U.S. Department of Health and Human Services 
Office of Inspector General 
 
 
Reasonable 
Assumptions in 
Manufacturer 
Reporting of AMPs 
and Best Prices 
 
Suzanne Murrin 
OEI-12-17-00130 
Deputy Inspector General 
September 2019 
for Evaluation and Inspections 
oig.hhs.gov  Report in Brief  U.S. Department of Health and Human Services 
September 2019 
Office  of Inspector General 
OEI-12-17-00130 
 
  
Why OIG Did This Review 
Reasonable Assumptions in Manufacturer 
Ensuring the accuracy of 
Reporting of AMPs and Best Prices 
manufacturer-reported AMPs and BPs 
is vital given that these prices are the 
In the absence of guidance to the contrary, the  primary benchmarks that the Federal 
Key Takeaway 
Centers for Medicare & Medicaid Services (CMS)  Government uses to calculate the 
Reasonable assumptions that 
allows manufacturers to make reasonable  rebates and discounts available to 
manufacturers make when 
assumptions that are consistent with statute  Medicaid and certain safety-net 
calculating average 
and regulation when they calculate the average  providers.  Previous OIG work has 
manufacturer prices and best 
sales prices (AMPs) and best prices (BPs) for  shown that manufacturers have made 
prices can have large 
Medicaid-covered drugs.   different assumptions when including 
financial ramifications for the 
or excluding certain sales in their price 
cost of prescription drugs to 
What OIG Found  calculations, potentially leading to 
Medicaid and to safety-net 
Our findings show that the use of reasonable  significantly lower or higher AMPs and 
providers.  However, under 
assumptions is common practice among  BPs.  AMPs and BPs are used to 
current practices, CMS never 
responding manufacturers, and that nearly two- calculate the amount of rebates that 
assesses the majority of 
thirds reported wanting additional guidance  manufacturers must pay to Medicaid.  
these assumptions.  The 
from CMS on assumptions-related issues.  In our  A lower AMP, for example, could 
agency believes that its 
analysis of manufacturer responses, four areas  reduce the rebate amount that 
statutory authority in this 
stood out as warranting attention from CMS:   a manufacturer must pay, thus 
area is limited.  
oral specialty drugs;  value based purchasing  increasing net costs for Medicaid.  In 
arrangements; bona fide service fees; and  addition, AMPs and BPs are also used 
rebates to pharmacy benefits managers.   to establish the prices paid by health 
care entities eligible for the 340B Drug 
Historically, CMS has provided little formalized oversight of the reasonable 
Discount Program.  In September 
assumptions process, specifically instructing manufacturers not to submit their 
2016, Congress asked OIG to examine 
reasonable assumptions to CMS.  The agency has stated that it has limited 
CMSs oversight of the Medicaid Drug 
authority to assess manufacturers assumptions, and that it does so only on a 
Rebate Program (MDRP).  This report 
case-by-case basis to support formal oversight inquiries, manufacturer 
is the last of three OIG evaluations 
recalculations, and requests for technical assistance.  To that end, CMS has 
related to this request. 
recently developed a process for specific manufacturer inquiries regarding  
calculations of AMP and BP.   
How OIG Did This Review 
Manufacturers and the Office of Inspector General (OIG) recognize that with  OIG surveyed a sample of drug 
hundreds of manufacturers, thousands of drugs, and a myriad of complex  manufacturers participating in the 
practices for pricing and sales, CMS is not in a position to review all assumptions  MDRP to identify the primary areas in 
on a regular basis.  However, given the far-reaching importance of AMPs and BPs,  which they make assumptions when 
OIG believes thatwith the goal of ensuring compliance and consistency in the  calculating AMP and BP.  OIG also 
industryCMS could take additional steps to improve oversight in the area.   asked manufacturers to identify the 
areas in which they would like greater 
What OIG Recommends and How the Agency Responded  guidance or instruction from CMS on 
We recommend that CMS (1) issue guidance related to specific areas identified in  calculating AMP or BP.  We also 
this reportspecifically, value based purchasing agreements; (2) assess the costs  interviewed and surveyed CMS 
and benefits of implementing a targeted process to review certain assumptions;  officials regarding their processes for 
and (3) implement a system to share responses to manufacturer inquiries for  collecting and reviewing the 
technical assistance.  CMS concurred with all three recommendations.   assumptions that manufacturers 
make. 
Full report can be found at oig.hhs.gov/oei/reports/oei-12-17-00130.asp   
TABLE OF CONTENTS 
BACKGROUND  1 
Methodology  5 
   
FINDINGS   
Almost all responding manufacturers reported making reasonable assumptions that affected  9 
the AMPs and BPs that CMS uses to determine Medicaid rebates and 340B discounts 
Nearly two-thirds of responding manufacturers reported wanting additional guidance from  11 
CMS regarding AMP and BP calculations 
CMS provides little formalized oversight of the reasonable assumptions process; the agency  20 
believes its statutory authority in this area is limited   
   
CONCLUSION AND RECOMMENDATIONS   
Issue guidance related to the areas identified in this reportspecifically, value based  24 
purchasing arrangements 
Assess the costs and benefits of implementing a targeted process to review certain  24 
assumptions 
Implement a system to share responses to manufacturer inquiries for technical assistance  25 
   
AGENCY COMMENTS AND OIG RESPONSE  26 
   
APPENDICES   
A:  Detailed Methodology  27 
B:  Percentage of manufacturers that reported wanting additional guidance from CMS  29 
regarding calculations of AMP and BP in each area 
C:  What manufacturers feel is lacking from current guidance in the five additional areas in  30 
which more than 40 percent of manufacturers requested guidance 
D:  Sample Percentages and Key Statistics for Manufacturers That Make Reasonable  32 
Assumptions  
E:  Sample Percentages and Key Statistics for Manufacturers That Request Guidance  33 
F:  Agency Comments  34 
   
ACKNOWLEDGMENTS  36 
 
   
BACKGROUND 
Objectives 
1.  To identify the extent to which drug manufacturers make 
reasonable assumptions when calculating average manufacturer 
prices (AMPs) and best prices (BPs).  
2.  To identify the extent to which manufacturers would like greater 
guidance or instruction from the Centers for Medicare & 
Medicaid Services (CMS) on calculating AMP and BP. 
3.  To describe CMSs processes for overseeing the reasonable 
assumptions made by drug manufacturers in the Medicaid Drug 
Rebate Program (MDRP).  
Rationale 
Ensuring that manufacturer-reported AMPs and BPs for prescription drugs 
are accurate is vital because these prices are used in administering 
programs (i.e., the MDRP and the 340B Drug Discount Program) that enable 
the Federal Government, State Medicaid agencies, and certain health care 
entities to reduce their costs by billions of dollars a year.  However, given 
the complexities of pharmaceutical industry sales practices andin certain 
scenariosthe absence of explicit Federal guidance, drug manufacturers 
may encounter challenges when calculating AMPs and BPs for covered 
outpatient drugs.  For this reason, CMS allows manufacturers to make 
reasonable assumptions as long as those assumptions are consistent with 
statutory and regulatory requirements. 
Prior to this report, OIG had not undertaken a systematic review of the 
reasonable assumptions that manufacturers make when calculating AMPs 
and BPs, or of CMSs oversight of the reasonable assumptions process.  
However, previous OIG work has shown that manufacturers often differ 
in determining whether to include or exclude certain types of sales in their 
price calculations.1  These differences have the potential to significantly 
lower or raise a drugs AMP or BP, and thereby to affect (1) the rebate 
amount that a manufacturer owes to the government2 and (2) the prices 
 
1 OIG, Average Manufacturer Price Determinations by Selected Drug Manufacturers Generally 
Were Consistent With Federal Requirements, A-06-13-00014, June 2014. 
2 For example, see OIGs report entitled Medicaid Could Save Hundreds of Millions by 
Excluding Authorized Generic Drug Transactions to Secondary Manufacturers from Brand 
Name Drugs Average Manufacturer Price Calculations  (A-06-18-04002), April 2019.  The 
Presidents Budget for Fiscal Year 2020 includes a provision to address the issue discussed in 
this report. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  1 
OEI-12-17-00130   
that eligible health care providers pay for drugs under the 340B Drug 
Discount Program.3 
In September 2016, OIG received a congressional request to examine CMSs 
oversight of the MDRP, stemming from concerns related to the 
misclassification of drugs (specifically, EpiPen) by manufacturers and the 
subsequent effect on rebate obligations.  As part of OIGs response to this 
request, this report examines the extent to which manufacturers make 
assumptions when calculating AMPs and BPs; identifies areas in which 
manufacturers may need additional guidance or instruction; and describes 
CMSs processes for overseeing assumptions.  The current report is the third 
in a series responding to the congressional request.  The first report found 
that potential misclassifications may have led to $1 billion in lost Medicaid 
rebates.4  The second report determined that 1 percent of drugs paid for 
under Medicaid in 2016 had not been approved by the Food and Drug 
Administration.5 
Medicaid Drug Rebate Program 
The Omnibus Budget Reconciliation Act of 1990 created the MDRP to help 
offset State and Federal Medicaid expenditures for prescription drugs.6  For 
Federal financial participation (i.e., Federal matching funds) to be available 
for covered outpatient drugs provided under Medicaid, manufacturers must 
enter into rebate agreements with the Secretary of Health and Human 
Services (the Secretary) and pay quarterly rebates to State Medicaid 
agencies.7  Statutory rebates enabled Federal and State governments to 
recoup $30 billion of the $54 billion that Medicaid spent on prescription 
drugs in fiscal year 2016.8    
The rebate amount that a manufacturer owes for each drug is based on the 
manufacturer-reported AMP andin some circumstancesBP.  Under their 
rebate agreements and pursuant to section 1927(b)(3) of the Social Security 
Act, manufacturers must provide CMS with the AMP for each of their drugs 
on a monthly and quarterly basis.  In general, AMP is defined as the average 
price paid to the manufacturer for the drug in the United States by 
(1) wholesalers for drugs distributed to retail community pharmacies and 
(2) retail community pharmacies that purchase drugs directly from the 
 
3 The 340B Drug Discount Program enables eligible health care providersgenerally, those 
that serve that serve the underinsured or uninsuredto purchase prescription drugs 
at statutorily discounted prices. 
4 OIG, Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion 
in Lost Medicaid Rebates, OEI-03-17-00100, December 2017. 
5 OIG, One Percent of Drugs With Medicaid Reimbursement Were Not FDA-Approved, 
OEI-03-17-00120, May 2019.   
6 CMS, Medicaid Drug Rebate Program.  Accessed at https://www.medicaid.gov/medicaid/ 
prescription-drugs/medicaid-drug-rebate-program/index.html on September 15, 2017. 
7 Sections 1927(a)(1) and (b)(1) of the Social Security Act. 
8 CMS, Actuarial Report on the Financial Outlook for Medicaid, 2018.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  2 
OEI-12-17-00130   
manufacturer.9  For brand-name products, manufacturers must also provide 
CMS with the BP of the drug each quarter.10  BP is defined as the lowest 
price available from the manufacturer to any wholesaler, retailer, provider, 
health maintenance organization, nonprofit entity, or governmental entity 
within the United States, with certain exceptions.11   
The basic rebate amount for 
a generic drug is 13 percent of the  Lower AMPs and higher BPs would 
AMP.  The basic rebate amount for  typically result in lower rebate 
a brand-name drug is the greater of  obligations for a manufacturer.  
23.1 percent of the AMP or the  These lower rebate obligations 
difference between the AMP and  subsequently cause Medicaid to 
BP.12  Further, the drugs 
pay more for prescription drugs, 
manufacturer must pay 
and also affect the prices paid by 
an additional rebate over and above 
340B covered entities. 
the basic rebate if the AMP for 
a drug has risen faster than 
inflation.13   
AMPs and BPs calculated under the MDRP are also used by the Health 
Resources and Services Administration to establish reduced prices under the 
340B Drug Discount Program for health care entities that serve vulnerable 
patient populations.14  Manufacturers must sell their covered outpatient 
drugs at or below discount prices (known as 340B ceiling prices) to health 
care entities participating in the 340B Drug Discount Program (known as 
covered entities).  The 340B ceiling price for a drug is equal to its AMP 
minus the Medicaid rebate amount.15  Congress intended for the savings 
from these discounted prices to enable covered entities to stretch scarce 
Federal resources as far as possible, reaching more eligible patients and 
providing more comprehensive services.16  
Reasonable Assumptions 
Manufacturers must calculate AMPs and BPsand determine which sales 
are included or excluded in their calculationconsistent with the Social 
Security Act and regulation.  However, given the complexities of sales 
practices in the pharmaceutical industry, manufacturers may find it difficult 
 
9 Section 1927(k)(1) of the Social Security Act. 
10 Section 1927(b)(3)(A)(i)(II) of the Social Security Act.  For this report, brand-name refers to 
single-source and innovator multiple-source drugs as defined in 42 CFR  447.502.  Generic 
refers to noninnovator multiple-source drugs. 
11 Section 1927(c)(1)(C) of the Social Security Act.   
12 Section 1927(c)(1) of the Social Security Act. 
13 Section 1927(c)(2)(A)(ii)(II) of the Social Security Act. 
14 42 CFR  256b(a)(1-2).   
15 42 CFR  10.10.   
16 House Report No. 102-384(II) (which accompanied H.R. 2890, the Medicaid and 
Department of Veterans Affairs Drug Rebate Amendments of 1992), at 12 (1992)(Conf. Rep.). 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  3 
OEI-12-17-00130   
to determine how to treat certain sales practices when calculating prices.  In 
the absence of guidance and adequate documentation to the contrary, 
manufacturers may make reasonable assumptions that are consistent with 
statutory requirements and intent as well as with regulatory requirements.17  
For example, manufacturers may feel the need to make assumptions 
regarding when a pharmacy qualifies as a retail community pharmacy, or 
what constitutes fair market value for a service.  CMS requires 
manufacturers to maintain adequate documentation supporting their 
assumptions.18  The different assumptions that a manufacturer adopts have 
the potential to significantly lower or raise a drugs AMP and/or BP, and in 
turn to affect the manufacturers rebate obligations.  Lower rebate 
obligations would result in Medicaids paying more for prescription drugs.  
CMSs Final Rule.  CMS published a final rule related to the MDRP on 
February 1, 2016.19  Among other things, the rule addresses changes that the 
Affordable Care Act required to the definition of AMP.20  The final rule also 
offers substantial guidance to manufacturers on numerous issues, but it 
does not provide complete clarity for some common pricing scenarios that 
manufacturers adopt.    
During the rulemaking process, manufacturer and stakeholder comments 
often expressed general support for the continued practice of allowing 
reasonable assumptions for AMP and BP calculations, while also voicing 
a need for additional guidance.  For example, CMS received a comment 
supporting less specificity in definitions, thereby allowing for the flexibility to 
accommodate changes in the industry and allow reasonable assumptions to 
fill in the details needed as the industry evolves.21  In contrast, other 
comments questioned the lack of specific guidance, such as one that asked 
whether detailed instructions would be forthcoming for manufacturers, or if 
manufacturers would be mostly on their own to interpret which sales to 
include or exclude from AMP.22  
Medicaid Drug Rebate Program Oversight 
Drug manufacturers may be subject to penalties for failure to comply with 
requirements of the MDRP.  CMS may terminate a manufacturer from the 
program for violating the requirements of the rebate agreement or for 
 
17 81 Fed. Reg. 5170, 5209 (Feb. 1, 2016). 
18 42 CFR  447.510(f). 
19 81 Fed. Reg. 5170 (Feb. 1, 2016).   
20 Prior to the Affordable Care Act, the Social Security Act defined AMP as the average price 
paid to the manufacturer by wholesalers for drugs distributed to the retail pharmacy class of 
trade. 
21 81 Fed. Reg. 5170, 5209 (Feb. 1, 2016). 
22 81 Fed. Reg. 5170, 5209 (Feb. 1, 2016). 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  4 
OEI-12-17-00130   
other good cause.23  In addition, OIG is authorized to impose civil monetary 
penalties for certain conduct in three types of situations: 
 If a wholesaler, manufacturer, or direct seller refuses a request by 
the Secretary for information about charges or prices, or knowingly 
provides false information in connection with a survey.  
 If a manufacturer knowingly provides false pricing information.  
 If a manufacturer fails to provide timely pricing information, 
including AMPs or BPs.24  
CMS provides very limited oversight of the assumptions that manufacturers 
make in their AMP and BP calculations.  The MDRP Manufacturer Release 
No. 78published in 2007is CMSs most recent instruction to 
manufacturers regarding the reasonable assumptions process.  It includes 
a request that manufacturers not provide their assumptions to the agency:  
We request that manufacturers not submit their assumptions for the 
monthly nor quarterly AMP and [BP] methodology to CMS.  
However, a record (written or electronic) outlining these 
assumptions must be maintained by the manufacturer in accordance 
with the recordkeeping requirements in [42 CFR  447.510(f)].  
Should a manufacturer disregard these instructions and submit such 
assumptions, they will not be reviewed and their receipt should not 
be considered as acquiescence by CMS to the submitted 
assumptions.25   
Methodology  Data Collection and Analysis  
Identification of Areas for Reasonable Assumptions.  We worked with CMS 
and industry stakeholders to develop a list of 15 common areas in which 
manufacturers are making reasonable assumptions subsequent to the final 
rule of February 1, 2016.  On the following page, Exhibit 1 presents a list of 
the common areas and their descriptions. 
   
 
23 Section 1927(b)(4)(B)(i) of the Social Security Act. 
24 Sections 1927(b)(3)(B) and (C) of the Social Security Act and 42 CFR  1003.1200. 
25 CMS, Medicaid Drug Rebate Program, Manufacturer Release No. 78, June 26, 2007.  Since 
CMSs original release, the regulatory provision has been renumbered. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  5 
OEI-12-17-00130   
Exhibit 1. Sales Products, Sales Practices, and/or Sales Calculation Types Included in 
Manufacturer Survey 
Sales Products, Sales Practices, and/or  General Description* 
Sales Calculations Types 
Authorized Generics  A brand-name drug that the brand manufacturer permits a secondary 
manufacturer or subsidiary to sell as a generic. 
5i Drugs  5i drugs are inhalation, infusion, instilled, implanted or injectable drugs 
that are not generally dispensed through retail community pharmacies. 
Oral Drugs Not Dispensed Through  Oral solid drugs (therefore non-5i) that are not generally dispensed 
Retail Community Pharmacies  through retail community pharmacies.  These drugs are often high-cost 
specialty products dispensed through specialty mail-order pharmacies.  
Line Extensions  A new formulation of an existing brand-name drug.  
Drugs Primarily Dispensed Through  Drugs that are primarily dispensed through the mail rather than by a retail 
the Mail   community pharmacy.  
Bona Fide Service Fees  Fees paid by a manufacturer to an entity that represents fair market value 
for a bona fide, itemized service actually performed on behalf of the 
manufacturer that the manufacturer would otherwise perform (or contract 
for) in the absence of the service arrangement, and that is not passed on 
in whole or in part to a client or customer of an entity, whether or not the 
entity takes title to the drug. 
Bundled Sales  Any arrangements (1) under which the rebate, discount, or other price 
concession is conditioned upon (a) the purchase of the same drug, drugs 
of different types, or another product, or (b) some other performance 
requirement; or (2) where the resulting discounts or other price 
concessions are greater than those which would have been available had 
the bundled drugs been purchased separately or outside the bundled 
arrangement.  
Prompt Pay Discounts   A discount that a manufacturer offers to a wholesaler for paying within 
a specified timeframe (e.g., within 10 days rather than 30 days).  
Returned Goods  Goods that are returned to a manufacturer for reasons such as having 
been recalled, being damaged, being expired, or being unsaleable.  
Sales to Wholesalers  Wholesalers purchase drugs directly from manufacturers with the intent 
to then distribute the drugs to dispensers (i.e., pharmacies).  
Stacked (i.e., Aggregated) Price  Manufacturers may stacki.e., aggregatein their price concessions 
Concessions  the discounts that they offer to customers.  
Value Based Purchasing  Arrangements between payers and drug manufacturers that tie payments 
Arrangements  for drugs to agreed-upon measures (e.g., clinical outcomes). 
Negative AMP Units and/or Dollars  When manufacturers calculate AMP, they may encounter scenarios in 
which their AMP units and/or dollars are negative.  
Lagged Price Concessions  Any discounts or rebates that are realized after the sale of the drug, 
except for customary prompt pay discounts.  
Sales Through Pharmacy Benefit  Pharmacy benefit managers are third-party entities that often negotiate 
Managers  rebates (discounts) on behalf of their clients with the drug manufacturers.  
*Note: These descriptions are intended to be plain-language explanations rather than strict statutory or regulatory definitions.  
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  6 
OEI-12-17-00130   
Manufacturer Survey.  We selected a stratified random sample of 
71 larger manufacturers and 100 smaller manufacturers out of the 362 total 
manufacturers participating in the MDRP as of June 2017. 26  We sent an 
electronic survey to the selected manufacturers in November 2017.  We 
asked manufacturers (1) whether they are making assumptions in the areas 
described in Exhibit 1, (2) whether current guidance in these areas is 
sufficient subsequent to the MDRP final rule, and (3) what their experiences 
have been with CMS oversight related to reasonable assumptions.  In total, 
103 manufacturers completed a survey, a 60-percent response rate.  The 
103 responding manufacturers corresponded to 304 individual labeler codes 
and accounted for 78 percent of total Medicaid reimbursement for drugs in 
2016.  Given this response rate, our findings cannot be generalized to all 
manufacturers that participate in the MDRP; rather, throughout this report 
we provide simple percentages for the responses from the manufacturers in 
our sample.  For further breakdown of the sample counts by strata, see 
Appendices A, D, and E.  
CMS Survey.  We requested information and reviewed relevant documents 
regarding CMSs processes for reviewing the reasonable assumptions made 
by drug manufacturers participating in the MDRP.  We also asked CMS to 
describe the technical assistance that it provides to drug manufacturers 
related to the calculation of AMPs and BPs, as well as how the agency 
decides when topics merit the issuance of formal guidance (e.g., Frequently 
Asked Questions documents, Manufacturer Releases).  
See Appendix A for a detailed description of our methodology, including 
a full description of our sample-selection methodology. 
Scope 
This inspection summarizes CMSs oversight of reasonable assumptions 
being made by manufacturers in the MDRP after the implementation of the 
February 1, 2016, MDRP final rule.  This study did not assess the specific 
assumptions made by manufacturers in their AMP and BP methodologies.     
Limitations 
The findings in this report apply only to the 103 manufacturers that 
responded to our survey.  Because of the limited response rate, we could 
not generalize the results to all manufacturers that participate in the MDRP.  
Furthermore, we did not request that manufacturers provide documentation 
of their reasonable assumptions and we were therefore unable to verify the 
accuracy of survey responses.   
 
26 The 362 manufacturers corresponded to 618 labeler codes listed on CMSs State Drug 
Utilization Data file.  The latter figure excludes any labeler codes for which Medicaid had no 
associated reimbursement in 2016 (i.e., Medicaid did not pay for any of the labeler codes 
drugs).  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  7 
OEI-12-17-00130   
Standards  We conducted this study in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General on 
Integrity and Efficiency. 
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  8 
OEI-12-17-00130   
FINDINGS 
Almost all  In total, 91 of 103 manufacturers reported making assumptions in at least 
1 of the 15 identified areas.27  Only 12 manufacturers reported that they 
responding 
currently do not make any assumptions.28  In all but 1 of the 15 areas, more 
manufacturers 
than half of the responding manufacturers with the underlying product 
reported making  types, sales practices, and/or sales calculations reported making related 
reasonable  assumptions (see Exhibit 2). 
assumptions that 
More than four out of five manufacturers reported making 
affected the AMPs 
reasonable assumptions related to bona fide service fees, bundled 
and BPs used  sales, and stacked price concessions 
to determine  Bona Fide Service Fees.  In general, a bona fide service fee is a fee that 
a manufacturer pays to an entity to perform a service that the manufacturer 
Medicaid rebates 
would otherwise perform itself.  To qualify as bona fide, the fee cannot be 
and 340B discounts  passed on to a client or customer of an entity.29  Examples include 
distribution service fees, inventory management fees, product stocking 
allowances, and fees associated with patient care programs (such as 
medication compliance programs and patient education programs). 
Of the 74 manufacturers that reported paying bona fide service fees, 
67 (91 percent) made assumptions about the fees when calculating AMP 
and/or BP.   
Bundled Sales.  In general, a bundled sale refers to an arrangement under 
which a price concession for a drug is contingent upon the purchase of 
another product or a certain volume of the same product.30  For example, 
a manufacturer might offer a 10-percent discount on drug A when 
a wholesaler purchases 1,000 units of drug B.    
Of the 29 manufacturers that reported offering bundled sale discounts, 
26 (90 percent) made assumptions about the sales when they calculated 
AMP and/or BP.   
Stacked Price Concessions.  When calculating BPs, manufacturers may 
stacki.e., aggregatein their price concessions the discounts that they 
offer to customers.  For example, a manufacturer may offer a prompt-pay 
discount to a wholesaler and a separate back-end rebate to a pharmacy for 
the same drug purchase. 
 
27 Of the 91 manufacturers that reported making assumptions in at least 1 of the 15 identified 
areas, 46 were smaller manufacturers and 45 were larger manufacturers. 
28 Of the 12 manufacturers that reported they currently do not make any assumptions, 
11 were smaller manufacturers and 1 was a larger manufacturer. 
29 42 CFR  447.502.  
30 Ibid. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  9 
OEI-12-17-00130   
Of the 49 manufacturers that reported stacking discounts that they offered 
to customers, 39 (80 percent) made assumptions on this issue, most 
commonly with regard to when it is and is not appropriate to stack price 
concessions in determining BP.   
Exhibit 2: At least half of manufacturers reported making reasonable assumptions when 
calculating AMPs and/or BPs in all but one of the identified areas  
Bona Fide Service Fees (n=74) 91%
Bundled Sales (n=29) 90%
Stacked Price Concessions (n=49) 80%
5i AMP Methodology Calculations (n=55) 78%
Prompt Pay Discounts (n=93) 76%
Drugs Primarily Dispensed Through Mail (n=25) 76%
Lagged Price Concessions (n=84) 75%
Negative AMP Units/Dollars (n=55) 73%
Sales to Wholesalers (n=98) 72%
OOrraall  DDrruuggss  NNoott  DDiissppeennsseedd  TThhrroouugghh  RReettaaiill  CCoommmmuunniittyy 
72%
Pharmacies (n=32P)harmacies (n=32) 
Authorized Generics (n=49) 69%
Sales to Pharmacy Benefit Managers (n=48) 67%
Value-Based Purchasing Arrangments (n=26) 65%
Returned Goods (n=78) 59%
Line Extensions (n=22) 45%
Manufacturers That Reported Making Reasonable Assumptions
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
Note:  The sample percentages of manufacturers reported in Exhibit 2 are only for manufacturers in our sample that reported having the 
underlying product types, sales practices, and/or sales calculations. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  10 
OEI-12-17-00130   
Nearly two-thirds of  Sixty-six of 103 manufacturers wanted additional guidance from CMS in at 
least 1 of the 15 assumption areas highlighted in the OIG survey.31  Most 
responding 
requested additional guidance in multiple areas.  The manufacturers that 
manufacturers 
did not want additional guidance typically stated that current direction is 
reported wanting  sufficient or that they had engaged with CMS regarding the topic to their 
additional guidance  satisfaction.   
from CMS regarding  In nine assumption areas, more than 40 percent of manufacturers with the 
underlying product types, sales practices, and/or sales calculations reported 
AMP and BP 
wanting additional guidance from CMS (see Appendix B).  These areas 
calculations 
included oral drugs not dispensed through retail community pharmacies; 
value based purchasing arrangements; bona fide service fees; bundled sales; 
line extensions; drugs primarily dispensed through mail; sales to pharmacy 
benefit managers (PBMs); authorized generics; and stacked price 
concessions.  
From manufacturer responses, four areas likely warrant additional 
CMS guidance  
For four of these areas, manufacturers desires for greater clarity, mixed 
withat timeswidely divergent assumptions illustrate a particular need 
for additional CMS guidance.  See Exhibit 3.  In some cases, this variation in 
assumptions may have led to a manufacturers reporting lower AMPs 
and/or higher BPs than its counterparts and resulted in lower rebate 
obligations for the manufacturer.  In turn, these lower manufacturer rebate 
obligations would have resulted in Medicaids paying more for prescription 
drugs.   
In the case of value based purchasing arrangements, manufacturers told 
OIG that the lack of guidance from CMS could be resulting in decreased 
adoption of these potentially cost-saving approaches.  The variety of price 
concessions and services that a manufacturer offers to a payer in a value 
based purchasing arrangement may lower the manufacturers BP by a 
substantial margin, thus increasing its Medicaid rebate and 340B discount 
obligations to the point where the manufacturer chooses to forgo any such 
arrangement.  Appendix C provides a summary of what manufacturers 
believed to be lacking from current guidance in the other five areas in which 
at least 40 percent of manufacturers requested guidance. 
 
 
 
 
31 Of the 66 manufacturers that wanted additional guidance from CMS in at least 1 of the 
15 assumption areas highlighted in the OIG survey, 30 were smaller manufacturers and 
36 were larger manufacturers. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  11 
OEI-12-17-00130   
 
Exhibit 3.  Percentages of manufacturers that requested additional guidance in each of the four 
areas  
OOrraall  DDrruuggss  NNoott  DDiissppeennsseedd  TThhrroouugghh  RReettaaiill  CCoommmmuunniittyy 
56%
Pharmacies (n=32P)harmacies (n=32) 
Value Based Purchasing Arrangements (n=26) 54%
Bona Fide Service Fees (n=74) 53%
Sales to Pharmacy Benefit Managers (n=48) 44%
Manufacturers That Requested Guidance
  
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
Note:  The sample percentages of manufacturers reported in Exhibit 3 are only for manufacturers in our sample that reported having the 
underlying product types, sales practices, and/or sales calculations. 
 
Oral Drugs Not Dispensed Through Retail Community Pharmacies.  
Typically, drugs are dispensed through retail community pharmacies, 
i.e., the grocery or drug store pharmacies that fill a prescription after 
a patient visits a doctor.  However, there are certain oral drugsoften, 
high-cost specialty productsthat are primarily dispensed through specialty 
mail-order pharmacies.  In regulation, CMS stated that sales to pharmacies 
that dispense primarily through the mail would not be included in AMP 
(because these pharmacies are not considered to be retail community 
pharmacies).32   
At the same time, these oral drugs do not fit the criteria for an alternative 
AMP calculationknown as the 5i AMPthat CMS created for other 
specialty drug products that are primarily distributed through the mail and 
are known as 5i drugs because they are inhaled, infused, instilled, 
implanted, or injected.  In the pharmaceutical industry, these oral drugs are 
sometimes referred to as crack drugs because they metaphorically slip 
through the cracks in guidance and regulation.  In a Frequently Asked 
Questions document published on July 6, 2016, CMS instructed 
manufacturers that:  
... if a specialty pharmacy meets the definition of a retail community 
pharmacy at section 1927(k)(10) of the [Social Security] Act, sales for 
[oral drugs not dispensed through retail community pharmacies] 
would be included in AMP.  This is true even in the event there are a 
 
32 42 CFR  447.504. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  12 
OEI-12-17-00130   
low number of AMP eligible sales.  Because CMS is permitting 
manufacturers to use a presumed inclusion approach when 
calculating AMP, and to make reasonable assumptions, an AMP will 
likely be generated for such drugs.33 
CMS also discusses these types of drugs at some length in the preamble to 
the MDRP final rule.  However, of the 32 manufacturers that reported 
having (in their respective portfolios) oral drugs that are not dispensed 
through retail community pharmacies, 18 manufacturers (56 percent) 
responded that they would still like additional guidance from CMS.  Another 
nine manufacturers34 that do not currently produce these types of oral 
drugs also requested additional guidance from CMS on this issue.  
Manufacturers felt that current statutory, regulatory, and subregulatory 
policies do not adequately address how to treat oral drugs not dispensed 
through retail community pharmacies.   
Given the lack of clarity, manufacturers applied several different approaches 
to calculate AMP for these drugs, all of which required assumptions.  Some 
manufacturers reported using a 5i AMP calculation approach for so-called 
crack drugs, despite the fact that the drugs do not meet the criteria to be 
considered 5i drugs.  Other manufacturers felt CMS guidance clearly stated 
that using the 5i AMP calculation for such drugs would be inappropriate.  
Instead, these manufacturers developed assumptions that would allow for 
the use of the standard AMP calculation, despite these drugs not being 
sold in what would typically be considered a retail community pharmacy.  
Exhibit 4 illustrates these differences. 
   
 
33 CMS, Covered Outpatient Drug Final Rule with Comment (CMS-2345-FC) Frequently Asked 
Questions, July 6, 2016.  
34 Of these nine manufacturers, five were smaller manufacturers and four were larger 
manufacturers.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  13 
OEI-12-17-00130   
Exhibit 4. Differences in manufacturers AMP methodologies for  
oral drugs not dispensed through retail community pharmacies 
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate 
Program, 2018. 
 
Manufacturers that did not treat oral specialty drugs as 5i drugs instead 
used assumptions to determine whether a drug met the criteria for being 
sold at a retail community pharmacy, which would allow manufacturers to 
use the standard calculation of AMP.  These assumptions focused on the 
regulation stating that sales to pharmacies that dispense primarily through 
the mail would not be considered as sales to retail community pharmacies.  
However, CMS allows manufacturers to make reasonable assumptions 
about what constitutes primarily, as outlined in a Frequently Asked 
Questions document: 
CMS declined to set a threshold in order to allow flexibility to 
recognize changes that take place in the pharmaceutical 
marketplace with regard to mail order business.  CMS further noted 
that manufacturers may make reasonable assumptions that 
a pharmacy is a retail community pharmacy when the majority of 
the drugs are not dispensed through the mail.  A majority is 
generally determined as greater than 50 percent[.]35   
Responding manufacturers interpretation of this instruction has varied (see 
Exhibit 5), with thresholds ranging from 15 percent to 50 percent of sales 
to establish whether a pharmacy could be considered a retail community 
pharmacy.  For example, to allow for an AMP to be calculated for a crack 
drug, one manufacturer assumed that a pharmacy that did as much as 
85 percent of its business via mail did not primarily dispense through the 
mail, and thus qualified as a retail community pharmacy. 
 
35 CMS, Covered Outpatient Drug Final Rule with Comment (CMS-2345-FC) Frequently Asked 
Questions, July 6, 2016.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  14 
OEI-12-17-00130   
Exhibit 5. Differences in manufacturers interpretations of guidance related to oral drugs 
primarily dispensed through the mail 
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
Value Based Purchasing Arrangements.  Generally speaking, a value 
based purchasing arrangement is a contract between a drug manufacturer 
and a payer that ties payment for a drug to an agreed-upon measure (e.g., 
a manufacturer agrees not to charge for a drug when a treatment is 
unsuccessful).36  Manufacturer responses pertaining to value based 
purchasing arrangements often expressed concerns that a lack of clarity 
regarding the rules may inhibit the adoption of these potentially cost-saving 
approaches (see Exhibit 6).  Because the variety of price concessions and 
services that a manufacturer offers to a payer in a value based purchasing 
arrangement may lower the manufacturers BP by a substantial margin, and 
thus greatly increase its Medicaid rebate and 340B discount obligations, 
manufacturers indicated that under current guidance, they might choose 
to forgo such arrangements.   
In the MDRP final rule, CMS states: 
With the recent introduction of value based purchasing 
arrangements in the pharmaceutical marketplace, we recognize the 
value of such arrangements especially when they benefit patients.  
We are also interested in assuring that states and Medicaid 
programs have clarity as to how these arrangements might exist in 
Medicaid.  Therefore, since these arrangements are unique, we are 
 
36 CMS, CMS Approves State Proposal to Advance Specific Medicaid Value-Based 
Arrangements With Drug Makers, June 27, 2018. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  15 
OEI-12-17-00130   
considering how to provide more specific guidance on this matter, 
including how such arrangements affect a manufacturers [BP].37 
In July 2016, CMS issued such guidance in the form of a notice to 
manufacturers participating in the MDRP (i.e., Manufacturer Release 99), in 
which the agency stated that value based purchasing arrangements are an 
innovative approach to providing health care and encouraged 
manufacturers to consider entering into such arrangements with State 
Medicaid programs.38  Further, CMS noted that it believes that value based 
purchasing arrangements are a means to address the high cost of certain 
drugs.39  CMS concluded that the impact on BP will differ depending on the 
structure of the value based purchasing arrangement.  CMS encouraged 
States and manufacturers to consider negotiating supplemental rebates as 
part of value based purchasing arrangements, as manufacturers could 
exclude such rebates from BP in certain cases.  
In Manufacturer Release No. 99, CMS also directed manufacturers to submit 
any issues or questions concerning a particular value based purchasing 
arrangement to CMSs Division of Pharmacy.  CMS stated that on the basis 
of such inquiries to its Division of Pharmacy, it would seek to generalize 
lessons learned regarding common questions and arrangements in 
subsequent guidance.  As of August 2019, CMS had not released any 
subsequent guidance related to value based purchasing arrangements.  
However, in discussions with OIG, CMS stated that the agency has limited 
ability to waive Section 1927 MDRP reporting requirements under a Section 
1115A or 1115(a) waiver, potentially limiting manufacturers ability to enter 
into these agreements with commercial payers.40 
Of the 26 drug manufacturers that reported having value based purchasing 
arrangements in place, 14 (54 percent) responded that they would like 
additional guidance from CMS.  An additional nine manufacturers41 without 
these arrangements in their current sales practices also requested guidance 
from CMS.  Manufacturers felt that current guidance is lacking and had 
concerns related to the temporal nature of these arrangements (i.e., when 
the sale occurs in one price reporting quarter, but the evaluation of the 
drugs effectivenessand potential price-adjusting discountoccurs in 
a later quarter) and the potential impact on BPs.   
   
 
37 81 Fed. Reg. 5170, 5253 (Feb. 1, 2016).   
38 CMS, Medicaid Drug Rebate Program, Manufacturer Release No. 99, July 14, 2016.  
39 Ibid.  
40 Section 1115(a) of the Social Security Act gives the Secretary authority to approve 
experimental, pilot, or demonstration projects that the Secretary finds to be likely to assist in 
promoting the objectives of the Medicaid program.  However, the Secretary is limited in the 
statutory requirements that may be waived. 
41 Of these nine manufacturers, seven were smaller manufacturers and two were larger 
manufacturers.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  16 
OEI-12-17-00130   
Exhibit 6. Manufacturers reported that lack of guidance is a barrier for adoption of value 
based purchasing arrangements
 
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
Bona Fide Service Fees.  CMS defines a bona fide service fee as: 
a fee paid by a manufacturer to an entity that represents fair market 
value for a bona fide, itemized service actually performed on behalf 
of the manufacturer that the manufacturer would otherwise perform 
(or contract for) in the absence of the service arrangement, and that 
is not passed on in whole or in part to a client or customer of 
an entity, whether or not the entity takes title to the drug.42, 43   
Although CMS discusses these fees at some length in the MDRP final rule, 
39 of the 74 manufacturers that reported paying these fees (53 percent) 
responded that they would still like additional guidance from CMS.44  An 
additional seven manufacturers that do not pay bona fide service fees also 
requested guidance. 45    
Manufacturers reported that current guidance fails to define or provide 
instructions related to a key component of bona fide service fees: the 
determination of fair market value.  In the preamble to the MDRP final rule, 
 
42 42 CFR  447.502. 
43 Bona fide service fees includebut are not limited todistribution service fees; inventory 
management fees; product stocking allowances; and fees associated with administrative 
service agreements and patient care programs.  
44 81 Fed. Reg. 5170, 5176 (Feb. 1, 2016).   
45 Of these seven manufacturers, five were smaller manufacturers and two were larger 
manufacturers.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  17 
OEI-12-17-00130   
CMS states the determination of fair market value is subjective and that any 
documentation can be used, provided that it makes clear the 
methodologies or factors the manufacturer used in making its fair market 
value determination.46  To that end, manufacturers reported a wide range 
of methods to assess what constitutes fair market value, ranging from a 
simple assumption that all fees reflect fair market value (as long as the fees 
are within the range of commercial standards) to hiring external consultants 
to establish benchmarks for fair market value.  One manufacturers response 
seemed to summarize industry concerns: 
...CMS should issue further guidance on the methodology that 
should be used to assess fair market value and the time period after 
which manufacturers should reassess the fair market value of fees.  
The issuance of further guidance would help to ensure consistency 
across the industry.   
In addition, CMS also requires that bona fide service fees paid by 
manufacturers not be passed on to clients or customers.  Current guidance 
allows manufacturers to presume that a fee is not passed on in the absence 
of evidence or notice to the contrary."47  However, a number of 
manufacturers pointed out that CMS has not defined or provided examples 
of what would constitute evidence or notice to the contrary.   
Finally, as illustrated in Exhibit 7, several manufacturers noted a need for 
greater clarity regarding certain administrative fees that they pay to PBMs, 
and whether those fees should be considered discounts, which would be 
included when calculating BP (thus resulting in a lower BP), or bona fide 
service fees, which would be excluded (thus resulting in a higher BP).  
   
 
46 81 Fed. Reg. 5170, 5180 (Feb. 1, 2016).  
47 81 Fed. Reg. 5170, 5181 (Feb. 1, 2016).  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  18 
OEI-12-17-00130   
Exhibit 7. Manufacturers reported differences in how they treat certain fees paid to PBMs  
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
Rebates Offered to Pharmacy Benefit Managers.  The MDRP final rule 
requires (at 42 CFR  447.505(c)(17)) that when manufacturers calculate BP, 
they must include PBM rebates, discounts, or other financial transactions 
(1) related to purchases for their mail order pharmacies or (2) where such 
rebates, discounts, or price concessions are designed to adjust prices at the 
retail or provider level.48  
Of the 48 manufacturers that sell drugs through PBMs, 21 (44 percent) 
responded that they would like additional guidance from CMS.  An 
additional three manufacturers49 that do not have sales through PBMs also 
requested guidance.  Specifically, manufacturers wanted additional clarity 
regarding how to determine whether or not a rebate is designed to adjust 
prices at the retail or provider level. 
Responding manufacturers noted that they have little insight into how PBMs 
use rebates and questioned whether such rebates are designed to adjust 
prices if manufacturer contracts do not direct how rebates are to be used.  
Despite these questions, most manufacturers reported that to be 
conservative, they assumed that all PBM rebates reduce retail/provider 
prices, and thus they include them when calculating BP.  However, one 
manufacturer stated the exact opposite, and another described a process 
that included some PBM rebates and excluded others (see Exhibit 8). 
 
48 81 Fed. Reg. 5170, 5351-5352 (Feb. 1, 2016).  
49 Of these three manufacturers, two were smaller manufacturers and one was a larger 
manufacturer.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  19 
OEI-12-17-00130   
Exhibit 8. Manufacturers reported differences in how they treat rebates that they offer to 
PBMs  
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
CMS provides little  CMS Does Not Collect or Regularly Review Reasonable 
Assumptions  
formalized 
As this report noted earlier, given the hundreds of manufacturers that 
oversight of the 
participate in the MDRP, CMS specifically instructs manufacturers not to 
reasonable  submit their assumptions to the agency, and states that if a manufacturer 
assumptions  does so, CMS will not review the assumptions.  Although CMS stated in 
writing that it has limited authority to assess the assumptions of 
process; the agency 
manufacturers, the agency exercises this authority on a case-by-case basis 
believes that its 
to support formal oversight inquiries, manufacturer recalculations, and 
statutory authority  requests for technical assistance.  In a limited number of specific cases, CMS 
in this area is  has notified a manufacturer that an assumption is not consistent with the 
regulation and statute.  If the manufacturer was reporting AMP and/or BP 
limited 
based on those assumptions, CMS asked that it recalculate and restate its 
AMP and/or BP.  However, CMS believes its authority does not extend to 
enforcementsuch as suspending a particular drug or manufacturerwhen 
an assumption is not consistent with the regulation and statute.  
According to CMS, the agency is not the official repository for assumptions 
and does not have a system in place to track them.  Rather, in accordance 
with 42 CFR  447.510, manufacturers must maintain records of the 
assumptions they make when calculating AMP and BP.  To ensure that 
manufacturers maintain records that are compliant with the recordkeeping 
requirements specified in 42 CFR  447.510(f), CMS has issued releases and 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  20 
OEI-12-17-00130   
reiterated these requirements in the updated National Drug Rebate 
Agreement published March 23, 2018. 50, 51   
In an October 2017 MDRP Drug Labeler Release, CMS requested that 
manufacturers submit inquiries about their AMP and BP calculations in 
writing to the rxdrugpolicy@cms.hhs.gov resource mailbox or to the 
Division of Pharmacy Director.52  The agency reported to OIG that it has 
recently begun receiving more technical assistance requests from 
manufacturers.  CMS believes that since issuing the MDRP final rule, it is 
able to more easily reference the rule in response to manufacturers 
inquiries. 
Manufacturers Reported Mixed Experiences in Working With CMS 
on Assumptions-Related Issues 
Of the manufacturers in our sample, 36 (35 percent) reported that they have 
contacted CMS for assistance regarding a scenario in which guidance on 
price calculations may be lacking.  Half of these manufacturers stated that 
they were satisfied with the assistance they received (see Exhibit 9).  
Respondents praised CMSs engagement and the expertise of its staff. 
Exhibit 9. Manufacturers described their satisfaction with CMS technical assistance  
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
In contrast, 11 manufacturers reported not being satisfied and 
5 manufacturers said that CMS never responded to their inquiries.  The 
remaining two manufacturers did not indicate whether or not they were 
 
50 CMS, Medicaid Drug Rebate Program, Drug Labeler Release No. 78, June 26, 2007.   
51 83 Fed. Reg. 12770 (March 23, 2018).  
52 CMS, Medicaid Drug Rebate Program, Drug Labeler Release No. 107, October 30, 2017.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  21 
OEI-12-17-00130   
satisfied.  The manufacturers that expressed dissatisfaction with CMSs 
responses primarily said that they were dissatisfied because CMS failed to 
substantively respond to their inquiries (see Exhibit 10).  In these cases, 
manufacturers felt CMSs responses did not answer their questions and 
simply reiterated the language of current guidance or allowance of 
reasonable assumptions.  
Exhibit 10. Manufacturers described their dissatisfaction with CMS technical assistance
 
 
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
 
Manufacturers Recognized the Barriers That CMS Faces in Providing 
Oversight, and They Suggested Several Options to Improve the 
Reasonable Assumptions Process 
Recognizing the sheer volume of documentation maintained by the 
hundreds of companies participating in the MDRP, less than 20 percent of 
responding manufacturers thought that CMS should regularly review 
records of their assumptions.  Instead, manufacturers suggested that CMS 
use certain factors (e.g., complexity of the subject area, manufacturer 
feedback, potential fiscal impact to the program) to determine which 
assumptions merit an in-depth review by CMS.  Other manufacturers said 
they believed that a periodic auditing of a sample of manufacturers could 
be a practical approach.  
When we asked manufacturers how CMS could improve its process for 
providing assistance, the most common answer related to timeliness.  
Manufacturers felt that CMS does not always reply in a timely manner, 
which could result in the manufacturers submitting AMPs and/or BPs 
without the clarity it had requested.    
Further, a number of manufacturers felt that CMS should publish its 
individual responses to all assumptions-related inquiries so that CMSs 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  22 
OEI-12-17-00130   
instructions would be available toand benefitthe greatest number of 
manufacturers.  Publishing these responses would require removing any 
proprietary information, but it would ensure that each manufacturer has 
access to the same information from CMS, thereby facilitating consistency 
and fairness in the program. 
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  23 
OEI-12-17-00130   
CONCLUSION AND RECOMMENDATIONS 
Ensuring the accuracy of manufacturer-reported AMPs and BPs is vital given 
that these prices are the primary benchmarks that the Federal Government 
uses in efforts to reduce drug costs for Medicaid and certain safety-net 
providers.  Recognizing the complexities of pharmaceutical industry sales 
practices andin certain scenariosthe absence of comprehensive Federal 
guidance, CMS allows drug manufacturers to make reasonable 
assumptions regarding their AMPs and BPs that are consistent with 
statutory and regulatory requirements. 
Our findings show that the use of reasonable assumptions when calculating 
AMPs and BPs is common practice among manufacturers.  However, we 
also note that the reasonableness of most assumptions being made by 
manufacturers is never assessed.  CMS believes its statutory authority in this 
area is limited, and the agency specifically instructs manufacturers not to 
submit their assumptions. As a result, CMS reviews assumptions only on 
a limited, case-by-case basis.   
OIG recognizes that with hundreds of manufacturers, thousands of drugs, 
and a myriad of complex practices for pricing and sales, CMS is not in 
a position to review all assumptions on a regular basis.  Many manufacturers 
also acknowledged the difficulty of such a task.  However, given the fact that 
these assumptions can have large financial ramifications on the cost of 
prescription drugs to Medicaid and safety-net providers, OIG believes 
thatwith the goal of ensuring compliance and consistency in the 
industryCMS could take additional steps to improve its oversight in the 
area.  Therefore, we recommend that CMS: 
Issue guidance related to the areas identified in this report, 
specifically value based purchasing arrangements  
OIG noted four specific areas that may need additional guidance from CMS: 
oral specialty drugs, bona fide service fees, PBM rebates, and value based 
purchasing arrangements.   
According to responding manufacturers, the lack of guidance related to 
value based purchasing arrangements could actually be inhibiting 
innovative payment practices.  Given that CMS has encouraged 
manufacturers to consider entering into such arrangements with State 
Medicaid programs, the agency should address manufacturers concerns by 
issuing guidance to the extent permitted in law.  
Assess the costs and benefits of implementing a targeted 
process to review certain assumptions 
To strengthen oversight of the assumptions being made by drug 
manufacturers participating in the MDRP, CMS should assess whether it 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  24 
OEI-12-17-00130   
would be cost-effective to develop a targeted process to collect and review 
manufacturer records related to certain practices.  CMS should explore 
(1) using a set of factors (e.g., the complexity of the subject area, feedback 
from manufacturers, and potential fiscal impact to the program) to prioritize 
areas in which it would review manufacturer assumptions, or (2) reviewing 
assumptions from a sample of manufacturers.  CMS could use the 
information from these reviews to inform its future published guidance and 
instruction.  
Implement a system to share responses to manufacturer 
inquiries for technical assistance  
To increase transparency and to facilitate consistency and fairness in the 
MDRP, CMS should implement a system to share its responses to 
manufacturer inquiries for technical assistance, protecting proprietary and 
confidential information as appropriate.  CMSs response to a single 
manufacturers inquiry has the potential to benefit other manufacturers in 
the program.  However, CMS should ensure that such sharing of responses 
with multiple manufacturers does not affect the timeliness of its response to 
the requesting manufacturer and thereby delay that manufacturer in 
submitting accurate AMPs and/or BPs.  CMS should also use this system to 
ensure that no manufacturer requests go unanswered.  
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  25 
OEI-12-17-00130   
AGENCY COMMENTS AND OIG RESPONSE 
In its response to our draft report, CMS reaffirmed its commitment to 
ensuring the integrity of the MDRP so that prescription drugs are affordable 
for States and accessible for Medicaid beneficiaries.  
CMS concurred with each of our three recommendations.  In response to 
our recommendation to issue specific guidance related to value based 
purchasing arrangements, CMS stated that it will work to provide additional 
clarity regarding these arrangements.  
In response to our recommendation to assess the costs and benefits of 
implementing a targeted process to review certain assumptions, CMS stated 
that it will determine whether the benefits outweigh the costs of 
implementing a targeted process to review certain manufacturer reasonable 
assumptions.  
Finally, in response to our recommendation to implement a system to share 
responses to manufacturer inquiries for technical assistance, CMS stated 
that it currently publishes guidance related to common issues or questions 
that manufacturers may have regarding a specific Medicaid drug rebate 
program topic.  However, CMS said that it will examine ways to improve and 
promote this process to ensure that its technical assistance can be used 
across the industry.  
The full text of CMSs comments can be found in Appendix F.  
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  26 
OEI-12-17-00130   
APPENDIX A:  Detailed Methodology 
Identification of Reasonable Assumption Areas.  We worked with CMS and 
industry stakeholders to develop a list of 15 common areas in which 
manufacturers have been making assumptions subsequent to the final rule 
of February 1, 2016.  To supplement OIGs own analysis of relevant literature 
to identify industry trends, we also sought the assistance of stakeholder 
groupsthe Pharmaceutical Research and Manufacturers of America 
(PhRMA), the Biotechnology Innovation Organization (BIO), and the 
Association for Accessible Medicines (AAM)in developing a list of 
common assumption areas.  PhRMA staff consulted with its members and 
provided OIG with a list.  BIO and AAM declined to collaborate with OIG on 
this matter.  We asked CMS staff to review the list and provide feedback, 
which we took into account for the manufacturer survey.  
Sample Selection.  OIG obtained 2016 data on Medicaid drug expenditures 
and utilization from CMSs State Drug Utilization Data file.53  We 
summarized this data by the labeler code that the Food and Drug 
Administration assigns to a manufacturer.  The State Drug Utilization Data 
file contained 618 labeler codes with reimbursement greater than $0.00.  
Because a single manufacturer may be associated with multiple labeler 
codes, we used CMSs Drug Manufacturer Contact Information file to 
combine all spending and utilization among all labeler codes with the same 
physical address to create a unique list of spending and utilization by 
manufacturer.54  This resulted in 362 manufacturers from which we drew our 
sample.  
We selected a stratified sample of manufacturers participating in the MDRP.  
The first stratum in our sample, which we refer to as larger manufacturers, 
consists of drug manufacturers that meet at least one of the following two 
criteria:  
(1) total amount reimbursed by Medicaid is greater than or equal to 
$500 million; or  
(2) total units reimbursed by Medicaid are greater than or equal to 
100 million units. 
 
53 The data include State, drug name, National Drug Code, number of prescriptions, and 
dollars reimbursed by Medicaid.  CMS, Medicaid Drug Rebate Program.  Accessed at 
https://www.medicaid.gov/medicaid/prescription-drugs/state-drug-utilization-
data/index.html on June 13, 2017.  
54 The file Drug Manufacturer Contact Information contains the optional effective date; the 
termination date (if applicable); and legal, invoice, and technical contact information for each 
drug company participating in the Medicaid Drug Rebate Program.  CMS, Medicaid Drug 
Rebate Program.  Accessed at https://www.medicaid.gov/medicaid/prescription-
drugs/medicaid-drug-rebate-program/index.html on June 14, 2017.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  27 
OEI-12-17-00130   
Combining both criteria ensured that we would reach not only 
manufacturers associated with high total expenditures, but also those with 
high sales volumes of lower-cost products (i.e., manufacturers of generic 
drugs).  We included all 71 larger manufacturers in our sample. The 71 larger 
manufacturers represent 89 percent of all spending in the Medicaid 
program in 2016.   
The second stratum, to which we refer as smaller manufacturers, includes 
all other manufacturers that do not meet the criteria for the first stratum 
(i.e., less than $500 million reimbursed by Medicaid or less than 100 million 
units reimbursed by Medicaid).  We randomly selected 100 of these 
291 smaller manufacturers for our sample. 
Exhibit 11: Stratified sample of drug manufacturers  
Description  Number of  Total Amount  Percentage  Sample  Responses  Response 
Manufacturers  Reimbursed  of Spending  Size  Rate 
Larger Manufacturers 
71  $55,862,322,387  89%  71  46  65% 
Manufacturers  with 
greater than or equal to 
$500 million in total 
Medicaid amount 
reimbursed OR with 
greater than or equal to 
100 million units 
reimbursed 
Smaller Manufacturers 
291  $7,208,684,768  11%  100  57  57% 
Manufacturers  with less 
than $500 million in total 
Medicaid amount 
reimbursed OR less than 
100 million units 
reimbursed 
    TOTAL  362  $63,071,007,154  100%  171  103  60% 
Source: OIG analysis of 2016 State drug utilization data, 2018.  
Note: We calculated the total amount reimbursed and percentage of spending for 2016 using the State Drug Utilization Data file55 and the Drug   
Manufacturer Contact file.56  Because of rounding, the total amount reimbursed does not equal the sum of individual numbers. 
 
55 We downloaded State Drug Utilization Data for 2016 on June 13, 2017, from 
https://www.medicaid.gov/medicaid/prescription-drugs/state-drug-utilization-
data/index.html. 
56 We downloaded the Drug Manufacturer Contact Information file on June 14, 2017, from 
https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drug-rebate-
program/index.html. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  28 
OEI-12-17-00130   
APPENDIX B:  Percentage of Manufacturers That 
Reported Wanting Additional Guidance From CMS 
Regarding Calculations of AMP and BP in Each Area
OOrraall  DDrruuggss  NNoott  DDiissppeennsseedd  TThhrroouugghh  RReettaaiill  CCoommmmuunniittyy 
56%
Pharmacies (n=32P)harmacies (n=32) 
Value-Based Purchase Agreement (n=26) 54%
Bona Fide Service Fees (n=74) 53%
Bundled Sales (n=29) 52%
Line Extensions (n=22) 45%
Drugs Primarily Dispensed Through Mail (n=25) 44%
Sales to Pharmacy Benefit Managers (n=48) 44%
Authorized Generics (n=49) 43%
Stacked Price Concessions (n=49) 41%
5i AMP Methodology Calculations (n=55) 25%
Lagged Price Concessions (n=84) 21%
Negative AMP Units/Dollars (n=55) 18%
Prompt Pay Discounts (n=93) 17%
Returned Goods (n=78) 15%
Sales to Wholesalers (n=98) 9%
Manufacturers That Requested Additional Guidance  
Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
Note:  The simple sample percentages of manufacturers reported in Appendix B are only for manufacturers in our sample that reported having the 
underlying product types, sales practices, and/or sales calculations.   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  29 
OEI-12-17-00130   
APPENDIX C:  What Manufacturers Feel Is Lacking 
From Current Guidance in the Five Additional Areas 
In Which More Than 40 Percent of Manufacturers 
Requested Guidance 
Authorized Generics.  In general, an authorized generic is a brand-name 
drug that the brand manufacturer permits a secondary manufacturer (or 
a subsidiary) to sell as a generic.  Of the 49 manufacturers with authorized 
generics, 21 (43 percent) responded that they would like additional 
guidance from CMS.  An additional seven manufacturers57 that did not have 
any authorized generics also requested guidance.  Specifically, 
manufacturers wanted additional clarity regarding scenarios in which the 
primary manufacturer and the manufacturer of the authorized generic are 
affiliated in some way (e.g., a subsidiary that typically produces generic 
drugs).  Another common request was for CMS to address what it means for 
a secondary manufacturer to act as a wholesaler in the context of 
authorized generics.  
Line Extensions.  Generally, a line extension is a new formulation of 
an existing brand-name drug (e.g., an extended-release version of the 
product).  Of the 22 manufacturers with line extensions, 10 (45 percent) 
responded that they would like additional guidance from CMS.  
An additional 13 manufacturers58 that did not have line extensions also 
requested guidance.  Manufacturers cited the lack of a definition of line 
extension.  In the MDRP final rule, CMS requested additional comments on 
the definition of line extension drug and the identification of new 
formulations that the Agency may consider addressing in future 
rulemaking.59  As of August 2019, CMS had not issued any further guidance 
on this issue.  
Drugs Primarily Dispensed Through the Mail.  There are certain drugs 
that are primarily dispensed through the mail rather than by retail 
community pharmacies.  Of the 25 manufacturers with drug products that 
are primarily dispensed through the mail, 11 (44 percent) responded that 
they would like additional guidance from CMS.  An additional four 
manufacturers60 that did not produce drugs primarily dispensed through the 
 
57 Of these seven manufacturers, four were smaller manufacturers and three were larger 
manufacturers. 
58 Of these 13 manufacturers, six were smaller manufacturers and seven were larger 
manufacturers. 
59 81 Fed. Reg. 5170, 5265 (Feb. 1, 2016).   
60 Of these four manufacturers, three were smaller manufacturers and one was a larger 
manufacturer. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  30 
OEI-12-17-00130   
mail also requested guidance.  As this reports second finding discusses, and 
as Exhibit 5 displays, CMS has not provided a specific definition of primarily 
dispensed through the mail, resulting in manufacturers adopting a variety 
of thresholds related to certain oral drugs that are dispensed primarily 
through specialty mail-order pharmacies.  
Stacked Price Concessions.  When calculating BPs, manufacturers may 
stacki.e., aggregatein their price concessions the discounts that they 
offer to customers.  For example, a manufacturer may offer a prompt-pay 
discount to a wholesaler and a separate back-end rebate to a pharmacy for 
the same drug purchase.  Of the 49 manufacturers that offered stacked 
price concessions, 20 (41 percent) responded that they would like additional 
guidance from CMS, most commonly in regard to when it is and is not 
appropriate to stack price concessions in determining BP.  An additional five 
manufacturers61 that did not engage in stacking also requested guidance.  
In the MDRP final rule, CMS states: We do not believe it is necessary to 
specify the degree of the relationship between two separate but related 
entities since the manufacturers price concessions or discounts that are 
passed on to BP-eligible entities are not predicated upon a relationship 
existing between the two entities.  However, manufacturers reported that 
they need further guidance explaining how corporate affiliations affect 
stacked price concessions.   
Bundled Sales.  In general, a bundled sale refers to an arrangement under 
which a price concession for a drug is contingent upon the purchase of 
another product, a certain volume of the same product, or some other 
performance requirement.  Of the 29 manufacturers that had bundled sales, 
15 (52 percent) responded that they would like additional guidance from 
CMS.  An additional five manufacturers62 that do not offer bundled sales to 
customers also requested guidance.  Manufacturers specifically requested 
that CMS provide additional guidance on temporal bundles (when sales and 
discounts occur in different quarters) and performance requirements 
(e.g., achieving of a certain market share or formulary placement.).   
 
61 Of these five manufacturers, three were smaller manufacturers and two were larger 
manufacturers. 
62 Of these five manufacturers, two were smaller manufacturers and three were larger 
manufacturers. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  31 
OEI-12-17-00130   
APPENDIX D: Sample Percentages and Key 
Statistics for Manufacturers That Make 
Reasonable Assumptions  
 
  Manufacturers with the sales  Manufacturers with the sales product, 
product, practice, and/or  practice, and/or calculation 
calculation  making assumptions 
           
          sample 
n  smaller (n)  larger (n)  smaller (n)  larger (n)  percentage 
Bona Fide Service 
Fees  74  36  38  32  35  91% 
Bundled Sales  29  4  25  3  23  90% 
Stacked Price 
Concessions  49  12  37  7  32  80% 
5i AMP Methodology 
Calculations  55  22  33  15  28  78% 
Drugs Primarily 
Dispensed Through 
the Mail  25  7  18  5  14  76% 
Prompt Pay Discounts  93  49  44  33  38  76% 
Lagged Price 
Concessions  84  40  44  26  37  75% 
Negative AMP 
Units/Dollars  55  21  34  14  26  73% 
Sales to Wholesalers  98  52  46  34  37  72% 
Oral Drugs Not 
Dispensed Through 
Retail Community 
Pharmacies  32  13  19  8  15  72% 
Authorized Generics  49  15  34  6  28  69% 
Sales to Pharmacy 
Benefit Managers  48  15  33  8  24  67% 
Value Based 
Purchasing 
Arrangements   26  4  22  0  17  65% 
Returned Goods  78  41  37  17  29  59% 
Line Extensions  22  4  18  2  8  45% 
 Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018. 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  32 
OEI-12-17-00130   
APPENDIX E:  Sample Percentages and Key 
Statistics for Manufacturers That Request 
Guidance 
 
  Manufacturers with the sales  Manufacturers with the sales product, 
product, practice, and/or  practice, and/or calculation -                               
calculation  requesting guidance 
           
          sample 
n  smaller (n)  larger (n)  smaller (n)  larger (n)  percentage 
Oral Drugs Not 
Dispensed Through 
Retail Community 
Pharmacies  32  13  19  6  12  56% 
Value Based 
Purchasing 
Arrangements  26  4  22  1  13  54% 
Bona Fide Service 
Fees  74  36  38  16  23  53% 
Bundled Sales  29  4  25  0  15  52% 
Line Extensions  22  4  18  3  7  45% 
Drugs Primarily 
Dispensed Through 
the Mail  25  7  18  2  9  44% 
Sales to Pharmacy 
Benefit Managers  48  15  33  3  18  44% 
Authorized Generics  49  15  34  5  16  43% 
Stacked Price 
Concessions  49  12  37  1  19  41% 
5i AMP Methodology 
Calculations  55  22  33  4  10  25% 
Lagged Price 
Concessions  84  40  44  7  11  21% 
Negative AMP 
Units/Dollars  55  21  34  3  7  18% 
Prompt Pay Discounts  93  49  44  7  9  17% 
Returned Goods  78  41  37  6  6  15% 
Sales to Wholesalers  98  52  46  3  6  9% 
 Source: OIG analysis of responses to survey of drug manufacturers in the Medicaid Drug Rebate Program, 2018.   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  33 
OEI-12-17-00130   
APPENDIX F:  Agency Comments 
 
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  34 
OEI-12-17-00130   
   
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  35 
OEI-12-17-00130   
ACKNOWLEDGMENTS 
Michael Kvassay served as the lead analyst for this study.  Office of 
Evaluation and Inspections staff who provided support include 
Adam Freeman, Althea Hosein, Christine Moritz, and Meghan Riggs.  
We would also like to acknowledge the contributions of other Office of 
Inspector General staff, including Mary Riordan, Jessica Swanstrom, and 
Christopher Weiser.   
This report was prepared under the direction of Dave Tawes, Regional 
Inspector General for Evaluation and Inspections in the Baltimore regional 
office, Heather Barton, Deputy Regional Inspector General, and 
Louise Schoggen, Assistant Regional Inspector General.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To obtain additional information concerning this report or to obtain copies, 
contact the Office of Public Affairs at Public.Affairs@oig.hhs.gov.  
Reasonable Assumptions in Manufacturer Reporting of AMPs and Best Prices  36 
OEI-12-17-00130   
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