OBJECTIVE: To evaluate the effectiveness of drug utilization review (DUR) letter intervention on reducing the cost of medications and other asthma-related expenditures under Medicaid. METHODS: Between April and July 1999, a DUR intervention designed to improve drug use among asthmatic children, aged 5 to 18 years, enrolled in a mid-eastern Medicaid program was implemented. The DUR intervention focused on the overuse of short-acting ß2-agonist metered dose inhalers using criteria derived from NHLBI 1997 guidelines. The intervention, in the form of a letter identifying the patient(s), each patient’s prescription and medical care utilization profile, and the DUR criteria was mailed to each of these physicians. Medicaid administrative and prescription claims data was continuously reviewed on a month-to-month basis from July 1999 to February 2000. The intervention group was compared to historical and concurrent comparison groups on several outcome variables: expenses associated with (1) asthma-related hospitalizations, (2) emergency department visits, and (3) asthma medication expense. The economic impact of the intervention was evaluated based on the analysis of differences in cost patterns between the pre and the post intervention periods. RESULTS: 382 asthmatic children with evidence of a short-acting ß2-agonist inhaler overuse and 564 physicians who had treated these children were identified. A 71% decrease in short-acting ß2-agonist inhaler costs was observed in the post intervention period. A 31% and a 41% decrease in the expenses to Medicaid for leukotriene drugs and anti-cholinergic drugs, respectively, after the letter intervention was recorded. There was no significant change observed in the number of recipients hospitalized. However there was a 24% decrease in the cost of asthma-related hospitalizations to the State Medicaid. A 54% reduction in the respiratory related ER costs was reported in the post-intervention period. CONCLUSION: The study showed that the letter intervention was useful in reducing asthma-related expenses to Medicaid.