State Medicaid programs use preferred drug lists to help limit prescribing of high-cost drugs and, at the same time, to free providers from having to obtain prior authorization for a given prescription. We examined the impact of the Food and Drug Administration's May 2007 safety warning regarding rosiglitazone (Avandia), a diabetes drug found to raise the risk of heart attacks, on the drug's availability on state Medicaid preferred drug lists and on the prescribing of diabetes medications more generally for Medicaid beneficiaries. Nearly all state Medicaid programs covered rosiglitazone as a preferred drug, requiring no prior authorization, with minimal change after the safety warning. At the same time, the safety warning was associated with a greater-than-expected decline in rosiglitazone prescribing among states providing coverage as a preferred drug. This suggests that providers reacted to the safety warning by reducing prescriptions. However, Medicaid programs that did provide coverage of rosiglitazone as a preferred drug still exhibited prescribing rates that were three to five times greater than rates in programs that did not provide coverage without prior authorization. We conclude that state Medicaid programs missed important opportunities to promote safer, more effective prescribing in the wake of the 2007 safety warning about rosiglitazone by making full use of preferred drug lists and prior authorization programs.