Authorized in 1965 under Title XIX of the Social Security Act, Medicaid is a federally aided, state-run medical assistance program. Over 35 million people received an estimated $152 billion in Medicaid services during fiscal year 1995. At the federal level, HCFA is responsible for administering the Medicaid program, establishing policies, developing operating guidelines, and ensuring states’ compliance with Medicaid regulations. Federal regulations require states to provide certain basic medical services, such as inpatient hospital and physician care, under their Medicaid programs. Federal regulations also authorize states to provide optional services, such as optometrist services, eyeglasses, and prescription drugs. During fiscal year 1995, all states provided prescription drugs as part of their Medicaid programs; the reported cost of these drugs during that year was about $8.3 billion. Because of growing concern over the increased use and cost of prescription drugs, in 1990 the Congress amended the Social Security Act to require states to implement DUR programs by January 1, 1993. The legislation mandated that these reviews include prospective screening for potential drug problems due to therapeutic duplication, drug-disease contraindication, drug-drug interaction, incorrect drug dosage, incorrect duration of treatment, drug-allergy interactions, and clinical abuse or misuse. (A glossary of drug utilization review terms appears at the end of this report.) HCFA was instructed to issue guidelines to the states on prospective DUR cost and benefit reporting. While not requiring that states use automated systems for prospective screening, the law encouraged their use, and required HCFA to initiate at least 10 statewide automated PRODUR demonstration projects. HCFA was required to report to the Congress by January 1, 1994. In addition to promoting patient safety, DUR programs must also be designed to educate physicians and pharmacists to better identify patterns of fraud, abuse (including overuse), or other inappropriate or medically unnecessary care. Physicians and pharmacists can also use these systems to increase their knowledge about patterns of use associated with specific drugs or groups of drugs. When a Medicaid patient submits a prescription to be filled, the pharmacist transmits recipient identification and prescription information to a statewide database via the PRODUR system. In an on-line, real-time environment, after verifying the recipient’s eligibility, the system screens the prescription against the recipient’s known Medicaid medical and prescription history. The system then sends the pharmacy a message indicating whether the claim is “payable” (valid), and whether any potential drug therapy problem, such as a drug-drug interaction, exists. If a potential drug therapy problem does exist, the pharmacist consults with the recipient and/or the recipient’s physician, depending upon the seriousness of the problem. After such consultation and according to the pharmacist’s judgment, the pharmacist may fill the prescription, resubmit the claim for a different drug prescribed by the physician, or submit a reversal to cancel the claim. Pharmacies in states that do not use automated, statewide PRODUR systems are generally limited to comparing the prescription presented with the patient’s medical history and prescription data maintained at that specific pharmacy or chain of pharmacies. Such a local system would not have the benefit of the patient’s complete Medicaid history; moreover, a local system would lack on-line eligibility verification. To determine if states’ PRODUR systems have improved patient safety, we obtained contractor-prepared reports and other data for five of the eight states that had been operating automated PRODUR systems for 12 months or longer at the time we began our review in May 1995: Maryland, Missouri, New Mexico, Oregon, and Pennsylvania. These reports showed the number and types of drug therapy “alerts” transmitted by each state’s PRODUR system, along with the number of claims pharmacies reversed as a result of such alerts. We selected these five states because (1) a single contractor serviced three of the states (Maryland, New Mexico, and Oregon) and agreed to perform the needed analyses, and (2) two states (Missouri and Pennsylvania) agreed to provide us with 12 months’ worth of their Medicaid prescription drug data for our own analysis. To determine the extent to which states’ PRODUR systems have provided measurable savings, we and contractors analyzed the five states’ PRODUR data for all conditions screened for. To determine actual savings realized from the denial of overutilization claims (often called “early refills”), we analyzed all such transactions denied between July 1, 1994, and March 31, 1995, identifying whether they were subsequently refilled within 90 days—including the period April 1995 through June 1995. State PRODUR and HCFA officials agreed with our assumption that if the prescriptions were not refilled within 90 days after being initially presented, they probably would not be refilled, and that the value of these prescriptions could reasonably be viewed as measurable savings. To evaluate the extent to which on-line eligibility-verification screening provided tangible savings, we identified the number of prescriptions denied (and the dollar value of the drugs) because recipients were not eligible for Medicaid benefits on the day they submitted their prescriptions. Eligibility screening is performed by a system separate from but often utilized with PRODUR systems. In addition, our estimates of cost savings derived from avoided hospitalization are based on FDA data. To discern the degree to which PRODUR systems can assist in identifying potential fraud, waste, and abuse, we reviewed alerts for overutilization (early refill) and therapeutic duplication; in such cases, individuals may be trying to obtain for resale a greater quantity of medication than that prescribed. We performed our review from May 1995 through April 1996, in accordance with generally accepted government auditing standards except that, as agreed with the requesters, we did not independently verify the accuracy of state- and contractor-provided prescription-transaction data. This was due to the excessive amount of time that would have been required to (1) obtain specific prescription information (such as physician and pharmacy names) and (2) trace these data back to the original prescription documents. Accordingly, we cannot verify the accuracy of the information provided. Our conclusions regarding patient safety and program savings are based on these data. HHS provided written comments on a draft copy of this report; they are reprinted as appendix I. Data from PRODUR systems operated by five geographically diverse states—Maryland, Missouri, New Mexico, Oregon, and Pennsylvania—show inappropriate drug therapy to be an ongoing and serious problem in the Medicaid program. These systems reported screening over 31.7 million prescription drug claims during 12-month periods between January 1994 and June 1995, and sent pharmacists alerts of potentially inappropriate drug therapy for about 6.3 million (20 percent) of these claims. Over 650,000 of these claims (2 percent of the total) were reported canceled because of serious risks posed by such conditions as potential drug-drug interaction, drug-disease conflict, and pregnancy conflict. Table 1 shows the potential for adverse medical reactions, as evidenced by the fact that alerts for drug-drug interaction, overutilization, and therapeutic duplication occur in great numbers. (Appendix II contains detailed data on PRODUR operations for each of the five states reviewed.) Along with increasing patient safety, the PRODUR systems in the states we reviewed reduced Medicaid program costs by millions of dollars annually through the cancellation of potentially wasteful prescriptions and the denial of prescriptions to ineligible recipients. Experiences in the five states reviewed show that program savings can more than offset the cost of these relatively inexpensive systems. Further, however, to the extent that these systems also help prevent unnecessary hospitalization due to adverse medical reactions from prescribed drugs, actual annual cost savings (according to a 1995 FDA review) may be appreciable. The cancellation of prescriptions due to the overutilization (early refill) alert has provided the five states in our review with substantial recurring savings. While a legitimate need for an early refill may exist in some situations, early refills can also indicate drug overutilization, which can threaten patient safety, or increase the potential for fraud or abuse. Our analyses showed that most canceled early refill prescriptions are subsequently filled, but savings from those not filled within 3 months, and thus presumed to represent program savings, have been substantial. As table 2 shows, states realized savings of about $5 million from canceled prescriptions not filled, with individual state savings ranging from about $153,000 to about $2.3 million. The five states also realized substantial savings from PRODUR systems with companion on-line screening capabilities to ensure that recipients are eligible for Medicaid benefits at the time a prescription is presented. Without on-line eligibility verification, Medicaid recipients can continue to obtain benefits for up to a full month, even if they lose eligibility during the middle of the month. The annual savings from this function, reported at over $25 million for the five states, more than offset—by a considerable margin—each state’s one-time system installation costs, which ranged from a reported $165,000 to $675,000. For example, as shown in table 2, Pennsylvania’s PRODUR system denied about $16.6 million in prescriptions because of ineligibility, from July 1994 through June 1995; in contrast, its one-time installation cost was $675,000. On the basis of its review of studies related to drug-induced illnesses, FDA estimates that 6.4 percent of all hospital admissions nationally are caused by inappropriate drug therapy—5 percent due to patient noncompliance with drug regimens, such as overutilization, and an additional 1.4 percent due to adverse drug reactions. Numerous other studies have been conducted worldwide to determine the extent to which inappropriate drug therapy results in hospitalization, with estimates ranging from 3 percent for the general population to as high as 28 percent for the elderly. Considering that Medicaid’s fiscal year 1995 inpatient hospitalizations totaled about $42 billion, even limited implementation of PRODUR systems could have a significant impact on reducing overall Medicaid program costs.