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Escalating drug costs and advent of managed care led WV Medicaid to implement the prior authorization policy for anti-ulcer medications (18% of 1994 expenditures). The study's purpose was to determine the policy's effect on utilization and expenditures of anti-ulcer medications and healthcare services such as inpatient hospitalizations, physician and outpatient hospital services (Phase I). The study also assessed the policy's effect on Medicaid recipient outcomes (Phase II). For Phase I, 36 months of Medicaid paid claims data (20 months pre-policy and 16 months post-policy) were analyzed for continuously eligible non-Medicare recipients. The policy's effects on utilization and expenditure time series were analyzed using segmented regression analysis. Phase II of the study utilized a prospective single group pre-test, post-test design. Recipients were selected if their therapy was affected by the prior approval policy and their overall quality of life (QOL), gastrointestinal quality of life (GIQOL) and utilization of healthcare services was measured. MOS Short Form-12 was used to measure the overall QOL. GIQOL scales measuring symptom experience, emotional health and daily functioning were developed and validated for the study. Post-test measures were obtained two months after policy intervention to determine change in outcomes. Results for Phase I showed a significant post-policy decrease in anti-ulcer medication utilization and expenditures. Except for gastrointestinal procedures, utilization of healthcare services did not increase during the post-policy period. Post-policy use of duplicative and high dose therapy decreased significantly whereas the use of low dose anti-ulcer medications and appropriate Misoprostol therapy increased significantly. The net policy impact reduced total WV Medicaid expenditures by about {dollar}3.7 million over 16 months. Phase II results indicated that the study subjects had significantly lower overall QOL than the normal U.S. population. The GIQOL scales developed for the study were reliable (Cronbach's alpha {dollar}>{dollar} 0.8) and valid. Statistical comparison of pre-test and post-test QOL, GIQOL, and health services utilization measures indicated no significant change in recipient health status and their healthcare services utilization. In conclusion, the policy resulted in a significant decrease in anti-ulcer medication expenditures, a minimal increase in diagnostic services, and no apparent change in recipient outcomes.