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Section II. Medicaid Vendor Drug Program Study

Overview of the Texas Medicaid Vendor Drug Program


The Texas Medicaid Vendor Drug program (VDP) contracts directly with more than 3,800 pharmacies across Texas to provide prescription drugs to clients in both the fee-for-service and managed care Medicaid programs. Most of these pharmacies are retail stores. Texas pays for all outpatient medications through the VDP except for some drugs provided as part of outpatient physician services. [1]

The Texas Medicaid program includes optional federal prescription drug services. The Health and Human Services Commission (HHSC), through the VDP administers these services, which were first offered in 1971.

In fiscal 2003, the program paid prescriptions for about 2.5 million Medicaid clients, dispensing almost 34.1 million prescriptions to an average of 0.9 million clients per month. Total VDP expenditures were about $1.9 billion for the year. [2]

VDP pays for up to three outpatient prescriptions per month per adult client living in the community. Clients in an inpatient hospital, residents of a nursing facility, managed care clients and children under 21 years of age are not subject to the three-prescription limit. Family planning drugs and insulin syringes also are not subject to the limit. [3]

The pharmacy provider information and prescription claims are processed on a separate system maintained by the HHSC. Paid claim history information is stored in the Medicaid data warehouse maintained by the Texas Medicaid Healthcare Partnership, HHSC's claims administrator.

VDP has processed prescription drug claims for the Kidney Health Care and the Children with Special Health Care Needs programs since September 1, 1999, and for the Children's Health Insurance Program since March 1, 2002. [4]

Vendor Drug Program Cost Containment Efforts

The VDP uses several methods to controls costs:

  • a Drug Utilization Review program;
  • the Texas Pharmaceutical and Therapeutics Committee; and
  • 14 field-based pharmacists located throughout the state who provide assistance and consultation to Medicaid clients, pharmacists, physicians and other health care providers.

Drug Utilization Review Program

VDP performs a prospective drug use review. This review consists of approving a drug before its paid, through an online pharmacy claims adjudication system. The system was implemented in September 1993, to comply with the federal Omnibus Budget Reconciliation Act of 1990 (OBRA '90) that requires prospective drug use reviews and patient counseling for all Medicaid patients.

The OBRA '90 drug review requires pharmacists to review each Medicaid patient's medication record (including specific demographic, allergy and past drug information) and the drug order before dispensing a new or refill medication. The pharmacist must identify problems such as:

  • inappropriate drug use;
  • therapeutic duplication;
  • drug-disease contraindications;
  • drug interactions;
  • incorrect drug dosage or duration of drug treatment;
  • drug-allergy interactions; and
  • clinical abuse or misuse.

If the pharmacist identifies a significant problem, he or she must take steps to avoid or resolve the problem, including consulting the prescribing physician. [5]

The review performed in the VDP claim processing system looks back at six months of paid prescription claim history to find active prescription claims with clinically significant drug interactions, therapeutic duplication (two drugs for the same use), ingredient duplications and high dosage alerts. In addition, VDP performs prospective clinical reviews on several categories of drugs. The VDP contractor, ACS/Heritage Information Systems, performs these edits.

VDP also performs a retrospective drug use review of prescription claims. VDP uses its findings from these reviews to educate pharmacies and prescribing physician providers on appropriate policy and procedures. If evidence of fraud is uncovered, VDP refers the case to HHSC's Office of the Inspector General (OIG). Cases that may involve substandard care are referred to the state's medical or pharmacy boards. [6]

Texas Pharmaceutical and Therapeutics Committee

The 2003 Legislature created the Texas Pharmaceutical and Therapeutics Committee to develop recommendations for a preferred drug list to be used by HHSC to pay for Medicaid client's prescriptions. This committee consists of six physicians and five pharmacists that participate in the Medicaid program. [7] One of its members must be actively engaged in caring and treating persons with severe mental illness, and have practical experience in the state Medicaid plan. The committee meets quarterly and its meetings are open to the public. [8]

Field-based Pharmacists

VDP has 14 field-based regional pharmacists throughout the state to provide assistance and consultation to Medicaid clients, pharmacists, physicians and other health care providers. Their 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 noncompliance and ways to correct them; and
  • other activities related to proper drug use and cost containment

The regional pharmacists conduct routine drug surveys of pharmacy providers to determine purchasing patterns, sources of purchases and the pharmacists billing practices, confirming that each pharmacy is billing the Medicaid program the same prices it charges the general public. A regional pharmacist may also perform priority compliance audits of a pharmacy; impose sanctions on a pharmacy provider; and assist the Attorney General's Office and the State Board of Pharmacy in investigations. A regional pharmacist may perform a priority audit whenever 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. [9]

VDP's drug formulary, called the Texas Drug Code Index, lists more than 32,000 drugs including single-source and multi source (generic) products. The formulary directory and rulebook are available on the VDP Web site at[10]

Pharmacy Providers

Pharmacy Provider Enrollment

Any pharmacy or pharmacist who has a current license or registration with the Texas Board of Pharmacy or is licensed under the laws of another state and is free from any pharmacy board restriction can enroll in the VDP by application. Prescribing practitioners who are authorized and licensed to practice the healing arts, as defined and limited by federal and state laws, and choose to provide their own pharmaceuticals also may apply to become providers in the VDP. [11] Pharmacies located outside Texas may enroll if they are located in a bordering state within 30 miles of the border or can show that they can provide additional benefits to Medicaid clients.

VDP reviews applications to determine whether the pharmacy ownership is eligible to be a provider in VDP and if all participating pharmacists are eligible to fill Medicaid prescriptions. VDP also checks all applicants for a criminal history or disciplinary orders from the Texas Board of Pharmacy. Coverage of claims or payments are not guaranteed until the completion of a fully executed contract that includes provider agreements and a vendor number. [12]

Pharmacy Provider Reimbursement

VDP pays pharmacy providers based on the lesser of HHSC's best estimate of acquisition cost (EAC), plus the agency's currently established dispensing fee per prescription; or the "usual and customary price" charged to the general public by these pharmacists. The dispensing fee is based on a specific formula with a limit of $200 per prescription and an ingredient reimbursement. The dispensing fee includes a delivery fee if appropriate, such as deliveries to a nursing home.

The EAC is defined as:

  • the wholesale estimated acquisition cost (WEAC); the direct estimated acquisition cost (DEAC) according to a pharmacy's usual purchasing source and the pharmacist's usual purchasing quantity; or a Texas maximum allowable cost (TMAC) for multi-source (generic) drugs

HHSC established the WEAC using prices reported to the VDP from the pharmaceutical manufacturers. The WEAC cannot exceed the wholesaler cost supplied by the drug manufacturers plus an amount representing wholesaler operating costs and profits under current market conditions. VDP examines market conditions every two years. HHSC establishes the DEAC using direct price information supplied by drug manufacturers.

The "usual and customary price" is the price the provider most frequently charges the general public for the same drug. VDP requires pharmacy providers to keep adequate records showing how they determine the usual and customary charge.

Multi-source drugs included in the Texas Drug Code Index are subject to the TMAC reimbursement limits. VDP determines the TMAC by using the WEAC for drugs in a therapeutic category, a group of drugs with similar actions. If a drug cannot be purchased wholesale, VDP uses the DEAC in calculating the TMAC. [13]

Financing and Expenditures

HHSC finances the VDP through the Medicaid program; it is subject to the same federal matching assistance percentage as Medicaid, which is 60.2 percent federal and 39.8 percent state for fiscal 2004. Expenditures for VDP prescription claims in calendar 2002 totaled $2.3 billion for 31.8 million claims.

Fraud and Abuse Activities

HHSC's Office of Inspector General monitors and investigates potential instances of fraud and abuse within the VDP. In addition to the activities discussed in Section I of the Medicaid Fee-For-Service Study, OIG has contracted with the Heritage Company for the following deliverables:

  • ranking of pharmacy's claim data by expenditures;
  • direct mail audits sent to Medicaid clients, asking them to confirm their receipt of prescription drugs billed for them (Heritage sends clients full color images of the drugs to help them confirm the medication they received);
  • on-site audits of selected pharmacies by Heritage staff under the direction of OIG; and
  • in-depth performance audits of selected pharmacies as directed by OIG[14]

Medicaid Vendor Drug Program Study


The Medicaid Vendor Drug study is intended to measure the incidence of potential overpayments, including potential occurrences of fraud and abuse. Section 403.028 of the Texas Government Code requires the Comptroller's office to perform this study biennially in consultation with the State Auditor's Office.

This VDP study, uses statistical sampling and review to identify specific prescription items and in some cases providers experiencing a high incidence of overpayments.

This section describes the sampling technique, review methodologies and study findings for the Medicaid Vendor Drug Program study.

Medicaid Vendor Drug Sample Selection

As with to the Medicaid fee-for-service study, the Medicaid VDP study sample was a random selection of 800 Medicaid clients with a sample day, including an initial sample prescription claim as a randomly selected starting point. Using the sample date as the core date, all other prescription claims for the sample patient were identified and labeled as associated sample services. Both the core sample service and the associated sample services were tagged with a study identification (ID) number built from the sample core. For example, the first sample client's core prescription item was assigned the study ID of VDP001 and the associated ID numbers were VDP001A01, VDP001A02, and so on. The sample prescription claims were selected from a universe of paid claims from October 1 through December 31, 2002. This timeframe was the same as used in the March 2003 pilot study.

National Heritage Insurance Company (NHIC) selected the sample using special programming written by its system staff. The NHIC sampling program for this study is described in Appendix B.3. The sample was selected from the VDP paid history file housed in the data warehouse and validated as statistically representative of the appropriate universe by the State Auditor's Office using statistical measures, such as the Chi-squared test and the Z-test of the mean of the total amount paid.

This study included 4,036 prescription claims representing a total paid amount of $191,888.

Once the sample was selected from the VDP history file, NHIC cross-reference the client and prescribing provider data to the Medicaid claim processing system to extract demographic information not carried in the VDP files.

The following information was collected on each client and prescription claim:

  • client Medicaid number
  • client Social Security number (SSN)
  • client name
  • client date of birth
  • client address
  • client Medicaid eligibility program
  • prescription number
  • date prescription written
  • date prescription claim paid
  • National Drug Code
  • brand name of drug (based on National Drug Code Directory)
  • refill number
  • compound code (if applicable for drugs with 2 or more chemicals)
  • pharmacy provider number - National Council of Prescription Drug Programs
  • pharmacy provider name
  • pharmacy address
  • pharmacy telephone number
  • drug cost (claim billed amount)
  • prescription paid amount
  • basis of cost determination (Cost Basis Code)
  • basis of cost description
  • prescribing physician name
  • prescribing physician Medicaid number
  • prescribing physician address
  • prescribing physician telephone number

Medicaid VDP Study Methodology

This section discusses the steps involved in the VDP study method, including the pharmacy provider request letters, the project team utilization review criteria and the VDP agency review.

Medicaid VDP Drug Prescription Review

This study consisted of a review of hard copies of the original prescriptions. HHSC staff requested copies of these prescriptions from the pharmacies through letters similar to the one used in the Medicaid FFS study. After the review team received the pharmacy's documents, professional nurses reviewed them and flagged potential overpayments. Following the project review, VDP pharmacists reviewed each sample prescription identified with a potential overpayment.

Medicaid VDP Prescription Request Letter

HHSC and the project team adapted the Medicaid FFS request letter to request sample prescription copies from the sample pharmacy providers.

As with the Medicaid FFS study, the review team sent up to three request letters to each pharmacy. The letters were sent certified with an attachment identifying the client by name, date of birth, sample date of service, prescription number and Medicaid number as it appeared on the provider's Medicaid payment statement. In the case of multiple prescriptions for different clients, all the clients and their study prescription numbers were listed on the attachment. The letter also included an affidavit form for the provider to affirm that the prescription(s) sent represented the complete documentation for the client for the date of service requested. A copy of the initial request letter is included in Appendix B.4.

If the provider failed to return the appropriate documentation, HHSC sent a second certified letter, followed by a phone contact with the provider explaining the request and the consequences of noncompliance. If there was no response to the second letter, a final certified letter was sent with a final reminder phone call.

All three of the letters had specified deadlines ranging from seven to 14 calendar days. The penalty for noncompliance consists of total recoupment of the prescription claim, because Medicaid regulations require providers to comply with medical record requests for paid services.

Prescription Drug Review Criteria

Professional nurses reviewed the prescription records received to confirm that they met both the federal and state prescription requirements. These prescription requirements are included in the VDP Discrepancy Error Code Table (Appendix B.5).

Texas State Board of Pharmacy requires the following information on each

  • patient's name and address;
  • name, strength and quantity of the drug to be dispensed;
  • directions for use;
  • the intended use of the drug, if appropriate;
  • the name, address and telephone number of the physician;
  • the name, address, telephone number and identification number of the advanced practice nurse or physician assistant completing the prescription drug order;
  • the date; and
  • the number of refills permitted[15]

Additionally, the physician must sign prescription drug orders either manually or electronically. An electronic signature is allowed if the practitioner is "using a system which electronically replicates the practitioner's manual signature on the written prescription, provided that security features of the system require the practitioner to authorize each use." [16] Prescriptions for controlled substances (narcotics, sedatives, etc.) "must be dated and signed on the date when issued" and have the physician's Drug Enforcement Agency (DEA) registration number. In Texas, prescriptions for controlled substances also must describe the quantity to be dispensed both numerically and written as a word, for example 20 (twenty). [17]

Beside the prescription documentation requirements, other discrepancies counted as overpayments in the following situations:

  • no documentation (original hard copy) of the written, fax or telephone drug prescription in the pharmacy records received;
  • medication prescribed different from the drug given to the client;
  • prescription medication contraindicated by the client's other known medications;
  • refilled prescription orders for long term/rehabilitation residential clients without confirmation from the prescribing provider;
  • prescription claims for a drug not appropriate for the patient's age; and
  • prescriptions with no corresponding medical visit for the client, excluding Medicare and Managed Care Organization clients

As with the FFS study, the Discrepancy Error Code Table includes an action plan recommendation for HHSC OIG.

The reviewers used standardized review worksheets (Appendix B.6) to record the review findings. The reviewers used the PDR Nurse's Drug Handbook and specific drug manufacturer's Internet sites to identify the drug actions, indications, dosage and clinical uses. [18] The project team entered the information from the worksheets into a database to compile the results for the overpayment calculation.

Medicaid Vendor Drug Program Study Findings

For the 4,036 sample prescriptions, the pharmacy providers sent records for 3,753 prescriptions (93 percent); 916 (24 percent) of these were found to have errors. The most common error, found in 488 records, was failure to send a copy of the original prescription. In place of the prescription copy, pharmacies sent patient account summaries, tax statement summaries and copies of the computerized prescription lists.

Seventy-one prescriptions for controlled drugs lacked the patient name and/or address as required. Thirty-eight of the controlled drug prescriptions lacked a physician's signature, address and/or DEA registration number as federally required.

Six prescriptions billed for a Medicaid client (child) actually were given to the parent. One prescription written for Thorazine (antipsychotic medication) was filled by the pharmacy with Trazadone HCL, an analgesic.

Table II-1 summarizes these results.

Table II-1: Medicaid VDP Prescription Review Findings
Review Finding Number of Prescriptions
No prescription received 295
No copy of the original prescription sent with the pharmacy records received 488
Did not meet federal documentation requirement for controlled substance 125
Did not meet State Board of Pharmacy documentation requirements* 375
Medication requested by prescribing physician not filled by the pharmacy 1
Potential fraud or abuse with prescription claim 7
Pharmacy data entry error 21
Pharmacy clerical error* 0
Total 916

Source: *Not counted as overpayment errors. Providers will receive educational letters on appropriate requirements.

The project team will refer all of these pharmacies to HHSC's Office of Inspector General for further review and investigation. HHSC will send an educational letter appropriate for the error. Where the prescription did not meet federal or state documentation requirements, the prescribing physician will also receive an educational letter. Prescriptions for controlled substances identified with documentation errors are counted as overpayments with a potential for recoupment.

Potential Overpayment Measurement

The overpayment calculation used is similar to the FFS study, with the exception of the weighting of the sample. Since the sample was selected with a simple random program without strata, the sample did not require this averaging procedure. When the sample was selected, the State Auditor's Office performed statistical analysis tests to confirm that the samples represented the universe of paid prescription claims. A point estimate of the overpayment error rate was then calculated by dividing the total dollars paid for the prescriptions identified with potential overpayments by the total dollars paid for the sample prescriptions. Example:

Medicaid Vendor Drug Program Study Overpayment Calculation
Amount of potential overpayments:
Total amount paid for the sample prescriptions:
= 21.22% Overpayment rate

Dollars at Risk

The overpayment measurement can be applied to the annual Medicaid VDP expenditures to determine the "dollars at risk" in the Medicaid VDP. The term "dollars at risk" is used because the amount that is computed when applying the overpayment measurement to the annual expenditures is not recoverable unless all of the questionable prescription claims are identified through a complete utilization review of all prescription claims submitted for payment, which is not possible given the size of the VDP. Instead, HHSC can use the findings in this study to target specific areas of investigation as they do for the FFS study.

The "dollars at risk" figure for 2002 was $491 million. This figure was computed by multiplying the point estimate of the overpayment error rate of 21.22 percent times $2.3 billion of VDP expenditures for calendar 2002.

Medicaid Vendor Drug Program Study Recommendations

Texas Health and Human Services Commission

  1. The Office of Inspector General should continue to conduct regular audits on the Vendor Drug Program to identify potential fraudulent or abusive practices by either the pharmacies or prescribing providers.
  2. The Vendor Drug Program department should consider targeted pharmacy provider education on state and federal prescription requirements for the corporate and independent pharmacies identified in this study and in any studies conducted by HHSC

Texas Comptroller of Public Accounts

  1. The Comptroller's office should evaluate the feasibility of performing parallel state and federal measurement studies on the Medicaid Vendor Drug program to conserve state funds

Fiscal Impact

These recommendations can be implemented with HHSC's current appropriations.


[1] Texas Health and Human Services Commission, Texas Medicaid in Perspective, Fourth Edition (Austin, Texas, June 2004), p. 4-17, available in pdf format at (Last visited January 14, 2005.)

[2] E-mail communication from Barbara Dean, acting director of the Texas Medicaid Vendor Drug Program, Health and Human Services Commission, February 19, 2004.

[3] Texas Health and Human Services Commission, Texas Medicaid Vendor Drug Program, Prescription Drug Claim Procedures: Medicaid (Austin, Texas, October 8, 2003), p. 7, available in pdf format at (Last visited January 14, 2005.)

[4] Texas Health and Human Services Commission, "About Vendor Drug Program," (Last visited January 14, 2005.)

[5] Texas Health and Human Services Commission, "Drug Utilization Review," (Last visited January 14, 2005.)

[6] E-mail communication from Don Valdes, Texas Health and Human Services Commission, January 20, 2005.

[7] Texas Health and Human Services Commission, "Texas Pharmaceutical and Therapeutics Committee," (Last visited January 14, 2005.)

[8] Health and Human Services Commission, Texas Medicaid Pharmaceutical and Therapeutics Committee By-Laws (Austin, Texas, December 17, 2003), available in pdf format at (Last visited January 14, 2005.)

[9] Health and Human Services Commission, "Pharmacy Field Administration", (Last visited January 16, 2003.)

[10] Texas Health and Human Services Commission, "Texas Drug Code Index-Pharmacy Product Enrollment," (Last visited January 14, 2005.)

[11] Texas Health and Human Services Commission, Vendor Drug Program Pharmacy Provider Handbook (Austin, Texas, March 1, 2004), p. 4, available in pdf format at (Last visited January 14, 2005.)

[12] Texas Health and Human Services Commission, "Pharmacy Contracting Process," (Last visited January 14, 2005.)

[13] Texas Health and Human Services Commission, Vendor Drug Program Pharmacy Provider Handbook, p. 13.

[14] E-mail communication from Genie DeKneef, director of Technical Analysis, Research & Support, Office of Inspector General, Texas Health and Human Services Commission, October 12, 2004.

[15] Texas State Board of Pharmacy, Texas Pharmacy Laws and Regulations Code, §291.31, Definitions (7), (Austin, Texas, August 31, 2000), p. 107.

[16] Texas State Board of Pharmacy, Texas Pharmacy Laws and Regulations Code, §291.34, Records (2)(A)(I) & (II).

[71] U.S. Department of Justice, Drug Enforcement Administration, Pharmacist's Manual - An Information Outline of the Controlled Substances Act of 1970 (January 31, 2002), , "Prescription Requirements," p. 381.

[18] George R. Spratto and Adrienne L. Woods, 2004 Edition PDR (Physician Desk Reference) Nurse's Drug Handbook (New York: Delmar Learning, 2004).