriptions and 56 percent of 

Medicaid expenditures for drugs subject to the FUL in the first quarter of 2006.38 We 

obtained the list of drugs subject to the FUL from CMS and, because the AMP-based 

FULs were not available during the course of our work, estimated what the AMPbased FULs would have been using AMP data from the first quarter of 2006 for each 

of the 77 drugs. 

Our analyses are limited to multiple-source outpatient prescription drugs that were 

subject to FULs for the first quarter of 2006 and do not include those drugs that may 

be added to the FUL list beginning January 1, 2007, per the expanded multiple-source 

definition in the Deficit Reduction Act of 2005 (DRA). Additionally, we compared 

corresponding AMP data with retail pharmacy acquisition cost data for each drug in 

our sample by National Drug Codes (NDC).39

To estimate FULs under the AMP-based methodology, we first extracted AMP data 

for the first quarter of 2006 for each of the 77 drugs in our sample from CMS’s 

Medicaid Drug Rebate Initiative (MDRI) system. CMS requires manufacturers to 

report AMP data within 30 days of the end of every calendar quarter. We then 

selected the lowest AMP for the first quarter of 2006 for each group of therapeutically 

equivalent drugs and multiplied it by 250 percent. These AMP data do not account for 

the impact of the DRA-required change in the definition of AMP which excludes 

36Medicaid utilization data reported to CMS include information on the total number of units and dollar 

amounts reimbursed for each drug. As of August 2006 when we selected our sample, Iowa, Minnesota, 

New Jersey, and Rhode Island had not reported their Medicaid utilization data for the first quarter of 

2006. 

37For drugs subject to the FUL, Medicaid covered 32.9 million prescriptions that were dispensed to 

Medicaid beneficiaries at retail pharmacies in the first quarter of 2006. 

38Drugs with the same name but different strengths, forms (such as capsules or tablets), or package 

sizes were counted separately as unique drugs. 

39NDCs are the universal product identifiers for drugs for human use. The Food and Drug 

Administration assigns the first segment of the NDC, which identifies the firm that manufacturers, 

repackages, or distributes a drug; the second segment identifies a specific strength, dosage form, and 

formulation for a particular firm; and the third segment identifies package size. A single drug can have 

multiple NDCs associated with it. For example, a drug made by one manufacturer, in one form or 

strength, but in three package sizes would have three NDCs. Three-segment NDCs are denoted by 11 

digits while two-segment NDCs are denoted by 9 digits, and do not account for package size. 
Enclosure I Enclosure I 

19 GAO-07-239R Medicaid Federal Upper Limits

 

prompt payment discounts.40 In addition, in estimating the AMP-based FULs, we did 

not exclude any outlier AMP data in order to be consistent with how CMS officials 

told us they will be implementing DRA provisions beginning January 1, 2007. 

Nonetheless, during the course of our work, we examined the AMP data underlying 

each FUL group for the presence of statistical outliers. 

To determine retail pharmacies’ acquisition costs for the 77 drugs, we purchased 

national average retail pharmacy acquisition cost data from IMS Health for the first 

quarter of 2006. IMS Health obtains these data on sales transactions from 

approximately 100 manufacturers and over 300 distribution centers, including drug 

wholesalers and chain warehouses. These manufacturers and distribution centers are 

responsible for over 85 percent of total market dollar volume. IMS Health projects 

these data to represent national average acquisition costs for each drug in our sample 

in the first quarter of 2006.41 The average pharmacy acquisition cost data that we 

obtained from IMS Health may be greater than actual average acquisition costs 

because these data do not account for rebates that pharmacies may receive from 

wholesalers or manufacturers.42 We calculated an average acquisition cost for each 

drug by weighting the acquisition cost for each therapeutically equivalent drug by its 

Medicaid expenditure for first quarter 2006.43

To compare the estimated AMP-based FULs to the average retail pharmacy 

acquisition costs for each of the 77 drug groups in our analysis, we calculated the 

percentage difference between the AMP-based FUL and (1) the average of acquisition 

costs for all therapeutically equivalent drugs within a group and (2) the average 

acquisition cost for the lowest cost therapeutically equivalent drug within a group. 

We also calculated the percentage difference of the AMP-based FUL to the average 

acquisition cost and minimum acquisition cost separately for the 27 high expenditure 

drugs, 27 frequently used drugs, and 23 drugs that were considered both high 

expenditure and frequently used. 

40In our previous work we found that prompt payment discounts are, on average, 2 percent of the sales 

transactions to which they apply. However, we have also reported that manufacturers vary in the 

purchasers to whom they offer prompt payment discounts and whether they include these discounts in 

their calculations of AMP. Therefore, attempting to account for prompt payment discounts for all of 

the multiple-source outpatient prescription drugs in our analysis would have, in some cases, 

overstated the impact of these discounts on our estimates of AMP-based FULs. See GAO, Medicaid 

Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States, 

GAO-05-102 (Washington, D.C.: Feb. 4, 2005). 

41For any given drug, the acquisition costs of individual pharmacies may be higher or lower than the 

national average. 

42These rebates may vary as retail pharmacies negotiate their rebates based on various factors, 

including the type of drug, manufacturer, and volume of purchases. In addition, they can negotiate 

rebates on a manufacturer’s entire line of products rather than on a per-drug basis. 

43We calculated a weighted average acquisition cost to account for Medicaid prescription drug 

utilization patterns. 
Enclosure I Enclosure I 

20 GAO-07-239R Medicaid Federal Upper Limits

We also assessed the extent to which AMP-based FULs are likely to vary over time by 

examining the variation of the lowest AMPs that would be used to set the estimated 

FULs for each of the 77 drugs in our sample from the third quarter of 2005 through 

the third quarter of 2006. Additionally, we compared the highest estimated AMPbased FUL from the fourth quarter of 2005 through the second quarter of 2006 to the 

average retail pharmacy acquisition cost for the first quarter of 2006 for each of the 77 

drugs. We also performed this comparison separately for the 27 high expenditure 

drugs, 27 frequently used drugs, and 23 drugs that were considered both high 

expenditure and frequently used. 

To assess the reliability of the AMP data, we reviewed relevant documentation 

regarding the construction and reporting of data extracted from CMS’s MDRI system. 

To assess the reliability of the IMS Health average retail pharmacy acquisition cost 

data, we reviewed relevant documentation regarding the construction and reporting 

of the data supplied. We determined that the data used were sufficiently reliable for 

our purposes. 

We performed our work from July 2006 through November 2006 in accordance with 

generally accepted government auditing standards. 
Enclosure II Enclosure II 

21 GAO-07-239R Medicaid Federal Upper Limits 

Percentage of Medicaid Prescriptions and Expenditures for 77 Medicaid 

Outpatient Prescription Drugs GAO Reviewed, First Quarter 2006 

Drug name and 

strength Dosage form 

Percentage of 

Medicaid 

prescriptions

Ranking by 

Medicaid 

prescriptions

Percentage of 

Medicaid 

expenditures 

Ranking by 

Medicaid 

expenditures

Acetaminophen 

Codeine 

Phosphate 

300-30mg 

Tablet 1.2 14 0.5 49

Acetaminophen 

Hydrocodone 

Bitartrate 

500-5mg 

Tablet 3.2 2 0.5 47

Acetaminophen 

Hydrocodone 

Bitartrate 

500-7.5mg 

Tablet 0.9 27 N/A N/A

Acetaminophen 

Hydrocodone 

Bitartrate 

500-10mg 

Tablet 0.6 43 1.1 17

Acetaminophen 

Hydrocodone 

Bitartrate 

750-7.5mg 

Tablet 0.6 45 N/A N/A

Acetaminophen 

Oxycodone HCl 

325-5mg 

Tablet 1.2 17 N/A N/A

Acetaminophen 

Propoxyphene 

Napsylate 

650-100mg 

Tablet 1.1 19 0.6 42

Albuterol 

0.9mg/inh 

Aerosol 3.7 1 1.8 9

Albuterol Sulfate 

0.083mg/ml 

Solution 1.8 4 2.0 6

Alprazolam 

0.25mg 

Tablet 0.6 38 N/A N/A

Alprazolam 

0.5mg 

Tablet 0.9 26 N/A N/A

Alprazolam 

1mg 

Tablet 0.8 29 N/A N/A

Amoxicillin 

125/5mg/ml 

Suspension 1.9 3 0.5 50

Amoxicillin 

500mg 

Capsule 1.6 5 N/A N/A

Amoxicillin 

Clavulanic Acid 

400/5mg/ml57/5mg/ml 

Suspension N/A N/A 1.9 7

Atenolol 

25mg 

Tablet 0.6 40 N/A N/A
Enclosure II Enclosure II 

22 GAO-07-239R Medicaid Federal Upper Limits

Drug name and 

strength Dosage form 

Percentage of 

Medicaid 

prescriptions

Ranking by 

Medicaid 

prescriptions

Percentage of 

Medicaid 

expenditures 

Ranking by 

Medicaid 

expenditures

Atenolol 

50mg 

Tablet 0.8 33 N/A N/A

Baclofen 

10mg 

Tablet N/A N/A 0.7 30

Baclofen 

20mg 

Tablet N/A N/A 0.6 41

Betamethasone 

Dipropionate 

Clotrimazole 

0.05-1% 

Cream N/A N/A 0.8 23

Carbamazepine 

200mg 

Tablet N/A N/A 0.6 45

Carisoprodol 

350mg 

Tablet 0.6 44 0.8 24

Cephalexin 

500mg 

Capsule 1.0 22 0.7 36

Ciprofloxacin HCl 

500mg 

Tablet 0.5 49 N/A N/A

Clonazepam 

0.5mg 

Tablet 1.3 11 0.7 29

Clonazepam 

1mg 

Tablet 1.1 18 0.9 21

Clonidine HCl 

0.1mg 

Tablet 1.0 24 N/A N/A

Cyclobenzaprine 

HCl 10mg 

Tablet 1.0 23 0.7 34

Diazepam 

5mg 

Tablet 0.6 42 N/A N/A

Fluoxetine HCl 

20mg 

Capsule 1.0 21 0.7 33

Fluoxetine HCl 

40mg 

Capsule N/A N/A 1.2 16

Folic Acid 

1mg 

Tablet 1.2 15 N/A N/A

Furosemide 

20mg 

Tablet 0.9 28 N/A N/A

Furosemide 

40mg 

Tablet 1.4 7 N/A N/A

Gabapentin 

100mg 

Capsule N/A N/A 0.7 32

Gabapentin 

300mg 

Capsule 0.7 36 5.1 1

Gabapentin 

400mg 

Capsule N/A N/A 1.3 12

Gabapentin 

600mg 

Tablet N/A N/A 4.2 2

Gabapentin 

800mg 

Tablet N/A N/A 2.0 5

Glimepiride 

4mg 

Tablet N/A N/A 0.5 46
Enclosure II Enclosure II 

23 GAO-07-239R Medicaid Federal Upper Limits

Drug name and 

strength Dosage form 

Percentage of 

Medicaid 

prescriptions

Ranking by 

Medicaid 

prescriptions

Percentage of 

Medicaid 

expenditures 

Ranking by 

Medicaid 

expenditures

Glyburide 

5mg 

Tablet N/A N/A 0.8 26

Glyburide 

Metformin HCl 

5mg 

Tablet N/A N/A 1.1 18

Hydrochlorothiazide 

25mg 

Tablet 1.5 6 N/A N/A

Hydroxyzine HCl 

25mg 

Tablet N/A N/A 0.8 27

Ibuprofen 

400mg 

Tablet 0.6 46 N/A N/A

Ibuprofen 

600mg 

Tablet 1.1 20 N/A N/A

Ibuprofen 

800mg 

Tablet 1.4 8 N/A N/A

Levothyroxine 

Sodium 

0.05mg 

Tablet 0.6 47 N/A N/A

Lisinopril 

10mg 

Tablet 0.8 32 0.6 44

Lisinopril 

20mg 

Tablet 0.7 37 0.6 39

Lisinopril 

40mg 

Tablet N/A N/A 0.6 40

Lorazepam 

0.5mg 

Tablet 1.3 10 0.9 20

Lorazepam 

1mg 

Tablet 1.2 16 1.3 13

Lorazepam 

2mg 

Tablet N/A N/A 0.6 43

Lovastatin 

40mg 

Tablet N/A N/A 0.7 35

Metformin HCl 

500mg 

Tablet 1.2 12 1.8 8

Metformin HCl 

1000mg 

Tablet 0.6 41 1.0 19

Metoprolol Tartrate 

50mg 

Tablet 0.8 30 N/A N/A

Metronidazole 

500mg 

Tablet 0.5 50 N/A N/A

Mirtazapine 

15mg 

Tablet N/A N/A 0.8 28

Mirtazapine 

30mg 

Tablet N/A N/A 0.7 37

Mupirocin 

2% 

Ointment N/A N/A 1.2 15

Naproxen 

500mg 

Tablet 0.8 31 N/A N/A

Omeprazole 

20mg 

Capsule N/A N/A 1.4 10
Enclosure II Enclosure II 

24 GAO-07-239R Medicaid Federal Upper Limits

Drug name and 

strength Dosage form 

Percentage of 

Medicaid 

prescriptions

Ranking by 

Medicaid 

prescriptions

Percentage of 

Medicaid 

expenditures 

Ranking by 

Medicaid 

expenditures

Paroxetine HCl 

10mg 

Tablet N/A N/A 0.6 38

Paroxetine HCl 

20mg 

Tablet N/A N/A 2.3 3

Paroxetine HCl 

30mg 

Tablet N/A N/A 0.8 22

Paroxetine HCl 

40mg 

Tablet N/A N/A 1.2 14

Penicillin V 

Potassium 

500mg 

Tablet 0.5 48 N/A N/A

Potassium Chloride 

20mEq

Tablet 0.8 34 0.8 25

Ranitidine HCl 

150mg 

Tablet 1.3 9 0.5 48

Ribavirin 

200mg 

Capsule N/A N/A 2.1 4

Sulfamethoxazole 

Trimethoprim 

800-160mg 

Tablet 1.0 25 N/A N/A

Tizanidine HCl 4mg Tablet N/A N/A 0.7 31

Tramadol HCl 

50mg 

Tablet 1.2 13 1.3 11

Trazodone HCl 

50mg 

Tablet 0.8 35 N/A N/A

Trazodone HCl 

100mg 

Tablet 0.6 39 N/A N/A

Source: GAO analysis of CMS Medicaid state drug utilization data. 

Note: Our sample contained 77 multiple-source outpatient prescription drugs in Medicaid for the first quarter of 2006, which 

comprised 27 frequently used prescription drugs, 27 high expenditure prescription drugs, and 23 prescription drugs that 

overlapped both categories. N/A appears in the table for drugs that were not in the overlap category. 
Enclosure III Enclosure III 

25 GAO-07-239R Medicaid Federal Upper Limits 

CMS Comments 
Enclosure III Enclosure III 

26 GAO-07-239R Medicaid Federal Upper Limits
Enclosure III Enclosure III 

27 GAO-07-239R Medicaid Federal Upper Limits
Enclosure III Enclosure III 

28 GAO-07-239R Medicaid Federal Upper Limits
Enclosure IV Enclosure IV

29 GAO-07-239R Medicaid Federal Upper Limits 

GAO Contact and Staff Acknowledgments 

GAO Contact

John E. Dicken, (202) 512-7119 or dickenj@gao.gov

Acknowledgments

In addition to the contact named above, Martha Kelly, Assistant Director; Rashmi 

Agarwal; Shamonda Braithwaite; Krister Friday; Yung Park; and Daniel Ries made key 

contributions to this report. 

(290556) 
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