Medicaid: States' Payments for Outpatient Prescription Drugs Page: 1 of 41
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Accountability * Integrity * Reliability
United States Government Accountability Office
Washington, DC 20548
October 31, 2005
The Honorable Edward Whitfield
Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
House of Representatives
Subject: Medicaid: States' Payments for Outpatient Prescription Drugs
Dear Mr. Chairman:
Spending on outpatient prescription drug coverage for Medicaid beneficiaries has
accounted for a substantial and growing share of Medicaid program expenditures.'
All states and the District of Columbia have elected to include outpatient prescription
drug coverage as a benefit of their Medicaid programs. Total Medicaid expenditures
on outpatient prescription drugs grew from $4.6 billion (nearly 7 percent of
Medicaid's total medical care expenditures) in fiscal year 1990 to $33.8 billion (13
percent of Medicaid's total medical care expenditures) in fiscal year 2003. This
represented more than twice the rate of increase in total Medicaid spending from
fiscal year 1990 through fiscal year 2003. Amid concerns about increasing Medicaid
drug spending, focus has been drawn to the ways states pay for prescription drugs.
State Medicaid programs pay pharmacies for covered outpatient prescription drugs
dispensed to Medicaid beneficiaries. The Centers for Medicare & Medicaid Services
(CMS)-the agency of the Department of Health and Human Services (HHS) that
oversees states' Medicaid programs-sets maximum payment limits for certain
drugs-federal upper limits (FUL)2-and provides guidelines regarding drug payment,
as defined by regulation.3 Within these parameters, states may determine their own
drug payment methodologies. States are to pay pharmacies the lower of the state's
estimate of the drug's acquisition cost to the pharmacy, plus a dispensing fee, or the
'Medicaid is a joint federal-state program that finances health insurance for certain low-income adults
2See 42 C.F.R. 447.332 (2004). Federal regulations require CMS to set specific FUL amounts for
certain multiple-source drugs that are provided by at least three suppliers. A multiple-source drug is a
drug that is either 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 both under a
proprietary name and without such a name. Payments for these drugs must not exceed, in the
aggregate, a reasonable dispensing fee plus an amount that equals 150 percent of the lowest published
price of the drug listed in national pricing compendia.
3See 42 C.F.R. 447.331 (2004).
GAO-06-69R States' Medicaid Payments for Prescription Drugs
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United States. Government Accountability Office. Medicaid: States' Payments for Outpatient Prescription Drugs, text, October 31, 2005; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc302656/m1/1/: accessed December 11, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.