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A simultaneous equations model is estimated to analyze the interaction between state Medicaid pharmaceutical drug reimbursement rates, drug recipients per capita, and expenditures per drug recipient. Interest groups are shown to have a strong positive impact on pharmacy reimbursement rates,which, in turn, have an impact on pharmacy participation rates and drug utilization and expenditure patterns. Finally, a strong inverse relationship exists between expenditures per recipient and program size. The results verify the existence of substantial variation in state Medicaid programs and point to potentially growing disparities as a result of current policies.