Order Code RL30726
CRS Report for Congress
Received through the CRS Web
Prescription Drug Coverage Under Medicaid
Updated February 21, 2006
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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
is prescription drug coverage. Beginning in January 2006, many of Medicaid’s
elderly and disabled beneficiaries began receiving their drug coverage under
Medicare. Nonetheless, Medicaid drug coverage remains an important source of
drugs for many low-income and disabled Medicaid beneficiaries and for Medicaid
financing, an important source of funding in the nation’s pharmaceutical markets.
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 groups. 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. Thirty-three states and the District of Columbia provide
prescription drug coverage to all Medicaid beneficiaries.
Prescription drug benefits under Medicaid are very broad. States can create
formularies, or lists of preferred benefits, but certain federal 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. There
are only 10 categories of prescription drugs that states are allowed to exclude from
coverage and one category for which federal Medicaid funds cannot be used.
Based on state financial reports for 2004, payments for Medicaid outpatient
prescription drugs, net of federal rebates, were $30.4 billion, accounting for about
11% of payments for all Medicaid services. 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 of $8.8 billion in federal rebates on prescription drugs in 2004. On average, in
2003, the last year for which prescription drug spending by enrollee are available,
per-person spending for Medicaid drugs was almost $1,120.1
Under the new Medicare Part D drug benefit rules, state Medicaid programs will
continue to contribute to the cost of drugs offered to the dually eligible population
under Medicare 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 Medicare program.
The Deficit Reduction Act of 2005 made a number of changes to the program’s
rules primarily relating to the financing of drugs and the cost sharing amounts that
states are able to require Medicaid beneficiaries to pay for these drugs.
1 CRS tabulations of CMS MSIS data for 2003.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Prescription Drug Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fee-for-Service Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Managed Care Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Over-the-counter (OTC) Medications . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Prescription Drugs — Pricing Policies and Rebates . . . . . . . . . . . . . . . . . . . . . . . 6
Medicaid Drug Payments and Federal Upper Limits . . . . . . . . . . . . . . . . . . . 6
States’ Payment Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dispensing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Medicaid Drug Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Single Source and “Innovator” Multiple Source Drugs . . . . . . . . . . . . 11
“Non-Innovator” Multiple Source Drugs . . . . . . . . . . . . . . . . . . . . . . . 12
Drug Pricing and Rebate Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Average Wholesale Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Circumventing the Best Price or Rebate Policies . . . . . . . . . . . . . . . . 15
Supplemental Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Controlling Drug Cost and Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Prior Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Prescribing/Dispensing Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Drug Use Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cost Sharing Requirements for Medicaid Prescription Drugs . . . . . . . 20
Other Cost Containment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Bulk Purchasing Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Importing Lower-Priced Drugs from Canada . . . . . . . . . . . . . . . . . . . 23
Medicaid Spending for OutpatientPrescription Drugs . . . . . . . . . . . . . . . . . . . . . 24
Medicaid Drug Spending by State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Spending by Eligibility Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Number and Cost of Prescriptions Filled . . . . . . . . . . . . . . . . . . . . . . . 28
Spending on Top Five Therapeutic Categories . . . . . . . . . . . . . . . . . . 29
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Impact of MMA 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Pharmacy Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
List of Tables
Table 1. Medicaid Coverage of Outpatient Prescription Drugs, 2005 . . . . . . . . . 3
Table 2. States’ Payment Formulas as of March 2005 . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Medicaid Rebate Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 4. Medicaid Total Drug Spending and Rebates by State, 2004 . . . . . . . . 13
Table 5. Medicaid Drug Prescription or Dispensing Limits, 2004 . . . . . . . . . . . 18
Table 6. Cost Sharing Requirements for Medicaid Pharmaceuticals
as of March 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Table 7. Total Medicaid Spending and Medicaid Prescription
Drug Spending and Percentage Change in Spending
for Selected Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Table 8. Total Medicaid Spending and Outpatient Drug Spending, 2004 . . . . . 26
Table 9. Average Medicaid Prescription Drug Spending
Among Medicaid Prescription Drug Users by Basis
of Eligibility, FY2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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 FY2004 for benefits and administration is estimated to have been
$175 billion2; states are estimated to have spent an additional $121 billion, for a total
program cost of $296 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 resources3
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 number of 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.4
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
2 Preliminary FY2004 CMS Form 64 Financial Reports.
3 “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.
4 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.
Several recent laws have had and will continue to have a major impact on
Medicaid prescription drug benefits. While specific provisions will be discussed in
detail below, a summary of those major changes that affect prescription drugs for
Medicaid beneficiaries are as follows.
The Medicare Prescription Drug, Improvements, and Modernization Act of 2003
(MMA, P.L. 108-173)
! established the Part D Medicare benefit. Effective January 1,
2006, all beneficiaries who are eligible for both Medicaid
benefits and Medicare benefits will receive their drug
coverage under the new Medicare Part D; and
! established a formula to continue the states’ contribution for
the cost of prescription drugs provided to dually eligible
beneficiaries whose drug coverage moved from Medicaid to
Medicare upon implementation of Part D.
The Deficit Reduction Act of 2005 (DRA 2005, P.L. 109-171)
! changed the federal upper limit on drug costs under the
Medicaid program;
! required that manufacturer-reported average manufacturer
prices be publically available;
! included provisions intended to improve states’ ability to
collect drug rebates for physician-administered and authorized
generic drugs; and
! liberalized states’ ability to establish co-payments on
prescription drugs for Medicaid beneficiaries.
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 2005, all states covered outpatient prescription
drugs for at least some Medicaid beneficiaries; well 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.

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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,
2005
State
Categorically needy
Medically needy*
Alabama
X
Alaska
X
Arizona
X
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
Maine
X
X
Maryland
X
X
Massachusetts
X
X
Michigan
X
X
Minnesota
X
X
Mississippi
X
Missouri
X
Montana
X
X
Nebraska
X
X
Nevada
X
New Hampshire
X
X
New Jersey
X
X
New Mexico
X
New York
X
X
North Carolina
X
X
North Dakota
X
X
Ohio
X
Oklahoma
X
Oregon
X
Pennsylvania
X
Rhode Island
X
X
South Carolina
X

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State
Categorically needy
Medically needy*
South Dakota
X
Tennessee
X
X
For children and adults in
Texas
X
families
Utah
X
X
Vermont
X
X
Virginia
X
X
Washington
X
X
West Virginia
X
X
Wisconsin
X
X
Wyoming
X
Source: Medicaid At-a-Glance, 2005; A Medicaid Information Source, Centers for Medicare and
Medicaid Services
, Department of Health and Human Services, Publication No. CMS-11024-05.
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.
* This column indicates drug coverage for only those states that include coverage of medically needy
individuals under their state Medicaid plans.
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
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.5
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) benzodiazepines6; and (j) drugs requiring tests or monitoring that can
only be provided by the drug manufacturer. Formularies may also exclude a drug for
which there is no significant therapeutic advantage over other drugs that are included
5 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.
6 Barbiturates and benzodiazepines are drugs generally used as sedatives and tranquilizers.

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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. Finally, as of January 1,
2006, federal law prohibits federal Medicaid funds from being used to pay for drugs
for the treatment of sexual or erectile dysfunction.
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.7 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 Directors8. 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
other stomach conditions); feminine products; and topical products. In 2004, all but
one state reported covering some OTC drugs, in most cases limited coverage or
coverage with restrictions. Nineteen states reported covering at least some OTC
drugs in seven categories: allergy, asthma, and sinus; analgesics; cough and cold;
smoking deterrents; digestive products; H2Antagonists; and topical products.9
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.
7 Section 1927(j) of the Social Security Act.
8 Coverage of Protease Inhibitors — June 19, 1996.
9 Pharmaceutical Benefits Under State Medical Assistance Programs 2004, National
Pharmaceutical Council at [http://www.npcnow.org/resources/PharmBenefitsMedicaid.asp].

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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 MMA
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 Payments and Federal Upper Limits
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 law requires the Secretary to establish
upper limits on federal payments for acquisition costs that are designed to encourage
the substitution of lower-cost generic equivalents for more costly brand-name drugs.
Those federal upper limits (FULs) apply separately to multiple source drugs10 —
those that have at least three therapeutically equivalent drug versions — and to all
other drugs. 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 DRA 2005, signed by the President on February 8, 2006, made several
significant changes to the FUL policy for multiple source drugs. Those changes will
become effective on January 1, 2007. The following paragraphs describe the existing
FUL policy in effect until the effective date of DRA 2005, and those FUL policies
that will go into effect after that date under DRA 2005.
The FULs for multiple source drugs are calculated by the Centers for Medicare
and Medicaid Services (CMS) and are periodically published in the state Medicaid
Manual.11 These upper limits apply, in the aggregate, to payments for multiple
source drugs. Until January 1, 2007, the FULs are calculated to be equal to 150% of
the published price for the least costly therapeutic equivalent. The published prices
10 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)].
11 42 CFR 447.331-447.332

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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), intended to represent the average price at which wholesalers sell a
drug product to retail pharmacies, are published annually in compendia by the
pharmaceutical industry.12
After implementation of DRA 2005, FULs will apply to multiple source drugs
(defined to include any drug for which there is at least one other drug sold and
marketed during the period that is rated as therapeutically equivalent and
bioequivalent to it). For these multiple source drugs, the FUL would be equal to
250% of the “average manufacturer price” (AMP) computed without regard to
prompt pay discounts. The AMP is a price reported to CMS by manufacturers, and
is calculated to be the average price at which manufacturers sell a drug product to
wholesalers.
Under either FUL policy, 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.
All “other” drugs include brand-name drugs and multiple source drugs for which
a specific FUL 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 state 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 are below
the payment levels determined by applying the upper limit for other drugs.
States’ Payment Formulas
While states must ensure that federal matching funds do not pay for drug prices
that exceed the upper limits described above, there are no other rules on how states
set their payment formulas for drugs. Most states today use payment formulas that
are based on the AWP less some percentage (Table 2) for most covered drugs,
although this may change with the implementation of DRA 2005. The formulas
below 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
12 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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states to estimate those acquisition costs, it is believed that the published AWPs are
more like manufacturers’ suggested wholesale prices rather than a true measure of
the average costs to pharmacies of 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.13
Table 2. States’ Payment Formulas as of March 2005
State
Amount for each prescription
Alabama
WAC+9.2%; AWP-10%
Alaska
AWP - 5%
Arizona
AWP - 15%
Arkansas
AWP - 20% (generic); AWP-14% (brand)
California
AWP - 17%
Colorado
AWP - 35% (generic) or AWP - 13.5%
Connecticut
AWP - 40% (generic);
AWP - 12%
Delaware
AWP - 14% (retail);
AWP - 16% (LTC and specialty
pharmacies)
District of Columbia
AWP - 10%
Florida
Lowest of AWP - 15.45% or WAC +
5.75%
Georgia
AWP - 11%
Hawaii
AWP - 10.5%
Idaho
AWP - 12%
Illinois
AWP - 25%, (generic);
AWP - 12% (brand)
Indiana
AWP - 20% (generic);
AWP - 13.5% (brand)
Iowa
AWP - 12%
Kansas
AWP - 27% (generic);
AWP - 13% (single source)
Kentucky
AWP - 12%
Louisiana
AWP - 13.5%;
AWP - 15% for chains
Maine
AWP - 15%; AWP - 17% or usual and
customary plus professional fee or
FUL/MAC plus professional fee for direct
supply drug list; Lower of AWP-20% plus
professional fee or usual and customary for
mail order*
Maryland
Lower of AWP - 12% or WAC+8%, direct
price+8% or distributor price when
available.
Massachusetts
WAC + 5%
13 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
Michigan
AWP - 13.5% (1-4 stores); or AWP - 15.1%
(5+ stores)
Minnesota
AWP - 11.5%
Mississippi
AWP - 12%
Missouri
Lower of AWP - 10.43% or WAC + 10%
Montana
AWP - 15%
Nebraska
AWP - 11%
Nevada
AWP - 15%
New Hampshire
AWP - 16%
New Jersey
AWP - 12.5%
New Mexico
AWP - 14%
New York
AWP - 12%
North Carolina
AWP - 10%
North Dakota
AWP - 10%
Ohio
Lower of WAC + 9% or AWP - 12.8%
Oklahoma
AWP - 12%
Oregon
AWP - 11% (institutional), or AWP - 15%
(non-institutional)
Pennsylvania
AWP - 10%
Rhode Island
WAC + 5%
South Carolina
AWP - 10%
South Dakota
AWP - 10.5%
Tennessee
AWP - 13%
Texas
Lower 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/pre0305.pdf]
Notes: * For other exceptions see state plan.
AWP: Average Wholesale Price
WAC: Wholesalers Acquisition Cost
Another provision in DRA 2005 requires the Secretary of HHS to make
manufacturers’ reported AMP data available on a monthly basis to states and to post
those amounts, with at least quarterly updates, on a website accessible to the public.
The availability of such data, beginning in July 2006, may encourage states to make
changes to their drug reimbursement formulas based on AMPs instead of AWPs.
There are a few reasons why states may want to make this change. First, basing
reimbursements on the same measure of price that the FULs are based on will help
to ensure that the ceilings are not exceeded. Second, the AMPs, unlike the AWPs,
will be calculated consistent with regulations that are to be promulgated by the

CRS-10
Secretary of HHS no later than July 1, 2007. In addition, AMPs are subject to the
oversight and review of the Secretary of CMS.
Dispensing Fees
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 just 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, the fees 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
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 2003 there were reported to have
been more than 550 manufacturers participating in the Medicaid drug rebate
program.14
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.15 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.
14 Testimony of Dennis Smith, Director, Center for Medicaid and State Operations, Centers
for Medicare and Medicaid Services, before the Energy and Commerce Committee,
Subcommittee on Oversight and Investigations, December 7, 2004.
15 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.

CRS-11
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.16 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
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. As estimated by the Office of the Inspector General of Health and Human
Services, at the median, AMP is 59% below the AWP. But this median masks large
differences based on the type of drug. For single source drugs and multisource
brand-name drugs, the median difference is between 23 and 28%. For generic drugs,
however, the median AMP is 70% lower than AWP at the median.17
16 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.
17 U.S. Department of Health and Human Services, Office of the Inspector General,
Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices, OEI-
05-05-00240, June 2005. Other comparative pricing analyses can be found in U.S. General
Accounting Office, States’ Medicaid Payments for Prescription Drugs, GAO-06-69R, Oct.
(continued...)

CRS-12
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 prices18 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 reduced Medicaid savings from the rebate program,
so Congress responded with a potential offset. Rebate percentages were increased
to those amounts shown in Table 3. MMA 2003 further excludes prices of drugs to
be provided under Medicare Part D once the program is implemented. This time no
offsetting rebate adjustment was made.
The Veteran’s Health Care 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.19
“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.
17 (...continued)
2005, and U.S. Congressional Budget Office, How the Medicaid Rebate on Prescription
Drugs Affects Pricing in the Pharmaceutical Industry
, Jan. 1996.
18 Depot prices are the prices paid for drugs procured through federal distribution systems
and warehoused at federal facilities (depots).
19 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-13
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 2004, the total amount of federally required drug rebates was reported by
states to be $8.8 billion. (States also reported collecting more than $.8 billion in
supplemental rebates not required by the federal government, although there is reason
to believe that reported amounts for state supplemental rebates are too low. See the
discussion on page 14.) On average, federal rebates represented about 22% of
Medicaid spending on outpatient prescription drugs. Rebates for 2004 by state are
reflected in Table 4.
Table 4. Medicaid Total Drug Spending and Rebates
by State, 2004
(in millions of dollars, includes state and federal shares)
Total spending
Federal rebates as
Federal rebates Spending net of
State
on prescription
percentage of drug
collected
federal rebates
drugs
spending
Alabama
594.5
126.7
467.8
21%
Alaska
115.3
29.2
86.1
25%
Arizona
5.4

5.4

Arkansas
380.4
82.3
298.2
22%
California
4817.6
1079.0
3738.6
22%
Colorado
264.1
60.3
203.9
23%
Connecticut
448.2
96.6
351.5
22%
Delaware
122.6
25.1
97.5
20%
Dist. Of Col.
106.5
20.5
85.9
19%
Florida
2,472.8
565.0
1,907.8
23%
Georgia
1,213.8
252.2
961.6
21%
Hawaii
117.1
27.8
89.4
24%
Idaho
153.4
29.9
123.5
19%
Illinois
1,751.6
393.6
1,358.1
22%
Indiana
703.9
177.4
526.6
25%
Iowa
371.9
84.8
287.2
23%
Kansas
274.2
65.4
208.8
24%
Kentucky
802.7
169.3
633.4
21%
Louisiana
944.2
187.6
756.5
20%
Maine
281.7
80.2
201.6
28%
Maryland
490.3
90.6
399.6
18%
Massachusetts
987.3
277.1
710.2
28%
Michigan
874.7
239.1
635.6
27%

CRS-14
Total spending
Federal rebates as
Federal rebates Spending net of
State
on prescription
percentage of drug
collected
federal rebates
drugs
spending
Minnesota
394.6
92.2
302.4
23%
Mississippi
668.1
125.4
542.7
19%
Missouri
1,119.7
220.6
899.1
20%
Montana
99.3
20.8
78.6
21%
Nebraska
231.3
46.6
184.7
20%
Nevada
127.9
28.9
99.0
23%
New Hampshire
128.6
33.2
95.3
27%
New Jersey
1,016.6
197.5
819.2
19%
New Mexico
117.4
24.5
92.9
21%
New York
4,782.6
962.5
3,820.1
20%
North Carolina
1575.0
324.7
1250.3
21%
North Dakota
59.7
14.1
45.7
24%
Ohio
1,819.6
407.9
1,411.7
22%
Oklahoma
416.3
74.2
342.1
18%
Oregon
245.2
53.8
191.3
22%
Pennsylvania
952.3
196.4
755.9
21%
Rhode Island
166.1
38.1
128.0
23%
South Carolina
673.0
163.6
509.4
24%
South Dakota
81.9
17.6
64.4
21%
Tennessee
2,196.1
461.9
1,734.1
21%
Texas
2,202.1
507.4
1,694.7
23%
Utah
192.1
45.8
146.3
24%
Vermont
160.0
34.2
125.8
21%
Virginia
582.1
134.8
447.3
23%
Washington
649.3
148.1
501.2
23%
West Virginia
376.4
92.8
283.6
25%
Wisconsin
684.9
162.0
522.9
24%
Wyoming
52.8
11.9
40.9
23%
Total
40,071.5
8,801.2
31,270.2
22%
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of 2004 CMS
Financial Management Reports.
* Arizona has a statewide managed care waiver in place. Under the waiver, all Medicaid services are
provided through capitated arrangements. Since drugs are included in the capitation payment to
MCOs, rebates do not apply.
Drug Pricing and Rebate Issues
Average Wholesale Prices. The DRA 2005 has addressed a concern that
had been raised repeatedly in the last several years regarding the AWPs and the
states’ and HHS’s reliance on those prices for setting pharmaceutical payment levels
and FULs. The concern that the AWPs do not reflect the intended wholesale prices,
and that manufacturers purposely manipulate the published AWPs to offer discounts
to certain purchasers without offering those prices to Medicaid has been studied by
Congress, the General Accounting Office, and the office of the Inspector General
(IG) of Health and Human Services (HHS).20 By replacing the FUL computation
with a formula based on AMPs, the use of AWPs for setting Medicaid drug prices
20 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.

CRS-15
may become a thing of the past. In addition, DRA 2005 allows the Secretary to
gather data on retail drug prices. This data may prove to be useful for determining
whether the upper limits on drug prices are too high, too low, or adequate.
Circumventing the Best Price or Rebate Policies. A second area that
has raised concerns having to do with Medicaid drug pricing issues relates to the best
prices that are reported by manufacturers to CMS and are used by CMS to calculate
rebates. There have been cases in which manufacturers sell drugs or report drug
prices in ways that circumvent Medicaid’s rebate requirement or minimize rebates
to be paid. For example, manufacturers could skirt 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 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.21 In addition, recently, Schering
Plough Corporation agreed to pay $293 million to resolve its liabilities in connection
with fraudulent pricing of its allergy drug Claritin under the Medicaid drug rebate
program. Schering Plough allegedly failed to include the value of certain incentives
offered to two managed care organizations in the best price reported for purposes of
the Medicaid drug rebate program. The resulting charge was that Medicaid rebates
were underpaid, and other entities (such as community health centers) that purchase
drugs at ceiling prices that are based on Medicaid drug rebate prices were
overcharged.22
DRA 2005 intervened to address another concern related to the collection of
rebates on certain drugs. The IG and CMS have both raised the concern that some
rebates have gone unpaid for certain drugs administered by physicians in their offices
(or in another outpatient setting), such as chemotherapy, simply due to operational
gaps. This is because providers use Healthcare Common Procedure Coding System
(HCPCS) J-codes to bill the Medicaid program for injectible prescription drugs,
including cancer drugs. The HCPCS J-codes do not, however, provide states with
the specific manufacturer information necessary to enable them to seek rebates. In
a letter to state Medicaid directors, CMS requested that states identify Medicaid
drugs, specifically those using HCPCS J-codes, by their NDC codes so that rebates
can be collected for these drugs (SMDL #03-002, dated March 14, 2003).
Nonetheless, DRA 2005 stepped in to require, as a condition of receiving Medicaid
payments, that states submit to the Secretary of HHS utilization data and coding
information for certain physician-administered outpatient drugs. Such data would be
required initially for all single source drugs administered by physicians. Later, the
same data would be required for the 20 physician-administered multiple source drugs
with the highest dollar volume as determined by the Secretary.
21 Correspondence from the Office of the Inspector General, Nov. 1999.
22 Testimony of George M. Reeb, Assistant Inspector General for the Centers for Medicare
and Medicaid Audits, Office of Inspector General, U.S. Department of Health and Human
Services before the Energy and Commerce Committee, Subcommittee on Oversight and
Investigations, December 7, 2004.

CRS-16
Finally, the DRA included a provision intended to improve best price reporting
for authorized generic drugs. Sometimes manufacturers produce both a brand-name
version of a prescription drug and also sell or license a second manufacturer (or a
subsidiary) to produce some of the same product to be sold or re-labeled as a generic.
Concerns have been raised by two Senators, both in a letter to the Chairman of the
Federal Trade Commission23 and at a hearing on Medicaid fraud24 that there may be
problems collecting rebates on these generic products, referred to as “authorized
generics.” One potential problem is that the reported best prices for the brand-name
product do not properly account for prices at which the authorized generics are sold.
A second potential problem is that the rebates for the authorized generics are
calculated using the wrong rebate formula.
The DRA 2005 modified the existing drug price reporting requirements to
ensure, effective January 1, 2007, that the manufacturer-reported prices, including
both the average manufacturer’s price and the manufacturer’s best price, include the
price of the authorized generic.25 In addition, the IG has included, in the agency’s
work plan for 2006, an investigation of rebates for authorized generic products.26
Supplemental Rebates. In addition to the rebates required under federal
law, a number of states charge certain pharmaceutical manufacturers additional
rebates. In 2004, 15 states claimed a total of $851 million in supplemental rebates
(federal share of $474 million).27 California collected 63% of the total reported
amounts. But reported collections are likely to be too low. In information provided
by CMS to the Committee on Energy and Commerce, 37 states are noted to have
supplemental rebates in effect. If true, supplemental rebate collections may well
exceed the amount reported in the 2004 CMS Financial Management Reports.
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. Under a prior
authorization requirement, only those pharmaceutical products that have been
approved in advance by a designated individual or entity are 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
23 Letter dated May 9, 2005 from Senators Grassley and Rockefeller to Federal Trade
Commission Chairman Deborah Platt Majoras posted at [http:\\www.Grassley.Senate.Gov].
24 U.S. Congress, House Committee on the Energy and Commerce, Subcommittee on
Oversight and Investigations, Medicaid Prescription Drug Reimbursement: Why the
Government Pays Too Much
, hearings, 108th Cong., 2nd sess., Dec. 7, 2004, H.Rept. 108-126
(Washington: GPO, 2004).
25 The bill language doesn’t use the term “authorized generic.” Instead it requires the
reported prices to include the price of any drug sold under a new drug application approved
(under Section 505c of the Federal Food, Drug and Cosmetic Act, FFDCA) by FDA.
26 See [http://www.oig.hhs.gov/publications/docs/workplan/2006/WorkPlanFY2006.pdf],
p. 27.
27 Supplemental rebates are required to be shared by states and the federal government in the
same way that federally required rebates are shared.

CRS-17
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 2004, all (including the
District of Columbia) but one state reports 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.28
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.
Prescribing/Dispensing Limitations. States may also restrict the quantity
of prescription drugs available to beneficiaries. Such prescribing and dispensing
limits are ubiquitous. All but two 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.
28 National Pharmaceutical Council, 2004.

CRS-18
Table 5. Medicaid Drug Prescription or Dispensing Limits, 2004
State
Limits on number, quantity, and refills of prescriptions
Alabama
30-day supply per Rx, 5 refills per Rx, 4 brand limit per month
Alaska
30-day supply per Rx, other ceilings on certain classes of drugs
Arizona
**
Arkansas
31-day supply per Rx, 3 Rx per month (extension to six), five
refills per Rx within 6 months
California
Six Rx per month, maximum 100 day supply for most meds.
Colorado
30-day supply per Rx, reasonable amounts for maintenance
medication, other limits may apply
Connecticut
240 units or 30-day supply, 5 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, 3 refills per Rx within 4 months, other
Columbia
limits specific to certain medications
Florida
4 brand-name Rxs per month (with exceptions)
Georgia
34-day supply per Rx, 5 Rx per month (adult), 6 Rx per month
(child); $2999.99/Rx limit (potential override)
Hawaii
30-day supply or 100 unit doses per Rx, maximum quantities for
some drugs.
Idaho
34-day supply (with exceptions), 3 cycles birth control, limits on
refills
Illinois
Medically appropriate monthly quantity
Indiana

Iowa
Maximum 30-day supply except select maintenance drugs (90
days)
Kansas
31 day supply per RX, 5 Rx per month, other limitations specific
to certain medications
Kentucky
30 day supply, Maximum 5 refills in six months, one dispensing
fee per month for maintenance medication
Louisiana
Greater of 30-day supply per Rx or 100 unit doses, 5 refills per
Rx within six months, max 8 Rx per recipient per month
Maine
34-day supply (brand), 90-day supply (generic), maximum 11
refills per Rx, 5 brand Rx per month
Maryland
34-day supply per Rx, 11 refills per Rx, refills cannot exceed
360-day supply
Massachusetts
30-day supply, 11 refills per Rx
Michigan
100-day supply, quantity limits for certain drugs
Minnesota
34-day supply
Mississippi
Greater of 34-day supply or 100 unit doses per Rx, 5 Rx per
month, 11 refills maximum
Missouri

Montana
34-day supply
Nebraska
Greater of 90-day supply or 100 dosage units per Rx, five refills
per Rx, 6 mo. for controlled substances, 31 days for injectibles
Nevada
34-day supply per Rx, 100 day supply for maintenance
medications, 5 refills within 6 months
New Hampshire
30-day supply, 90-day supply on maintenance medications
New Jersey
34-day supply or 100-unit dosage per Rx, 5 refills within 6
months

CRS-19
State
Limits on number, quantity, and refills of prescriptions
New Mexico
34-day supply except contraceptives (100 days) and maintenance
drugs (90 days)
New York
5 refills per Rx, annual limits on number of Rx and OTC drugs
available (with exceptions)
North Carolina
34-day supply per Rx, with exceptions, 6 Rx per month
North Dakota
34-day supply per Rx, max 12 refills per script, other limits on
refills based on class of drug
Ohio
34-day supply; 102 day supply for maintenance, 5 refills per Rx
Oklahoma
34-day supply or 100 unit doses per Rx, 6 Rx per month (age 21
and over, under 21 unlimited)
Oregon
34-day supply, 15-day supply for initial Rx for chronic
conditions, duration limits on selected drugs
Pennsylvania
Greater of 34-day supply or 100 unit, 5 refills within 6 months, 6
Rx per month
Rhode Island
30-day supply per Rx (non-maintenance), 5 refills per Rx
South Carolina
34-day supply w/ unlimited Rx (children), 4 Rx per month
(adult) with exceptions
South Dakota
Varies by drug
Tennessee
31-day supply, 1 year for non-controlled medications
Texas
3 Rx per month, unlimited Rxs for nursing home residents and
children, max 5 refills, cumulative limit on specific drugs
Utah
31-day supply per Rx, max 5 refills per Rx, other limits on
specific drugs
Vermont
60-day supply for maintenance medications, 5 refills per Rx
Virginia
34-day supply per Rx
Washington
34-day supply per Rx, usually 2 refills per month, 4 refills for
antibiotics or scheduled drugs
West Virginia
34-day supply, 11 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: National Pharmaceutical Council, Pharmaceutical Benefits Under State Medical Assistance
Programs 2004.
Notes: Rx: Prescription
** Within federal and state guidelines, individual managed care and pharmacy benefit management
organizations make formulary/drug decisions.
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

CRS-20
dispensing prescriptions; ongoing retrospective review of prescribing practices;
educational outreach for pharmacists, physicians, and beneficiaries; and pharmacy
counseling.
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.
Cost sharing is another area that the DRA 2005 made significant changes that could
affect prescription drug benefits for Medicaid beneficiaries. Under current (pre-DRA
2005) cost sharing limitations, states are prohibited from requiring copayments on
services provided to children under age 18, pregnant women for any services that
relate to the pregnancy or to any medical condition that may complicate pregnancy;
and people who are hospitalized or residing in a long-term care facility. In addition,
copayments cannot be charged for people receiving hospice, emergency29 and family
planning services. Within those guidelines, states may, and most do, impose
“nominal” cost sharing amounts on other users of drug benefits.30 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 as of March 2005
State
Amount for each prescription
Alabama
$.50 to $3.00
Alaska
$2.00
Arizonaa

Arkansas
$.50 to $5.00
California
$1.00
Colorado
$.75 (generic); $3.00 (brand)
Connecticut
$1.00
Delaware
None
District of Columbia
$1.00
Florida
2.5% of payment up to $300
$.50 (generic, preferred); $.50 to $3.00
Georgia
(brand)
Hawaii
None
Idaho
None
Illinois
none for generic; $3.00 (brand)
Indiana
$3.00
29 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.
30 DRA 2005 changed the definition of “nominal” amounts so that beginning with FY2006,
those amounts, as established in regulations CFR Chapter IV, Section 447.54, will be
indexed by inflation (as estimated using the medical care component of the consumer price
index.)

CRS-21
State
Amount for each prescription
Iowa
$1.00
Kansas
$3.00
Kentucky
$1.00
Louisiana
$.50 to $3.00
$2.50 (generic and brand); $3.00 per day in
Maine
rural health clinics-All subject to ceilings
Maryland
$1.00-$2.00
Massachusetts
$1.00-$3.00
Michigan
$1.00 (generic); $3.00 (brand)
Minnesota
$1.00 (generic); $3.00 (brand)
$1.00 (generic); $2.00 (preferred brand);
Mississippi
$3.00 (brand)
Missouri
$.50 to $2.00
Montana
$1.00
Nebraska
$2.00
Nevada
$1.00 (generic); $2.00 (brand)
New Hampshire
$1.00 (generic); $2.00 (brand & compound)
New Jersey
None
New Mexico
None
New York
$.50 (generic); $2.00 (brand)
North Carolina
$1.00 (generic); $3.00 (brand)
North Dakota
$3.00 (brand)
Ohio
$3.00 (non-preferred)
Oklahoma
$1.00 to $2.00
Oregon
$2.00 (generic); $3.00 (brand)
Pennsylvania
$1.00
Rhode Island
None
South Carolina
$3.00
South Dakota
$2.00
Tennessee*

Texas
None
Utah
$3.00
Vermont
$1.00 to $3.00
Virginia
$1.00
Washington
None
West Virginia
$.50-$3.00
$.50 (over the counter); $1.00 (generic) $3.00
Wisconsin
(brand)
Wyoming
$2.00
Source: [http://www.cms.hhs.gov/medicaid/drugs/pre0305.pdf].
Notes:
* Within federal and state guidelines, individual managed care and pharmacy benefit management
organizations make formulary/drug decisions.
DRA 2005 created two optional cost sharing plans that states could choose to
implement as alternatives to the cost sharing limitations described above. Under the
new cost sharing options, both of which will become effective on March 31, 2006,
states are prohibited from requiring cost sharing for certain Medicaid beneficiaries.
The list of those that must remain exempt from cost sharing is slightly different from

CRS-22
the list of those exempt under prior law. States will be prohibited from imposing cost
sharing for (1) services provided to mandatory children who are under age 18 or are
in foster care under Part B of Title IV, or are receiving adoption or foster care
assistance under Title IV-E regardless of age; (2) preventive services provided to
children under 18 regardless of family income; (3) services provided to pregnant
women that relate to pregnancy or to other medical conditions that may complicate
pregnancy; (4) services provided to terminally ill individuals receiving Medicaid
hospice; (5) services provided to individuals in medical institutions who are required
to spend their income down to qualify for Medicaid; (6) emergency services; (7)
family planning services and supplies; and (8) services provided to women qualifying
for Medicaid under the breast and cervical cancer eligibility group.
The first new cost sharing option under DRA 2005 allows states to establish cost
sharing amounts that exceed nominal amounts and to vary those amounts among
classes or groups of individuals or by types of services. The second option, which
applies specifically to outpatient prescription drugs, allows states to establish a cost
sharing plan under which beneficiaries are charged higher cost sharing amounts for
state-identified non-preferred drugs, and no or reduced cost sharing amounts for
preferred drugs.
The two new options come with additional limitations. Besides the groups that
are specifically exempted, as described above, the DRA 2005 cost sharing amounts
cannot exceed 10% of the cost of the item or service for individuals with income
between 100% and 150% of poverty, and 20% of the cost of the item or service for
individuals with an income over 150% of poverty. In addition, an aggregation of all
cost sharing amounts cannot exceed 5% of family income.
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.31 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
31 GAO/HEHS-97-47; Pharmacy Benefit Managers; FEHBP Plans Satisfied With Savings
and Services, but Retail Pharmacies Have Concerns, Feb. 1997.

CRS-23
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. Five states have joined
forces to negotiate for lower prescription drug prices.32 Michigan, Vermont, new
Hampshire, Alaska, and Nevada comprise a joint purchasing pool for Medicaid drugs
that has been operating since 2004. Each states has estimated 2004 savings to the
Medicaid program that range from $250,000 in New Hampshire to $8 million in
Michigan. 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%.33 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,
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.34 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).
32 See HHS press release at [http://www.hhs.gov/news/press/2004pres/20040422.html].
33 “Aggregate Purchasing of Prescription Drugs: The Massachusetts Analysis,” Heinz
Family Philanthropies, Sept. 11, 2001.
34 Gloria Gonzalez, “Cities Vow to Maintain Canadian Rx Reimports,” Business Insurance,
Feb. 2, 2004, vol. 38, issue 5.

CRS-24
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 2004, total payments for Medicaid outpatient prescription drugs, net of all rebates
— federal and state — was $30.4 billion, accounting for about 10.8% of payments
for all Medicaid services.35 The average annual growth in drug spending under
Medicaid over the 13- year period was about 14.4% 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.
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%
2004
$281.8
9.6%
$30.4
16.4%
Source: Table prepared by Congressional Research Service (CRS) based on tabulations from HCFA
Form 64/ CMS Form 64 data and Financial Management Reports.
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 federal and state rebates have been
subtracted from totals.
Medicaid Drug Spending by State. Table 8 shows 2004 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.)
35 CRS tabulation of 2004 Medicaid Financial Management Reports.

CRS-25
Medicaid drug spending as a percentage of total Medicaid medical assistance
spending varies widely. About 25.7% of Medicaid spending in Tennessee is
attributed to outpatient prescription drugs. New Mexico spends the smallest
percentage of program spending on outpatient drugs — about 3.3%. 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.36
New York reported spending the largest amount on Medicaid outpatient
prescription drugs — almost $3.8 billion in 2004. Wyoming, the state with the
smallest Medicaid enrollment, reported the lowest amount of outpatient prescription
drug spending — $40.9 million, in 2004.
36 Institute for Health Services Research, Apr. 1995.

CRS-26
Table 8. Total Medicaid Spending and
Outpatient Drug Spending, 2004
(payments in millions of dollars)
Drug spending as
Outpatient Drug
Medical assistance
State
percentage of all
spending
Spending
medical assistance
Tennessee
25.7%
1,734.1
7,029.8
Mississippi
16.5%
542.7
3,284.7
Vermont
15.8%
125.8
798.8
North Carolina
15.7%
1,250.3
7,945.6
Kentucky
15.5%
633.4
4,086.4
Louisiana
15.3%
756.5
4,933.0
Florida
14.9%
1,907.8
12,790.0
Missouri
14.8%
899.1
6,082.5
West Virginia
14.6%
283.6
1,937.3
Oklahoma
13.7%
342.1
2,500.5
Georgia
13.7%
961.6
7,044.1
Illinois
13.6%
1,358.1
9,991.3
South Carolina
13.2%
509.4
3,848.4
Idaho
13.2%
123.5
938.7
Nebraska
12.9%
184.7
1,430.8
Alabama
12.9%
467.8
3636.8
Iowa
12.8%
287.2
2239.3
Delaware
12.3%
97.5
792.0
Ohio
12.2%
1,411.7
11550.5
California
12.2%
3,738.6
30677.3
Wisconsin
11.9%
522.9
4410.9
Utah
11.8%
146.3
1,235.6
Montana
11.8%
78.6
666.6
Kansas
11.7%
208.8
1,782.4
Virginia
11.7%
447.3
3,825.2
Arkansas
11.5%
298.2
2,585.1
South Dakota
11.5%
64.4
561.6
Wyoming
11.2%
40.9
365.8
Indiana
10.8%
526.6
4,889.3
Texas
10.5%
1,694.7
16,077.7
New Jersey
10.3%
819.2
7928.4
Maine
10.0%
201.5
2,021.2
Hawaii
9.8%
89.3
908.0
Alaska
9.7%
86.1
884.0
Washington
9.6%
501.2
5,243.6
Nevada
9.5%
99.0
1,037.9
North Dakota
9.5%
45.7
479.7
New York
9.3%
3,820.1
40,978.5
Connecticut
9.1%
351.5
3,875.7
Maryland
8.7%
399.6
4,586.4
New Hampshire
8.3%
95.3
1,148.6
Massachusetts
8.1%
710.2
8,725.1
Rhode Island
7.8%
128.0
1,646.3
Michigan
7.7%
635.6
8,224.9
Dist. Of Col.
7.7%
85.9
1,116.0
Colorado
7.7%
203.9
2,648.6
Oregon
7.7%
191.3
2,596.3

CRS-27
Drug spending as
Outpatient Drug
Medical assistance
State
percentage of all
spending
Spending
medical assistance
Minnesota
5.4%
302.4
5,550.2
Pennsylvania
5.4%
755.9
14,088.4
New Mexico
4.2%
92.9
2,212.8
Arizona*


4,933.1
Total
11.1%
31,270.2
281,794.7
Source: Table prepared by Congressional Research Service (CRS) based on tabulations of 2004 CMS
Form Financial Management Reports.
Notes: Outpatient drug spending is net of rebates. 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.
* Arizona has a statewide managed care waiver in place and does not report outpatient prescription
drug expenditures separately.
Spending by Eligibility Group. The Medicaid Statistical Information
System (MSIS — the only source of state reported data that identifies spending by
eligibility group) shows states spending on drugs in 2003, the latest year for which
all 50 state reports are available, of $32.2 billion spent on outpatient prescription
drugs. Of that amount, states reported a total of about $18.2 billion, or about 56%
for individuals qualifying for Medicaid on the basis of being blind or having a
disability, almost 25% ($7.9 billion) for elderly individuals, just more than 9% ($3.0
billion) on non-disabled and foster care children and an additional 9% ($2.9 billion)
on adults in families with dependent children.37, 38
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.39
37 Expenditures in this paragraph are those reported by states through the Medicaid
Statistical Information System (MSIS) for FY2003. 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 FY2004; 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.
38 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.
39 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
(continued...)

CRS-28
Among all Medicaid prescription drug users in FY2003, the average Medicaid
prescription drug spending amount was $1,118. 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 $3,060.
Among children with prescription drug spending, the average amount was $229.
Table 9. Average Medicaid Prescription Drug Spending Among
Medicaid Prescription Drug Users by Basis of Eligibility, FY2003
Percentage of
Medicaid
Average Medicaid
Number of
enrollees with
drug spending per
Medicaid
prescription drug
Medicaid prescription
enrollees
spending
drug user
Aged
5,101,111
65.0%
$2,399
Blind/Disabled
8,405,098
70.7%
$3,060
Child*
27,285,057
47.5%
$229
Adult
14,352,033
45.6%
$445
BCCA women
13,344
60.7%
$1,732
Total**
55,157,774
52.2%
$1,118
Source: Congressional Research Service (CRS) tabulations of data from CMS MSIS State Summary
Datamart.
Notes: 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.
* Includes foster care children.
** Total does not sum because this figure includes enrollees for whom basis of eligibility was
unknown.
Number and Cost of Prescriptions Filled. In 2003, Medicaid agencies
reported processing more than 562 million prescriptions. The average cost of a
prescription for the same year was about $60.02.40
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.41
39 (...continued)
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.
40 Pharmaceutical Benefits Under State Medical Assistance Programs 2004.
41 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.

CRS-29
Spending on Top Five Therapeutic Categories. The National
Pharmaceutical Council (NPC) reported that, in 2003, almost 75% of Medicaid drug
spending was for drugs in five categories: central nervous system drugs;42
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% of states’
total drug spending.
Current Issues
Impact of MMA 2003
State Medicaid programs are undergoing major 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, as of the start of 2006, Medicaid eligibles who are
also eligible for Medicare receive outpatient prescription drug coverage through the
new Medicare prescription drug benefit instead of through Medicaid. While this law
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 have both new administrative and financial obligations under MMA
2003. States are required to conduct eligibility determinations for the low-income
subsidies and cost sharing assistance for the Medicare program. This is 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 qualify for low-
income subsidies under Medicare Part D is similar to the QMB eligibility group,
except that this group allows for somewhat higher income 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 is 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 eligibles43 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%
42 A large classification of drugs that includes psychotherapeutics, treatments for seizure
disorders and Parkinson’s, and drugs for pain, among others.
43 Including the estimated actuarial value of prescription drug benefits provided under a
capitated care.

CRS-30
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. For further information on the impact of Medicare Part D on
Medicaid beneficiaries, see the following CRS reports: RL33268, Medicare
Prescription Drug Benefit: An Overview of Implementation for Dual Eligibles
, by
Jennifer O’Sullivan and Karen Tritz, and CRS Report RS21837, Implications of the
Medicare Prescription Drug Benefit for Dual Eligibles and State Medicaid
Programs
, by Karen Tritz.
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. To date, these demonstrations have provided comprehensive pharmacy
benefits for low-income seniors and individuals with disabilities with income at or
below 200% FPL. According to CMS’s website, at the start of this year, there were
three states that were using a Pharmacy Plus waivers to obtain federal matching funds
for prescription drug benefit programs.44 These program are expected to undergo
significant changes as the Medicare prescription drug benefit takes over the provision
of prescription drug for many of the individuals served by the programs.
44 See the following CMS websites: [http://www.cms.hhs.gov/MedicaidPharmacyPlus/] and
[http://www.cms.hhs.gov/MedicaidStWaivProgDemoPGI/MWDL/list.asp#TopOfPage].

CRS-31
Glossary
Actual Acquisition Cost (AAC) — Pharmacist’s or provider’s payments made
to purchase a drug from any source (e.g., manufacturer, wholesaler) net of discounts,
rebates, etc.
Average wholesale price (AWP) — Intended to reflect the average price at
which pharmaceutical products are purchased from wholesalers. In reality, it is more
like a 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 and more recently applied to Medicare products
paid under Part B of the program. 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

CRS-32
ingredient and have the same biological effects. Innovator multiple source drugs are
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.