Order Code RL30726
CRS Report for Congress
Received through the CRS Web
Prescription Drug Coverage Under Medicaid
Updated March 12, 2004
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
April Grady
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Prescription Drug Coverage Under Medicaid
Summary
Medicaid is a joint federal-state entitlement program that pays for services on
behalf of certain groups of low-income persons. One of its most important benefits,
especially for the elderly and disabled, is prescription drug coverage. Medicare, the
nation’s health insurance program for the elderly and disabled, does not cover most
prescription drugs but will begin doing so beginning January 1, 2006 as a result of
the passage of the Medicare Prescription Drug Improvement, and Modernization Act
of 2003 (P.L. 108-173, MMA 2003) as signed into law on December 8, 2003.
Outpatient prescription drug coverage under Medicaid is an optional benefit. If states
choose to cover prescription drugs, they must be provided to Medicaid enrollees who
are categorically needy, that is, to individuals who qualify for Medicaid on the basis
of being in certain categories that were traditionally tied to the receipt of cash
assistance. In addition, states have the option of choosing to provide prescription
drug coverage to medically needy individuals, persons who are not poor by cash
welfare standards, but who require help with medical expenses. Forty-four states and
the District of Columbia provide prescription drug coverage to all Medicaid
beneficiaries.
Prescription drug benefits under Medicaid are very broad. States may create
formularies, or lists of preferred benefits, but several coverage rules keep actual
coverage very comprehensive. Even in Medicaid managed care organizations, which
are not subject to those rules, current practice combined with a directive from the
Center for Medicare and Medicaid Services (CMS) ensures that drugs made available
to fee-for- service enrollees must also be available to managed care enrollees. Most
states also cover some categories of non-prescription drugs. There are only 10
categories of prescription drugs that states are allowed to exclude from coverage.
In 2002, total payments for Medicaid outpatient prescription drugs, net of
rebates, were $23.4 billion, accounting for about 9.5% of payments for all Medicaid
services. On average, per person annual spending for Medicaid drugs was $335. The
per person spending for outpatient prescription drugs for blind and disabled Medicaid
enrollees was 10 times the amount spent for children enrolled in Medicaid. Since
1990, pharmaceutical manufacturers whose drugs are covered by state Medicaid
programs are required to rebate a portion of states’ payments for their products.
States reported collecting a total $5.9 billion in rebates on prescription drugs in 2002.
State Medicaid programs will be undergoing major changes in their drug
coverage policies over the next few years in response to the creation of a Medicare
drug benefit under MMA 2003. While specific information about the coverage under
the new Medicare Part D is not available at this time, it is likely that Medicaid
prescription drug coverage for dually eligible individuals will be considerably
reduced. Under MMA 2003 state Medicaid programs will continue to pay for drugs
offered to the dually eligible population under Medicare, however, based on a
specified formula. In addition, Medicaid administrations will be required to conduct
eligibility determinations for individuals qualifying for low-income assistance for the
new program.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Prescription Drug Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fee-for-Service Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Managed Care Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Over-the-counter (OTC) medications . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Prescription Drugs — Pricing Policies and Rebates . . . . . . . . . . . . . . . . . . . . . . . 5
Medicaid Drug Payment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Medicaid Drug Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Single Source and “Innovator” Multiple Source Drugs . . . . . . . . . . . . . 9
“Non-Innovator” Multiple Source Drugs . . . . . . . . . . . . . . . . . . . . . . . 10
Drug Pricing and Rebate Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Average Wholesale Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Circumventing the Best Price or Rebate Policies . . . . . . . . . . . . . . . . 13
Supplemental Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Controlling Drug Cost and Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prior Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prescribing/Dispensing Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Drug Use Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Cost Sharing Requirements for Medicaid Prescription Drugs . . . . . . . 17
Other Cost Containment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Bulk Purchasing Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Importing Lower Priced Drugs from Canada . . . . . . . . . . . . . . . . . . . . 19
Medicaid Spending for Outpatient Prescription Drugs . . . . . . . . . . . . . . . . . . . . 20
Medicaid Drug Spending by State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Spending by Eligibility Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Number and Cost of Prescriptions Filled . . . . . . . . . . . . . . . . . . . . . . . 25
Spending on Top Five Therapeutic Categories . . . . . . . . . . . . . . . . . . 25
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Impact of H.R. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Pharmacy Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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List of Tables
Table 1. Medicaid Coverage of Outpatient Prescription Drugs, 2002 . . . . . . . . . 2
Table 2. States’ Payment Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3. Medicaid Rebate Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 4. Medicaid Total Drug Spending and Federal Rebates by State, 2002 . . 11
Table 5. Medicaid Drug Prescription or Dispensing Limits, 2002 . . . . . . . . . . . 15
Table 6. Cost Sharing Requirements for Medicaid Pharmaceuticals, 2002 . . . . 17
Table 7. Total Medicaid Spending and Medicaid Prescription Drug Spending
and Percentage Change in Spending for Selected Years . . . . . . . . . . . . . . . 21
Table 8. Total Medicaid Spending and Outpatient Drug Spending, 2002 . . . . . 22
Table 9. Average Medicaid Prescription Drug Spending Among
Medicaid Prescription Drug Users by Basis of Eligibility, FY2000 . . . . . . 24
Table 10. Distribution of Medicaid Prescription Drug Spending Among
Medicaid Prescription Drug Users by Basis of Eligibility, FY2000 . . . . . . 24
Table 11. Pharmacy Plus Programs, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Appendix Table A-1. Percentage of Medicaid Enrollees with Prescription
Drug and Managed Care Spending by State, FY2000 . . . . . . . . . . . . . . . . 31

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Prescription Drug Coverage Under Medicaid
Introduction
Medicaid is a joint federal-state entitlement program that pays for medical
services on behalf of certain groups of low-income persons. It is the third largest
social program in the federal budget, exceeded only by Social Security and Medicare
and is typically the second largest spending item for states. The federal share of
Medicaid costs in FY2002 for benefits and administration is estimated to have been
$146 billion1 and states are estimated to have spent an additional $112 billion, for a
total program cost of $ 258 billion.
Medicaid programs are administered and designed by the states under broad
federal guidelines. States must provide Medicaid to certain population groups and
have the option of covering others. Similarly, a state must cover certain basic
services and may cover additional services if it chooses. States set their own
payment rates for services, with some limitations. There is, thus, considerable
variation in Medicaid programs with some relatively limited and others very
generous in terms of eligible populations, covered benefits and payments for services.
Medicaid is a means-tested program. Enrollees’ income and other resources2
must be within program financial standards. These standards vary among states, and
among different population groups within a state. With some exceptions, Medicaid
is available only to persons with very low incomes — most Medicaid enrollees have
income that is below the poverty level.
With a few narrow exceptions, Medicaid is available only to children, adult
members of families with children, pregnant women, and to persons who are aged,
blind, or disabled. Persons not falling into those categories — such as single adults
and childless couples — generally cannot qualify no matter how low their income is.3
The various eligibility groups have traditionally been divided into two basic classes,
the “categorically needy” and the “medically needy.” The two terms once
distinguished between welfare-related (categorically needy) beneficiaries and those
qualifying only under special Medicaid rules which allow states to cover persons
whose income is too high to qualify for cash welfare support but who nevertheless
need help with medical bills (medically needy). However, non-welfare groups have
1 Preliminary FY2002 CMS Form 64 Financial Reports.
2 “Resources” include bank accounts and similar liquid assets, as well as real estate,
automobiles, and other personal property whose value exceeds specified limits and usually
exclude an individual’s primary residence.
3 Several states use special waivers of Medicaid’s eligibility rules to extend coverage to
other groups of individuals not traditionally eligible.

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been added to the “categorically needy” list over the years. As a result, the terms are
no longer especially helpful in sorting out the various populations for whom
mandatory or optional Medicaid coverage has been made available. However, the
distinction remains important when considering certain benefits. Some benefits are
considered mandatory for categorically needy individuals; that is, states must cover
those benefits for the categorically needy but they are optional for medically needy
individuals. Other benefits, including prescription drugs, are optional for both groups
of beneficiaries. Some states provide those optional benefits only to categorically
needy individuals, some states provide those benefits to both groups, and some
provide those benefits to certain subcategories of medically needy as well as
categorically needy.
Prescription Drug Benefits
Coverage of outpatient prescription drugs is optional for state Medicaid
programs. States choose whether or not to include coverage of outpatient drugs in
their Medicaid benefit package. In 2002, all states covered outpatient prescription
drugs for at least some Medicaid beneficiaries; more than half of the states reported
covering outpatient drugs for all Medicaid beneficiaries. The remaining states
covered drugs for at least categorically needy individuals (Table 1) and sometimes
for other specified groups in addition to the categorically needy. Prescription drug
coverage is one of the few optional Medicaid services provided by all states. This
is in part due to the belief that coverage of prescription drug benefits is a “good deal”
— that the provision of this benefit can help to keep enrollees healthier and
potentially prevent more serious and/or costly medical interventions.
Table 1. Medicaid Coverage of Outpatient Prescription Drugs,
2002
State
Categorically needy
Medically needy
Alabama
X
Alaska
X
Arizona
X
Arkansas
X
X
California
X
X
Colorado
X
Connecticut
X
X
Delaware
X
District of Columbia
X
X
Florida
X
X
Georgia
X
X
Hawaii
X
X
Idaho
X
Illinois
X
X
Indiana
X

Iowa
X
X
Kansas
X
X
Kentucky
X
X
Louisiana
X
X

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State
Categorically needy
Medically needy
Maine
X
X
Maryland
X
X
Massachusetts
X
X
Michigan
X
X
Minnesota
X
X
Mississippi
X
Missouri
X
For Aged, Children and
Montana
X
Adults in Families
Nebraska
X
X
Nevada
X
New Hampshire
X
X
New Jersey
X
For Aged, Blind and
Disabled, and Children
New Mexico
X
New York
X
X
North Carolina
X
X
North Dakota
X
X
Ohio
X
Oklahoma
X
X
Oregon
X
For Aged, and Blind and
Disabled
Pennsylvania
X
X
Rhode Island
X
X
South Carolina
X
South Dakota
X
Tennessee
X
Texas
X
For Children and Adults
in Families
Utah
X
X
Vermont
X
X
Virginia
X
X
Washington
X
X
West Virginia
X
X
Wisconsin
X
X
Wyoming
X
Source: Table prepared by Congressional Research Services (CRS) based on analysis from
Pharmaceutical Benefits Under State Medical Assistance Programs 2002, National Pharmaceutical
Council at [http://www.npcnow.org/resources/issuearea/medicaidpharmaceutical.asp]
Note: Arizona and Tennessee provide pharmaceutical coverage to all beneficiaries through programs
operated under Section 1115 demonstration waivers. These programs do not recognize the federal
distinction between categorically and medically needy.
Fee-for-Service Coverage. For Medicaid beneficiaries who are not enrolled
in Medicaid managed care plans, federal statute allows states to establish formularies.
“Formularies” are lists of preferred pharmaceuticals. When health care insurers or
providers cover only those drugs on the list and deny payment for others, the list is
referred to as a “closed formulary.” Medicaid formularies are seldom as restrictive
as the closed formularies found in the private market for insurance because of two

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statutory requirements. The first requirement is that states must cover any non-
formulary drug (with the exception of drugs in 10 specific categories — see below)
that is specifically requested and approved through a prior authorization process.4
The second requires states to cover all drugs offered by manufacturers entering into
rebate agreements with the Secretary of Health and Human Services (HHS).
While ensuring that Medicaid formularies are not too restrictive, federal statute
does (Section 1927(d) of Medicaid law), on the other hand, clearly allow states to
exclude the following categories of drug products from Medicaid coverage: drugs
used (a) to treat anorexia, weight loss or weight gain; (b) to promote fertility; (c) for
cosmetic purposes or hair growth; (d) for the relief of coughs and colds; (e) for
smoking cessation; and (f) prescription vitamins and mineral products (except
prenatal vitamins and fluoride preparations; (g) non-prescription drugs; (h)
barbiturates; (i) benzodiazepines5; and (j) drugs requiring tests or monitoring that can
only be provided by the drug manufacturer. In addition, formularies may exclude a
drug for which there is no significant therapeutic advantage over other drugs that are
included in the formularies as long as there is a written explanation of the reason for
its exclusion and the explanation is available to the public.
Managed Care Coverage. For Medicaid beneficiaries who are enrolled in
managed care plans, plans to which states pay a fixed monthly payment in exchange
for the provision all or some subset of covered services, Medicaid statute includes a
broad exception to the drug coverage rules described above.6 The law allows the
enrolling managed care organization to develop and administer its own formulary.
In practice, however, when prescription drugs are covered under the managed care
arrangement, states enforce limitations on the formularies of managed care entities
similar to those imposed on states by the federal government. This policy was
initiated in correspondence from the Secretary of Health and Human Services (HHS)
to State Medicaid Directors7. This letter notified states that drugs covered under the
state plan must also be made available in Medicaid managed care formularies for
Medicaid managed care enrollees. States generally establish contract clauses in their
agreements with Medicaid health maintenance organizations (HMOs) and other
managed care organizations (MCOs) that allow such entities to establish formularies
but also require them to meet all of the fee-for-service coverage rules.
Over-the-counter (OTC) medications. Many state Medicaid programs
also cover OTC medications — or those medications that can be purchased without
a prescription. A survey conducted by the National Pharmaceutical Council (NPC)
questions states about Medicaid coverage of eight categories of non-prescription
drugs: allergy, asthma, and sinus medications; analgesics; cough and cold medicines;
smoking deterrents; digestive products; H2 antagonists (drugs used to treat ulcers and
4 Prior authorization is a process whereby a patient’s provider requests approval for
coverage from the Medicaid agency or its contractor of a specific drug before dispensing
that drug.
5 Barbiturates and benzodiazepines are drugs generally used as sedatives and tranquilizers.
6 Section 1927(j) of the Social Security Act.
7 Coverage of Protease Inhibitors — June 19, 1996.

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CRS-5
other stomach conditions); feminine products; and topical products. Thirty-three
states reported covering some drugs in at least five of the eight categories while 13
reported covering some drugs in all eight categories.8
In general, Medicaid pharmaceutical benefits are very broad, encompassing
most prescription drugs and many non-prescription drugs. Medicaid beneficiaries
receiving care in the fee-for-service sector are assured of broad pharmaceutical
coverage due to statutory requirements that prohibit states with closed formularies
from denying drugs requested and approved in the prior authorization process and
those offered by manufacturers that have rebate agreements in effect. The benefits
provided to Medicaid managed care enrollees tend to be similarly broad because of
administrative policies.
State Medicaid programs will be undergoing major changes in their drug
coverage policies over the next few years in response to the recent passage of H.R.
1, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.
The new law (P.L. 108-173), signed by President Bush on December 8, 2003. The
law provides for a Medicare drug benefit for Medicaid beneficiaries who also qualify
for Medicare. While specific information about the drugs that will be covered under
Medicare is not available at this time, it is likely that Medicaid prescription drug
coverage for dually eligible individuals will be considerably reduced since Medicaid
programs are specifically prohibited from continuing to cover drug offered under the
Medicare plans. State Medicaid programs will continue to be required to pay for
drugs offered to the dually eligible population under Medicare, however, based on
a formula specified in MMA 2003. The formula requires states to contribute an
amount equal to 90% (declining to 75% over several years) of the per capita cost of
states’ drug spending under Medicaid in 2003 multiplied by the number of dual
eligibles enrolling in the new Medicare benefit. In addition, Medicaid
administrations will be required to conduct eligibility determinations for individuals
qualifying for low-income assistance for the new program.
Prescription Drugs — Pricing Policies and Rebates
Medicaid Drug Payment Methods
Medicaid reimbursement for outpatient prescription drugs has two components:
an amount to cover the cost of the ingredients (the acquisition cost) and an amount
to cover the pharmacist’s professional services in filling and dispensing the
prescription (the dispensing fee). Medicaid regulations establish upper limits on
federal payments for acquisition costs (42 CFR 447.331-447.332) that are designed
to encourage the substitution of lower cost generic equivalents for more costly brand
name drugs. Two separate ceilings on acquisition costs are used, one for certain
8 Pharmaceutical Benefits Under State Medical Assistance Programs 2002, National
Pharmaceutical Council at [http://www.npcnow.org/resources/issuearea/
medicaidpharmaceutical.asp]

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CRS-6
multiple source drugs9 and one for all other drugs. Multiple source drugs are those
marketed or sold by two or more manufacturers or labelers, or marketed or sold by
the same manufacturer or labeler under two or more different proprietary names or
under a proprietary name and without such a name. The limits do not apply to
individual claims for prescription drugs. Rather, the limits are applied in the
aggregate to each state’s spending for a particular drug.
The federal upper payment limits for multiple source drugs are calculated by
the Centers for Medicare and Medicaid Services (CMS) and are periodically
published in the state Medicaid Manual. The upper limits are equal to 150% of the
published price for the least costly therapeutic equivalent. The published prices that
CMS uses as a basis for calculating upper payment limits are the lowest of the
“average wholesale prices” for each group of drug equivalents. Average wholesale
prices (AWPs) are published annually in compendia by the pharmaceutical industry.10
Each state must assure the Secretary that its Medicaid spending for multiple-source
drugs is in accordance with the upper limits plus reasonable dispensing fees. The
effect of this requirement is that, when a lower cost “generic” equivalent exists for
a brand-name drug, a pharmacy will be paid at a price tied to the generic price even
if the brand-name drug is actually furnished. The pharmacy, therefore, has a financial
incentive to substitute the lower cost generic equivalent for the brand-name drug.
The upper limit for multiple source drugs does not apply if a physician provides
handwritten certification on the prescription that a specific brand is medically
necessary for a particular recipient. The brand name would then be dispensed subject
to the limits applicable to “other” drugs.
“Other” drugs include brand name drugs and multiple-source drugs for which
a specific limit has not been established. The upper limit that applies to “other”
drugs is the lower of the estimated acquisition cost (EAC) plus a reasonable
dispensing fee or the provider’s usual and customary charge to the general public.
The EAC is the Medicaid agency’s best estimate of the price generally paid by
pharmacies and other providers to acquire the drug. States may use another payment
method as long as, in the aggregate, a state’s payments for “other” drugs is below the
payment levels determined by applying the upper limit for other drugs.
While states must meet the overall requirement that federal spending falls below
the “upper payment limits,” there are no other rules on how states set their payment
formulas for drugs. Most states use payment formulas that are based on the AWP
less some percentage (Table 2) for most covered drugs. The formulas represent
states’ attempt to estimate the true acquisition costs that retailers pay to wholesalers
to obtain the pharmaceuticals they sell. While AWPs are used by the states to
estimate those acquisition costs, those prices are more like manufacturers’ suggested
wholesale prices rather than a true measure of the average costs to pharmacies of
9 A multiple-source drug is a covered outpatient drug for which there are two or more drug
products which are therapeutically, pharmaceutically and bio-equivalent and are sold or
marketed in the state (1927(k)(7)(A)(i)).
10 American Druggist First DataBank Annual Directory of Pharmaceuticals (Blue Book), and
Medi-Span’s Pricing Guide, and Medical Economic’s Drug Topics Redbook.

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CRS-7
obtaining pharmaceuticals. In reality, many drug wholesalers compete with each
other by offering pharmacies different discounts from AWP, and some pharmacies
purchase their drugs directly from the manufacturers, skipping wholesalers entirely.11
Table 2. States’ Payment Formulas
State
Amount for each prescription
Alabama
WAC+9.2%; AWP-10%
Alaska
AWP - 5%
Arizona
AWP - 15% + $2
Arkansas
AWP - 20% (generic); AWP-14% (brand)
California
AWP - 5%
Colorado
AWP - 35% (generic) or AWP - 13.5%
Connecticut
AWP - 40% (generic);
AWP - 12%
Delaware
AWP - 14% (traditional);
AWP - 16% (non-traditional)
District of Columbia
AWP - 10%
Florida
Lowest of AWP - 13.25%, WAC + 7%,FUL, or
SMAC
Georgia
AWP - 10%
Hawaii
AWP - 10.5%
Idaho
AWP - 12%
Illinois
AWP - 25%, (generic);
AWP - 12% (brand)
Indiana
AWP - 20% (generic);
AWP - 13.5% (brand)
Iowa
AWP - 10%
Kansas
AWP - 27% (generic);
AWP - 13% (single source)
Kentucky
AWP - 12%
Louisiana
AWP - 13.5%;
AWP - 15% for chains
Maine
AWP - 13%
Maryland
AWP - 10% or WAC+10%, direct price+10% or
distributor price when available.
Massachusetts
WAC + 6%
Michigan
AWP - 13.5% (1- 4 stores); or AWP - 15.1% (5+
stores)
Minnesota
AWP - 14%
Mississippi
AWP - 12%
Missouri
AWP - 10.43% or WAC + 10%
Montana
AWP - 15%
Nebraska
AWP - 11%
Nevada
AWP - 15%
New Hampshire
AWP - 12%
11 E.K. Adams, D.H. Kreling, and K. Gondek, State Medicaid Pharmacy Payments and Their
Relation to Estimated Costs, Health Care Financing Review, vol. 15, no. 3, spring 1994, p.
27.

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State
Amount for each prescription
New Jersey
AWP - 10%
New Mexico
AWP - 12.5%
New York
AWP - 10%
North Carolina
AWP - 10%
North Dakota
AWP - 10%
Ohio
WAC + 9% or AWP - 12.8%
Oklahoma
AWP - 12%
Oregon
AWP - 11% (institut), or AWP - 15% (non-
institut)
Pennsylvania
AWP - 10%
Rhode Island
WAC + 5%
South Carolina
AWP - 10%
South Dakota
AWP - 10.5%
Tennessee
AWP - 13%
Texas
lowest of AWP - 15% or WAC + 12%
Utah
AWP - 15%
Vermont
AWP - 11.9%
Virginia
AWP - 10.25%
Washington
AWP - 14% (single source and multiple source (1-
4 manuf.)), AWP - 50% (multiple source, 5+),
AWP - 19% (brand-mail order), AWP - 15%
(generic-mail order)
West Virginia
AWP - 12%
Wisconsin
AWP - 11.25%
Wyoming
AWP - 11%
Source: [http://www.cms.hhs.gov/medicaid/drugs/prescriptions.asp]
Note: AWP: Average Wholesale Price
WAC: Wholesalers Acquisition Cost
Dispensing fees, the amounts paid to pharmacies to cover the cost of dispensing
the prescription medication are only limited insofar as they must be “reasonable.”
Such fees generally range from under $3.00 per prescription to over $5.00 per
prescription, although fees may be higher in states that do not use a flat fee. Until
only recently, few states varied professional dispensing fees. Today dispensing fees
in many states vary, most often with higher fees paid for generics than for single
source drugs. In a few states they vary by urban/rural location or based on the
pharmacy’s historical operating cost and volume.
Medicaid Drug Rebates
An important feature of Medicaid’s “best price” drug payment policy was
created in the Omnibus Budget Reconciliation Act of 1990. That law requires drug
manufacturers that wish to have their drugs available for Medicaid enrollees to enter
into rebate agreements with the Secretary of HHS, on behalf of the states. Under the
agreements, pharmaceutical manufacturers must provide state Medicaid programs
with rebates on drugs paid for Medicaid beneficiaries. The formulas used to compute
the rebates are intended to ensure that Medicaid pays the lowest price that the
manufacturers offer for the drugs. In return for entering into agreements with the

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Secretary, state Medicaid programs are required to cover all of the drugs marketed
by those manufacturers (with possible exceptions for the 10 categories of drugs that
states are allowed to exclude from coverage). In 1999 there were reported to have
been more than 500 manufacturers with Medicaid rebate agreements with the federal
government. Those agreements cover more than 55,000 drug products.12
Rebate requirements do not apply to drugs dispensed by Medicaid managed care
organizations when the drugs are paid as part of the MCOs capitation rate, and to
drugs provided in hospitals, and sometimes in physicians’, or dentists’ offices, or
similar settings.13 Rebate requirements, on the other hand, do apply to prescription
drugs provided on a fee-for-service basis as well as to nonprescription items, such as
aspirin, when they are prescribed for a Medicaid beneficiary and covered under the
state’s Medicaid plan.
The rebates are computed and remitted by pharmaceutical manufacturers each
quarter based on utilization information supplied by the state programs. States
collect the rebates from the manufacturers. The federal share of the rebates are
subtracted from states’ claims for their federal share of program costs.
In setting the amount of required rebates, the law distinguishes between two
classes of drugs. The first includes single source drugs (generally, those still under
patent) and “innovator” multiple source drugs (drugs originally marketed under a
patent or original new drug application (NDA) but for which generic competition
now exists). The second class includes all other, “non-innovator” multiple source
drugs (generics). Table 3 shows the requirements applicable to the two different
classes of drugs. These are discussed in further detail below.
Single Source and “Innovator” Multiple Source Drugs. Manufacturers
are required to pay state Medicaid programs a basic rebate for single source and
innovator multiple source drugs. Basic rebate amounts are determined by comparing
the average manufacturer price (AMP) for a drug (the average price paid by
wholesalers) to the “best price,” which is the lowest price offered by the
manufacturer in the same period to any wholesaler, retailer, nonprofit, or public
entity.14 The basic rebate is the greater of 15.1% of the AMP or the difference
between the AMP and the best price.
Additional rebates are required if the weighted average prices for all of a given
manufacturer’s single source and innovator multiple source drugs rise faster than
inflation as measured by the consumer price index for all urban consumers. Prices
12 D.K. Baugh, P.L. Pine, and S. Blackwell, Trends in Medicaid Prescription Drug
Utilization and Payments, 1990-97, Health Care Financing Review, vol. 20, no. 3, spring
1999. Reported as personal communication with S. Gaston (HCFA), Baltimore, MD, Mar.
11, 1999.
13 The general rule here is that rebates apply to drugs when they are billed separately, and
not when their costs are embedded in a claim for another service.
14 For the purposes of determining Medicaid rebates, prices paid by a number of federal and
state entities are excluded from the definition of the “best price.” These are discussed in
further detail below.

---

CRS-10
in effect on October 1, 1990 are used as a base and are compared with prices in the
month before the start of the period for which the rebate is to be issued to determine
if current prices have risen faster than inflation.
The AMP, used to calculate rebates, and the AWP, used by states to set prices
for drugs and by the federal government to calculate upper payment limits, each
measure pharmaceutical prices but at different stages of the journey from
manufacturing plant to individual drug user. The AMP measures prices charged by
manufacturers when selling to wholesalers. The AWP measures the prices charged
by wholesalers when selling the products to retail pharmacies. The AMP was created
in Medicaid statute for the purpose of calculating rebates. The statute further
requires that those prices remain confidential. The AWPs are figures that are
developed and used by manufacturers and retailers and are shared in the industry in
several annual publications. While the numbers are not overtly linked by formula or
derivation, economists would assume similar forces would impact the prices at each
stage. In 1996, the Congressional Budget Office (CBO) estimated the AMP to be
about 20% less than AWP for more than 200 drug products frequently purchased by
Medicaid beneficiaries.15
Since 1990 there have been a few changes to the Medicaid drug rebate policy.
Before 1992 “best price” was defined to exclude drugs sold to federal agencies at
depot prices16 and single award contract prices. Under the Veterans Health Care Act
of 1992 (P.L. 102-585) prices charged by manufacturers to certain federal agencies
were also excluded from the determination of “best price.” These agencies include
the Department of Veteran’s Affairs (DVA), the Department of Defense (DOD), the
Public Health Service (PHS) and various PHS-funded health programs, and state
(non-Medicaid) pharmaceutical assistance programs. The exclusion of those prices
from the “best price” potentially reduces Medicaid savings from the rebate program.
To offset this, minimum rebates were increased to the percentages shown in Table
3. The Act also provides, as a condition of Medicaid reimbursement for a
manufacturer’s drugs, that the manufacturer enter into a separate agreement with the
Secretary to provide discounts and rebates to certain PHS-funded entities with public
disproportionate share hospitals, as well as a new discount agreement with DVA.17
“Non-Innovator” Multiple Source Drugs. For non-innovator multiple
source drugs, basic rebates are equal to 11% of the AMP. Prices offered to other
payers are not considered, nor is there any additional rebate for excess price
increases.
15 How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical
Industry, Jan. 1996, p. 20.
16 Depot prices are the prices paid for drugs procured through federal distribution systems
and warehoused at federal facilities (depots).
17 Even before the Veterans Health Care Act of 1992, the DVA had been negotiating
discounted prices with manufacturers for drugs provided at DVA and other military
facilities.

---

CRS-11
Table 3. Medicaid Rebate Formulas
Single source and
“innovator” multiple
“Non-innovator”
source drugs
multiple source drugs
The greater of:
15.1% of the AMP or AMP
Basic rebate
minus best price
11% of the AMP
Required if the drug
product price rises faster
than inflation as measured
Additional rebate
by the CPI-U
N/A
Source: Section 1927(c) of the Social Security Act.
In 2002, the total amount of federally required drug rebates was reported by
states to be $5.6 billion. (States also collected about $.3 billion in supplemental
rebates not required by the federal government.) On average, those rebates summed
to 19% of Medicaid spending on outpatient prescription drugs. Rebates for 2002 by
state are reflected in Table 4.
Table 4. Medicaid Total Drug Spending and Federal Rebates
by State, 2002
(in millions of dollars)
Rebates as
percentage of
Total drug
Federal
Supplemental
Spending net
drug
State
spending
rebate
rebate
of rebates
spending
Alaska
70.7
14.3
—
56.4
20.3%
Alabama
452.3
85.0
—
367.3
18.8%
Arkansas
273.3
56.7
—
216.6
20.7%
Arizona
3.7
— a
—
3.7
0.0%
California
3,591.5
695.1
251.6
2,644.9
26.4%
Colorado
189.7
39.1
—
150.7
20.6%
Connecticut
357.9
62.6
—
295.3
17.5%
District of
66.1
11.4
—
54.7
17.3%
Columbia
Delaware
97.8
17.0
—
80.8
17.4%
Florida
1,717.7
301.5
52.2
1,364.0
20.6%
Georgia
873.7
205.5
—
668.2
23.5%
Hawaii
88.3
15.3
—
73.0
17.3%
Iowa
285.5
50.1
—
235.4
17.5%
Idaho
119.2
22.9
—
96.2
19.2%
Illinois
1,293.4
190.3
—
1,103.1
14.7%
Indiana
631.6
126.5
—
505.1
20.0%
Kansas
213.8
29.8
—
184.0
13.9%
Kentucky
652.9
133.3
—
519.6
20.4%
Louisiana
714.1
113.7
—
600.4
15.9%
Massachusetts
959.0
191.1
—
767.9
19.9%
Maryland
297.3
53.8
0.4
243.0
18.3%

---

CRS-12
Maine
220.4
47.4
—
173.0
21.5%
Michigan
674.2
172.5
— b
501.7
25.6%
Minnesota
310.2
62.7
—
247.5
20.2%
Missouri
790.9
147.3
—
643.6
18.6%
Mississippi
567.3
115.2
—
452.1
20.3%
Montana
83.6
16.0
—
67.6
19.1%
North Carolina
1,100.8
207.1
—
893.8
18.8%
North Dakota
52.5
11.7
—
40.8
22.2%
Nebraska
207.8
47.9
—
159.9
23.0%
New
99.7
20.9
—
78.8
21.0%
Hampshire
New Jersey
694.7
127.4
—
567.3
18.3%
New Mexico
73.9
13.3
—
60.6
18.0%
Nevada
86.9
13.5
—
73.4
15.6%
New York
3,660.4
664.0
—
2,996.5
18.1%
Ohio
1,334.0
263.3
—
1,070.7
19.7%
Oklahoma
285.1
51.5
—
233.6
18.1%
Oregon
279.0
54.5
—
224.6
19.5%
Pennsylvania
718.2
154.3
—
563.9
21.5%
Rhode Island
125.2
26.2
—
99.0
20.9%
South Carolina
451.8
98.3
—
353.6
21.7%
South Dakota
62.4
12.1
—
50.3
19.3%
Tennesseea
905.4
180.6
—
724.8
19.9%
Texas
1,591.1
305.1
—
1,286.0
19.2%
Utah
140.3
36.8
—
103.5
26.2%
Virginia
459.0
76.8
—
382.2
16.7%
Vermont
114.2
24.5
—
89.7
21.5%
Washington
542.0
100.9
—
441.1
18.6%
Wisconsin
442.7
89.2
—
353.5
20.2%
West Virginia
277.0
49.0
—
228.1
17.7%
Wyoming
39.1
8.7
—
30.4
22.2%
National Totals
29,345.4
5,613.3
304.2
23,427.8
20.2%
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of CMS form
64 data.
a. A number of states, including Arizona and Tennessee have statewide managed care waivers. In
Arizona, all Medicaid services are provided through capitated arrangements. Since drugs are
included in the capitation payment to MCOs, rebates do not apply. Tennessee provides most
services through capitated arrangements, but “carves out” certain pharmaceutical products.
Drugs that are not included in capitation rates are paid on a fee-for-service basis, and rebates
apply.
b. Amount less than $50,000.

Drug Pricing and Rebate Issues
Average Wholesale Prices. Over the last several years, a number of
concerns have been raised about the AWPs and the states’ and HHS’ reliance on
those prices for setting pharmaceutical payment levels and federal upper payment
levels. In addition to concerns that the AWPs do not reflect wholesale prices, claims
have been raised that manufacturers purposely manipulate the published AWPs to
offer discounts to certain purchasers without offering those prices to Medicaid. Upon
prompting by individual Members of Congress, the Inspector General (IG) of Health

---

CRS-13
and Human Services (HHS) explored those concerns.18 Her inspection could not
determine how often such practices occur, but indicated that some gaming of
Medicaid’s best price rules does occur. In at least one case she found that a
pharmaceutical manufacturer sold products to a Health Maintenance Organization
(HMO) without the manufacturer’s label. The HMO then re-labeled the drug. By
claiming that the drug had been sold to a “repackager,” instead of a wholesaler, the
manufacturer was able to offer a discount to the HMO that was not available to
Medicaid. In addition, a report issued by the IG in May 1998 explored the idea that
Medicaid drug prices are not adequately related to Medicaid drug rebates because
prices are set using the AWP and rebates are calculated using a different measure of
price.19 Since Medicaid drug rebates are not based on the AWP, manufacturers may
have an incentive to raise AWPs, to obtain higher payments for Medicaid drugs
without triggering higher rebates for those same drugs.
In response to criticism about the AWP, H.R. 1, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, establishes a new price setting
construct for certain prescription drugs currently covered and paid under the
Medicare program. Medicare drugs covered under Medicare Part B and furnished
after January 1, 2005 will be paid based on the average sales price. A manufacturer’s
average sales price will be calculated for each calendar quarter by dividing a
manufacturer’s total sales of each drug by the total number of units sold in that
quarter. Certain sales will be exempted from the calculation, including sale of drugs
exempted from Medicaid best price determination and sales that are nominal in
amount.
Circumventing the Best Price or Rebate Policies. In addition, some
critics have suggested that manufacturers sometimes sell drugs in ways that
circumvent the rebate requirement. For example, in November 1999, Representative
Henry Waxman wrote a letter to the Inspector General (IG) of HHS claiming that
manufacturers are increasingly skirting the best price requirement by selling finished
drugs to certain favored HMOs at large discounts and claiming that they have been
sold to “repackagers” or “redistributors.” Since drugs that are sold by repackagers
or redistributors are not subject to Medicaid’s rebate requirements, rebates are
avoided. In 1999, the Inspector General estimated the lost rebate for one repackaged
drug at over $25 million in one year and is considering conducting a study to further
examine these practices.20 Medicaid programs may also not be receiving rebates for
drugs that are provided to physicians for direct physician-to-patient dispensing
although it is not clear how often this occurs or if it results in a large amount of lost
rebate.
18 U.S. Congress, House Committee on Government Reform, Correspondence to
Representative Henry A. Waxman, Ranking Minority member, from June Gibbs Brown,
Inspector General, Dept. of Health and Human Services, Nov. 22, 1999.
19 U.S. Dept. of Health and Human Services, Office of the Inspector General, Need to
Establish Connection Between the Calculation of the Medicaid Drug Rebates and
Reimbursement for Medicaid Drugs, A-06-97-00052, May 1998.
20 Correspondence from the Office of the Inspector General, Nov. 1999.

---

CRS-14
Supplemental Rebates. In addition to the rebates required under federal
law, a few states charge certain pharmaceutical manufacturers additional rebates. In
2002, four states claimed a total of $304 million in supplemental rebates (federal
share of $159 and state share of $145).21 Those rebates were reported in four states;
Michigan, Maryland, Florida, and California. California collected 82% of the total.
Two states have approved new supplemental rebate programs that will be
combined with prior authorization requirements. Under the two programs, neither
of which has been implemented yet, drug manufacturers that agree to pay new
supplemental rebates would be exempted from certain prior authorization procedures.
A program of this type, MaineRx, was the subject of legal challenges brought by the
Pharmaceutical Research and Manufacturers of America (PhRMA) whose attorneys
argued that the Medicaid Act pre-empts MaineRx insofar as it threatens to coerce
manufacturers into reducing their prices on non-Medicaid sales and interferes with
Medicaid benefits without serving any Medicaid purpose. The case went to the U.S.
Supreme Court, which ruled in favor of the state, thereby clearing the way for
MaineRx to be implemented.22
Controlling Drug Cost and Use
Prior Authorization. States use a number of techniques to control cost and/or
use of pharmaceuticals. One of those techniques is prior authorization. Prior
authorization is the requirement that only pharmaceutical products for which advance
approval is sought and received from a designated individual or entity are to be
covered. States may establish prior authorization programs under Medicaid for all
drugs or for certain classes of drugs, as long as these programs meet two criteria: (1)
they must respond within 24 hours to a request for approval, and (2) they must
dispense at least a 72-hour supply of a covered drug in emergency situations. In
2002, all (including the District of Columbia) but four states report having a prior
authorization procedure for at least some covered drugs, but little information is
available describing the number or types of drugs those states require to undergo such
review.23
Some pharmaceutical industry representatives and consumer advocates have
voiced opposition to states’ use of prior authorization programs. They claim such
programs are burdensome, are not cost effective, and are becoming increasingly
restrictive. In addition, there are concerns that states are adding more and more drugs
to lists of those that require prior authorization and that such requirements are
particularly problematic for individuals who need newly developed drugs, possibly
because reviewers are less familiar with those drugs. Prior authorization is reportedly
particularly problematic for persons needing psychotherapeutics, a population for
whom compliance with drug therapies is often challenging to achieve even without
additional administrative barriers.
21 Supplemental rebates are shared by states and the federal government in the same way that
federally-required rebates are shared.
22 Pharmaceutical Research and Manufacturers of America v. Walsh., U.S. Supreme Court
No. 01-188 (May 19, 2003).
23 National Pharmaceutical Council, 2003.

---

CRS-15
Prescribing/Dispensing Limitations. States may also restrict the quantity
of prescription drugs available to beneficiaries. Such prescribing and dispensing
limits are ubiquitous. All but four states surveyed for the National Pharmaceutical
Council (NPC) indicated the use of prescribing or dispensing limits (Table 5). The
most common type of constraint is on the quantity of drug that may be made
available for each prescription. Almost all of the states routinely limit the amount
of certain drugs dispensed to a 30 to 34-day supply.
Table 5. Medicaid Drug Prescription or Dispensing Limits, 2002
State
Limits on number, quantity, and refills of prescriptions
Alabama
30-day supply per Rx, five refills per Rx
Alaska
30-day supply per Rx
Arizona
0
Arkansas
31-day supply per Rx, three Rx per month (extension to six); five
refills per Rx within six months
California
Six Rx per month, maximum 100 day supply for most meds.
Colorado
30-day supply per Rx, 100 day supply for maintenance
medication, other limits for stadol & oxycontin
Connecticut
240 units or 30 day supply, five refills except for oral
contraceptives
Delaware
34-day supply or 100 unit doses per Rx (whichever is greater)
District of
30-day supply per Rx, three refills per Rx within four months,
Columbia
other limits specific to certain medications
Florida
Four brand name Rxs per month (with exceptions)
Georgia
31-day supply per Rx, five Rx per month (adult), six Rx per
month (child); $2999.99/Rx limit
Hawaii
30-day supply or 100 unit doses per Rx
Idaho
34-day supply (with exceptions)
Illinois
One month supply, 11 refills per Rx
Indiana
Medically appropriate monthly quantity
Iowa
34 day supply except select maintenance drugs (90 days)
Kansas
31 day supply per RX, five Rx per month, other limitations
specific to certain medications
Kentucky
30 day supply, Maximum five refills in six months; one
dispensing fee per month for maintenance meds.
Louisiana
Greater of 30-day supply per Rx or 100 unit doses; five refills
per Rx within six months, max eight Rx per recipient per month
Maine
34-day supply per Rx; 90 day supply (generic), maximum 11
refills per Rx
Maryland
34-day supply per Rx; two refills per Rx
Massachusetts
five refills per Rx.
Michigan
100 day supply, No refills for Schedule II drugs, five refills per
180 days for Schedule III & V drugs
Minnesota
Max three month supply
Mississippi
Greater of 34-day supply or 100 unit doses per Rx; five Rx per
month; five refills maximum
Missouri
34-day supply or 100 unit doses per Rx; up to 90 day Rx
maximum
Montana
Greater of 34-day supply or 100 unit doses per Rx
Nebraska
Greater of 90-day supply or 100 dosage units per Rx, five refills
per Rx, six mo. Fo controlled substances, 31 days for injectibles

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CRS-16
State
Limits on number, quantity, and refills of prescriptions
Nevada
34-day supply per Rx; 100 day supply for maintenance
medications
New Hampshire
30-day supply 90 day supply on maintenance medications
New Jersey
34-day supply or 100 unit dosage per Rx; five refills within six
months
New Mexico
34 day supply; except contraceptives (100 days)
New York
Five refills per Rx; annual limits on number of Rx and OTC
drugs avail (with exceptions)
North Carolina
34-day supply per Rx, with exceptions; six Rx per month
North Dakota
34-day supply per Rx, max 12 refills per script; one refill on PPIs
Ohio
34-day supply (acute) and 102 unit doses (chronic)
Oklahoma
34-day supply or 100 unit doses per Rx; three Rx per month
(21+)
Oregon
15-day supply for initial Rx for chronic conditions
Pennsylvania
Greater of 34-day supply or 100 unit; five refills within six
months; six Rx per month
Rhode Island
30-day supply per Rx (non-maintenance); five refills per Rx
South Carolina
34-day supply w/ unlimited Rx (children); four Rx per month
(adult).
South Dakota
None
Tennessee
0
Texas
Three Rx per month; unlimited Rxs for nursing home residents
and children; max five refills
Utah
31-day supply per Rx; max five refills per Rx, other limits on
specific drugs
Vermont
60 day supply for maintenance medications, five refills per Rx
Virginia
34-day supply per Rx
Washington
34-day supply per Rx; usually two refills per month; four refills
for antibiotics or scheduled drugs
West Virginia
34-day supply; five refills per Rx with quantity limits on some
drugs
Wisconsin
34-day supply per Rx with exceptions, maximum 11 refills
during 12 month period
Wyoming
Quantity limits on some medications as deemed clinically
appropriate
Source: Table prepared by Congressional Research Service (CRS) based on analysis from
Pharmaceutical Benefits Under State Medical Assistance Programs 2002.
Note: Rx: Prescription
Schedule II: Drugs with high potential for abuse and/or severe dependence
Schedule III: Drugs with some potential for abuse and/or moderate or low dependence
Schedule IV: Drugs with low potential for abuse and/or limited dependence relative to II
Schedule V: Drugs with low potential for abuse and/or limited dependence relative to Schedule IV
Currently, individual managed care and PBM organizations make decisions, but this policy may be
changing. First, the state is reportedly phasing in a single, uniform preferred drug list, and second, a
U.S. District Court recently cleared the way for the TennCare program to fill only a three day supply
of certain new medications. The pharmacy would be required to seek the doctor’ permission to switch
to a drug on the TennCare formulary, after which a 14 day supply would become available. (Source:
B. de la Cruz, www.Tennessean.Com, Sept. 26, 2003.)

---

CRS-17
Drug Use Review. All states use policies to control the use of outpatient
prescription drugs and all have programs in place to assess the quality of their
pharmaceutical programs. The Omnibus Budget Reconciliation Act of 1990 included
a requirement that all states implement drug use review (DUR) programs, and
provided for enhanced federal matching payment to cover the costs of conducting
those DUR activities. DUR programs are aimed at both improving the quality of
pharmaceutical care and assisting in containing costs. The major features of DUR
programs are: enhanced communication between pharmacists and beneficiaries upon
dispensing prescriptions; ongoing retrospective review of prescribing practices;
educational outreach for pharmacists, physicians, and beneficiaries; and pharmacy
counseling. Nationally, states reported spending a total (federal and state share) of
about $5.8 million on Medicaid drug use review practices in 2002, although some
states reported zero for spending in that category.24
Cost Sharing Requirements for Medicaid Prescription Drugs. In
addition to prior authorization and utilization review, many Medicaid programs
impose cost sharing requirements on enrollees to control drug use and spending. The
Medicaid statute prohibits states from requiring copayments on services provided to
children under age 18, pregnant women, institutionalized individuals, and certain
enrollees in HMOs. In addition, copayments cannot be charged for emergency25 and
family planning services. Within those guidelines, states may, and most do, impose
“nominal” cost sharing amounts on other users of drug benefits. States that require
copayments for covered outpatient drugs generally charge between $.50 and $3.00
per prescription — most falling at about $1.00 per prescription (Table 6).
Table 6. Cost Sharing Requirements for Medicaid
Pharmaceuticals, 2002
State
Amount for each prescription
Alabama
$.50 to $3.00
Alaska
$2.00
Arizonaa
—
Arkansas
$.50 to $5.00
California
$1.00
Colorado
G: $.75, B.$3.00
Connecticut
None
Delaware
None
District of Columbia
$1.00
Florida
None
Georgia
G/P: $.50, B/NP: $.50 to $3.00
Hawaii
None
Idaho
None
24 Preliminary FY2002 CMS Form 64.
25 States may obtain a waiver of this rule to impose up to twice the nominal amount
established for outpatient services for services received at a hospital emergency room, if the
services are not emergency services, as long as they have established to the satisfaction of
the Secretary that beneficiaries have alternative sources of non-emergency, outpatient
services that are available and accessible.

---

CRS-18
State
Amount for each prescription
Illinois
$1.00
Indiana
$.50 to $3.00
Iowa
$1.00
Kansas
$3.00
Kentucky
$1.00
Louisiana
$.50 to $3.00
Maine
$.50 to $3.00
Maryland
$1.00
Massachusetts
$2.00
Michigan
$1.00
Minnesota
None
Mississippi
$1.00 to $3.00
Missouri
$.50 to $2.00, $5.00 for some waiver
populations
Montana
$1.00 to $5.00
Nebraska
$2.00
Nevada
None
New Hampshire
G: $.50, B.$1.00
New Jersey
None
New Mexico
None (except for SCHIP and certain working
disabled)
New York
G: $.50, B: $2.00
North Carolina
$1.00 to $3.00
North Dakota
B: $3.00
Ohio
None
Oklahoma
$1.00 to $2.00
Oregon
None
Pennsylvania
$1.00 to $2.00
Rhode Island
None
South Carolina
$3.00
South Dakota
$2.00
Tennesseea
—
Texas
None
Utah
$3.00 to $5.00 per month
Vermont
$1.00 to $2.00
Virginia
G: $1.00, B: $2.00
Washington
None
West Virginia
$.50 - $2.00
Wisconsin
$1.00, max $5 per recip per month
Wyoming
$2.00
Source: Pharmaceutical Benefits Under State Medical Assistance Programs 2002.
Note: G: Generic
P: Preferred
B: Brand name
NP: Not preferred
a. Within federal and state guidelines, individual managed care and pharmacy benefit management
organizations make formulary/drug decisions.

---

CRS-19
Other Cost Containment Strategies. Some states are attempting to
manage drug costs through the use of pharmaceutical benefits managers (PBMs).
Many private insurers, including those that provide coverage to federal employees
under the Federal Employees Health Benefits Program (FEHBP), contract with
PBMs for drug benefits management and claims payment. PBMs enable insurers to
obtain discounts for pharmaceuticals that would not otherwise be available to single
insurers because the PBMs administer multiple insurers’ covered populations. In
addition, PBMs provide a variety of administrative services intended to improve
quality and control costs, such as retail pharmacy network development, mail order
pharmacy operation, formulary development, manufacturer rebate negotiation and
prescription checks for adverse drug interactions.26 While PBMs have begun to
administer a significant portion of the market for private prescription drug benefits,
they are not broadly used by states in administering Medicaid drug benefits.
Bulk Purchasing Programs. A number of states have considered
establishing bulk purchasing programs for outpatient prescription drugs. Bulk
purchasing can be used to obtain those drugs required by state Medicaid agencies
combined with those needed by other in-state agencies such as state employees’ plans
and local governments or could combine the prescription drug needs of two or more
states together. While many states are considering such programs, few have actually
been implemented and evidence of savings based on these purchasing arrangements
among the few implemented purchasing arrangements are scarce. This is because
most programs are implemented along with other changes to the formularies and/or
the management of pharmaceutical benefits, making isolating the impact of the bulk
negotiating power very difficult.
Two Medicaid purchasing pools are in place today. Administrators of one of
those, established by Michigan and Vermont, claims to have reduced the rate of
growth of drug spending in states by 11%.27 Other states reportedly plan to join that
pool. Georgia established a purchasing program for its state prescribing needs that
combines Medicaid outpatient drugs with those needed for public employees and
university employees. The program which combines bulk purchasing with plan
design changes and a preferred drug list, is claimed to have reduced “pharmacy cost
trends” by 18 to 25%.28 While relatively little bulk purchasing is under way today,
it is likely that this approach will continue to gather attention in the coming years as
states seek ways to control Medicaid costs.
Importing Lower Priced Drugs from Canada. Several state and local
governments are currently considering plans to reimport prescription drugs from
Canada in order to save money on medicines that they reimburse for or provide to
residents and/or employees. For example, states such as California, Iowa, Illinois,
26 GAO/HEHS-97-47; Pharmacy Benefit Managers; FEHBP Plans Satisfied With Savings
and Services, but Retail Pharmacies Have Concerns, Feb. 1997.
27 “Multi-State Medicaid Pooling Program Generates Significant Cost Savings for Michigan
and Vermont,” The First Bulletin published by First Health Services Corporation, Oct. 30,
2003.
28 “Aggregate Purchasing of Prescription Drugs: The Massachusetts Analysis,” Heinz
Family Philanthropies, Sept. 11, 2001.

---

CRS-20
Minnesota, and New Hampshire have begun exploring the prospect of drug
importation, and at least two localities, Springfield, Massachusetts and the city of
Montgomery Alabama, have already begun to import drugs for employees and
retirees.29 These states or other units of government argue that they have a duty to
explore innovative methods for providing more affordable prescription drugs to their
residents, even at the risk of violating federal law. Each state and local importation
plan varies in their details — at least one includes pharmaceuticals for Medicaid
recipients, but most do not. At this time there are no reimportation programs in
operation for Medicaid beneficiaries, although this may change. A provision in
MMA 2003 requires the Secretary of HHS to promulgate regulations allowing
pharmacists and wholesalers to reimport pharmaceutical products once the Secretary
certifies to Congress that such reimported drugs provide no risk to the public’s health
and safety and will result in a significant reduction in cost to the American consumer
(MMA 2003, Section 1121).
Medicaid Spending for Outpatient
Prescription Drugs
Total Medicaid payments for outpatient prescription drugs represent a growing
portion of Medicaid spending. In 1990, states reported total payments for outpatient
prescription drugs of about $4.6 billion, or just over 6% of total program spending.
In 2002, total payments for Medicaid outpatient prescription drugs, net of rebates,
were $23.4 billion, accounting for about 9.5% of payments for all Medicaid
services.30 The average annual growth in drug spending under Medicaid over the
eight year period was a substantial 15% per year.
Despite the large and growing share of Medicaid spending on drugs, those
numbers represent only a portion of true Medicaid drug spending. States do not
include the cost of outpatient prescription drugs provided through capitated
arrangements in their reports. In 1990, this probably did not present a major gap in
the available information about Medicaid drug spending since only about 10% of
Medicaid enrollees received coverage through capitated managed care arrangements.
Today, however, well over one-half of Medicaid’s enrollees receive some or all of
their benefits through Medicaid managed care organizations or prepaid health plans.
In addition, other prescription drug payments for products purchased directly from
physicians or included in claims for other services, such as institutional and home
health care, are not reported as outpatient drug spending.
29 Gloria Gonzalez, “Cities Vow to Maintain Canadian Rx Reimports,” Business Insurance,
Feb. 2, 2004, vol. 38, issue 5.
30 Preliminary 2002 CMS 64.

---

CRS-21
Table 7. Total Medicaid Spending and Medicaid Prescription
Drug Spending and Percentage Change in Spending
for Selected Years
(in billions of dollars)
Total Medicaid
Average annual
Medicaid
Average annual
benefits
percentage
prescription
percentage
Year
spendinga
change
drug spendingb
change
1990
$ 72.5
—
$ 4.6
—
1995
$ 151.8
15.9%
$ 8.4
12.7%
2000
$195.5
5.2%
$16.6
14.7%
2002
$246.3
12.2%
$23.4
18.8%
Source: Table prepared by Congressional Research Service (CRS) based on tabulations from HCFA
Form 64/ CMS Form 64 data.
a. Does not include administrative costs.
b. Does not include prescription drugs paid through capitated arrangements, obtained directly from
physicians or bundled in claims for other services, and rebates have been subtracted from totals.
Medicaid Drug Spending by State. Table 8 shows 2002 Medicaid
spending for prescription drugs by state in order, beginning with the state with the
largest percentage of program spending for prescription drugs. (Amounts in Table
8 are total reported payments for outpatient prescription drugs minus rebates.)
Medicaid drug spending as a percentage of total Medicaid medical assistance
spending varies widely. About 15.7% of Medicaid spending in Mississippi is
attributed to outpatient prescription drugs. New Mexico spends the smallest
percentage of program spending on outpatient drugs — about 3.4%. While wide
variation in drug spending exists across states, in the past Medicaid was claimed to
be the single largest payer for outpatient prescription drugs within each state.31
New York reported spending the largest amount on Medicaid outpatient
prescription drugs — almost $ 3 billion dollars in 2002. Wyoming, the state with the
smallest Medicaid enrollment, reported the lowest amount of outpatient prescription
drug spending — $30.4 million, in 2002.
31 Institute for Health Services Research, Apr. 1995.

---

CRS-22
Table 8. Total Medicaid Spending and
Outpatient Drug Spending, 2002
(payments in millions of dollars)
Drug spending as
Medical
percentage of all
Outpatient
assistance
State
medical assistance
drug spending
spending
Mississippi
15.7%
452.1
2,877.0
West Virginia
14.4%
228.1
1,584.2
Florida
13.8%
1,364.0
9,871.5
Kentucky
13.8%
519.6
3,763.2
Vermont
13.6%
89.7
660.7
North Carolina
13.3%
893.8
6,723.6
Delaware
12.7%
80.8
634.0
Tennessee
12.5%
724.8
5,787.1
Illinois
12.5%
1,103.1
8,809.1
Idaho
12.4%
96.2
773.5
Louisiana
12.3%
600.4
4,886.0
Maine
12.1%
173.0
1,430.1
Missouri
12.0%
643.6
5,360.6
Nebraska
11.9%
159.9
1,339.1
Alabama
11.9%
367.3
3,093.3
Montana
11.8%
67.6
571.5
Indiana
11.4%
505.1
4,448.3
Ohio
11.1%
1,070.7
9,658.0
Wyoming
11.1%
30.4
274.6
South Carolina
10.7%
353.6
3,292.9
Georgia
10.7%
668.2
6,241.2
Utah
10.5%
103.5
984.2
Oklahoma
10.3%
233.6
2,260.4
Virginia
10.0%
382.2
3,812.2
Kansas
10.0%
184.0
1,836.7
Hawaii
9.9%
73.0
740.0
California
9.8%
2,644.9
26,890.5
Arkansas
9.7%
216.6
2,237.8
Massachusetts
9.5%
767.9
8,063.0
Texas
9.5%
1,286.0
13,523.5
South Dakota
9.2%
50.3
549.9
Iowa
9.1%
235.4
2,575.1
Nevada
9.1%
73.4
808.2
North Dakota
8.9%
40.8
461.4
Oregon
8.7%
224.6
2,571.6
Connecticut
8.5%
295.3
3,456.3
Washington
8.5%
441.1
5,168.5
Wisconsin
8.4%
353.5
4,193.2
New York
8.3%
2,996.5
36,295.1
Alaska
8.2%
56.4
685.8
New Hampshire
7.8%
78.8
1,016.1
New Jersey
7.3%
567.3
7,745.9
Rhode Island
7.3%
99.0
1,358.5
Maryland
6.7%
243.0
3,613.5

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CRS-23
Drug spending as
Medical
percentage of all
Outpatient
assistance
State
medical assistance
drug spending
spending
Michigan
6.6%
501.7
7,562.1
Colorado
6.5%
150.7
2,323.1
Minnesota
5.6%
247.5
4,414.5
District of Columbia
5.4%
54.7
1,021.8
Pennsylvania
4.6%
563.9
12,130.9
New Mexico
3.4%
60.6
1,776.8
Arizona
n/a
n/a
3,541.6
Total
9.5%
23,427.9
246,283.9
Source: Table prepared by Congressional Research Service (CRS) based on tabulations preliminary
CMS Form 64 data.
Note: Does not include outpatient drug spending for Medicaid beneficiaries enrolled in some
managed care organizations, payments for products purchased directly from physicians, or payments
included in claims for other services such as institutional care.
Spending by Eligibility Group. In 2000, the most recent year for which
state Medicaid statistical reports link expenditures to enrollees, states reported a total
of just over $20 billion spending for outpatient prescription drugs. Of those funds,
almost 58% ($11.6 billion)of that amount went to individuals qualifying for Medicaid
on the basis of being blind or having a disability, almost 27% ($5.4 billion) for
elderly individuals, almost 8% ($1.6 billion) on non-disabled children and an
additional 7% ($1.4 billion) on adults in families with dependent children.32, 33
Table 9 shows average Medicaid prescription drug spending among Medicaid
prescription drug users by eligibility group. The data do not reflect spending for
those who receive prescription drugs through managed care only, but they do provide
a general idea of the relative spending among different groups of beneficiaries.34
Among all Medicaid prescription drug users in FY2000, the average Medicaid
32 Expenditures in this paragraph are those reported by states through the Medicaid
Statistical Information System (MSIS) for FY2000. Those data do not match expenditures
reported above in Tables 4 and 8 (based on CMS-64 reports) for two reasons; because
Tables 4 and 8 are for fiscal year 2002; and because data reported on form CMS 64 have
always varied slightly from the MSIS reported totals. Because the CMS 64 reports are filed
for financial accounting purposes, they are generally considered to be a more accurate
accounting of total outlays, and are preferred when examining state and/or federal totals.
Those data, however do not allow for analysis of spending and use of services for individual
and groups of individuals. For those kind of analysis, data from the MSIS system are used.
33 For additional state-by-state data on Medicaid prescription drug spending for dual
eligibles, see CRS Report RL31987, Dual Eligibles: Medicaid Expenditures for Prescription
Drugs and Other Services, by Karen Tritz and Megan Lindley.
34 If per-person drug spending under managed care (which is not shown separately in MSIS
data) differs significantly from per-person drug spending under FFS (which is shown
separately in MSIS data), the estimates provided here could be somewhat distorted. Since
Medicaid HMOs enroll many more children and adults than aged or disabled individuals,
the exclusion of managed care drug payments might have a greater relative impact on
estimates of average spending among children and adults.

---

CRS-24
prescription drug spending amount was $992. Children had the lowest average
spending, while blind and disabled enrollees had the highest. Among blind and
disabled enrollees with prescription drug spending, the average amount was $2,316.
Among children with prescription drug spending, the average amount was $188.
Table 9. Average Medicaid Prescription Drug Spending Among
Medicaid Prescription Drug Users by Basis of Eligibility, FY2000
Percentage of
Medicaid
Average Medicaid
Number of
enrollees with
drug spending per
Medicaid
prescription drug
Medicaid prescription
enrollees
spending
drug user
Aged
4,294,972
67.3%
$1,853
Blind/Disabled
7,474,028
67.0%
$2,316
Child
21,762,670
37.9%
$188
Adult
10,669,462
37.0%
$366
Total
44,201,132
45.5%
$992
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of CMS
MSIS data.
Note: HI data are FY1999, all other states are FY2000. Enrollee counts exclude MSIS records with
missing/unknown eligibility status. Medicaid prescription drug users are defined as enrollees with
non-zero Medicaid prescription drug spending. Does not include drug rebates or payments for drugs
purchased directly from physicians or included in claims for other services such as institutional care.
Since it is generally included in the capitation payment for managed care (not broken out separately),
figures on prescription drug users and spending do not include those who receive prescription drugs
through managed care only (see Appendix Table A-1 for a state-by-state comparison of the percentage
of enrollees with drug spending and the percentage of enrollees with managed care).
Table 10. Distribution of Medicaid Prescription Drug Spending
Among Medicaid Prescription Drug Users by Basis of Eligibility,
FY2000
Medicaid
Percentiles
enrollees with
drug spending
10th
25th
50th
75th
90th
Aged
2,888,919
$156
$512
$1,309
$2,582
$4,197
Blind/ Disabled
5,005,036
$64
$278
$1,103
$2,909
$5,651
Child
8,258,635
$9
$22
$66
$169
$381
Adult
3,949,947
$12
$34
$100
$275
$775
Total
20,102,537
$14
$45
$173
$927
$2,862
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of CMS
MSIS data.
Note: HI data are FY1999, all other states are FY2000. Enrollee counts exclude MSIS records with
missing/unknown eligibility status. Does not include drug rebates or payments for drugs purchased
directly from physicians or included in claims for other services such as institutional care. Since it is
generally included in the capitation payment for managed care (not broken out separately), figures on
prescription drug users and spending do not include those who receive prescription drugs through
managed care only (see Appendix Table A-1 for a state-by-state comparison of the percentage of
enrollees with drug spending and the percentage of enrollees with managed care).

---

CRS-25
Table 10 shows the distribution of Medicaid prescription drug spending among
Medicaid prescription drug users by eligibility group. Among all Medicaid
prescription drug users in FY2000, the bottom 25% had $45 or less in Medicaid
prescription drug spending, and the top 25% had more than $927. Those in the
middle had prescription drug spending amounts between $45 and $927. The bottom
half of aged prescription drug users had $1,309 or less in prescription drug spending,
while the bottom half of children with drug spending had $66 or less.
As noted earlier, the average Medicaid prescription drug spending amount was
$992 among Medicaid prescription drug users in FY2000. However, Table 10 shows
that 50% of prescription drug users had amounts of $173 or less, and more than 75%
had amounts below the $992 average. This indicates that prescription drug spending
amounts are not evenly distributed among users, and that a relatively small
proportion of users have very high prescription drug spending.
Number and Cost of Prescriptions Filled. In 2001, Medicaid agencies
reported processing over 478 million prescriptions. Not all states reported this
information, but among those that did, the average cost of a prescription was about
$52.82.35
Some studies have found large variations in drug use patterns among states. The
reasons for such variation may reflect differences in composition of Medicaid
enrollment, drug policies in effect in the state, and/or different physician prescribing
behaviors.36
Spending on Top Five Therapeutic Categories. In 2001, the National
Pharmaceutical Council (NPC) reported over one-third (76.9%) of Medicaid drug
spending was for drugs in five categories: central nervous system drugs;37
cardiovascular drugs; anti-infective agents; gastrointestinal drugs; and hormones and
synthetic substitutes. While state-by-state variation is large, spending on central
nervous system drugs is by far the largest category for which Medicaid drug spending
occurs. On average, spending for this class of drugs comprises about 37.6% of
states’ total drug spending.
35 Pharmaceutical Benefits Under State Medical Assistance Programs 2002.
36 B. Stuart, B.A. Briesacher, F. Ahern, D. Kidder, C. Zacker, G. Erwin, D. Gilden, and C.
Fahlman “Drug Use and Prescribing Problems in Four State Medicaid Programs,” Health
Care Financing Review, vol. 20, no. 3, spring 1999.
37 A large classification of drugs that includes psychotherapeutics, treatments for seizure
disorders and Parkinson’s, and drugs for pain, among others.

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CRS-26
Current Issues
Impact of H.R. 1
State Medicaid programs will experience significant changes in response to the
implementation of the provisions of the Medicare Prescription Drug, Improvements
and Modernization Act of 2003 (MMA 2003, P.L. 108-173) signed in December of
2003. The new law provides that, beginning in 2006, Medicaid eligibles who are
also eligible for Medicare will receive outpatient prescription drug coverage through
the new Medicare prescription drug benefit instead of through Medicaid. While this
bill doesn’t affect eligibility for Medicaid programs, it does, however, affect the
benefits that Medicaid programs will cover. Under MMA 2003, state Medicaid
programs will be prohibited from covering any drugs that are to be provided through
the Medicare benefit, and cannot pay cost sharing amounts for those drugs.
States will have both administrative and financial obligations under MMA 2003.
States will be required to conduct eligibility determinations for the low-income
subsidies and cost-sharing assistance for the program. This makes sense because the
assistance for low-income Medicare Part D beneficiaries is based on the statutory
description for a Medicaid coverage group — Qualified Medicare Beneficiaries
(QMBs). QMBs are a group of dual eligible enrollees for whom Medicaid pays
Medicare’s cost sharing requirements. The group of individuals who will qualify for
low-income subsidies under Medicare Part D will look just like QMBs but with
higher financial standards.
In addition, states will share in the cost of the new Medicare program based on
a formula that projects what they would have paid for pharmacy benefits for the dual
eligible population had the Medicare benefit not passed. Beginning in 2006, each
state will be required to make a monthly payment to the Secretary of HHS equal to
the product of the state’s share of 2003 Medicaid per capita spending for drugs for
all full-benefit dual eligibles38 trended forward to the current year, multiplied by the
total number of such dual eligibles for such state for the month, and multiplied again
by the “factor” for the month. The “factor” is 90% in 2006, and will phase down to
75% over 10 years. The formula ensures that states continue to fund a significant
share of the cost of the new Medicare drug benefit for those individuals who would
have otherwise been eligible for Medicaid prescription drugs. A state’s failure to
make the required payments will result in interest charges and in an offset to amounts
otherwise payable under Medicaid.
An indirect impact of MMA 2003 on Medicaid programs will be that the rebate
programs and collections will shrink considerably, since a large portion of
Medicaid’s prescription drugs will shift to being offered and covered through the
Medicare program.
38 Including the estimated actuarial value of prescription drug benefits provided under a
capitated care.

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CRS-27
Pharmacy Plus
Federal law gives states the flexibility to conduct demonstration projects as long
as those projects promote the objectives of the Medicaid program. Under these
demonstrations, states can waive many statutory eligibility and/or benefits rules. The
current Administration has encouraged states to pursue targeted policies under a
number of “waiver initiatives.” One of those initiatives, called Pharmacy Plus
waivers, encourages states to provide only pharmacy benefits to low-income seniors
and individuals with disabilities who do not otherwise qualify for Medicaid drug
coverage. These demonstrations provide comprehensive pharmacy benefits for
low-income seniors and individuals with disabilities with income at or below 200%
FPL. In fiscal year 2002, there were four approved Pharmacy Plus waivers. Two
states reported waiver data in fiscal year 2002. In that year 193,574 individuals
received pharmacy benefits at a federal cost of approximately $169 million. Features
of those programs are in Table 11 below. These program are expected to undergo
significant changes as the Medicare prescription drug benefit becomes implemented.
Table 11. Pharmacy Plus Programs, 2003
Florida
Illinois
South Carolina
Wisconsin
Age 65 and over
Age 65 and
Age 65 and
with income
over with
over with
Age 65 and over
below 200% FPL
income below
income below
with income
including spend-
Enrollees
120% FPL
200% FPL
below 200% FPL
down.
Medicaid Rx
Medicaid Rx
Medicaid Rx
Medicaid Rx
Benefit
benefit
benefit
benefit
benefit
After annual
cap of $1,750,
$160 per
then 20%
Limits
month
copay
None
None
Enrollees pay
$500 fee to have
access to
Medicaid prices
during
“deductible
period”. After
Monthly
that, $10 per
“rebate” check
generic/$21 per
of $25 for
name brand
Participants with
individuals
copays apply
income between
68,149
with employer
50,000
160% and 200%
enrollment
provided drug
enrollment
pay $500
Other
ceiling
benefits
ceiling
deductible
Source: Based on information from CMS website at [http://www.cms.hhs.gov/medicaid/1115/
pharmacyplus.asp]

---

CRS-28
Glossary
Actual Acquisition Cost (AAC) — Pharmacist’s or provider’s net payments
made to purchase a drug from any source (e.g., manufacturer, wholesaler) net of
discounts, rebates, etc.
Average wholesale price (AWP) — The manufacturer’s suggested wholesale
price to the retailer, listed in any of the published compendia of cost. In 2003 the
compendia include the American Druggist First DataBank Annual Directory of
Pharmaceuticals (Blue Book), and Medi-Span’s Pricing Guide, and Medical Economic’s
Drug Topics Redbook.
Average manufacturers price (AMP) — the average price paid to a
manufacturer by wholesalers for a drug. AMP was created as a benchmark for the
purpose of calculating Medicaid rebates (OBRA 1990) and is not publically
available.
Average Sales Price (ASP) — A new system created by federal and state
prosecutors in settlements with pharmaceutical manufacturers TAP and Bayer to
ensure more accurate price reporting. ASP is the weighted average of all non-federal
sales to wholesalers and is net of chargebacks, discounts, rebates, and other benefits
tied to the purchase of the drug product, whether it is paid to the wholesaler or the
retailer.
“Best price” — with respect to single source and innovator multiple source
drugs, the lowest price at which the manufacturer sells the covered outpatient drug
to any purchaser (excluding depot prices and single award contract prices of any
federal agency, prices charged by manufacturers to DVA, DOD, PHS and various
PHS-funded health programs, and state (non-Medicaid) pharmaceutical assistance
programs) in the United States. Used to calculate rebates due for those drugs.
Dispensing fee — a payment to cover the cost of the pharmacist’s professional
services in filling and dispensing a prescription.
Estimated acquisition cost (EAC) — the Medicaid agency’s best estimate of
the price paid by pharmacists or providers.
Formulary — a list of drug products that may be dispensed or reimbursed.
Insurers or states may create a “closed” (or “restricted”) formulary where only those
drug products listed will be reimbursed by that plan or program. Other formularies
may have no restrictions (“open” formularies) or may have certain restrictions such
as higher patient cost-sharing requirements for off-formulary drugs.
Maximum allowable cost (MAC) — A maximum dollar amount the
pharmacist is paid for selected products.
Multiple source drug — a drug that is made available by at least three different
suppliers, and the FDA has determined that at least three approved formulations of
the drug are “therapeutically equivalent” that is, contain identical doses of the active
ingredient and have the same biological effects. Innovator multiple source drugs are

---

CRS-29
those that are marketed under an original new drug application (NDA) approved by
the FDA. Non-innovator multiple source drugs are all other multiple source drugs.
Original new drug application — an FDA-approved drug or biological
application that received one or more forms of patent protection, patent extension or
marketing exclusivity rights granted by the FDA.
Pharmaceutical benefit managers (PBMs) — Entities that contract with
health insurers to manage pharmaceutical benefits. Activities provided by PBMs
could include claims payment; administrative services, such as retail pharmacy
network development; mail order pharmacy operation; formulary development;
manufacturer rebate negotiation and prescription checks for adverse drug
interactions; and negotiating discounts on pharmaceuticals products.
Single source drug — A covered outpatient drug that is produced or distributed
under an original NDA approved by the FDA, including a drug product marketed by
any cross-licensed producers or distributors operating under the NDA.
Stop-loss — A specified annual threshold for medical services to be paid by an
insured person. Once the threshold is reached, the insurance coverage commences.
Wholesale acquisition cost (WAC) — The wholesaler’s net payment made to
purchase a drug product from the manufacturer, net of purchasing allowances and
discounts.
Sources: E.K. Adams, Emory University School of Public Health, Atlanta, GA and K. Gondek,
HCFA as published in the Health Care Financing Review, vol. 15, no. 3, spring 1994, p. 26; State
Medicaid Manual, Part Six, Transmittal 36, Apr. 2000; Federal Regulations.

---

CRS-30
Appendix A
The following Table A-1 shows Medicaid program enrollment by state, the
percentage of program enrollment with prescription drug spending, and the
percentage with managed care spending. The table is intended to help identify states
with large managed care enrollment, and thus low or no prescription drug spending
reported for those enrollees. (Since capitated payments for managed care
organizations (MCOs) often cover prescription drug costs, states with lots of
managed care enrollment often under report prescription drug spending.) For
example, Arizona’s enrollment is almost entirely in managed care arrangements, as
suggested by 94.2% of enrollees in Table A-1 with managed care spending. As
suspected, very few enrollees are reported to have prescription drug spending — only
1%. Tennessee reports no prescription drug spending outside of managed care
payments.
Most of the states with a low percentage of program enrollment in MCOs (based
on having few enrollees with managed care spending) show on average 60 to 70%
of all enrollees have prescription drug spending. This would suggest that Table 9
underestimates the percentage of children and adults on Medicaid who use
prescription drug services. Since Medicaid data cannot provide us with any
information about their use of prescription drug services, it is not known if the
average per capita spending amounts in that table, and in Table 10 reflect the
spending patterns of those managed care enrollees or if their use of drug services is
somehow fundamentally different from those who are not in MCOs.

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CRS-31
Appendix Table A-1. Percentage of Medicaid Enrollees with
Prescription Drug and Managed Care Spending by State,
FY2000
Percentage with
Percentage
Number of
prescription
with managed
State
enrollees
drug spending
care spending
Alaska
109,457
54.7%
0.0%
Alabama
665,767
65.5%
0.0%
Arkansas
504,284
57.4%
0.0%
Arizona
683,224
1.0%
94.2%
California
8,063,639
29.5%
62.6%
Colorado
377,590
40.0%
85.9%
Connecticut
417,682
26.7%
68.4%
District of
Columbia
150,767
25.0%
66.3%
Delaware
124,327
62.6%
79.9%
Florida
2,236,955
47.2%
33.7%
Georgia
1,238,794
65.2%
1.8%
Hawaii
202,912
17.1%
80.6%
Iowa
316,425
66.2%
77.7%
Idaho
150,817
61.0%
0.0%
Illinois
1,733,578
57.9%
13.3%
Indiana
753,597
54.9%
23.0%
Kansas
267,812
57.7%
20.5%
Kentucky
718,058
58.4%
94.3%
Louisiana
827,413
66.5%
0.0%
Massachusetts
1,090,300
60.0%
68.6%
Maryland
721,762
54.6%
69.5%
Maine
211,318
68.1%
1.5%
Michigan
1,360,613
31.4%
73.1%
Minnesota
596,726
29.8%
62.7%
Missouri
991,428
44.4%
39.2%
Mississippi
595,813
69.6%
1.4%
Montana
96,268
60.0%
3.1%
North Carolina
1,201,882
67.1%
4.6%
North Dakota
62,213
62.2%
1.8%
Nebraska
237,333
69.5%
72.5%
New Hampshire
110,155
66.2%
6.6%
New Jersey
847,717
34.7%
64.2%
New Mexico
398,498
16.8%
73.6%
Nevada
158,527
30.9%
40.4%
New York
3,401,448
63.6%
28.8%
Ohio
1,420,230
54.4%
25.4%
Oklahoma
584,620
37.7%
65.2%
Oregon
549,294
34.2%
89.8%
Pennsylvania
1,767,817
23.4%
56.4%
Rhode Island
182,149
27.3%
67.3%
South Carolina
775,396
60.9%
5.6%
South Dakota
98,572
54.0%
100.0%
Tennessee
1,535,081
0.0%
97.9%
Texas
2,706,974
67.8%
26.8%
Utah
198,097
64.9%
85.5%

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CRS-32
Percentage with
Percentage
Number of
prescription
with managed
State
enrollees
drug spending
care spending
Virginia
668,842
50.1%
31.3%
Vermont
146,200
68.9%
44.7%
Washington
916,837
35.1%
65.3%
Wisconsin
619,128
42.5%
54.8%
West Virginia
354,326
73.1%
0.0%
Wyoming
52,470
62.8%
0.0%
Total
44,201,132
45.5%
45.4%
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of CMS
MSIS data.
Note: HI data are FY1999, all other states are FY2000. Enrollee counts exclude MSIS records with
missing/unknown eligibility status. Drug spending does not include drug rebates, payments for drugs
purchased directly from physicians or included in claims for other services such as institutional care,
or drugs included in the capitation payment for managed care. Managed care spending includes
capitated payments for enrollment in an HMO, HIO, or prepaid health plan.

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