OBJECTIVES: To determine the effect of generic drug competition and new brand product entry on drug acquisition costs for Medicaid. METHODS: Using the Ohio Medicaid pharmacy claims database, we construct quarterly per-prescription reimbursement figures for each of the individual brand-name and generic antiulcer gastric medications (i.e., proton pump inhibitors (PPIs), H2 antagonists, and Carafate) from quarter 1, 1997, through quarter 3, 2002. The drug acquisition cost for each generic and brand-name drug is calculated as the per-prescription reimbursement less an estimate of the Medicaid rebate per prescription using the rules as explained in a recent Kaiser Commission report. A pooled cross-section, time-series regression model is estimated using ordinary least squares. Percentage change in per-prescription acquisition cost is regressed on change in the producer price index for finished goods, change in the number of generic and brand-name antiulcer drugs, change in the number of brand name drugs in the submarket (PPIs or H2 antagonist or Carafate), and percentage change in the number of generic manufacturers. RESULTS: The acquisition cost for generic prescriptions decreases over time. With the exception of Pepcid, the acquisition costs for H2 drugs rise fairly steadily throughout the study period. All of the PPIs have rising per-prescription acquisition costs. For generic drugs, the rise of number of generic companies has a significant negative impact on generic drug acquisition costs (p=0.0004). Neither the change in the producer price index nor any change in the number of drugs in the drug's smaller or wider market has a significant impact on acquisition-cost change (p>0.10). CONCLUSIONS: The cost benefit to Medicaid from a rise in competition is being passed on in terms of lower acquisition costs for generic drugs. Branded medications continue to show a rise in cost per script.