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Overview of the Texas Medicaid Vendor Drug Program

The Texas Medicaid program includes optional federal prescription drug services. These services, implemented in 1971, are administered by the Health and Human Services Commission (HHSC) through the Texas Medicaid Vendor Drug program (VDP). An organization chart of the VDP is in Appendix B.1.

The VDP pays for up to three outpatient prescriptions a month per adult recipient living in the community to pharmacies participating in the program. Recipients in an inpatient hospital, residents of a nursing facility, managed care recipients and children under 21 years of age are not subject to the three prescription limit.[1] Also Family Planning drugs and insulin syringes are not subject to this limit.[2]

The pharmacy provider information and prescription claims are processed on a separate system maintained by the HHSC. The paid claim history information is stored in the Medicaid data warehouse maintained by National Heritage Insurance Company (NHIC), HHSC’s claims administrator.

The VDP has processed prescription drug claims for the Kidney Health Care and the Children with Special Health Care Needs programs since September 1, 1999. In March 2002, the VDP began processing prescription drug claims for the Children’s Health Insurance Program (CHIP).[3]

Vendor Drug Program Cost Containment Efforts
Since 1984, the VDP has used cost containment efforts to arrive at a fair professional fee for pharmacists based on their actual cost of doing business. Two forms of cost containment implemented with the program in 1971 were post payment audits and routine drug surveys conducted by field-based regional pharmacists. From 1984 to the present, the VDP has made nine different changes to the program to contain costs. These are summarized below by the year they were implemented:

1984 — The VDP participates in State/federal audits of pharmacy invoices to determine the pharmacy’s actual costs to purchase prescription drug products.

1985 — Based on these audits, the VDP changes its product reimbursement from Average Wholesale Price (AWP) to AWP-10.5 percent or Wholesaler’s Cost + 12 percent, whichever is less, for products purchased through wholesalers. The program also implements requirements on pharmacies for billing purchases to Medicaid as “direct” if the drug products are purchased directly from manufacturers. The Texas Maximum Allowable Cost (TMAC) program also goes into effect for multi-source (generic) products.

1986 — Discounts are available to chain pharmacies who purchase centrally, so the “warehouse” category of reimbursement is added to the automated claim processing system. Pharmacy providers purchasing through central purchasing arrangements are required to bill Medicaid using their central purchasing arrangement and are paid less for their claims based on their savings from these arrangements.

1990 — Based on evidence that recipients improperly used the H2 antagonist, such as Prilosec, and other related products (anti-ulcer drugs) as maintenance medications, a policy is implemented to limit the dosage of these products for long term use. The Vendor Drug Program reduced dosages and discontinued these products when appropriate to save money for the program.

1991 — Effective January 1991, the Omnibus Budget Reconciliation Act of 1990 (OBRA ‘90) mandates the coverage of all products of drug manufacturers who sign federal rebate agreements. The federal government contracts with drug manufacturers to provide state Medicaid programs with a discount or rebate on certain drug products. States are required to collect the rebates. Rebate collections since 1991 have averaged approximately 22 percent of the drug product costs in the VDP. These collections are used as a method of finance for the Vendor Drug Program.

1993 — The Drug Use Review (DUR) department begins retrospective review of prescription claims to determine appropriate use. The DUR Board helps educate physician providers to reduce prescribing problems.

1994 — Prospective DUR begins generating Point of Sale alerts to pharmacy providers of possible drug-drug interactions or inappropriate duplication or dosing of drugs. Point of Sale is the direct payment to the pharmacy for prescriptions filled for Medicaid recipients based on electronic verification of their Medicaid eligibility.

1997 — Based on another round of State/federal invoice audits and legislative concerns about market place reimbursement in Medicaid, the federal government reduced the AWP discount from 10.5 percent to 15 percent. This federal action reduced the pharmacists’ opportunity for profit contained in the professional fee from 7 percent to 2 percent. These State/federal audits also indicated that certain specialized drug products could be routinely purchased below the standard discounts.

2000 — Investigations by the Attorney General’s Medicaid Fraud Control Units find more specialty products where the published drug pricing does not reflect the price available in the consumer market. Based on these findings, the VDP reduced drug prices in April and May on these drug products. The VDP reduced prices again in September, based on follow up invoice audits performed by the Texas Department of Health’s internal audit department. Further reductions are anticipated on additional products with more widespread use as outpatient drug products by the VDP as new internal drug audits are completed.[4]

Most recently, the HHSC’s Office of Investigation and Enforcement and the VDP have contracted with The Heritage Company to perform a Pharmacy Auditing Pilot. This pilot consists of a series of auditing steps to identify potential fraud or abuse and cost savings for the VDP. The steps include onsite pharmacy compliance audits, recipient surveys with photos and detailed information about the drugs billed so that they can confirm receiving these drugs, in-depth audits of specific pharmacies suspected of fraud or abuse, and finally, a “cyber” search that will compare the pharmacy drug claim dates with Medicaid claim dates. The search will include a special program to identify claims with potential fraud or abuse. The pilot began in November 2002 and will wrap up in June 2003. Heritage has performed similar audits in 13 other states and found that the most overt fraud schemes are from phantom claims and kited (fictitious) claims.[5]

Pharmacy Provider Reimbursement
Pharmacy providers are paid a dispensing fee based on a specific formula with a limit of $200 per prescription and an ingredient reimbursement. The ingredient reimbursement is based on two provision types:

• Wholesale estimated acquisition cost (WEAC) or direct estimated acquisition cost (DEAC) based on a pharmacy’s usual purchasing method; and

• Texas Maximum Allowable Ingredient Cost (TMAC) or Federal Upper Limit (FUL) prices for multi-source (generic) drugs.

The HHSC established the WEAC and DEAC using market sources including published drug prices and pricing reported directly from drug manufacturers. These two costs are usually derived by HHSC from the manufacturer’s Average Wholesale Price (AWP) and the Wholesale Acquisition Cost (WAC). The Centers for Medicare and Medicaid Services (CMS) update the FUL prices every six months. Physicians may override the TMAC or FUL limits by indicating “brand medically necessary” on a prescription for a multi-source (generic) drug with an upper limit price.

The overall dispensing fee and ingredient reimbursement formula amount is limited to a maximum of the pharmacy provider’s usual and customary charge to the general public. There are some exceptions to this reimbursement policy for special classes of medications, for example, the over-the-counter (OTC) drugs such as aspirin or cough syrups. OTC drugs are paid at 150 percent of the estimated acquisition cost with no additional dispensing fee.

In an analysis of actual acquisition costs of prescription drug products, the Office of Inspector General (OIG) stated “that there is a wide range of discounts from AWP for pharmacy purchases depending on the category of drug that is being purchased.” Discounts ranging between 17.2 percent to 72.1 percent below the AWP were found by OIG. In order to bring the Medicaid pharmacy reimbursements in line with actual acquisition costs, OIG recommends a four-tiered reimbursement methodology. These tiers address a percentage discount off AWP for drug products from the following four sources: single source brand name, innovator multiple source (brand name generics) without FULs, non- innovator multiple source (generic) without FULs and FUL multiple source drugs. Note that all multiple-source drugs are various types of generic drug products available to consumers; products that are not under a drug manufacturer patent or trademark. OIG recommended that the Centers for Medicare and Medicaid Services (CMS) encourage states to adopt this four tier payment system “to bring pharmacy reimbursement more in line with the actual acquisition cost of drug products(to the pharmacies).” CMS agrees with this recommendation. [6]

Approximately 3,700 pharmacies participate in the VDP with 60 percent chain-affiliated stores and 40 percent independently-owned stores. The independently-owned stores fill approximately 55 percent of the Medicaid prescriptions.[7]

Vendor Drug Program Formulary
The Vendor Drug Program maintains a pharmacy product enrollment or formulary according to the Texas Drug Code Index (TDCI) that address the addition, retention and deletion of drugs. The TDCI covers more than 32,000 drugs including single source and multi-source (generic) products. [8] The VDP only pays for drugs listed on this formulary.

Pharmacy Field Administration
The VDP has 14 field-base regional pharmacists located throughout the state to provide assistance and consultation to Medicaid clients, pharmacists, physicians and other health care providers.[9] These pharmacists’ responsibilities include:

• educating contracted pharmacy providers on policies, procedures and state and federal laws;

• monitoring and determining program compliance;

• explaining and advising on causes of non-compliance and method of correction; and

• performing activities related to proper drug use and cost containment.

The regional pharmacists conduct routine drug surveys of the pharmacy providers to determine a provider’s purchasing pattern, source of purchase and billing practices, specifically that the pharmacy is billing the Medicaid program the same usual and customary prices charged to the general public. A Regional Pharmacist may also request priority (compliance) audits, impose sanctions on a pharmacy provider and assist the Attorney General’s Office and the Stare Board of Pharmacy in investigations. A Regional Pharmacist performs priority audits when a provider appears to be deviating from program policy. Routine consultation visits, special assignments, computer reports, or complaints may initiate a priority audit and subsequent fraud investigation.[10]

Drug Utilization Review
In addition to the regional pharmacists, the VDP performs prospective drug use review through the online pharmacy claims adjudication system. This was implemented in September 1993, to comply with the Omnibus Budget Reconciliation Act of 1990 (OBRA ‘90) that requires pharmacists to conduct prospective drug use reviews and to provide patient counseling for all Medicaid patients. The OBRA ‘90 drug review requires pharmacists to review a patient’s medication record (specific demographic, allergy and past drug information maintained on each patient) and the drug order prior to dispensing a new or refill medication. The pharmacist must identify problems such as:

• inappropriate drug use;

• therapeutic duplication;

• drug-disease contraindications;

• drug-drug interaction;

• incorrect drug dosage or duration of drug treatment;

• drug-allergy interactions; and

• clinical abuse or misuse.

If the pharmacist identifies a significant problem, the pharmacist must take steps to avoid or resolve the problem including consulting the prescribing physician.[11]

The prospective review performed in the VDP claim processing system looks back at six months of paid prescription claim history to find active prescription claims that have clinically significant drug-drug interactions, therapeutic duplication, ingredient duplications, and high dosage alerts. Additionally, the VDP performs a retrospective drug use review of the prescription claims. The VDP uses theses findings from the retrospective reviews to educate the pharmacy and prescribing physician providers on appropriate policy and procedures unless there is evidence of fraud. The VDP refers suspected fraudulent providers to HHSC/OIE and refers potential substandard care discoveries to the medical or pharmacy boards.[12]

Financing and Expenditures
The VDP is financed through the Medicaid program and has the same federal matching assistance percentage based on the Texas average per capita income, which is 60.2 percent federal and 39.8 percent state for fiscal 2002. The total expenditures for the VDP prescription claims for calendar year 2001 was $1.4 billion for 28.7 million claims.


[1] Texas Health and Human Services Commission, Texas Medicaid in Perspective, Fourth Edition (Austin, Texas, May 2002) p. 4-11 to 4-12, (Last visited January 16, 2003.)

[2] Health and Human Services Commission, Prescription Drug Claim Procedures Manual (Austin, Texas, August 08, 2000). p. 13, (Last visited January 16, 2003.)

[3] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, “About Vendor Drug...,” (Austin, Texas), (Last visited January 16, 2003.)

[4] Health and Human Services Commission, Vendor Drug Program, “Cost Containment Time Line” prepared by Patricia Gladden, (Austin, Texas).

[5] Presentation meeting by Heritage Company, Austin, Texas, November 12, 2002.

[6] Health and Human Services, Office of Inspector General, “Medicaid Pharmacy – Additional Analyses of the Actual Acquisition Cost of Prescription Drug Products,” (A-06-02-00041) (Washington D.C. September 16, 2002), (Last visited January 16, 2003.)

[7] Myers and Stauffer, L.C., Certified Public Accountants, “Determination of the Cost of Dispensing Pharmaceutical Prescriptions For the Texas Vendor Drug Program,” Prepared for the Texas Health and Human Services Commission. (Austin, Texas, August 2002),
p. 6-7, (Last visited January 16, 2003.)

[8] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, “Pharmacy Product Enrollment”, (Austin, Texas), (Last visited January 16, 2003.)

[9] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, “Pharmacy Field Administration,” (Austin, Texas), (Last visited January 16, 2003.)

[10] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, “Vendor Drug Field Division, Guidelines For The Regional Pharmacist,” (Austin, Texas, August 2001), pp. 1, 2 and 17.

[11] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, “Drug Utilization Review,” (Austin, Texas), (Last visited January 16, 2003.)

[12] Health and Human Services Commission, Texas Medicaid Vendor Drug Program, E-mail communication from Curtis Burch, Jr., R. Ph. to the Comptroller’s office. September 30, 2002.