Department of Health and Human Services 
OFFICE OF 
   
INSPECTOR GENERAL 
 
 
 
 
 
 
 
H   R
IGHER  EBATES FOR          
 
B -N D R
RAND   AME  RUGS  ESULT IN 
 
L C M
OWER  OSTS FOR  EDICAID 
 
C   M P D 
OMPARED TO  EDICARE  ART 
 
 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
August 2011 
OEI-03-10-00320   
   
 E X E C U T I V E   S U M M A R Y  
OBJECTIVES
 
1.  To compare pharmacy reimbursement under Medicare Part D to 
pharmacy reimbursement under Medicaid for selected drugs. 
2.  To compare manufacturer rebates under Medicare Part D to 
manufacturer rebates under Medicaid for selected drugs.   
3.  To compare net drug costs under both programs and determine the 
effect that differences may have on overall program costs.  
BACKGROUND 
Section 3313(b) of the Affordable Care Act (ACA), P.L. 111-148, directs 
the Office of Inspector General to complete a study by October 1, 2011, 
that (1) compares the prices paid (including rebates) for 200 covered 
Part D drugs by Part D plan sponsors to the prices paid (including 
rebates) for the same drugs by State plans under Medicaid and             
(2) assesses the impact of price differences. 
Medicare Part D provides an optional prescription drug benefit to all 
Medicare beneficiaries.  The Centers for Medicare & Medicaid Services 
(CMS) contracts with private companies (hereinafter referred to as 
sponsors) to provide drug coverage to beneficiaries who choose to enroll 
in the program.  The Part D program relies on sponsors to negotiate 
drug manufacturer rebates to reduce the cost of the program to 
beneficiaries and the Government.  Because rebates are subtracted from 
the sponsors costs, they lower the beneficiarys premium and the cost to 
the Government.    
The Medicaid drug rebate program was established to reduce 
expenditures for Medicaid prescription drugs.  For Federal payment to 
be available for covered outpatient drugs under Medicaid, the Social 
Security Act mandates that drug manufacturers enter into rebate 
agreements with the Secretary of Health & Human Services, report 
quarterly average manufacturer prices (AMP) to CMS for each of their 
covered outpatient drugs, and pay quarterly rebates to State Medicaid 
agencies.  The Medicaid rebate amount for any given drug generally 
depends on the quarterly AMP.  In addition, if the AMP for a brand-
name drug has risen faster than inflation, then the manufacturer must 
pay an additional rebate.    
In 2005, Medicaid paid in excess of $43 billion for prescription drugs; 
however, drug expenditures decreased by almost half in the following 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  i   
   
E X E C U T I V E   S U M M A R Y  
year, when drug coverage for dual eligible beneficiaries (i.e., 
beneficiaries eligible for both Medicare and Medicaid) shifted from 
Medicaid to Medicare Part D.  Medicaid expenditures for prescription 
drugs totaled just under $26 billion in 2009.  In the last year before 
coverage for dual eligibles was moved to Part D (2005), Medicaid 
rebates totaled about 26 percent of drug expenditures.  However, 
although Medicaid expenditures decreased by almost half after 2005, 
Medicaid rebates as a percentage of expenditures increased.  As a result 
of these rebates, Medicaid recouped between 29 and 38 percent of its 
expenditures for prescription drugs each year between 2006 and 2009, 
yielding an average annual savings of about $8 billion.   
For this review, we compared pharmacy reimbursement and rebates 
under Medicare Part D and Medicaid for the 100 brand-name and       
100 generic drugs with the highest Part D expenditures.  We then 
examined each programs net costs and determined the effect of 
differences on overall costs. 
FINDINGS 
In 2009, pharmacy reimbursement amounts under Medicare Part D 
and Medicaid were similar for most selected brand-name drugs but 
differed substantially for over half of selected generic drugs.  For 
70 of the 100 brand-name drugs under review, the difference between 
the average Part D and Medicaid unit reimbursement amounts was less 
than 2 percent.  For more than half (53) of the generic drugs under 
review, pharmacy reimbursement under Part D and Medicaid differed 
by more than 15 percent.   
For all 30 brand-name drugs for which the reimbursement difference 
exceeded 2 percent, it was Medicaid that paid more.  Overall, Medicaid 
reimbursement was higher for 63 brand-name drugs; Part D 
reimbursement was higher for the remaining 37. 
In 2009, Medicaid unit rebate amounts for brand-name drugs were 
substantially higher than Part D unit rebate amounts; rebates for 
generic drugs under both programs were negligible.  Overall, 
Medicaid unit rebate amounts were 3 times greater than Part D unit 
rebate amounts at the median for the 100 brand-name drugs under 
review.  For 68 of these drugs, manufacturers paid at least twice as 
much per unit in Medicaid rebates compared to amounts paid per unit 
under Part D.  Conversely, Part D unit rebate amounts exceeded 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  ii   
   
E X E C U T I V E   S U M M A R Y  
Medicaid unit rebate amounts for just five of the brand-name drugs 
under review.   
Unlike rebates for brand-name drugs, rebates for generic drugs had 
little impact in reducing expenditures.  Part D sponsors collected 
virtually no Part D rebates for generic drugs, and Medicaid rebates for 
generic drugs reduced total expenditures by only 3 percent. 
Medicaid rebates were substantially higher than Part D rebates because 
manufacturers for virtually all brand-name drugs under review paid 
inflation-based rebates in addition to basic rebates.  For 98 of the        
100 brand-name drugs under review, manufacturers paid this 
additional rebate in all 4 quarters of 2009.  In the aggregate, 55 percent 
of the total Medicaid rebates owed by manufacturers for the 100 brand-
name drugs under review ($1.6 billion out of $2.9 billion) are owed 
because AMPs rose faster than inflation.   
After accounting for rebates, Medicaid net costs for selected 
brand-name drugs were much lower than Part D net costs.  
Although average Part D and Medicaid reimbursement amounts for 
most brand-name drugs under review were similar, Medicaid unit 
rebates for these drugs were substantially higher than those under Part 
D.  Consequently, Medicaids net unit costs (i.e., pharmacy 
reimbursement minus rebates) were much lower than net unit costs 
under Part D in 2009.  
As previously stated, Medicaid unit reimbursement amounts were 
actually higher than Part D unit reimbursement amounts for                
63 brand-name drugs.  However, after accounting for rebates, Medicaid 
net unit costs were higher than Part D net unit costs for only 7 drugs; 
Part D net unit costs exceeded Medicaid unit costs for the remaining 93. 
As further evidence of Medicaids substantially higher unit rebate 
amounts, Medicaid collected nearly two-thirds as much in rebates as 
Part D ($2.9 billion vs. $4.5 billion) for the selected drugs despite having 
only about one-fourth of the expenditures ($6.4 billion vs. $24 billion).  
In 2009, rebates reduced Part D expenditures by 19 percent for the        
100 brand-name drugs under review (from $24 billion to $19.5 billion).  
Medicaid rebates accounted for a substantially higher percentage of 
total expenditures, reducing expenditures by 45 percent (from            
$6.4 billion to $3.5 billion) for these 100 drugs. 
 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  iii   
   
E X E C U T I V E   S U M M A R Y  
CONCLUSION 
Prescription drug rebates reduce the program costs of both Medicare 
Part D and Medicaid.  Medicaid rebates are defined by statute; 
additional rebates are required when prices for brand-name drugs 
increase faster than inflation.  Unlike the Medicaid program, Part D 
sponsors (or contractors acting on their behalf) negotiate rebates with 
drug manufacturers without any statutory requirements on rebate 
amounts.  In fact, the law establishing the Part D program expressly 
prohibits the Government from instituting a price structure for the 
reimbursement of covered Part D drugs. 
In this review, we found that Part D sponsors and State Medicaid 
agencies paid pharmacies similar amounts for most brand-name drugs 
under review.  However, statutorily defined Medicaid unit rebate 
amounts for brand-name drugs exceeded Part D unit rebate amounts by 
a substantial margin.  As a result, Medicaid collected nearly two-thirds 
as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion 
vs. $4.5 billion), despite having only about one-fourth of the expenditure 
($6.4 billion vs. $24 billion).   
Medicaid rebates for brand-name drugs may increase as a result of ACA 
provisions that raise the rebate percentage.  Given the potential impact 
on beneficiary and Government expenditures, we believe that it is 
important for CMS to continually examine any differences in how each 
program collects rebates.              
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS agreed with our overall findings.  CMS stated that it was pleased 
OIG confirmed that the Medicaid rebate program is working well and 
providing substantial rebates to offset the high costs of prescription 
drugs.  CMS agreed that the ACA may further increase Medicaid 
rebates for brand-name drugs and that it is important to continue to 
examine the differences in how each program collects rebates.  We did 
not make any changes to the report based on CMSs comments.   
     
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  iv   
 T A B L E   O F   C O N T E N T S  
EX ECUT I VE  SUM M ARY  .....................................i 
 
 
I NT RO DU CT I O N  ............................................ 1 
 
 
F I NDI NG S  .................................................  13 
  In 2009, pharmacy reimbursement amounts under Medicare           
Part D and Medicaid were similar for most selected brand-name  
drugs but differed substantially for over half of selected generic   
drugs .................................................  13 
  In 2009, Medicaid unit rebate amounts for brand-name drugs        
were substantially higher than Part D unit rebate amounts;       
rebates for generic drugs under both programs were negligible ..  15 
  After accounting for rebates, Medicaid net costs for selected             
brand-name drugs were much lower than Part D net costs .....  17 
 
CO NCL U SI O N  .............................................  19 
  Agency Comments and Office of Inspector General Response ....  19 
 
APP EN DI X  ................................................  21 
  Agency Comments ......................................  21 
 
 
ACKNO WL E DG M E N T S .....................................  22   
   
 I N T R O D U C T I O N  
OBJECTIVES 
1.  To compare pharmacy reimbursement under Medicare Part D to 
pharmacy reimbursement under Medicaid for selected drugs. 
2.  To compare manufacturer rebates under Medicare Part D to 
manufacturer rebates under Medicaid for selected drugs.   
3.  To compare net drug costs under both programs and determine the 
effect that differences may have on overall program costs.  
BACKGROUND 
Section 3313(b) of the Affordable Care Act (ACA), P.L. 111-148, directs the 
Office of Inspector General (OIG) to complete a study by October 1, 2011, 
that (1) compares the prices paid (including rebates) for 200 covered      
Part D drugs by Part D plan sponsors to the prices paid (including rebates) 
for the same drugs by State plans under Medicaid and (2) assesses the 
impact of price differences. 
Medicare Part D Drug Coverage 
The Medicare prescription drug program, known as Medicare Part D, 
provides an optional prescription drug benefit to all Medicare 
beneficiaries.1   The Centers for Medicare & Medicaid Services (CMS) 
contracts with private companies, known as Part D plan sponsors 
(hereinafter referred to as sponsors), to provide drug coverage to the 
nearly 30 million beneficiaries who choose to enroll in the program.2  
Part D expenditures totaled $61 billion in 2009.3    
Sponsors offer benefits through (1) stand-alone prescription drug plans 
(PDP) and (2) Medicare Advantage prescription drug plans (MA-PD). 
MA-PDs provide integrated medical coverage, including drugs, through 
managed care.  Most beneficiaries are responsible for certain costs, 
which may include a monthly premium, an annual deductible, and 
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003,         
P.L. 108-173. 
2 CMS, 2010 Enrollment Information.  Accessed at http://www.cms.hhs.gov on                 
March 11, 2011.   
3 The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary 
Medical Insurance Trust Funds, 2010 Annual Report of the Boards of Trustees of the 
Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,    
p. 10.  Accessed at http://www.cms.gov on October 13, 2010. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  1   
   
I N T R O D U C T I O N  
coinsurance or copayments.  However, certain low-income beneficiaries 
are eligible to receive assistance to pay some or all of these costs.4   
Dual eligibles.  When Medicare Part D was implemented in 2006, more 
than 6 million low-income senior citizens and disabled individuals were 
full-benefit dual eligibles, i.e., beneficiaries enrolled in both Medicare 
and Medicaid.  Until December 31, 2005, dual eligibles received 
outpatient drug benefits through Medicaid.  However, on                
January 1, 2006, Federal financial participation ended for Medicaid 
drug coverage for dual eligibles.5  Instead, dual eligibles now receive 
drug coverage under Part D.  
Medicare Part D Drug Reimbursement 
Beneficiaries enrolled in Medicare Part D typically obtain drugs from 
pharmacies.  Pharmacy reimbursement (i.e., the point-of-sale price) 
under Part D is based on prices negotiated between pharmacies and 
sponsors (hereinafter referred to as negotiated prices).  Regulation 
defines negotiated prices as prices for covered Part D drugs that:             
(1) the sponsor (or its affiliated contractor) and pharmacy have 
negotiated as the amount the pharmacy will receive for a particular 
drug, (2) are reduced by price concessions6 that the sponsor has elected 
to pass through to Part D enrollees at the point of sale, and (3) include 
any pharmacy dispensing fees.7  Negotiated prices contain two main 
elements:8  
1.  Ingredient cost  the amount paid to the pharmacy for the drug 
itself.   
2.  Dispensing fee  the amount paid to the pharmacy for dispensing 
the drug.  This amount includes only those activities related to the 
transfer of the drug from the pharmacy to the beneficiary, including 
charges associated with mixing the drug, delivery, and overhead.9 
 
4 42 CFR  423.780 and 42 CFR  423.782. 
5 Section 1935 of the Social Security Act (the Act). 
6 Rebates from drug manufacturers are the most common type of price concession.      
7 42 CFR  423.100.  
8 Negotiated prices for Medicare Part D also include a data element for sales tax.  See 
CMS, Instructions:  Requirements for Submitting Prescription Drug Event Data.  Accessed 
at http://www.cms.hhs.gov on October 4, 2010. 
9 CMS, Instructions:  Requirements for Submitting Prescription Drug Event Data.  
Accessed at http://www.cms.hhs.gov on October 4, 2010.   
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I N T R O D U C T I O N  
The ingredient cost of the drug is usually based on the lowest of            
(1) the average wholesale price (AWP) discounted by a specified 
percentage,10 (2) the maximum allowable cost, or (3) the pharmacys 
usual and customary charge to the public.11  The portion of the 
negotiated price paid by the plan sponsor and the portion paid by the 
beneficiary are determined by the plans cost-sharing rules.  
Reimbursement is negotiated among sponsors, manufacturers, and 
pharmacies; the law creating the Part D program expressly prohibits 
the Government from establishing a price structure for the 
reimbursement of drugs under Part D.12   
All sponsors submit data and information necessary for CMS to 
determine and make payment.13  Every time a beneficiary has a 
prescription filled under Part D, his or her plan must submit a 
prescription drug event (PDE) record.  The PDE record contains drug 
cost, payment, and utilization data.14   
Medicare Part D Rebates 
Sponsors negotiate drug manufacturer rebates to reduce the cost of the 
Part D program to beneficiaries and the Government.  Sponsors either 
negotiate directly with manufacturers for rebates or contract with a 
third party entity to negotiate on their behalf; in either case they are 
required to report these rebates to CMS. 
Before the beginning of each year, sponsors submit a bid to CMS for 
each plan they intend to offer.15  The bids are the sponsors estimates of 
the cost to provide the prescription drug benefit to each beneficiary and 
include drug costs, utilization, and rebates.  In its bid instructions, CMS 
 
10 AWPs are listed in commercial publications.  They are derived from manufacturer-
reported data for both brand-name and generic drugs and are not defined in law or 
regulation.  Previous OIG work found that AWPs are often significantly higher than the 
prices that drug manufacturers, wholesalers, and similar entities actually charge the 
physicians and pharmacies that purchase these drugs.  For example, see OIG, Medicaid 
Pharmacy  Actual Acquisition Cost of Brand Name Prescription Drug Products                    
(A-06-00-00023), August 2001; Medicaid Pharmacy  Actual Acquisition Cost of Generic 
Prescription Drug Products (A-06-01-00053), March 2002; and Medicaids Use of Revised 
Average Wholesale Prices (OEI-03-01-00010), September 2001. 
11 If ingredient cost is based on the usual and customary charge, the pharmacy is not 
paid a dispensing fee.   
12 Section 1860D-11(i) of the Act. 
13 Sections 1860D-15(c)(1)(C) and (d)(2) of the Act, 42 CFR  423.322. 
14 CMS, Instructions:  Requirements for Submitting Prescription Drug Event Data.  
Accessed at http://www.cms.hhs.gov on October 4, 2010.  
15 42 CFR  423.265. 
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defines expected rebates as the sponsors best estimate of price 
concessions that decrease the sponsors costs for Part D drugs.16  CMS 
uses the bids to calculate each plans beneficiary premium.  Because 
expected rebates are subtracted from the sponsors expected costs, they 
lower the bid amount and, thus, the beneficiarys premium.    
CMS, using these bids, makes prospective payments to sponsors to cover 
the cost of providing the Part D benefit.  Therefore, the overall cost of 
the program to the Government is reduced because expected rebates are 
subtracted from expected costs.  In an annual rebate report after the 
end of the year, sponsors must provide CMS with information about the 
actual costs, including the amount of rebates that they received.17  CMS 
uses these reports to reconcile its prospective payments with sponsors 
actual costs and thus, to determine whether sponsors owe money to the 
Government or vice versa.  
Medicaid Drug Coverage 
Title XIX of the Act established Medicaid, a program administered by 
States and financed with State and Federal funds.  Medicaid pays for 
medical care and health-related assistance for certain vulnerable and 
needy individuals and families.  All 50 States and the District of 
Columbia provide coverage for drugs under Medicaid.  In 2005, 
Medicaid paid in excess of $43 billion for prescription drugs; however, 
drug expenditures decreased by almost half in the following year, when 
drug coverage for dual eligible beneficiaries shifted from Medicaid to 
Part D.  Since 2006, Medicaid payments for prescription drugs have 
remained relatively steady (see Table 1 on page 6).  In 2009, Medicaid 
expenditures for drugs totaled approximately $26 billion.  
Medicaid Drug Reimbursement 
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are reimbursed for them by State Medicaid agencies.  
Federal regulations require, with certain exceptions, that each State 
Medicaid agencys reimbursement for covered outpatient drugs not 
exceed (in the aggregate) the lower of the providers usual and 
customary charge to the public for the drugs or the estimated 
 
16 CMS, Instructions for Completing the Prescription Drug Plan Bid Pricing Tool for 
Contract Year 2011, April 2010. 
17 CMS, Medicare Part D Reporting Requirements, January 2010. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  4   
   
I N T R O D U C T I O N  
acquisition cost for drugs (i.e., the ingredient cost) plus a reasonable 
dispensing fee.18  These costs are defined as:   
1.  Ingredient cost.  Medicaid payment for ingredient cost is based on 
the estimated acquisition cost.  Regulations define estimated 
acquisition cost to be the States best estimate of the price 
generally and currently paid by providers for the drug.19  CMS 
allows States flexibility in determining what constitutes the 
ingredient cost of drugs covered by their Medicaid programs; 
therefore, Medicaid reimbursement varies across States.  During the 
period covered by this review (i.e., 2009), most States calculated the 
estimated acquisition cost based on the AWP discounted by a 
specified percentage.20  For certain drugs, States also used the 
Federal upper limit or State maximum allowable cost programs in 
setting reimbursement amounts.21, 22 
2.  Dispensing fee.  State Medicaid agencies also pay a reasonable 
dispensing fee to pharmacies for pharmacy services.  Each State 
determines its Medicaid dispensing fee, which generally ranged from 
$1.75 and $7.50 per prescription as of December 2009.23 
The Medicaid Drug Rebate Program 
To reduce expenditures for Medicaid prescription drugs, CMS and the 
States have implemented certain cost containment measures, including 
the Medicaid drug rebate program.  For Federal payment to be available 
for covered outpatient drugs under Medicaid, the Act mandates that 
drug manufacturers enter into rebate agreements with the Secretary of 
 
18 42 CFR  447.512.   
19 42 CFR  447.502.   
20 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2009.  Accessed at http://www.cms.hhs.gov on March 9, 2011. 
21 The Federal upper limit program limits Medicaid reimbursement for certain generic 
drugs and ensures that the Federal Government acts as a prudent buyer by taking 
advantage of current market prices for generic drugs.   
22 A maximum allowable cost is a ceiling price that applies to a group of generic drugs.  
Individual States determine which drugs are included in their programs and the methods 
by which the maximum allowable cost for a drug is calculated. 
23 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2009.  Accessed at http://www.cms.hhs.gov on March 9, 2011.  This range 
excludes drugs dispensed through nonretail pharmacies, compounded drugs, and home 
intravenous therapy.   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  5   
   
I N T R O D U C T I O N  
Health & Human Services and pay quarterly rebates to State Medicaid 
agencies.24   
In the last year before coverage for dual eligibles was moved to Part D 
(2005), Medicaid collected $11.2 billion in rebates from manufacturers 
(26 percent of total drug expenditures).  However, as Table 1 illustrates, 
although Medicaid expenditures decreased by almost half after 2005, 
Medicaid rebates as a percentage of expenditures increased.  As a result 
of these rebates, Medicaid recouped between 29 and 38 percent of its 
expenditures for prescription drugs each year between 2006 and 2009, 
yielding an average annual savings of about $8 billion.25, 26  See Table 1 
for additional information on Medicaid expenditures and rebates.   
Table 1:  Medicaid Expenditures and Rebates 20052009 
Medicaid  Rebates as a Percentage of 
Year  Expenditures 
Rebates  Expenditures 
2005  $43.2 billion  $11.2 billion  26% 
2006  $22.5 billion  $8.6 billion  38% 
2007  $22.6 billion  $6.6 billion  29% 
2008  $24.0 billion  $8.0 billion  33% 
2009  $25.6 billion  $9.0 billion  35% 
Source:  CMS Medicaid data for calendar years 20052009. 
As part of the Medicaid drug rebate program, manufacturers must 
provide CMS with the average manufacturer price (AMP) for each of 
their national drug codes (NDC) on a quarterly basis.27  An NDC is a 
unique 11-digit identifier that represents a specific manufacturer, 
product, and package size.  During the period covered by this review, 
the AMP was generally defined as the average price paid to the 
 
24 Sections 1927(a)(1) and (b)(1) of the Act.  Sections 1927(k)(23) of the Act define a 
covered outpatient drug.   
25 According to CMS staff, the substantial increase in rebates as a percentage of 
expenditures from 2005 to 2006 may be partially explained by the time lag between when 
expenditures occur and when the rebates are actually collected.  
26 States can negotiate supplemental rebates with drug manufacturers that are in 
addition to the statutory rebates in Table 1.  From 2005 to 2009, State Medicaid agencies 
collected approximately $1 billion per year in supplemental rebates that would further 
reduce Medicaid expenditures.   
27 Section 1927(b)(3) of the Act. 
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III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN    
manufacturer for the drug in the United States by wholesalers for 
drugs distributed to the retail pharmacy class of trade.28    
The Medicaid unit rebate amount (URA) for a drug generally depends 
on the quarterly AMP submitted by the manufacturer, as well as 
whether the drug is brand-name or generic (because the Medicaid 
rebate for brand-name drugs is higher).29  From 1996 to 2009, the basic 
URA for a brand-name drug was either 15.1 percent of the AMP or the 
difference between the AMP and best price (whichever was greater).30, 
31 The basic URA for a generic drug was 11 percent of the AMP.   
Furthermore, if the AMP for a brand-name drug has risen faster than 
inflation, then the drugs manufacturer must pay an additional rebate.32  
To determine whether a brand-name drug is subject to the increased 
rebate amount, CMS compares the reported AMP for a given quarter to 
its inflation-adjusted baseline AMP.  The baseline AMP for a drug is the 
AMP for the first quarter after the drugs initial market date.  To adjust 
the baseline AMP for inflation, CMS first divides the baseline AMP by 
the baseline Consumer Price IndexUrban (CPI-U), which is the CPI-U 
for the first month prior to the first quarter after the drugs initial 
market date.  The result of that calculation is then multiplied by the 
quarterly CPI-U, which is the CPI-U for the month prior to the quarter 
being calculated.  If the reported AMP is greater than the inflation-
adjusted baseline AMP, then the difference is added to the URA. 
CMS calculates a URA for each NDC and transmits that information to 
States.  States then determine the total quarterly rebates that 
 
28 Section 1927(k)(1) of the Act.  Section 2503 of the ACA changed the definition of AMP, 
effective October 2010.  That change is not relevant for the purposes of this study. 
29 Brand-name drugs are approved by the Food and Drug Administration (FDA) under a 
new drug application and are generally sold by one manufacturer.  Generic drugs are 
approved by FDA under abbreviated new drug applications and are generally sold by 
multiple manufacturers at a lower cost.   
30 Section 1927(c) of the Act.  Pursuant to section 1927(b)(3)(A)(i)(II) of the Act, 
manufacturers must provide a best price for each of their brand-name drugs on a 
quarterly basis.  Generally speaking, best price is defined by section 1927(c)(1)(C) of the Act 
as the lowest price available from the manufacturer to any purchaser in the United States, 
with certain exceptions. 
31 Effective January 2010,  2501(a) of the ACA increases the URA for brand-name drugs 
to the greater of 23.1 percent of the AMP or the difference between AMP and best price 
(with certain exceptions).  Section 2501(b) of the ACA increases the URA for generic drugs 
to 13 percent of the AMP. 
32 Section 1927(c)(2) of the Act.   
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II NN TT RR OO DD UU CC TT II OO NN   
participating manufacturers owe by multiplying the URA for a specific 
drug by the number of units of that drug dispensed to Medicaid 
beneficiaries in that quarter.   
Related OIG Work 
A February 2009 OIG report compared pharmacy reimbursement under 
Medicare Part D and Medicaid for 79 drugs.33  It did not compare total 
program expenditures and did not determine the impact of rebates.  The 
report found that, nationally, the average pharmacy reimbursement 
amounts for both programs were similar for most selected brand-name 
drugs.  The report also found that nationally, Medicaid pharmacy 
reimbursement amounts typically exceeded those in Part D for selected 
generic drugs. 
A March 2011 OIG report examined manufacturer rebates under          
Part D.34  That report found that sponsors reported receiving             
$6.5 billion in drug manufacturer rebates in 2008.  These rebates should 
reduce the cost of the Part D program.  However, the report also found 
that sponsors underestimated rebates in 69 percent of their bids for 
plan year 2008, causing beneficiary premiums and Government 
payments to be higher than they otherwise would have been.  
METHODOLOGY 
Scope 
For this review, we compared pharmacy reimbursement and rebates 
under Medicare Part D and Medicaid for selected high-expenditure 
brand-name and generic drugs (i.e., NDCs).  We selected these drugs 
based on PDE data from both PDP and MA-PD sponsors.  We selected 
the 100 brand-name drugs with the highest Part D expenditures in 
retail pharmacies in 2009 and the 100 generic drugs with the highest 
Part D expenditures in retail pharmacies in 2009.  Part D expenditures 
for these 200 drugs totaled $27 billion ($24 billion for brand-name drugs 
and $3 billion for generic drugs).  Medicaid expenditures for these 
 
 
33 OIG, Comparing Pharmacy Reimbursement:  Medicare Part D to Medicaid,             
OEI-03-07-00350. 
34 OIG, Concerns With Rebates in the Medicare Part D Program, OEI-02-08-00050. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  8   
   
I N T R O D U C T I O N  
 200 drugs totaled $6.8 billion ($6.4 billion for brand-name drugs and 
$449 million for generic drugs).35   
Data Collection 
Medicare Part D.  We obtained PDE records from CMS for all covered 
drugs dispensed in retail pharmacies with dates of service in 2009 and 
aggregated these data to identify expenditures by NDC.  We determined 
whether a drug was brand-name or generic using drug type information 
from two national drug compendia (Redbook and First DataBank), as 
well as Medicaid drug product data.  We used data from the National 
Council of Prescription Drug Programs (NCPDP) that identify the 
primary pharmacy type to limit PDE records to drugs dispensed in 
retail pharmacies.36  We then identified the top NDCs (100 brand-name 
drugs, 100 generic drugs) by total Part D expenditures (i.e., the sum of 
the ingredient cost and dispensing fee) based on these PDE claims data.  
The 200 selected NDCs were associated with 44 manufacturers.   
Medicaid.  We obtained State Medicaid payment, utilization, and 
dispensing fee data for 2009 from CMS.  Using these files, we 
determined State Medicaid agencies expenditures for and utilization of 
the 200 drugs identified above.   
Rebates.  To obtain Medicare Part D rebate data, we sent letters to the 
44 manufacturers of the 200 selected drugs in December 2010.  We 
asked them to report how much they paid in Part D rebates, by NDC, to 
Part D sponsors in 2009 for drugs dispensed in retail pharmacies.  All 
manufacturers provided rebate data.37   
Several manufacturers that paid Part D rebates were unable to limit 
their rebate data to drugs dispensed in retail pharmacies.  Some of 
these provided estimates of rebates based on utilization; others did not 
provide these estimates.  For drugs sold by manufacturers that did not 
provide actual or estimated retail-specific data, we calculated rebate 
estimates ourselves.  To do this, we used PDE data to calculate what 
 
35 According to summary data for individual NDCs, Part D expenditures for these        
200 drugs accounted for almost half of program expenditures for drugs dispensed in retail 
pharmacies in 2009 and Medicaid expenditures for these 200 drugs accounted for about      
30 percent of program expenditures in 2009.         
36 A retail pharmacy has a dispenser type classification of 01 in NCPDP data.   
37 Manufacturers of eight of the selected brand-name drugs reported that either (1) they 
do not provide rebates for these drugs or (2) these drugs are not dispensed in retail 
pharmacies. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  9   
   
II NN TT RR OO DD UU CC TT II OO NN   
percentage of a drugs utilization was dispensed through retail 
pharmacies and calculated rebates proportionally.   
For Medicaid rebates, we obtained 2009 quarterly URAs from CMS for 
each of the drugs under review to calculate total rebates.  URAs include 
both the basic and additional rebates (where applicable).   
Data Analysis 
Pharmacy reimbursement amounts.  We first compared 2009 pharmacy 
reimbursement of sponsors with that of State Medicaid agencies.  To do 
this, we calculated the average Part D and Medicaid unit 
reimbursement amounts for each of the selected drugs by dividing total 
expenditures (ingredient costs and dispensing fees) by the total quantity 
dispensed.  We calculated the percentage differences in pharmacy 
reimbursement between Medicare Part D and Medicaid for each    
brand-name drug and each generic drug under review and compared 
these differences.  Additionally, we calculated the median percentage 
differences in pharmacy reimbursement between Medicare Part D and 
Medicaid for all brand-name drugs and all generic drugs under review.   
Manufacturer rebates.  We then calculated and compared Part D and 
Medicaid rebates.  We calculated total 2009 Part D rebates for the       
200 drugs based on manufacturer submissions and then determined a 
unit rebate amount for each drug by dividing total rebates by quantity 
dispensed.  For Medicaid, we calculated total 2009 rebates by 
multiplying the quarterly URAs38 by quarterly utilization for each drug 
and adding these totals.  We calculated a single Medicaid unit rebate 
amount in 2009 for each drug by dividing total rebates by quantity 
dispensed.  We then determined the percentage differences in unit 
rebate amounts between the two programs for each brand-name and 
each generic drug under review and compared these differences.  We 
also calculated the median percentage differences in rebates between 
the two programs for all brand-name and all generic drugs under 
review.     
To gain further insight into the differences between Part D and 
Medicaid rebates, we determined whether the manufacturers of the 
brand-name drugs under review paid inflation-based rebates to States 
in addition to the basic Medicaid rebates.  To do this, we calculated the 
 
38 URA refers to CMSs calculated amount to determine rebates; unit rebate amount 
hereinafter refers to OIGs calculation of a volume-weighted average in 2009 of the 
quarterly URAs.   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  10   
   
II NN TT RR OO DD UU CC TT II OO NN   
quarterly basic rebate amount for each brand-name drug (i.e.,           
15.1 percent of AMP or the difference between AMP and best price) and 
subtracted it from the drugs quarterly URA.  The difference was the 
amount of additional rebate that was owed because the drugs price 
increased faster than the rate of inflation.       
Net costs.  Finally, we determined the effect of differences in pharmacy 
reimbursement and rebates on expenditures by calculating net costs 
under each program.  To calculate net costs, we subtracted unit rebate 
amounts from unit reimbursement amounts for each drug under review.  
We calculated the percentage differences in net unit costs between 
Medicare Part D and Medicaid for each drug under review and 
compared these differences.  We also calculated the median percentage 
differences in net costs between Medicare Part D and Medicaid for all 
brand-name drugs and all generic drugs under review.   
Limitations 
The findings in this report apply only to the 200 drugs we reviewed 
and are not projectable to all drugs covered under Part D and 
Medicaid.  We did not verify the accuracy or completeness of CMSs 
Part D PDE data; CMSs Medicaid utilization data; manufacturer 
rebate submissions; CMSs Medicaid rebate data; pharmacy 
classifications; or drug type data from CMS, Redbook, or First 
DataBank.   
The prices that serve as the bases for Medicaid rebate data (i.e., 
AMPs and best prices) are subject to revision.  Therefore, the findings 
in this report are based on rebate data available at the time of the 
analysis.  Part D and Medicaid rebate data are confidential; 
consequently, all of our findings are reported in the aggregate.39  
Additionally, we did not collect data on supplemental rebates 
negotiated by States, nor did we include them in the analysis.   
Several manufacturers that paid Part D rebates were unable to limit 
their rebate data to drugs dispensed in retail pharmacies.  In these 
cases, the manufacturers either provided estimates of these rebates or 
we calculated estimates based on reported rebates for drugs 
dispensed to all sources.     
 
39 Additionally,  3313(b)(2)(B) of the ACA prohibits OIG from publishing proprietary 
information in this report.   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  11   
   
I N T R O D U C T I O N  
The ACA changed the definition of AMP as well as the URA for 
Medicaid drug rebates.  In addition, provisions in the ACA increased 
Medicaid rebate percentages and additional Part D price reductions 
on certain brand-name drugs for certain beneficiaries in 2011.40  
However, these provisions were not in effect during the period under 
review.   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors 
General on Integrity and Efficiency. 
 
40 Section 3301 of the ACA established a drug discount program for Part D beneficiaries 
that have entered the coverage gap (i.e., the period when a beneficiary is responsible for 
paying 100 percent of his or her drug costs), effective January 1, 2011.   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  12   
   
F I NFF DII NNI NDD GII SNN  GG SS   
Part D sponsors and State 
In 2009, pharmacy reimbursement amounts under 
Medicaid agencies paid pharmacies 
Medicare Part D and Medicaid were similar for most 
similar amounts for most of the 
selected brand-name drugs but differed 
selected brand-name drugs.41  
substantially for over half of selected generic drugs 
However, for most of the generic 
drugs under review, differences in pharmacy reimbursement between 
the two programs were much greater.      
Pharmacy reimbursement amounts differed by less than 2 percent for over 
two-thirds of brand-name drugs 
For 70 of the 100 brand-name drugs under review, the difference 
between the average Part D and Medicaid unit reimbursement amounts 
was less than 2 percent.  Pharmacy reimbursement differed by less than 
10 percent for an additional 20 drugs.  Only 5 of the 100 brand-name 
drugs had a difference in pharmacy reimbursement that exceeded        
25 percent.42   
As Figure 1 illustrates, for all 30 drugs for which the reimbursement 
difference exceeded 2 percent, it was Medicaid that paid more.  Overall, 
Medicaid reimbursement was higher for 63 drugs; Part D 
reimbursement was higher for the remaining 37.  At the median, 
Medicaid reimbursement amounts to pharmacies were 1 percent higher 
than the Part D amounts for brand-name drugs.   
Pharmacy reimbursement amounts differed by more than 15 percent for 
over half of generic drugs  
As Figure 2 illustrates, pharmacy reimbursement amounts under     
Part D and Medicaid differed by more than 15 percent for 53 of the             
100 generic drugs under review.  In fact, the difference in pharmacy 
reimbursement for 28 of these drugs exceeded 25 percent (6 of these 
drugs had differences that exceeded 50 percent).43  Overall, Medicaid 
reimbursement was higher for 62 of these drugs; Part D reimbursement 
was higher for the remaining 38.44  At the median, Medicaid 
 
41 This is generally similar to the results of our previous price comparison issued in 2009.  
See OIG, Comparing Pharmacy Reimbursement:  Medicare Part D to Medicaid,                  
OEI-03-07-00350. 
42 Medicaid paid between 32 and 52 percent more than Part D paid for these five drugs.   
43 Medicaid paid between 57 and 138 percent more than Part D paid for four of these 
drugs.  For the remaining two drugs, Medicaid paid 51 and 53 percent less than Part D.    
44 Although differences in reimbursement for most of these drugs exceeded 15 percent, in 
actual dollar terms, the differences were typically less than $0.25 per unit. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  13   
   
F I N D I N G S  
reimbursement amounts were 3 percent higher than Part D amounts for 
selected generic drugs. 
  Figure 1.  Comparison of Unit Reimbursement Amounts in 2009 for the  
  100 Brand-Name Drugs Under Review  
   
Medicaid Paid Less Than Part D Medicaid Paid More Than Part D
(n=37) (n=63)
50
Drugs 123400000 0 0 0 0 37 -----------------------------------------0 33 16 4 5 5
Percentage Difference in Pharmacy Reimbursement
   Source:  OIG analysis of 2009 Part D PDE data and 2009 Medicaid utilization data.   
 
Figure 2.  Comparison of Unit Reimbursement Amounts in 2009 for the 100 Generic 
Drugs Under Review 
 
Medicaid Paid Less Than Part D  Medicaid Paid More Than Part D 
(n=38)   (n=62)
30
Drugs1200 2 18      9 7 1 1 ----------------------------------------0 3 13 22 16 4 4
0
 
 
 
     
 
  Percentage Difference in Pharmacy Reimbursement
 
 
  Source:  OIG analysis of 2009 Part D PDE data and 2009 State Medicaid utilization data.   
 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  14   
   
FFFF IIII NNNN DDDD IIII NNNN GGGG SSSS     
Overall, Medicaid unit rebate 
In 2009, Medicaid unit rebate amounts for brand-
amounts were 3 times greater 
name drugs were substantially higher than Part D 
than Part D unit rebate 
unit rebate amounts; rebates for generic drugs 
amounts at the median for the 
under both programs were negligible    100 brand-name drugs under 
review.  For 68 of these drugs, 
manufacturers paid at least twice as much per unit in Medicaid rebates 
in 2009 compared to amounts paid per unit under Part D (Medicaid unit 
rebate amounts were over 10 times greater than Part D unit rebate 
amounts for 10 of these drugs).  Manufacturers for an additional eight 
brand-name drugs responded that they did not provide any Part D 
rebates in 2009 (Medicaid rebates for these drugs ranged from 16 to      
54 percent of the unit costs for those drugs).  Conversely, Part D unit 
rebate amounts exceeded Medicaid unit rebate amounts for just five of 
the brand-name drugs under review.  Figure 3 illustrates the 
substantial difference in rebate amounts for Part D and Medicaid.45   
     Figure 3.  A Comparison of Unit Rebate Amounts for Brand-Name Drugs 
 
Medicaid Rebates Are Lower Than Part D Rebates Medicaid Rebates Are Higher Than Part D Rebates
(n=5) (n=87)
 
Drugs 1230000 1 3     1 --------------------------------0 19 20 23 15 10
 
 
  Difference in Unit Rebate Amounts
 
     Source:  OIG analysis of 2009 Part D rebate data and 2009 Medicaid rebate data.   
Unlike rebates for brand-name drugs, rebates for generic drugs had 
little impact in reducing net expenditures.  Part D sponsors collected 
virtually no rebates for generic drugs, according to manufacturer rebate 
 
45 Figure 3 includes only the 92 drugs for which there were both Medicaid and Part D 
rebates, thus enabling us to calculate the percentage difference.  Manufacturers for the 
remaining eight brand-name drugs reported either (1) that they do not provide Part D 
rebates for these drugs or (2) that these drugs were not dispensed in retail pharmacies. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  15   
   
F I N D I N G S  
data.  Although manufacturers pay Medicaid rebates for generic drugs, 
they reduced total expenditures for the 100 generic drugs under review 
by only 3 percent.  For individual generic drugs, Medicaid rebates 
ranged from less than 1 percent to 9 percent of reimbursement.46  The 
small amount of Medicaid expenditures and rebates attributed to 
generic drugs is due to the fact that the AMPs, on which rebates are 
based, for generic drugs are often much less than actual Medicaid 
reimbursement amounts.   
Medicaid rebates were substantially higher than Part D rebates for        
brand-name drugs because manufacturers for virtually all brand-name 
drugs under review paid inflation-based rebates  
From 1996 through 2009, the basic URA for a brand-name drug was the 
greater of 15.1 percent of the AMP or the difference between the AMP 
and best price.  In addition, if the AMP for a brand-name drug rose 
faster than inflation, then the drugs manufacturer was (and still is) 
required to pay an additional rebate over and above the basic URA.  For 
98 of the 100 brand-name drugs under review, manufacturers paid this 
additional rebate in all 4 quarters of 2009.47   
The inflation-based additional rebate is the primary reason Medicaid 
rebates are substantially higher than Part D rebates.  In the aggregate, 
55 percent of the total Medicaid rebates owed by manufacturers for the 
100 brand-name drugs under review ($1.6 billion out of $2.9 billion) are 
owed because AMPs rose faster than inflation.  For 70 of the             
brand-name drugs, the additional rebate portion of the URA (i.e., the 
inflation-based amount) actually exceeded the basic rebate portion (i.e., 
either 15.1 percent of the AMP or the difference between the AMP and 
best price).  The additional unit rebate amounts alone exceeded the   
Part D unit rebate amounts for 69 brand-name drugs48 under review 
and were at least two times more than the Part D rebate amounts for    
38 of these drugs.     
 
 
46 CMSs rebate data did not contain rebate amounts for one of the selected generic 
drugs.  We excluded the drug from this portion of the analysis.   
47 The manufacturer of one of the remaining two drugs paid the additional rebate for 
that drug in three of four quarters of 2009; the manufacturer for the other drug did not pay 
any additional rebates for that drug in 2009.   
48 This total does not include the eight brand-name drugs for which the manufacturers 
reported either (1) that they do not provide Part D rebates for these drugs or (2) that these 
drugs were not dispensed in retail pharmacies. 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  16   
   
F I N D I N G S  
Although average Part D and 
After accounting for rebates, Medicaid net costs 
Medicaid reimbursement amounts 
for selected brand-name drugs were much 
for most brand-name drugs under 
lower than Part D net costs 
review were similar, Medicaid 
unit rebates for these drugs were substantially higher than those under 
Part D.  Consequently, Medicaids net unit costs (i.e., pharmacy 
reimbursement minus rebates) were much lower (34 percent at the 
median) than net unit costs under Part D in 2009.   
As previously stated, Medicaid unit reimbursement amounts were 
actually higher than Part D unit reimbursement amounts for                     
63 brand-name drugs. However, after accounting for rebates, Medicaid 
net unit costs were higher than Part D net unit costs for only 7 drugs; 
Part D net unit costs exceeded Medicaid net unit costs for the remaining 
93.  In fact, Medicaid net unit costs were more than 25 percent below 
Part D net unit costs for nearly three-fourths of these brand-name 
drugs.  Figure 4 illustrates the effect of rebates on drugs costs.   
Figure 4.  Comparison of Average Medicare Part D and Medicaid Net and Gross 
Costs for Brand-Name Drugs 
125 _
_
_
_
_
_
_
_
100 __ 93
_
_
_
_
_
_
75 __ Medicaid 
_ Pays More
Drugs 63 _____
_
50 __ Medicaid 
37 __ Pays Less
_
_
_
_
_
25 _
_
_
_
__ 7
_
_
_
0
Gross Unit Costs Net Unit Costs
  Source:  OIG analysis of 2009 Part D PDE data, Part D manufacturer rebates, Medicaid utilization data, and Medicaid rebates.   
 
 
 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  17   
   
FF II NN DD II NN GG SS   
Medicaid collected nearly two-thirds as much in rebates as Part D despite 
having only one-fourth of the expenditures 
As further evidence of Medicaids substantially higher unit rebate 
amounts, Medicaid collected nearly two-thirds as much in rebates as 
Part D ($2.9 billion vs. $4.5 billion) for the selected brand-name drugs 
despite having only about one-fourth of the expenditures ($6.4 billion vs.      
$24 billion).   
Overall, rebates reduced Part D expenditures by 19 percent for the         
100 brand-name drugs under review (from $24 billion to $19.5 billion) in 
2009.  Medicaid rebates accounted for a substantially higher percentage 
of total expenditures, reducing Medicaid spending for the 100 drugs 
under review by 45 percent (from $6.4 billion to $3.5 billion).  See 
Figure 5 for an illustration on the effect of rebates on expenditures for 
brand-name drugs. 
 
Figure 5.  Rebates as a Percentage of Expenditures Under Part D and  
Medicaid 
Part D Expenditures for 100 Brand-Name Drugs Medicaid Expenditures for 100 Brand-Name Drugs
 
Part D 
Rebates   
(19%) Medicaid 
Rebates 
 
(45%)
Part D Costs
  Medicaid 
Costs
 
 
     
          Source:  OIG analysis of 2009 Part D PDE data, manufacturer rebate data, 2009 Medicaid utilization data, and Medicaid rebate data.   
 
 
 
 
 
 
 
   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  18   
   
F I NC DO I NN CG LS U  S I O N  
 
Prescription drug rebates reduce the program costs of both Medicare 
Part D and Medicaid.  Medicaid rebates are defined by statute; 
additional rebates are required when prices for brand-name drugs 
increase faster than inflation.  Unlike the Medicaid program, Part D 
sponsors (or contractors acting on their behalf) negotiate rebates with 
drug manufacturers without any statutory requirements on rebate 
amounts.  In fact, the law establishing the Part D program expressly 
prohibits the Government from instituting a price structure for the 
reimbursement of covered Part D drugs. 
In this review, we found that Part D sponsors and State Medicaid 
agencies paid pharmacies similar amounts for most brand-name drugs 
under review.  However, statutorily defined Medicaid unit rebate 
amounts for brand-name drugs exceeded Part D unit rebate amounts by 
a substantial margin.  As a result, Medicaid collected nearly two-thirds 
as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion 
vs. $4.5 billion), despite having only about one-fourth of the 
expenditures ($6.4 billion vs. $24 billion).  
Despite Part Ds larger market share (including dual eligible 
beneficiaries who once received drug coverage under Medicaid), Part D 
does not collect as much in rebates that reduce program expenditures.  
A major driver of the higher Medicaid rebates was the additional 
amount owed when prices for brand-name drugs increase faster than 
inflation.  This not only produces additional Medicaid rebates, but also 
helps protect the program from increased costs when manufacturers 
raise prices.   
Furthermore, Medicaid rebates for brand-name drugs may increase as a 
result of the ACA provisions that raise the rebate percentage.  Given the 
potential impact on beneficiary and Government expenditures, we 
believe that it is important for CMS to continually examine any 
differences in how each program collects rebates.        
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS agreed with our overall findings.  CMS stated that it was pleased 
OIG confirmed that the Medicaid rebate program is working well and 
providing substantial rebates to offset the high costs of prescription 
drugs.  CMS agreed that the ACA may further increase Medicaid 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  19   
   
C O N C L U S I O N  
rebates for brand-name drugs and that it is important to continue to 
examine the differences in how each program collects rebates.   
We did not make any changes to the report based on CMSs comments.  
For the full text of CMSs comments, see the Appendix. 
   
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  20  A P  PEN  D  x 
Agency Comments 
/"VlV~., 
~	
( ,'S! DEPARTMENT OF HEALTH & HUMAN SERVICES  Centers tor Medicare & Medicaid Services 
Deputy Administrator 
Baltimore. MD 21244-1850 
JUL 1 5 2011
DATE: 
TO: 	 Daniel R. Levinson 

Inspect,or eeneral 

FROM: 	 MMilyn Tavenner 

PrincipallDeputy Administrator 

SUBJECT: 	 Office ofInspector General (DIG) Draft Report:  Higher Rebates for Brand-Name 
Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D 
(OEI-03-10-00320) 
Thank you for the opportunity to review and comment on the subject OIG Draft Report entitled: 
"Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to 
Medicare Part D" (OEI-03-1 0-00320). This report was required by Section 33J3(b), Study and 
Report on Prescription Drug Prices Under Medicare Part D and Medicaid, ofthe Affordable Care 
Act. This report compares pharmacy reimbursement and manufacturer rebates under Medicare 
Part D to Medicaid for the 100 brand-name and 100 generic drugs with the highest Part D 
expenditures using 2009 data.  This report also compares each program's net drug costs and 
examines the effect that differences may have on overall program costs. The Centers for 
Medicare & Medicaid Services (CMS) agrees with the overall findings in the DIG report 
acknowledging the efforts CMS has made to improve lowering the costs in the Medicaid drug 
program. 
CMS was pleased the DIG confirmed that the Medicaid rebate program is working well, and 
providing substantial rebates to offset the cost ofthe high costs ofprescription drugs. CMS also 
acknowledges that the OIG correctly attributed differences in cost to statutory requirements 
regarding rebates in Medicaid and Medicare Part D. Unlike in the Medicaid program, Part D 
sponsors (or contractors acting on behalfofsponsors) negotiate rebates with drug manufacturers 
without any statutory requirements on rebate amounts, and the Government is expressly 
prohibited from instituting a price structure for the reimbursement ofcovered Part D drugs. 
Additionally, we agree with the DIG that the Affordable Care Act may further increase brand 
name drug rebates in the Medicaid program and that it is important for CMS to continually 
examine the differences in how each program collects rebates. 
We would like to thank the DIG for their efforts in reviewing pharmacy reimbursement and 
rebates under Medicare Part D and Medicaid and look forward to working with the OIG on (his 
and other issues in the future. 
OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  21   
   
 A C K N O W L E D G M E N T S  
 
 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and David E. Tawes, Director of the Medicare and 
Medicaid Prescription Drug Unit.   
Edward K. Burley served as the team leader for this study.  Other 
principal Office of Evaluation and Inspections staff from the 
Philadelphia regional office who contributed to the report include Daniel 
J. Mallinson; central office staff who contributed include Eddie Baker, 
Jr., and Kevin Manley.  
 
  OEI-03-10-00320  HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D  22   
Office of Inspector General 
http://oig.hhs.gov 
 
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amended, is to protect the integrity of the Department of Health and Human Services 
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investigations, and inspections conducted by the following operating components: 
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