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Improve Purchasing of Prescription Drugs


Rising prescription drug costs in the Medicaid Vendor Drug Program and other state health plans are straining the state budget. To contain these costs, Texas’ Vendor Drug Program for Medicaid recipients should contract with a pharmacy benefit manager to take advantage of the most advanced cost management techniques. The Employees Retirement System and Teacher Retirement System could generate savings by expanding their use of prior authorization for certain drugs that are costly and subject to inappropriate use.


Prescription drug costs represent one of the fastest-growing segments of health care spending. Since 1990, national spending for prescription drugs has tripled. The U.S. Centers for Medicare and Medicaid Services expects annual drug spending to rise from $117 billion in 2000 to $366 billion in 2010.[1] State Medicaid programs also have experienced significant growth in prescription drug costs. Between 1997 and 2000, National Medicaid spending for prescription drugs rose by about 18 percent annually, while total Medicaid spending rose by just 7.7 percent.[2]

The Medicaid Vendor Drug Program is Texas’ largest state purchaser of prescription drugs. Texas Medicaid’s pharmacy costs have been rising by 15 percent or more annually for the past three years (Exhibit 1).[3] The share of Texas Medicaid spending devoted to prescription drugs rose from 7 percent in 1998 to 14 percent in 2001.[4]

Exhibit 1
Texas Vendor Drug Program Expenditures
Fiscal 1997-2001
(Amounts in millions)

  1999 2000 2001
Total State/Federal Dollars $952.7 $1,129.6 $1,330.8
Amount Financed by Texas General Revenue Fund (in millions of dollars) $290.7 $ 349.9 $ 417.4
Amount Financed by Rebates(state share)[5] $67.5 $85.3 $105.8
Percent Change in Total State/Federal Dollars from Prior Year 15% 19% 18%
Source: Texas Health and Human Services Commission.

The rising cost of prescription drugs is due to a number of factors beyond price, including increased usage and the types of drugs being dispensed. The health care field increasingly relies on pharmaceuticals as the primary treatment for many ailments; doctors are prescribing a wider array of drugs, more often. In 1985, for example, U.S. doctors prescribed an average 109 drugs per 100 office visits, but by 1999 the ratio had risen to 146 drugs per 100 visits.[6]

In addition, rising demand is being driven by a 1997 change in U.S. Food and Drug Administration policy that allows pharmaceutical companies to advertise directly to consumers. Direct-to-consumer advertising is associated with increased frequency of diagnosis by physicians, as well as an increased use of certain medications.[7] Spending on direct pharmaceutical advertising rose from $266 million in 1994 to $2.5 billion in 2000, and has been rising by an average annual 33 percent over the last four years.[8]

In addition, newer and more sophisticated pharmaceutical products tend to come to the market at significantly higher prices. Changes in the average cost per prescription are driven in part by the shift from lower-cost, older drugs to higher-cost, newly approved drugs.[9]

All state agencies with a prescription drug benefit must focus on drug usage, since it has become the largest driver of costs. Texas’ Medicaid Vendor Drug Program estimates that 43 percent of its increase in drug costs is due to increased usage; 39 percent is due to the introduction of new and more expensive drug products; and just 18 percent is due to changes in drug prices.[10] Private insurers and other states have discovered that management of drug usage, and not just drug prices, is needed to control spiraling costs.

In Texas, the Health and Human Services Commission (HHSC) administers the Vendor Drug Program. All Texas Medicaid recipients, including those enrolled in managed care organizations (MCOs), receive prescriptions through the Vendor Drug Program. Adult recipients may receive up to three prescriptions per month and are not required to make co-payments at this time. The three-prescription limit does not apply to recipients under age 21 or those residing in nursing homes.

Of the $1.3 billion spent by the Medicaid Vendor Drug Program in fiscal 2001, more than $1.1 billion or approximately 87 percent of expenditures went for drugs. The remaining money was spent on reimbursements to pharmacies for drug dispensing, inventory management and administrative costs.[11]

On March 1, 2002, the Vendor Drug Program also began to administer the outpatient pharmacy benefit for the Children’s Health Insurance Program.

Brand drug reimbursement

State Medicaid agencies generally reimburse pharmacies for brand-name drug ingredients based on the Average Wholesale Price (AWP), less a percentage, or the Wholesale Acquisition Cost (WAC) plus a percentage. The AWP is the published, suggested wholesale price of a drug, based on a sample of prices paid by wholesalers to its manufacturer. The WAC is the payment made by a pharmacist to purchase a drug from a wholesaler. Texas reimburses pharmacies at AWP less 15 percent or WAC plus 12 percent, whichever is lowest. Most states reimburse pharmacies at AWP less 10 to 12 percent.

While Texas’ reimbursements for ingredient costs are lower than the national average, the state is generous in the dispensing fees it pays to pharmacies. Texas pays a dispensing fee of $5.27 per prescription.[12] Only Alabama, Louisiana and Arkansas pay higher dispensing fees.[13] Texas also pays pharmacies an inventory management fee of 2 percent of the ingredient reimbursement plus the dispensing fee. Texas is the only state in the country that pays this fee.

In recent months, at least 11 states—Colorado, Connecticut, Illinois, Kentucky, Mississippi, New Jersey, New York, Ohio, Oklahoma, Tennessee and Wisconsin—have considered or implemented reductions in pharmacy reimbursements.

Multi-source drug reimbursement

For drugs with several manufacturers, states often use a Maximum Allowable Cost (MAC) policy. Texas has a MAC policy for more than 400 drugs.[14] A MAC policy limits what a state will pay for a drug. For example, five different companies manufacture the drug Stelazine, used to treat symptoms of certain mental or emotional conditions. The price for 100 tablets of Stelazine ranges from $18.16 to $59.42; the product with the median price costs $31.32.[15] Texas’ policy sets the MAC for drugs with multiple manufacturers at the median price.

Eight states including California and Illinois require the pharmacist to dispense the lowest-cost multi-source drug. Texas does not have such a policy.[16] This means that a pharmacist can dispense a manufacturer’s version of a drug at the MAC price even when another, less expensive version is available. For example, in Texas a pharmacist could dispense UDL Laboratories’ version of Stelazine for $31.32 even when Mylan’s product costs just $18.16. Vendor Drug Program staff at HHSC indicated that the MAC is set at the median cost to preserve access in cases when a lower-cost drug may be in short supply.

Preferred drug lists

To address the growing cost of drugs, many states have created a preferred drug list (PDL)—a list of generic and cost-effective brand-name drugs. Commercial health plans and employers use PDLs to manage their drug costs. The groups of physicians and pharmacists who develop the PDL and review new and existing pharmaceuticals on an ongoing basis generally are called Pharmacy and Therapeutics (P&T) Committees. These committees review pharmaceutical products with regard to clinical efficacy, safety and cost-effectiveness.

Health plans and employers often use a tiered co-payment structure to encourage the use of drugs on the PDL. For example, a plan may provide a strong incentive to use generics by offering them with the lowest co-payment. A mid-range co-payment would be required for brand-name drugs on the PDL, with the highest co-payment reserved for brand-name drugs that do not appear on the PDL. Such financial incentives encourage patients to voluntarily select generic and cost-effective brand-name drugs.[17]

While state Medicaid agencies may require a co-payment for prescriptions, federal law exempts many Medicaid recipients from co-payments and restricts the amount of co-payments that Medicaid may charge. As a result, state Medicaid agencies cannot support a PDL through financial incentives.

Prior authorization

Several states have adopted PDLs that require physicians to obtain prior authorization from the state before a pharmacy can dispense a non-preferred drug. This allows the patient to receive higher-cost drugs if they are deemed medically necessary; otherwise, the physician must use either a clinically appropriate generic or a preferred brand-name drug. Certain therapeutic classes of drugs, such as those used for treating serious mental illnesses and HIV/AIDS, may not require prior authorization.

In addition, states must follow certain federal criteria, including a requirement that requests for authorization be answered within 24 hours. In an emergency, doctors may prescribe the drug if Medicaid or its agent cannot respond to a prior authorization request within this time period. In such cases, state Medicaid agencies generally authorize a 72-hour supply after the fact. In the event that a prior authorization request is denied, the state should provide an appeal process for physicians.

E-Texas asked a clinical pharmacist to evaluate some Texas programs offering drug benefits. This study found that the state’s Medicaid Vendor Drug Program, Employees Retirement System’s (ERS’) HealthSelect plan and Teacher Retirement System (TRS) each could realize substantial savings by implementing or expanding prior authorization for certain prescription drugs, including gastrointestinal agents, cholesterol-lowering agents, anti-inflammatory agents, antidepressants and antihistamines. Published studies of prior authorization programs show an average 50 percent reduction in the costs associated with targeted drugs.[18]

Prior authorization already has produced benefits for the state. For example, the Texas correctional health care system’s use of prior authorization for a newer class of drugs to treat gastrointestinal disorders, called proton pump inhibitors, has produced a usage rate of just 3 percent, versus 97 percent for an older line of H2 antagonists also used to treat gastrointestinal disorders (Zantac generic). In the Vendor Drug Program, by contrast, proton pump inhibitors accounted for 68 percent of prescriptions in fiscal 2001, while 32 percent of prescriptions called for H2 antagonists. The correctional system also uses prior authorization for the cholesterol-lowering agents known as statins (Lipitor, Pravacol, Mevacor, etc.); patients must use generic Mevacor unless their cholesterol levels are too high to be reduced adequately without a more potent agent.[19]

Supplemental rebates

Both Florida and Michigan have adopted supplemental rebate programs to enhance and support their PDLs. Another half-dozen states are in the process of doing so.[20] California has had such a program in place since 1990.

A supplemental rebate program requires a drug manufacturer to provide additional rebates for brands included on the PDL. A supplemental rebate contract is held directly between the state and each participating drug company. The supplemental rebates are in addition to any other rebates the Medicaid program already receives from the drug manufacturer. The state Medicaid agency must report and share a percentage of the supplemental rebates (the same percentage as its Medicaid federal/state share) with the federal government.

State supplemental rebate programs take a variety of forms. For example, Florida contracted with Provider Synergies, an Ohio-based company, to conduct supplemental rebate negotiations with pharmaceutical manufacturers on its behalf. Provider Synergies asked each manufacturer to provide discount amounts for each product, along with information on the drugs’ clinical efficacy. Provider Synergies began negotiations on Florida’s behalf in early June 2001 and completed them by August 2001. Simultaneously, Florida’s fiscal agent (a company providing Medicaid claims processing services and pharmacy services) developed a prior authorization system. The program was implemented in October 2001. As a result of the PDL and supplemental rebates, Florida expects to save more than $243 million in fiscal 2002.[21]

Pharmacy benefit management

The Texas Vendor Drug Program is run almost entirely by HHSC employees. Many states, by contrast, hire third-party vendors to operate this component of Medicaid. These vendors are either traditional fiscal agents or pharmacy benefit managers (PBMs).

Fiscal agents include firms such as Affiliated Computer Services and Electronic Data Systems that provide claims processing services to state Medicaid agencies. They provide pharmacy benefit management services to state agencies but generally have less experience in pharmacy cost management services for private organizations. Fiscal agents generally implement the policies dictated by their state clients. For example, fiscal agents do not negotiate reimbursement rates with pharmacies, but instead pay pharmacies based on the state’s existing reimbursement policies.[22] Cost management policies are implemented only at the state’s request.

PBMs, by contrast, work predominantly in the private sector and have only recently begun to provide services for state Medicaid agencies. At this writing, PBMs serve 137 million people, or 51 percent of all Americans, and 71 percent of Americans with pharmacy coverage. Major PBMs include First Health, Express Scripts and Advance PCS. Advance PCS alone covers 75 million people, the majority of whom are in the private sector.

A number of state Medicaid agencies now use PBMs, primarily through programs in which the state contracts with a managed care organization and the MCO subcontracts with a PBM. States also are beginning to contract with PBMs directly. For example, Georgia contracts directly with Express Scripts.

PBMs bring private-sector experience in pharmacy cost containment to Medicaid. Because they have so many beneficiaries, PBMs can spread their administrative costs across more patient lives. One PBM recently reported that its administrative costs for their entire service package is less than 2 percent of total costs, and in many cases, it is closer to 1 percent.[23]

Only a few states across the country process claims for the Medicaid pharmacy benefit themselves, instead contracting with a fiscal agent, PBM or MCO. Texas’ Vendor Drug Program is unique in that it both manages the pharmacy benefit and processes claims using the Texas Department of Human Services’ claims processing system.

Clinical pharmacy management protocols (established practices for administering specific drugs) and pharmacy benefit management best practices are constantly evolving. While the Vendor Drug Program has integrated many sophisticated techniques into its system, it cannot spread the costs of these upgrades over tens of millions of covered lives, as do PBMs. A recent report from Advance PCS indicated that the major PBMs spend an average $2 million per year on integrating the latest cost management technologies into their claims processing systems.[24] For a PBM with 50 million covered lives, such an expense represents just 4 cents per covered life. If the Vendor Drug Program had spent $2 million to upgrade its system with the latest technologies in 2002, it would have spent 42 percent of its entire $4.8 million automation allocation for the year on upgrades alone.[25]

The latest pharmaceutical cost management techniques require experienced clinicians and information systems professionals. Because these problems affect almost every benefit program in the nation, such people are in high demand. Large PBMs can hire such individuals and spread the cost across all of their customers.

Retirement systems and PBMs

ERS and TRS both contract for pharmacy benefits management through a PBM, a strategy that has allowed them to realize substantial savings. ERS uses a variety of strategies including three-tiered co-pays, brand limits and generic preference in its HealthSelect plan. TRS also has generic preference and increased co-pays for brand-name products.

ERS’ three-tier co-pay system provides incentives for the use of lower-cost drugs; it helped the agency reduce its net costs for prescription drugs by 2.6 percent between fiscal 1999 and 2000. The agency also plans to implement prior authorization for some drugs and extend quantity and duration limits for others, and has created programs to monitor manufacturer rebates.

TRS has created similar programs. It has a generic limitation program forbidding reimbursement beyond the cost of the generic product, if available. TRS also has increased the co-pay for brand-name products, and requires prior authorization for some products. It reported annual savings of $34.2 million from these measures for fiscal 2000.[26]

Other cost-containment options

Other prescription cost-containment options that the Vendor Drug Program could employ are described in Exhibit 2.

Exhibit 2
Additional Cost Containment Options

Therapeutic Substitution
Therapeutic substitution is the process of switching a patient's drug therapy from a more expensive medication to a similar, less costly medication from the same therapeutic category. In general, the prescribing physician must approve such a substitution before it is made. Typically, therapeutic substitution occurs when a physician has prescribed a brand name drug and a less expensive, chemically equivalent generic is available. However, brand-to-brand substitutions also may occur.
Counter Detailing
Counter detailing is the process of educating physicians about the costs and benefits of various prescription drugs to encourage them to practice more cost-conscious prescribing. The information provided to physicians is meant to "counter" the direct detailing of pharmaceutical sales representatives who frequently promote expensive brand-name products. Counter detailers suggest that physicians discontinue medications that are no longer needed and instead consider using cost saving and equally effective alternative drugs. The Vendor Drug Program will be sending some educational materials to physicians regarding the cost of drugs and alternative drugs.

For example, counter detailers in Florida made 88 visits to physicians in October 2000. They focused on physicians who "tended to prescribe" Vioxx and Celebrex, costly anti-inflammatory drugs, instead of less costly generics, explaining that ibuprofen or naproxen could be just as effective and less expensive. By January, physicians were writing fewer prescriptions for Vioxx and Celebrex, a move expected to save Florida's Medicaid program $196,000 per year. Other drug classes are being targeted, with similar results.
Step Therapy
Step therapy requires physicians to use protocols to move patients from one drug therapy to the next, starting with the most cost-efficient. If the first-line therapy is not effective, the physician can step the patient up to a more expensive alternative. Examples include using generic naproxen first to treat arthritis. If the therapy is unsuccessful, the physician then would switch the patient to Vioxx or Celebrex, which are more expensive.
34-Day Limit
Currently, Texas' Vendor Drug Program limits the number of prescriptions for certain client populations to three per month. Patients, however, may receive up to a 90-day supply of a given drug on a single prescription. Allowing for more than a 30-day supply often leads to increased costs, as the patient may receive medication for a period in which they are no longer eligible for Medicaid. It also leads to higher spoilage losses, as the patient may have an adverse reaction to the drug or may be placed on a different dosage. About half of states have a 34-day or shorter limit on prescription supply.
Source: Texas Comptroller of Public Accounts.


A. The Health and Human Services Commission should contract with a pharmacy benefit manager (PBM) to bring the most advanced cost management techniques to the Texas Vendor Drug program.

Texas and the U.S. have experienced double-digit inflation in Medicaid pharmacy costs for the last three years. To control this runaway growth, Texas should employ the most advanced and sophisticated pharmacy cost management techniques while keeping administrative costs as low as possible. By contracting with a PBM, Texas would gain access to the latest innovations and protocols from both the private and public sectors. If Texas were to build such resources internally, the per-recipient administrative cost would be significantly higher than the cost of contracting with a PBM, because a PBM can spread its administrative costs across tens of millions of covered lives. The PBM should:
  • develop a preferred drug list and negotiate supplemental rebates;
  • conduct prior authorization approvals quickly and efficiently;
  • implement step therapy programs and conduct counter-detailing as needed throughout the state;
  • use the latest in private pharmacy cost management innovations and technologies; and
  • manage pharmacy costs through an advanced claims processing system.

B. The Health and Human Services Commission should create a Pharmacy and Therapeutics Committee to establish a preferred drug list (PDL) for the Medicaid Vendor Drug Program.

The Medicaid PDL would be a listing of prescription products selected based on the efficacy, safety and cost of the drug products. The PDL would be used to inform clinicians of effective products that provide favorable net costs to Medicaid. The Pharmaceutical and Therapeutics Committee would be composed of health professionals including physicians, pharmacists and a member of the general public. The committee should meet at least quarterly to review the PDL. The PDL would have to be finalized by January 1, 2004 so that the program can begin by March 1, 2004.

C. The Employees Retirement System (ERS) and Teacher Retirement System (TRS) should expand their use of prior authorization for drugs not on their preferred drug lists, particularly for gastrointestinal agents, cholesterol lowering agents, anti-inflammatory agents, antihistamines and antidepressants.

Physicians could submit requests to prescribe drugs not on the PDL. ERS and TRS could add or remove drugs to and from the PDL should they determine that doing so would be cost-effective.ERS and TRS should develop methodologies to measure and report the savings achieved from prior authorization to the Comptroller’s office and the Legislative Budget Board (LBB). The Comptroller’s office and the LBB should approve these methodologies by March 1, 2004. In addition, ERS and TRS should report to the Comptroller’s office and the LBB every six months on the savings realized, with the first report submitted for the period ending August 31, 2004. Any shortfall in savings should be made up by increases in prescription drug co-pays. The current ERS and TRS PBM contracts contain performance measures. If ERS and TRS determine that additional performance measures are needed to ensure compliance with this recommendation, they would need to add those measures to their contract.

Fiscal Impact

E-Texas provided a consultant with a year of pharmacy claims data from the Texas Vendor Drug Program. The consultant studied policy changes that could lead to an estimated $240.6 million in shared savings to the state and federal governments. Net savings to general revenue are estimated at $94.4 million in fiscal 2005, the first full year of implementation. Saving estimates for fiscal 2004 assume program implementation at mid-year. These estimates are based only on the Medicaid population and do not include the recent addition of the CHIP program.

On September 30, 2002, HHSC filed proposed rule changes to the product cost reimbursement formula and the pharmacy dispensing fee. The e-Texas estimates are based on the Vendor Drug Program reimbursement formula and pharmacy dispensing fees in place prior to the proposed rule.

The Medicaid policy changes include:

  • eliminating potentially inappropriate charges such as wrong quantity/invalid package size to pharmacies ($4.7 million);
  • modifying reimbursement to pharmacies ($24.1 million);
  • switching prescriptions written for multi-source brand drugs to their generic equivalents ($17.0 million);
  • creating a preferred drug list/prior authorization and supplemental rebate program ($159.0 million);
  • increasing the use of prior authorization to deter inappropriate usage ($17.0 million);
  • ensuring that providers follow accepted medical protocol for prescriptions, by limiting the quantity of drug units and/or the duration of therapy as needed ($3.8 million);
  • creating a step therapy program ($18.2 million); and
  • creating dosage and days-supplied limitations ($11.0 million).

The net increase in administrative costs from a PBM contract could range from about 35 cents to 50 cents per claim. The estimate assumes the highest administrative cost, but the actual administrative cost would depend on the services the PBM is hired to perform. E-Texas estimates that administrative costs would increase by about $14.2 million. In addition, the estimate assumes that Texas would hire a consultant in fiscal 2004 to develop the PBM procurement instrument at a one-time cost of about $500,000.

To achieve these savings, Medicaid Vendor Drug Program general revenue appropriations should be reduced by $141.5 million during the fiscal 2004-05 biennium.

Vendor Drug Program Fiscal Impact

Fiscal Year Savings to General Revenue Savings to Federal Funds (Cost) to General Revenue (Cost) to Federal Funds Net Savings to General Revenue Net Savings to Federal Funds
2004 $ 50,740,000 $ 76,660,000 ($3,560,000) ($3,560,000) $47,180,000 $ 73,100,000
2005 $101,490,000 $153,310,000 ($7,130,000) ($7,130,000) $94,360,000 $146,180,000
2006 $101,490,000 $153,310,000 ($7,130,000) ($7,130,000) $94,360,000 $146,180,000
2007 $101,490,000 $153,310,000 ($7,130,000) ($7,130,000) $94,360,000 $146,180,000
2008 $101,490,000 $153,310,000 ($7,130,000) ($7,130,000) $94,360,000 $146,180,000

ERS and TRS could reduce their prescription drug costs by an estimated $7.7 million in general revenue in the first year and $15 million in the second year by expanding the use of prior authorization for gastrointestinal agents, cholesterol-lowering agents, anti-inflammatory agents, antidepressants and non-sedating antihistamines. The ERS savings estimate is based only on HealthSelect because at the time of this study HealthSelect Plus did not have a PBM providing pharmacy services. This is a very conservative estimate for both ERS and TRS, and savings may well exceed these amounts.

Savings estimates for fiscal 2004 assume that ERS and TRS would phase in the expansion of prior authorization over six months. This amount of time should be more than adequate because both agencies have a contract with a PBM that has experience with prior authorization. The estimate reduces ERS and TRS savings by 10 percent to account for increased administrative costs. This a conservative assumption; actual costs are more likely to be in the range of 5 percent.

Fifty-nine percent of ERS savings would accrue to the General Revenue Fund and the remaining 41 percent to other funds. All TRS savings would accrue to general revenue.

To achieve these savings, the Legislature should reduce ERS general revenue appropriations for the 2004-05 biennium by $9 million and TRS general revenue appropriations by $14 million.

ERS Fiscal Impact

Fiscal Year Savings to General Revenue (Cost) to General Revenue Net Savings to General Revenue
2004 $3,414,000 ($341,000) $3,073,000
2005 $6,828,000 ($683,000) $6,145,000
2006 $6,828,000 ($683,000) $6,145,000
2007 $6,828,000 ($683,000) $6,145,000
2008 $6,828,000 ($683,000) $6,145,000

Fiscal Year Savings to Other Funds (Cost) to Other Funds Net Savings to Other Funds
2004 $2,373,000 ($237,000) $2,136,000
2005 $4,745,000 ($475,000) $4,270,000
2006 $4,745,000 ($475,000) $4,270,000
2007 $4,745,000 ($475,000) $4,270,000
2008 $4,745,000 ($475,000) $4,270,000

TRS Fiscal Impact

Fiscal Year Savings to General Revenue (Cost) to General Revenue Net Savings to General Revenue
2004 $ 5,196,000 ($ 520,000) $4,676,000
2005 $10,393,000 ($1,039,000) $9,354,000
2006 $10,393,000 ($1,039,000) $9,354,000
2007 $10,393,000 ($1,039,000) $9,354,000
2008 $10,393,000 ($1,039,000) $9,354,000

The table below shows the combined fiscal impact for the proposals.

Summary of Fiscal Impact

Fiscal Year Savings to General Revenue (Cost) to General Revenue Net Savings to General Revenue
2004 $ 59,350,000 ($4,421,000) $ 54,929,000
2005 $118,711,000 ($8,852,000) $109,859,000
2006 $118,711,000 ($8,852,000) $109,859,000
2007 $118,711,000 ($8,852,000) $109,859,000
2008 $118,711,000 ($8,852,000) $109,859,000

Fiscal Year Savings to Other Funds (Cost) to Other Funds Net Savings to Other Funds
2004 $2,373,000 ($237,000) $2,136,000
2005 $4,745,000 ($475,000) $4,270,000
2006 $4,745,000 ($475,000) $4,270,000
2007 $4,745,000 ($475,000) $4,270,000
2008 $4,745,000 ($475,000) $4,270,000

Fiscal Year Savings to Federal Funds (Cost) to Federal Funds Net Savings to Federal Funds
2004 $ 76,660,000 ($3,560,000) $ 73,100,000
2005 $153,310,000 ($7,130,000) $146,180,000
2006 $153,310,000 ($7,130,000) $146,180,000
2007 $153,310,000 ($7,130,000) $146,180,000
2008 $153,310,000 ($7,130,000) $146,180,000


[1]The Henry J. Kaiser Family Foundation, “Medicare and Prescription Drugs,” Washington, D.C., May 2001. (Fact sheet.)

[2]The Henry J. Kaiser Family Foundation, Medicaid: Purchasing Prescription Drugs (Washington, D.C., January 2002), p. 1.

[3]Texas Health and Human Services Commission, Medicaid Vendor Drug Program, by Bob Harriss (Austin, Texas, March 19, 2002), p. 7; and Texas Department of Health, Medicaid Vendor Drug Program (Austin, Texas, March 28, 2000), p. 7.

[4]U.S. Center for Medicaid and Medicare Services, “CMS-64, Financial Management Report for FY 1998” and “Financial Management Report for FY 2001,” both available through (Last visited October 7, 2002.)

[5]The Omnibus Budget Reconciliation Act (OBRA) of 1990 established the Medicaid Drug Rebate Program. Through this program, a state Medicaid agency can obtain rebates from drug manufacturers if the state meets certain criteria. Rebates must be shared with the federal government in an amount based on the state’s federal match. Texas participates in the Medicaid Drug Rebate Program and uses its share of these rebates to finance portions of the Vendor Drug Program’s budget.

[6]National Institute for Health Care Management, Prescription Drugs and Mass Media Advertising, 2000 (Washington, D.C., November 2001), p. 4.

[7]Woodie Zachry, Marvin Sheperd, Melvin Hinich, James Wilson, Carolyn Brown and Kenneth Lawson. “Relationship Between Direct-to-Consumer Advertising and Physician Diagnosing and Prescribing,” American Journal of Health-System Pharmacy (January 1, 2002), pp. 42-49.

[8]U.S. Pharmacopoeia, “Prescription Drug Trends: Implications for State Drug Programs,” Rockville, Maryland, p. 3. (Issue brief.)

[9]U.S. Pharmacopoeia, “Prescription Drug Trends: Implications for State Drug Programs,” Rockville, Maryland, p. 2. (Issue brief.)

[10]Texas Health and Human Services Commission, Medicaid Vendor Drug Program, p. 8.

[11]Texas Health and Human Services Commission, Medicaid Vendor Drug Program, p. 12.

[12]It is important to note that Texas currently limits the days supplied of a drug to 90 days. Many states with lower dispensing fees limit days supplied to 34 days. Thus, the pharmacist who fills a prescription every 34 days at a relatively low dispensing fee may generate a larger total dispensing fee than a pharmacist who fills a prescription every 90 days at a relatively high dispensing fee.

[13]National Pharmaceutical Council, Pharmaceutical Benefits (Reston, Virginia, 2002), pp. 4-57.

[14]Telephone interview with Patsy Napier and Curtis Burch, Texas Vendor Drug Program, March 13, 2002.

[15]Texas Health and Human Services Commission, Medicaid Vendor Drug Program, p. 16.

[16]National Pharmaceutical Council, Pharmaceutical Benefits, pp. 4-59.

[17]E-mail communication from Elyse Forkosh, Tucker Alan Inc., September 24, 2002.

[18]Neil J. MacKinnon and Ritu Kumar, “Prior Authorization Programs: A Critical Review of the Literature,” Journal of Managed Care Pharmacy, April 7, 2001.

[19]E-mail communication from Matt Keith, consultant, August 6, 2002.

[20]E-mail communication from Elyse Forkosh, Tucker Alan Inc., September 17, 2002.

[21]E-mail communication from David Medvedeff, clinical pharmacist, Medicaid Pharmacy Section, Florida Agency for Health Care Administration, Tallahassee, Florida, September 17, 2002.

[22]E-mail communication from Elyse Forkosh, Tucker Alan Inc., April 4, 2002.

[23]E-mail communication from Elyse Forkosh, Tucker Alan Inc., September 9, 2002.

[24]E-mail communication from Elyse Forkosh, Tucker Alan Inc., September 24, 2002.

[25]E-mail communication from Elyse Forkosh, Tucker Alan Inc., September 24, 2002.

[26]E-mail communication from Matt Keith, consultant, August 6, 2002.

[27]Russell Gold, “States Battling High Drug Costs Appeal to Doctors to Help Fight,” Wall Street Journal (August 22, 2001).

[28]National Pharmaceutical Council, Pharmaceutical Benefits, pp. 4-54.