Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Cost Containment of Medicaid HIV/AIDS 
Drug Expenditures 
JULY 2001 
OEI-05-99-00611  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended by Public Law 100-504, is to protect the integrity of the Department of Health 
and Human Services programs as well as the health and welfare of beneficiaries served by 
them. This statutory mission is carried out through a nationwide program of audits, 
investigations, inspections, sanctions, and fraud alerts. The Inspector General informs the 
Secretary of program and management problems and recommends legislative, regulatory, 
and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections is one of several components of the Office of 
Inspector General. It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the 
public. The inspection reports provide findings and recommendations on the efficiency, 
vulnerability, and effectiveness of departmental programs. 
OEI's Chicago regional office prepared this report under the direction of William Moran, 
Regional Inspector General and Natalie Coen, Deputy Inspector General. Principal OEI 
staff included: 
REGION  HEADQUARTERS 
Ann Maxwell, Project Leader
 Elise Stein, Director, Public Health and 
Madeline Carpinelli, Analyst
 Human 
Services

Erin Bliss, Intern
 Stuart Wright, Director, Medicare and 
Medicaid 
To obtain copies of this report, please call the Chicago Regional Office at (312) 353-4124. 
Reports are also available on the World Wide Web at our home page address: 
http://www.hhs.gov/oig/oei  E X E C U T I V E   S U M M A R Y  
PURPOSE 
To compare the amount that Medicaid reimburses for HIV/AIDS drugs to the prices paid 
by other government purchasers. 
BACKGROUND 
Title XIX of the Social Security Act established Medicaid as a jointly-funded, 
Federal-State health insurance program to provide medical services to low-income 
persons. It is estimated that Medicaids net spending on prescription drugs, the most 
frequently used benefit in the Medicaid program, totaled $16.4 billion in fiscal year (FY) 
2000. The Centers for Medicare and Medicaid Services (CMS), formerly known as the 
Health Care Financing Administration, spent $617 million on antiretrovirals in FY 1999. 
Medicaid provides prescription drug benefits for 42 to 46 percent of the 335,000 persons 
living with HIV/AIDS who receive regular care. 
As the largest source of public coverage for prescription drugs, Medicaid strives to be a 
prudent purchaser of pharmaceuticals. It does this by limiting drug reimbursement to 
pharmacies and by receiving quarterly rebates from drug manufacturers. 
Other Federal programs also seek to limit pharmaceutical costs. To assess how Medicaid 
is functioning as a Federal purchaser of HIV/AIDS drugs, we compared Medicaids net 
unit costs (reimbursement price minus rebates) for antiretrovirals in FY 2000 to other 
Federal purchasers. In particular, we compare Medicaids net prices to: 1) Federal 
ceiling prices, 2) Federal supply schedule prices, 3) 340B Drug Pricing Program ceiling 
prices, and 4) the net costs paid under the 340B Drug Pricing Program rebate option 
available to AIDS Drug Assistance Programs. 
FINDINGS 
Medicaid pays up to 33 percent more than other Federal Government drug 
discount programs for HIV/AIDS drugs 
Comparing the prices paid for antiretrovirals, we found that the 10 Medicaid agencies in 
our sample pay 33 percent more than the Federal ceiling price, 10 percent more than the 
Federal supply schedule and 15 percent more than the 340B Drug Discount Program 
ceiling prices. Medicaids net costs also averaged 5 percent more than AIDS Drug 
Assistance Programs participating in the rebate option for most antiretrovirals. 
i 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Differences in Federal drug pricing formulas are partially responsible for cost 
discrepancies 
The difference in HIV/AIDS antiretroviral drug costs across Federal programs is partially 
explained by the fact that each of the Federal purchasers we reviewed adheres to a 
different federally mandated formula. The intention of each of these approaches is to 
place limits on the prices of drugs procured by Federal purchasers. Yet, the outcomes of 
the various approaches differ and result in consistently higher antiretroviral drug prices 
for the Medicaid program. 
State reimbursement formulas affect the magnitude of the gap between Medicaid 
and other government drug purchasers 
State Medicaid agencies flexibility in setting reimbursement rates has resulted in 
different prices for the same antiretroviral drugs among State Medicaid agencies. 
Massachusetts reports the lowest unit expenditures on pharmacy acquisition costs. If the 
other nine States in our sample utilized Massachusetts formula, they could have saved an 
annualized $24.5 million dollars. Georgia reports the highest unit expenditures on 
pharmacy acquisition costs. 
Medicaid could have saved $102 million if the 10 States surveyed purchased the 
16 antiretrovirals at Federal ceiling prices 
Comparing the actual per drug expenditures of Medicaid to what they would have paid if 
they had access to Federal ceiling prices results in a joint Federal/State savings of $102 
million in FY 2000 ($54 million Federal share) for the 10 States in our review. This 
represents 25 percent of the total spent on antiretrovirals in these States. If all Medicaid 
programs were able to obtain Federal ceiling prices, we estimate the program could have 
saved $140 million ($73 million Federal share). 
RECOMMENDATIONS 
The rules guiding Medicaid reimbursement and rebates are intended to allow the program 
to participate in the pharmaceutical market as prudent buyers. Our findings demonstrate 
that Medicaid is paying more for antiretroviral drugs than other Federal purchasers. We 
offer several options regarding Medicaid drug reimbursement and rebates as potential 
means to lower Medicaid expenditures on antiretroviral drugs. 
For the 16 HIV/AIDS drugs examined, Centers for Medicare and Medicaid Services 
should review the current reimbursement methodology and work with States to 
find a method that more accurately estimates pharmacy acquisition cost 
In order to maximize scarce Federal and State dollars, it is essential to improve the 
accuracy of States estimated pharmacy acquisition cost. We offer the following three 
suggestions for improving reimbursement methodology: 
ii 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  <  Option 1:  Develop safeguards to protect Medicaid from average wholesale 
price (AWP) manipulations, or 
<  Option 2:  Create national estimated acquisition cost for the States based 
upon the average manufacturers price, or 
<  Option 3:  Share average manufacturer price data with States so that they can 
accurately set Medicaid reimbursement amounts. 
Whichever method CMS adopts to improve estimated acquisition cost, a re-examination 
of the dispensing fee should also be conducted to ensure that pharmacists can cover their 
costs. 
The Centers for Medicare and Medicaid Services should initiate a review of 
Medicaid rebates for the 16 HIV/AIDS drugs examined 
Though an improved reimbursement methodology would generate program savings, it 
would not completely close the gap between Medicaid and other government drug 
purchasers. This would require a more substantial rebate from drug manufacturers. We 
offer the following two suggestions to CMS for further research: 
<  Option 1:  Increase the rebate percentage of average manufacturer price, or 
<  Option 2:  Base the rebates on average wholesale price rather than average 
manufacturer price. 
While our findings and recommendations pertain only to antiretroviral drugs, numerous 
other Inspector General reports have concluded that Medicaid pays more than other 
Federal and private purchasers for a wide variety of drugs. As part of a larger effort to 
examine the problems plaguing Medicaid drug reimbursement and rebate policies, our 
recommendations build off the recommendations made in those previous reports. Future 
work in this area may, in turn, find that the recommendations presented in this report for 
antiretroviral drugs may have broader applicability. 
AGENCY COMMENTS 
The CMS provided comments on the draft report in which they agreed with the overall 
intent of our recommendations, but expressed reservations with many of the specific 
suggestions we offered for achieving them. Primarily, CMS felt that they did not have 
the statutory authority to make the suggested changes. Since reducing Medicaid prices 
for HIV/AIDS medications is so crucial to ensuring access to these drugs, we encourage 
CMS to seek any legislation necessary to accomplish the task. However, we continue to 
believe that most of the options delineated in the report can be undertaken without 
amending current law. The complete text of CMSs comments can be found in Appendix 
E. Additional discussion can be found on page 26. 
iii 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY ...................................................... i

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

FINDINGS

Medicaid Pays 33 Percent More than other Federal Programs for HIV/AIDS Medications  . .  11

Differences in Drug Pricing Formulas Partially Responsible for Cost Discrepancies  ....... 12

Reimbursement Formulas Affect Magnitude of the Gap ............................... 14

Medicaid Could Have Saved $102 Million ......................................... 16

RECOMMENDATIONS  .....................................................  18

AGENCY COMMENTS  .....................................................  26

APPENDICES

A: Glossary  of Terms .......................................................... 29

B: List of Antiretroviral Drugs  .................................................. 30

C: Sampled States Formula for Estimating Acquisition Cost  .......................... 31

D: Sampled States Dispensing Fees .............................................. 32

E: Agency Comments  ......................................................... 33

F:  Related Office of Inspector General Report Summaries  ............................ 37

G:  Related Office of Inspector General Reports ..................................... 40

H:  End Notes ................................................................ 41

iv 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  I N T R O D U C T I O N  
PURPOSE 
To compare the amount that Medicaid reimburses for HIV/AIDS drugs to the prices paid 
by other government purchasers. 
BACKGROUND 
Medicaid 
Medicaid is the largest program providing medical services to Americas poorest people 
and represents our nations primary health care safety net for low-income women, 
children and disabled persons. Title XIX of the Social Security Act established Medicaid 
as a jointly-funded, Federal-State health insurance program. The Federal Government 
contributes a matching percentage of State Medicaid outlays, ranging from 50 percent to 
83 percent of health care costs, depending on the States relative per capita income. 
The Centers for Medicare and Medicaid Services (CMS), formerly known as the Health 
Care Financing Administration (HCFA), administers Medicaid at the Federal level. The 
CMS estimates expenditures for the program totaled $201 billion in fiscal year (FY) 
2000, $114 billion in Federal and $87 billion in State funds. This funding covered 
approximately 41 million individuals. 
Medicaid and HIV 
Of the total $201 billion Medicaid spent in FY 2000, $4.1 billion went for HIV/AIDS 
care.1  The States portion of expenditures for Medicaid HIV/AIDS patients was $1.9 
billion. Federal Medicaid HIV/AIDS spending was $2.2 billion. 
There are an estimated 800,000 to 900,000 Americans living with HIV/AIDS, 300,000 of 
whom are estimated to be living with AIDS. Fifty-five percent of all adults and 90 
percent of children with AIDS are enrolled in Medicaid. 
Most persons with HIV/AIDS who qualify for Medicaid coverage do so by meeting one 
of two eligibility requirements. First, many individuals with HIV/AIDS become disabled 
as a result of their illness. This disability, combined with limited income, makes them 
eligible for Social Security Income, and consequently, eligible for Medicaid. Second, 
people with HIV may meet categorical and financial tests unrelated to their disease. 
Despite Medicaids critical role in providing care for both HIV and AIDS patients, 
eligibility for the largest population of HIV infected persons, childless adults that have 
not yet been disabled by AIDS, is limited. 
1 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Medicaid eligibility may be broadening for persons infected with HIV. Since 1997, CMS 
has granted States the ability to submit a 1115 waiver proposal to test Medicaid 
eligibility expansion. In February 2000, Maine received approval to extend Medicaid 
benefits to non-disabled persons living with HIV. In January 2001, Massachusetts also 
received waiver approval to enable people with HIV to qualify for comprehensive health 
coverage under Medicaid. In 1999, Section 204 of the Ticket to Work and Work 
Incentives Improvement Act established the Demonstration to Maintain Independence 
and Employment grant program. This program authorizes States to provide Medicaid 
benefits and services to workers who have physical or mental impairments that, without 
medical assistance, will result in disability. Thus far, Mississippi has been granted $27.5 
million to provide Medicaid coverage to 500 persons living with HIV/AIDS. Finally, 
Congress is considering national legislation to provide States with an option to extend 
Medicaid coverage to low-income non-disabled individuals with HIV/AIDS without the 
need to apply for an 1115 waiver. 
Medicaid and Prescription Drug Coverage 
Medicaid is the largest source of public coverage for prescription drugs. It is estimated

that Medicaids net spending on prescription drugs, the most frequently used benefit in

the Medicaid program, totaled $16.4 billion in FY 2000. Medicaid provides prescription

drug benefits for 42 to 46 percent of the 335,000 persons living with HIV/AIDS who

receive regular care. In FY 1999, Medicaid spent $617 million for antiretrovirals.

Medicaids prescription drug program faces increasing demand and rising pharmaceutical

costs. The rate of HIV infection is accelerating among low-income persons, especially

women. In the last decade the proportion of AIDS cases reported among women has

tripled.2  Demand for services has also increased due to Medicaid eligibility expansion. 

Further, pharmaceutical costs have been increasing approximately 16 to 21 percent

annually compared to the 4 to 7 percent annual increases in overall Medicaid spending.3

As a result of increasing demand and increasing costs, containment of prescription drug

expenditures has become an important issue at both the State and Federal level.

Currently, Medicaid seeks to control pharmaceutical expenses in several ways. One way

is to limit drug coverage through such measures as prescriptions limits and restrictions on

specific drugs based upon drug formularies.4  However, Medicaids ability to use

formularies is limited. In particular, CMS issued a letter in June 1996 to State Medicaid

directors requiring States to cover all Food and Drug Administration approved protease

inhibitors, a prominent drug class used in the treatment of HIV/AIDS. States can also

institute beneficiary co-payments, but these cannot exceed the maximum of $3. 

Medicaid also strives to limit the cost of drugs. Toward this end, State agencies limit the

amount they reimburse pharmacies for prescription drugs. They also receives rebates

from manufacturers for dispensed drugs.

2 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Medicaid Drug Reimbursement to Pharmacies 
Under Section 1902(a)(30)(A) of the Social Security Act, CMS has the authority to set 
upper payment limits for services available under the Medicaid program. On July 31, 
1987, CMS published the final rule (52 FR 28648) that limits Medicaid drug 
reimbursements to pharmacies. The guidelines for payment were issued to ensure that 
the Federal Government act as a prudent buyer of drugs. 
The reimbursement methods set forth differ for generic and brand name drugs. All of the 
drugs in our study are brand name because there are no generic antiretrovirals available at 
this time. For brand name drugs, Medicaid reimbursement is the lower of either the 
pharmacists usual and customary charge to the general public or the estimated 
acquisition cost (EAC) plus a reasonable dispensing fee. 
Estimated Acquisition Cost 
The estimated acquisition cost is the State agencys best estimate of the price generally 
paid by pharmacies for a drug.5  The CMSs final rule does not specify any particular 
method for calculating EAC. As a result, States have developed their own methods for 
estimating acquisition cost. States typically use one of two methods. The cost plus 
method calculates the providers cost based upon the wholesaler acquisition cost (WAC) 
plus a markup percent. The WAC is the list price established by manufactures for sales 
to wholesalers. The list less method relies upon the average wholesale price (AWP) 
less a discount percentage. The AWP is the manufacturers suggested list price for a 
wholesaler to charge a pharmacy for a drug. Both the AWP and WAC are listed and 
updated by First Databank, a national drug pricing compendium, in the national drug 
product and pricing information publication the Blue Book. 
The majority of State Medicaid agencies use the list less method. However, various 
investigations into AWP demonstrated that AWP was overstated by as much as 10 to 20 
percent. In response, CMS clarified that the State determination of estimated acquisition 
cost using AWP must include a significant discount to be considered an acceptable 
estimate. In 1997, the Office of Inspector General (OIG) report, Medicaid Pharmacy -
Actual Acquisition Costs of Prescription Drug Products for Brand Name Drugs (A-06-
96-00030) found that the actual acquisition costs for brand name drugs were still on 
average 18 percent lower than AWP. The average State discount in 1999 was 10.4 
percent off of AWP.6 
Recent investigations conducted by the Department of Justice, the Office of Inspector 
General and Medicaid Fraud Control Units are further calling into question AWPs 
validity. They have found that even with the significant discount off of average 
wholesale price, prices paid by Medicaid are still inflated. As a result, efforts are being 
made to ensure accurate drug pricing data are used in setting Medicaid reimbursement 
rates. First Databank has agreed to change the way it reports prices for 48 
pharmaceuticals based on figures that fraud investigators have determined to be closer to 
3 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  what medical providers actually pay. None of the 48 pharmaceuticals with revised prices 
are antiretrovirals used for treating HIV/AIDS. 
Dispensing Fees 
State agencies are required to determine reasonable dispensing fees, or, if dispensing fees 
are not paid separately, to impute an amount equivalent to a reasonable dispensing fee. 
This fee represents the charge for the professional services provided by a pharmacist 
when dispensing a prescription. Prior to 1987, States were required to survey dispensing 
fee costs and update those fees in a periodic manner. The requirement was eliminated 
with the expectation that States would continue to work to establish a reasonable 
dispensing fee level and document these in their State plan. 
Manufacturer Rebates: The Medicaid Drug Rebate Program 
In addition to limiting reimbursement, the Medicaid program controls costs by obtaining 
rebates from drug manufacturers. The Omnibus Budget Reconciliation Act of 1990 
created the Medicaid Drug Rebate Program. This Federal statute mandates that drug 
manufacturers provide rebates to State Medicaid agencies. For their drugs to be eligible 
for Medicaid reimbursement, manufacturers must enter into rebate agreements with the 
Secretary of the Department of Health and Human Services and pay quarterly rebates to 
the State Medicaid agencies. 
Rebates are calculated separately for generic drugs and brand name drugs. The rebate for 
brand name drugs is the greater of 15.1 percent of the average manufacturer price (AMP) 
per unit or the difference between the AMP and the manufacturers Best Price. The 
average manufacturer price is the average unit price paid to the manufacturer for the drug 
by wholesalers. The Best Price is defined as the lowest price available from the 
manufacturer to any wholesaler, retailer, provider, health maintenance organization, 
nonprofit entity, or government entity, excluding any prices charged to certain 
government agencies and the Federal Supply Schedule, State pharmaceutical assistance 
programs, and any single award contract prices.7  In an effort to restrain drug price 
inflation, the rebate calculation includes an additional rebate on any drug whose price 
increases at a rate faster than the Consumer Price Index-Urban. 
Other Federal Drug Purchasing Systems 
Department of Veterans Affairs 
The Veterans Health Care Act (VHCA) of 1992, Section 603, states that prices to the 
Department of Veterans Affairs (VA), Department of Defense, the Coast Guard and the 
Public Health Service, known as the Big 4, may not exceed 76 percent of the non-Federal 
average manufacturer price (non-FAMP). The non-FAMP is the manufacturers weighted 
average of commercial, non-Federal sales per unit. These statutorily discounted prices 
4 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  are typically referred to as the Federal ceiling prices. The law additionally requires that 
the Big 4 access these Federal ceiling prices through the Federal supply schedule (FSS). 
In addition to calculating the Federal ceiling price, the VA manages several Federal 
supply schedules dealing with health care commodities for the entire Federal 
Government, including Schedule 65 I B for pharmaceuticals. The FSS provides a 
schedule of contracts and prices for a broad range of drugs that allow agencies to 
purchase various quantities of pharmaceuticals while still obtaining the discount 
associated with bulk purchasing. Using competitive procedures, contracts are awarded to 
companies to provide drugs at the most favored customer price. 
340B Covered Entities 
Section 602 of VHCA enacted Section 340B of the Public Health Services Act. This sets 
statutory ceiling prices for pharmaceuticals purchased by certain covered entities. The 
entities eligible for 340B Drug Discount Program direct purchase option purchase drugs 
directly from the manufacturers through a centralized mechanism. The ceiling price 
formula is roughly the average manufacturers price decreased by the Medicaid unit 
rebate amount (URA). 
Among those eligible for the 340B Drug Discount Program are the AIDS Drug 
Assistance Programs (ADAP), established by the Ryan White Comprehensive AIDS 
Resource Emergency Act of 1990. The ADAPs provide medications to low-income 
individuals living with HIV/AIDS who have limited or no coverage from private 
insurance or Medicaid. 
The 340B ceiling price is available to 23 State ADAPs who acquire pharmaceuticals 
through a centralized purchaser. Another 24 State ADAPs take advantage of a rebate 
option that allows them to access Medicaid unit rebates on a quarterly basis. Like 
Medicaid, these ADAPs do not purchase their own drugs but rather reimburse retail 
pharmacies for prescriptions filled. 
Pharmaceutical Industry Overview 
The pharmaceutical industry is extremely complex, including a myriad of arrangements 
that differ by drug, company and purchaser. Chart 1 provides an extremely basic view of 
these interactions. It is only meant to explicate the fundamental dynamics among the 
various entities involved in Medicaid drug purchasing and distribution. It does not, by 
any means, capture the full complexity of the system. The following paragraphs explain 
the chart from top to bottom. 
Manufacturers typically do not distribute their products, but rather rely on wholesalers to 
warehouse and distribute their drugs. For brand name drugs, manufacturers set the 
wholesale acquisition price as a list price for wholesalers to purchase drugs from 
manufacturers. Manufacturers also set the average wholesale price as a suggested list 
5 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  price for wholesalers to charge drug suppliers. Both the WAC and the AWP operate as 
suggested list prices and are typically not what is paid. Buyers negotiate lower prices 
through the inclusion of discounts, rebates or free goods. 
Wholesalers purchase large quantities of drugs from manufacturers and distribute them to 
drug suppliers, including retail pharmacies, pharmacy benefit managers, hospitals and 
physicians. Almost 80 percent of all prescription drugs are purchased through 
wholesalers. The interaction between these components and the Medicaid program has 
been diagramed in Chart 1 below. We have also included a glossary of terms in 
Appendix A. 
6 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Chart 1: Pharmaceutical Industry 
Manufacturers 
Manufacturers distribute their products primarily through drug wholesalers but also sell 
directly to pharmacies, hospitals and other bulk purchasers. 
Manufacturers establish wholesale acquisition cost and average wholesale price. 
List Price: Wholesale Acquisition Cost (WAC) 
Actual Selling Price: Average Manufacturers 
Price (AMP) 
Wholesalers 
Wholesalers act as the middlemen that distribute 
pharmaceuticals from manufacturers to pharmacies. 
List Price: Average Wholesale Price (AWP) 
Actual Selling Price: Actual Acquisition Cost 
(AAC) 
Retail Pharmacies 
Pharmacies dispense prescriptions to consumers and provide 
professional pharmacist services. 
Reimbursement: Estimated Acquisition Cost 
(EAC) -(WAC plus a percentage or AWP 
minus a percentage) -plus dispensing fee 
Manufacturer Rebates: 
15.1% of AMP or AMP-Best Price 
Medicaid Agencies 
Cover the pharmaceutical costs for eligible low-income women, children and disabled. 
7 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Related Work by the Office of Inspector General 
The Office of Inspector General has issued a significant body of work related to all 
aspects of Medicaid drug pricing including reimbursement, rebates and the accuracy of 
AWP. In 1997, the OIG released a series of reports specific to 10 States estimating the 
difference between AWP and the prices at which pharmacies purchase brand name and 
generic drugs. The results from the 10 States are summarized in two reports: Medicaid 
Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products (A-06-97-
00011) and Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products 
for Brand Name Drugs (A-06-97-00030). These reports found that pharmacies pay an 
average of 42.5 percent less than AWP for generic drugs and 18.3 percent less for brand 
name drugs. The OIG recommended that CMS work to ensure that the States reimburse 
the ingredient portion of Medicaid in a manner more consistent with the findings of the 
report. It was also recommended that CMS study any of the other factors, such as 
dispensing fees, which they believe could significantly impact pharmacy reimbursement. 
Other related reports include Need to Establish Connection Between the Calculation of 
Medicaid Drug Rebates and Reimbursement for Medicaid Drugs (A-06-97-00052). 
This report examines the disparity inherent in the fact that Medicaid drug rebates are 
calculated using the AMP while the Medicaid program reimburses pharmacies based on 
AWP. The Inspector General recommended a legislative change to base rebates on the 
AWP. In Medicaid Drug Rebates: The Health Care Financing Administration1 Needs to 
Provide Additional Guidance to Drug Manufacturers to Better Implement the Program 
(A-06-91-00092), the OIG found manufacturers calculations of AMP to be inconsistent. 
The OIG recommended that CMS should survey manufacturers to identify the various 
calculation methods used to determine AMP and develop a more specific policy for 
manufacturers. 
Another related OIG report looks at the prices paid for 10 antiretrovirals by the AIDS 
Drug Assistance Program (ADAP). This report, AIDS Drug Assistance Program Cost 
Containment Strategies (OEI-05-99-00610), found that ADAP ceiling prices are, on 
average, 16 percent higher than the Federal ceiling prices and that ADAPs could have 
saved $58 million in 1999 if they were able to access the Federal ceiling prices. 
SCOPE AND METHODOLOGY 
This inspection compares the net prices (reimbursement price minus rebates) that 10 
State Medicaid agencies paid for all 16 HIV/AIDS antiretroviral drugs to the prices paid 
by other government purchasers. Specifically, the prices paid by the State Medicaid 
agencies were compared to the Federal ceiling prices, the Federal supply schedule 
contract prices, and the prices available to 340B eligible entities. 
1  In June 2001, the Health Care Financing Administration (HCFA) was renamed the Centers for 
Medicare and Medicaid Services (CMS). 
8 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  The 10 States selected accounted for 73 percent of Medicaids total fee-for-service 
spending on antiretrovirals in FY 1999. They also accounted for nearly 70 percent of all 
AIDS cases in the United States (excluding Puerto Rico).8  The States are: California, 
Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, New York, 
Pennsylvania and Texas. 
We selected the most commonly prescribed package size for each of the 16 Food and 
Drug Administration approved antiretroviral drugs. A list of these selected drugs can be 
found in Appendix B. Antiretrovirals constitute one of the most prescribed and effective 
drug therapies for treating HIV/AIDS and are covered by all Medicaid agencies. 
We focused on the pharmaceutical prices paid by the fee-for-service component of 
Medicaid. We did not consider drug prices negotiated by Medicaid managed care 
organizations. Most States carve out HIV/AIDS prescription drug payments from their 
managed care contracts and pay for these drugs separately under their standard drug 
benefit policy. Furthermore, managed care organizations negotiate their own drug 
discounts with manufacturers and are not covered by Federal laws that seek to contain 
Medicaid drug costs. 
For the purpose of this study, we focused on drug acquisition costs. For Medicaid, we 
defined these as the net costs to Medicaid for antiretroviral drugs. This is calculated by 
subtracting the manufacturers rebates paid to Medicaid from the reimbursement rates 
paid by Medicaid to the pharmacies. We selected acquisition cost, choosing to disregard 
administrative overhead, drug distribution and storage expenses, in order to control for 
different administrative and drug distribution systems. Comparisons incorporating this 
data would amount to a comparison of alternate systems and are not the focus of this 
study. 
To conduct our analysis, we gathered information regarding pharmaceutical pricing from 
CMS and the VA. The CMS supplied us with the average manufacturers price, the Best 
Price, the Medicaid unit rebate amount, 340B ceiling prices as well as total expenditures 
on antiretrovirals. The VA provided us with data on the Federal ceiling prices and the 
FSS contract prices. 
To gather data on actual State Medicaid agencies expenditures, we sent a survey to each 
of the 10 States in our sample in September 2000. The survey requested States to record 
drug reimbursements, rebates and dispensing fees for the first two quarters of Federal FY 
2000. The survey also asked States brief questions concerning the reimbursement 
formula, dispensing fee charges, and any additional rebates. Finally, the States were 
requested to provide the total amount spent on the 16 drugs in FY 1999. 
The surveys were followed up with telephone interviews with each States Medicaid 
Director or Pharmacy Division Director. The purpose of the interviews was to gain a 
general understanding of program operations and to explore any efforts surrounding 
9 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  HIV/AIDS treatment or drug cost containment strategies. The interviews were conducted 
between September and November of 2000. 
We have taken precaution not to disclose any proprietary drug prices. Towards this end, 
most estimates are averages and all estimates have been rounded. All savings estimates 
based on this information have been annualized. We conducted our review in accordance 
with the Quality Standards for Inspections issued by the Presidents Council on Integrity 
and Efficiency. 
10 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  F I N D I N G S  
Medicaid pays up to 33 percent more than other Federal
Government drug discount programs for HIV/AIDS drugs 
Comparing the prices for antiretrovirals, we found that the Medicaid agencies we

sampled pay up to 33 percent more than other Federal Government programs that

purchase antiretrovirals. On average, Medicaid pays:

<  33 percent more than the Federal ceiling price,9

<  10 percent more than the Federal supply schedule contract prices, and,

<  15 percent more than the 340B Drug Discount Program ceiling prices.

On average, Medicaid will pay 61 cents more per pill than the Big 4 agencies covered by

the Federal ceiling prices. This difference ranges from 7 cents more per pill for

Rescriptor and $1.10 more per pill for D4T. For D4T, this difference translates into $66

more per prescription.

While Medicaids average net price is higher than the Federal Supply Schedule average

price when all 16 drugs are considered, for 7 drugs, Medicaid pays less than the FSS

price. Medicaid averages 11 cents less per pill for theses 7 drugs. However, where

Medicaid is paying more than the FSS, they are averaging 50 cents more per pill. For

example, Medicaid pays 46 percent more for D4T than agencies accessing the FSS and

44 percent more for Videx.

These comparisons indicate that the Medicaid program is not as successful as other

Federal purchasers in securing low-cost pharmaceuticals for its recipients. One possible

explanation for the discrepancy is the fact that the various programs purchase their drugs

at different points in the economic chain of pharmaceutical manufacturers, wholesalers

and pharmacies. The VA, on behalf of the Big 4 and the rest of the agencies accessing

the FSS, as well as the 340B Drug Discount Program (direct purchase option) purchase

directly from manufacturers or wholesalers. The Medicaid program does not purchase

drugs directly. Rather, participating pharmacies bill Medicaid an allowed amount for

filled prescriptions. 

Given that Medicaids price purchases the additional services of a pharmacist, it is not

surprising that Medicaids reimbursement rate is higher than other programs purchase

prices. The National Association of Chain Drug Stores found that in 1999, 22 percent of

the cost of a prescription went to the pharmacy and another 2.3 percent went to the

wholesaler. However, the prices used in the above comparisons were not Medicaids 

reimbursement prices, but rather its net prices. Medicaids net price is their

reimbursement price minus manufacturer rebates. The rebates are intended to give

11 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Medicaid the benefit of price discounts offered by the manufacturers to their largest 
customers. Even calculating in these rebates, Medicaid is paying the highest prices for 
antiretrovirals of any Federal purchaser. 
Medicaid pays 5 percent more for antiretrovirals than AIDS Drug Assistance 
Programs with identical drug distribution structure 
While the above comparisons may only approximately gauge Medicaids drug 
purchasing performance due to differences among the programs, one would expect 
Medicaid to pay the same amount for the same drugs when compared to a government 
program of similar structure. In order to assess this, we compared the prices Medicaid 
pays for antiretrovirals to those paid by AIDS Drug Assistance Programs utilizing the 
rebate option of the 340B Drug Discount Program. 
The Medicaid program and the rebate ADAPs share identical drug purchasing and 
distribution structures. Like Medicaid, rebate ADAPs reimburse pharmacies for the 
purchase and distribution of drugs. Like Medicaid, rebate ADAPs receive the Medicaid 
unit rebate from manufacturers on a quarterly basis. Despite their identical structures, 
Medicaid paid, on average, 5 percent more than the drug assistance programs for 10 
antiretrovirals in 1999. Medicaid reimburses 6 percent more for Combivir, Videx and 
Retrovir. Since both programs receive the same statutorily defined rebates, the 
discrepancy indicates that Medicaids reimbursement rate for the sampled States is higher 
than the average reimbursement rate for the rebate ADAPs. 
Differences in Federal drug pricing formulas are partially
responsible for cost discrepancies 
Each Federal drug purchaser adheres to a different federally mandated formula to contain 
drug costs. The Big 4 and the 340B programs, because they have the ability to purchase 
directly from a manufacturer or wholesaler, are able to realize their savings up-front 
through federally defined ceiling prices. Medicaid, on the other hand, attempts to contain 
costs by recouping rebates from manufacturers after paying discounted retail prices for 
pharmaceuticals. The intent of each approach is to place limits on the prices of drugs 
procured by Federal purchasers. Yet the outcomes of the various approaches differ and 
result in consistently higher prices for the Medicaid program. Table A outlines the 
formulas governing drug prices for the Federal programs of interest. 
12 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Table A. Federal Drug Discount Formulas 
Statutory Authority 
Drug Purchasing Program  Drug Purchasing Formula1 0 
Reimbursement  Cost 
Base  Containment 
Measure 
Omnibus Budget
Medicaid  Wholesaler  15.1% of  Reconciliation Act 1990 
prices  Manufacturer 
prices 
Veterans Health Care Act 
Federal Ceiling Price  Manufacturer  24% of  of 1992 (Section 603) 
prices  Manufacturer 
prices 
annual  Federal Property and 
Federal Supply Schedule  most favored  negotiations  Administrative Services 
customer price  with  Act of 1949 
manufacturers 
340B Drug Discount Program  Manufacturer  Veterans Health Care Act 
(direct purchase)  prices  15.1% of  of 1992 (Section 602) 
Manufacturer 
prices 
340B Drug Discount Program  Wholesaler 
(rebate option)  prices  15.1% of  63 CFR 35239 
Manufacturer 
prices 
As shown in Table A, there are several considerations when comparing Federal drug 
pricing formulas. One is the price estimate used as the base reimbursement amount, a 
second involves the calculation of those base estimates, and a third is the level of the 
mandated discounts. 
Medicaid and rebate ADAPs reimburse based on a wholesale list price. This is a 
recommended list price for the sale of drugs from wholesalers to retailers. On the other 
hand, the Federal ceiling price and the 340B ceiling price are sales calculated using 
manufacturer prices. As a result, Medicaid is at a disadvantage because its 
reimbursement formula is based on the wholesale list price, which is always higher than 
the manufacturer sales price. It is higher since it represents a price farther down the 
chain of buyers and sellers. It is also higher because wholesale list price is only a list 
price that is almost always higher than the actual purchase price, whereas manufacturer 
sales prices are based on actual transaction prices. 
13 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Second, even when measures for the various programs are based on manufacturers 
prices, there are different interpretations of what that base includes. The VA bases its 
reimbursement and cost containment on the non-federal average manufacturer price (non-
FAMP). Non-FAMP is the average price of a drug that is paid by wholesalers in the 
United States to the manufacturer, except for any prices paid by the Federal 
Government.11  The CMS bases cost containment on average manufacturer price, which 
is the average price paid to the manufacturer for the drug by wholesalers for drugs 
distributed to the retail pharmacy class of trade.12  Although conceptually similar, these 
definitions are not identical, and CMS and the VA may calculate them slightly 
differently. Both AMP and non-FAMP specifically exclude sales to federal purchasers, 
but how they may vary is unclear. Furthermore, the VA updates their non-FAMP 
calculation annually whereas CMS updates the AMP calculation quarterly. 
Third, the level of discounting in the programs cost containment measure also differs. 
Medicaid and rebate ADAPs receive the Medicaid unit rebate amount from 
manufacturers. This is roughly 15.1 percent of AMP. They receive these rebates 
quarterly only after reimbursing retail pharmacies at prices based on average wholesale 
price. The 340B Drug Discount Program also uses the Medicaid unit rebate amount to 
discount the cost of drugs, but there is a key difference between program formulas. The 
340B direct purchase program subtracts the unit rebate amount (URA) from the drug 
price prior to the drug purchase. The Federal ceiling price provides an even steeper 
discount by subtracting 24 percent off of manufacturer prices rather than the 15.1 percent 
represented by the Medicaid unit rebate amount. Thus, Medicaid faces disadvantages in 
both paying a higher reimbursement base and receiving a lower cost containment 
discount when compared to Federal ceiling prices. 
State reimbursement formulas affect the magnitude of the
gap between Medicaid and other government drug
purchasers 
State Medicaid agencies have flexibility in setting their reimbursement rates. This has 
resulted in different prices for the same drugs among State Medicaid agencies. 
Massachusetts net unit prices are 24 percent higher than the Federal ceiling prices for 
these 16 drugs. Marylands approach yields net prices that are 33 percent higher than the 
Federal ceiling price. Georgia bears the highest net costs, which are 55 percent higher 
than the Federal ceiling price. Given the fact that Medicaid manufacturer rebates are 
nationally set by CMS, the only explanation for the difference among States is their 
reimbursement methodology. 
As previously stated, Medicaid reimbursement of pharmacies includes two components, 
the estimated acquisition cost and the dispensing fee. The State Medicaid Manual 
defines estimated acquisition cost as the agencys best estimate of the price generally 
and currently paid by providers.13  Currently, CMS grants States maximum flexibility in 
determining estimated acquisition cost. Seven of the 10 States calculate this estimate 
14 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  based solely upon average wholesale price. Two States consider both average wholesale 
price and wholesaler acquisition cost and reimburse at the lower calculation. One State 
bases calculations solely upon WAC. Appendix C contains a list of the States 
reimbursement formulas. 
Massachusetts reports the lowest unit pharmacy acquisition costs 
The other nine States reimburse pharmacies at an average unit price that is 2 to 16 
percent higher than Massachusetts cost for these 16 drugs. If the other nine States in our 
sample utilized Massachusetts formula, they could have saved an annualized $24.5 
million. Of this total, over $12.7 million represent the Federal share of program savings. 
These savings would narrow the disparity between State Medicaid net costs and Federal 
ceiling prices by 24 percent. The gap would close even further for the Federal supply 
schedule (58 percent) and 340B covered entities (44 percent). 
Massachusetts is the only State in our sample that consistently calculates pharmacy 
reimbursement based upon wholesaler acquisition cost. The WAC represents the price at 
which wholesalers purchase the drug from the manufacturer. Massachusetts reimburses 
at WAC plus 10 percent. The other six States (not in our sample) that use WAC for 
constructing pharmacy costs also average a 10 percent mark-up. 
Georgia reports the highest unit pharmacy acquisition costs 
Georgia reimburses pharmacies at an average unit price that is 9 to 16 percent higher than 
the reimbursement of the other nine States. If Georgia utilized a reimbursement 
calculation equal to the average calculation of the other nine States, it could have saved 
over $1.5 million in annual net costs. This represents a savings of 10 percent of 
Georgias total net costs, of which the Federal Government pays a 60 percent share. 
Georgia reports using AWP minus 10 percent as its formula and obtaining its pricing 
information from First Databank. Four other States in our sample also report the 
consistent use of the AWP minus 10 percent formula and the receipt of data from First 
Databank. The average drug cost for Georgia is over 9 percent higher than these other 
four States. 
Eight of ten States pay modest dispensing fees 
While the estimated acquisition cost calculation is intended to reimburse the pharmacies 
costs to purchase the drug, the dispensing fee is meant to compensate pharmacies for the 
costs of dispensing the drug. 
Most States pay pharmacists a flat dispensing fee for brand name drugs. These flat fees 
range from $3.0014 to $4.23. The average flat dispensing fee is $3.89. Some States 
employ a tiered dispensing fee that varies across drugs. For two of these tiered-fee 
15 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  States, the maximum dispensing fees average $4.35. See Appendix D for a list of 
dispensing fees by State. 
Illinois and Texas are the only States in our sample with significantly higher dispensing 
fees. Illinois pays a fee equal to 10.4 percent of the drug cost, up to a maximum fee of 
$15.40. For 15 of the antiretrovirals, the calculated fee reached the Illinois cap, and the 
average fee for all 16 drugs was $15.10. The Texas fee system pays $5.27 plus 2 percent 
of the drug cost. This calculation produced an average fee of $10.85 for Texas for the 16 
drugs in our study. 
Medicaid could have saved $102 million if the 10 States 
surveyed purchased 16 antiretroviral drugs at Federal ceiling
prices 
The 10 States we reviewed would have saved a total of $51 million or 25 percent15 of 
their net cost for the first two quarters of FY 2000 if their drug prices equaled the Federal 
ceiling prices. This amounts to program savings of $102 million annually. The Federal 
share of this savings is approximately $54 million annually. 
While this savings estimate is limited to only 10 of the 52 Medicaid programs, the 10 
States are those with the largest percentage of HIV/AIDS cases. These States also 
represent the bulk of Medicaid expenditures on antiretrovirals. We estimate that they 
represent 73 percent of the total Medicaid spent in FY 1999 for the 16 antiretrovirals. If 
we assume this same percentage for FY 2000, we can estimate that if all Medicaid 
programs net prices were equal to the Federal ceiling prices, the program could have 
saved $140.5 million, saving the Federal Government $73.8 million. 
The States that would save the most if Medicaid net costs were equivalent to other 
Federal drug prices are New York, Florida and California. This is due to the extremely 
large volume of drugs they purchase. These three States purchased 73 percent of all of 
the units purchased by our sample States. The States that would maximize per unit 
savings are Georgia, Texas and Illinois. On average, Georgia could save over a dollar 
per pill if their net prices were equal to the Federal ceiling prices. They could save 75 
cents per pill if their net prices were equal to those listed on the Federal supply schedule. 
Medicaid could have saved over $55 million, representing over half of the total savings 
estimate, if their net prices for just 3 of the 16 drugs were equal to the Federal ceiling 
prices. If the net price of Combivir was equivalent to the Federal ceiling prices, the 
program would have saved $26 million. Medicaid could have saved another $18 million 
if D4T net prices were equivalent to the Federal ceiling prices and almost $12 million on 
Epivir. The median savings for all 16 drugs is $4 million. 
16 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  These savings could be applied to the expanding need for antiretroviral therapy 
All States have opted to include prescription drug benefits in their programs, so Medicaid 
covers antiretroviral therapy for all eligible persons with HIV/AIDS. Medicaid faces 
increasing demand for antiretrovirals because the population of Medicaid eligible persons 
with HIV/AIDS is growing. Program savings can be translated into the ability to provide 
life-saving antiretrovirals to additional persons for the same cost. The $102 million 
savings could purchase additional antiretrovirals to meet the impending pharmaceutical 
needs and improve the lives of several thousand more individuals living with HIV/AIDS. 
Using the estimate of $12,000 a year for combination antiretroviral therapy, the savings 
could purchase a complete regimen for over 8,500 HIV-infected persons. 
Focusing solely on the three drugs with the most savings, Epivir, Combivir and D4T, also 
results in a substantial increase in purchasing power for these life-saving therapeutics. 
The $102 million in savings could purchase an additional 728,000 bottles of D4T at 
Federal ceiling prices. This translates into a prescription of a bottle per month for 60,000 
patients. Alternately, the $102 million in savings could purchase 712,000 additional 
bottles of Epivir for 59,000 patients annual needs or 315,000 bottles of Combivir for 
26,300 patients. 
This purchasing ability is particularly important for the Medicaid program in light of 
three trends. First, some States are considering extending Medicaid eligibility to low-
income HIV-positive individuals before they become categorically eligible through 
disability. The CMS has already approved waivers for Maine and Massachusetts to 
conduct such demonstration programs, and other States have pending applications. 
States that apply for such demonstration waivers must prove budget neutrality, and 
decreased drug costs can help the States to extend prescription drug eligibility and still 
meet this requirement. 
Second, the rate of HIV infection is accelerating among low-income persons, especially 
women. In the last decade the proportion of AIDS cases reported among women has 
tripled16. This trend suggests that more HIV-positive persons will become categorically 
eligible for Medicaid. Providing antiretroviral therapy to more persons without 
increasing total expenditures would ease the impending strain on Medicaid budgets. 
Third, some States have already experienced budget strains and shortfalls related to 
Medicaid drug costs, and these pressures can have serious consequences for the provision 
of optional services. For example, the Medicaid Director of Indiana has proposed 
restricting Medicaid drug coverage and eliminating certain other optional services to 
avert budget shortfalls over the next 2 years.17  Cost savings for antiretrovirals represents 
one means to alleviate strained budgets and to preclude the need to restrict coverage of 
these lifesaving drugs. 
17 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  R E C O M M E N D A T I O N S  
Maximizing the ability to purchase life-saving antiretroviral drugs may be the only 
fiscally viable solution to meeting the challenges of increasing demand and access. 
Demand for HIV/AIDS pharmaceuticals continues to increase as the standard of care for 
persons living with HIV/AIDS grows increasingly reliant on drug therapy. The National 
Institutes of Health/Public Health Service Guidelines for the Use of Antiretroviral Agents 
in HIV Infected Adults and Adolescents calls for the use of combination therapy 
comprised of at least three drugs. Additionally, the numbers of HIV-infected people are 
climbing among the low-income, traditionally under-served, population. This, in 
combination with the fact that approximately 68 percent of the HIV/AIDS population in 
care has no private health insurance18 will continue to place increasing demands on 
Medicaid to provide more pharmaceuticals. Beyond this increase in demand, State and 
Federal legislatures continue to consider expanding Medicaid coverage to a broader 
range of HIV-infected persons. 
The rules guiding Medicaid reimbursement and rebates are intended to allow the program 
to participate in the pharmaceutical market as prudent buyers. Our findings demonstrate 
that Medicaid is paying more for antiretroviral drugs than other Federal purchasers. 
Because of this discrepancy and the potential program savings, the CMS should revisit 
the rules governing Medicaid reimbursement and rebates for antiretrovirals. 
Unfortunately, the extreme complexity of the pharmaceutical market complicates the 
resolution of these issues. The drug industry is multi-layered, with a variety of 
manufacturing, distribution and retail sales arrangements that not only differ by 
geographic location, but also by product. Thus, it is extremely difficult to determine how 
and to what degree changes will affect market participants. Recognizing the potential for 
unexpected impacts, we offer several options within each recommendation for CMS to 
examine as means to improve reimbursement and rebate methodology for antiretroviral 
drugs. Our recommendations suggest starting points for additional research and 
discussion on how these changes could impact quality and access to care. Such 
comprehensive examinations represent the first step to actuating the long term goals that 
involve regulatory or legislative changes. 
18 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  For the 16 HIV/AIDS drugs examined, Centers for Medicare
and Medicaid Services should review the current 
reimbursement methodology and work with States to find a
method that more accurately estimates pharmacy acquisition 
cost 
The CMS has the ability to address deficiencies in the Medicaid reimbursement system. 
Under Section 1902(a)(30)(A) of the Social Security Act, CMS has the authority to set 
upper payment limits for services available under the Medicaid program. Regulations 
42 CFR 447.331 through 447.334 limit the aggregate amounts State Medicaid agencies 
may claim for pharmaceuticals. To be granted Federal matching funds to pay for 
pharmaceuticals, State agencies are required to submit claims to CMS for approval. In 
order to maximize scarce State and Federal dollars it is essential that CMS use its 
authority to help improve the accuracy of States' estimated pharmacy acquisition cost. 
Options for Improving Estimated Acquisition Cost 
Medicaids current reimbursement system predominantly relies upon average wholesale 
price to estimate acquisition cost. The CMS can improve the EAC calculation either by 
making changes to AWP within the existing system or by changing the basis of the 
calculation. If CMS prefers to continue using AWP, then we suggest the following 
improvement option: 
<	 Option 1: Develop safeguards to protect Medicaid from average wholesale 
price manipulations 
The CMS has demonstrated an awareness of problems with AWP validity, and we 
encourage CMS to intensify its efforts to address this issue. In 1997 and 1998, 
CMS supported legislative proposals that would have required Medicare 
reimbursement to be based upon actual acquisition cost rather than average 
wholesale price. Also in 1998, in comments to an OIG report, Need to Establish 
Connection Between the Calculation of Medicaid Drug Rebates and 
Reimbursement for Medicaid Drugs (A-06-97-00052), CMS indicated that they 
were planning to examine the calculation of AWP. They stated that this review 
would include issues such as, how AWP is defined; how to safeguard against 
manipulation of AWPs to maximize reimbursement or minimize rebates; how to 
verify the accuracy of AWPs; the need for an indexing factor; and differences in 
AWPs for brand name versus generic drugs.19  The CMS has not yet undertaken 
this examination, but we suggest that they follow through with their planned 
study. Such an examination would provide a solid foundation of knowledge for 
building safeguards to protect Medicaid from AWP manipulations. 
19 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  More recently, CMS has expressed the intent to work with State Medicaid 
programs to implement a revised AWP methodology that the Department of 
Justice has established with First Databank regarding a limited set of drugs. One 
approach to revising the AWP methodology would be for CMS to require EAC 
calculations using AWP to be based on market surveys in order to qualify for 
Federal financial participation. Providing clear guidelines for acceptable 
calculations will assist States in maintaining Medicaids responsiveness to the 
pharmaceutical marketplace. 
Furthermore, we suggest that CMS reinforce these guidelines by requiring a more 
frequent reporting of payment assurances by States. To access Federal matching 
funds, States must make findings and assurances that their drug reimbursements 
have not exceeded the maximum aggregate limits that CMS has established.20 
Payment assurances for brand name drugs compare the prices paid by State 
agencies to State calculations of estimated acquisition cost. The CMS set this 
reporting period for every 3 years to limit the burden on States to make these 
calculations. At the time of the regulation, however, CMS did not anticipate that 
States would use the EAC reimbursement method as consistently as they have. 
Submitting pricing assurances may be less arduous than anticipated because 
States already make estimated acquisition cost calculations. Increasing the 
frequency of these reports may increase accountability of State reimbursements 
without imposing an undue burden. 
If CMS prefers to create a new basis for estimating acquisition cost, then we 
suggest that CMS use average manufacturer price for the EAC calculation. The 
CMS can either set national EAC levels or allow States to set their own levels. If 
CMSs main concern is protection of AMP confidentiality, then we recommend 
Option 2. If CMS is more concerned with State flexibility, then we recommend 
Option 3. 
Option 2: Create national estimated acquisition costs for States based upon 
average manufacturer price 
An alternative to creating a market-based average wholesale price may be to 
discontinue the reliance upon this figure. The use of AWP for estimating 
acquisition costs emerged as a matter of convenience because AWP data was 
readily accessible. Initially, it did not seem problematic to rely on manufacturers 
pricing information without audit controls. Because manufacturers do not bill the 
program for their drugs, there appeared to be little to no incentive to inflate prices. 
However, over the years the financial link between manufacturers and Medicaid 
billers has become evident. Manufacturers can inflate AWP and generate 
financial incentives for providers to favor their products. Now that these issues 
have been identified, the negative repercussions of relying on AWP outweigh the 
convenience. 
20 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  An alternate reimbursement option involves CMS determining its own estimated 
acquisition cost for States based upon average manufacturer price. Unlike AWP, 
which is a suggested list price, AMP is a calculation that reflects actual 
transactions between drug manufacturers and commercial purchasers. 
Manufacturers submit AMP information to CMS quarterly, which CMS uses to 
calculate Medicaids unit rebate amounts. The average manufacturer price data is 
subject to Federal oversight and audits, which ensure its accuracy. 
A reimbursement formula based on AMP instead of AWP would also serve to 
connect rebates and reimbursement. Currently, reimbursement is based on AWP 
and rebates are based on AMP, creating a disconnection between the two 
calculations. This disconnection has introduced incentives for manufacturers to 
inflate average wholesale price to generate profit for providers. If both rebates 
and reimbursement were based on AMP, however, the incentive to inflate 
reimbursement amounts would be removed as any increase to AMP would also 
cause an increase in the rebates paid by the manufacturer. 
The confidentiality of AMP is statutorily protected, so States cannot currently 
obtain this information and use it to create their own estimated acquisition cost. 
The CMS, however, could determine its own methodology for estimating 
acquisition cost based upon AMP plus some mark-up percentage to compensate 
wholesalers and pharmacies. Under the condition that CMS does not reveal its 
EAC formula, AMP would remain confidential. The CMS could then report EAC 
data to States along with the unit rebate information it already reports on a 
quarterly basis. 
While this option may limit State flexibility to determine their own payment 
systems, it would allow the States and the Federal Government to access 
significant program savings. In order to maintain some level of flexibility, CMS 
could implement this suggestion using aggregate reimbursement limits for States. 
This would require that total State spending on drugs did not exceed a maximum 
set by CMS, without imposing a strict ceiling on each prescription drug price. 
This approach would afford States and physicians some flexibility on a case by 
case basis while also providing the Federal Government with the needed 
oversight and control over expenditures. 
<	 Option 3: Share average manufacturer price data with States so that they 
can accurately set Medicaid reimbursement rates 
The rebate program requires drug manufacturers to report average manufacturer 
price and Best Price data to the Secretary in order to have their drugs reimbursed 
by Medicaid. Both AMP and Best Price are confidential. The confidentiality 
provision mandates that AMP and Best Price information provided by the 
manufacturer will not be disclosed by the Secretary or State Medicaid agency in 
21 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  a form which reveals the Manufacturer, or prices charged by the Manufacturer 
except as necessary to carry out the Medicaid rebate program.21 
Currently, CMS interprets the confidentiality clause very narrowly. This 
interpretation prevents CMS from sharing average manufacturer price data with 
State Medicaid agencies. The CMS reports only the unit rebate amounts to States, 
from which States cannot deduce AMP because of the complex unit rebate 
methodology. It would seem plausible, however, to interpret the confidentiality 
provision more broadly as a safeguard to prevent manufacturers from gaining 
access to the pricing information of their competitors. The legislation specifically 
prohibits the State Medicaid agencies from disclosing average manufacturer price 
and Best Price, which implies a legislative assumption that State Medicaid 
agencies would have access to that information. In September 1995, CMS 
addressed this issue in response to comments received on the proposed rule 
regarding Medicaid payment for outpatient drugs. The CMS asserted that they 
would not to disclose AMP to the States but maintained that the statute 
contemplates the disclosure of manufacturer pricing data to the States and that they 
believed Congress intended that States have access to sufficient pricing 
information to implement the Medicaid drug rebate program.22 
Furthermore, the statute also indicates that State Medicaid agencies have a legal 
obligation to protect manufacturers confidentiality interests. The CMS could 
initiate this reimbursement option by working with the States to devise a means of 
protecting the confidentiality of average manufacturer price. For example, the 
State Medicaid agencies could conduct in-house calculations of reimbursement for 
antiretrovirals using AMP plus a markup percentage that would be kept 
confidential. Because this methodology would only affect 16 drugs, performing 
and protecting this calculation should not present a formidable burden. Once CMS 
and the States have agreed upon protection measures, then CMS could provide 
AMP data to the States on a quarterly basis. 
By sharing AMP information with the State Medicaid agencies, CMS could 
provide States with the means to fulfill the intent of the Medicaid reimbursement 
to reflect actual acquisition costs. Improving the accuracy of State estimates 
would also generate program savings. Furthermore, States would maintain 
flexibility in determining their reimbursement formulas and enjoy more valid 
information upon which to base those determinations. 
Examining the Current Medicaid Dispensing Fees 
Regardless of which option CMS chooses to improve pharmacy reimbursement 
methodology, any change should include a separate consideration of appropriate 
dispensing fees to ensure that pharmacists can cover their professional costs. Otherwise, 
pharmacies may begin to refuse Medicaid patients, limiting access for beneficiaries. 
22 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  In the past, CMS has expressed concern about fair pharmacy compensation for serving 
Medicaid clients and has stated that one means to ensure access was to permit pharmacies 
to profit from sales to Medicaid clients. Though the final rule of 1987 deleted a 
procedural requirement for States determination of reasonable dispensing fees, CMS 
expressed the expectation that the States would continue their customary activities to 
establish this fee. These activities included: 1) audits and surveys of pharmacy 
operational costs; 2) compilation of data regarding professional salaries and fees; and 3) 
analysis of compiled data regarding pharmacy overhead costs, profits, etc. We 
recommend that CMS consider reinstating the requirement that States determine a 
reasonable dispensing fee using one of the methods described or another appropriate 
method for estimating pharmacy dispensing costs. 
The Centers for Medicare and Medicaid Services should 
initiate a review of Medicaid rebates for the 16 HIV/AIDS drugs
examined 
Though an improved reimbursement methodology would generate program savings, it 
would not completely close the gap between Medicaid and other government drug 
purchasers. Medicaid reimbursement cannot be lowered so far as to eliminate all 
pharmacy profit without risking pharmacies' willingness to serve this population. This 
access concern limits the extent to which decreased reimbursement can achieve savings. 
However, the Medicaid rebate program could significantly increase the unit rebate amount 
and still allow the manufacturers to profit from participation. Drug manufacturers receive 
approximately 76 percent of the cost of a prescription. After deducting taxes, research, 
marketing and other operational costs from this gross share, manufacturers retain a net 
profit that averages over 18 percent. 
Initiating a review of the rebate formula to address the purchasing disadvantage that 
Medicaid faces in comparison to other Federal purchasers would be consistent with the 
legislative history of the program. The Omnibus Budget Reconciliation Act of 1990 
created the Medicaid drug rebate program and set forth a formula based upon average 
manufacturer price and Best Price. This formula produced an unintended consequence 
that disadvantaged certain Federal drug purchasers, including the VA. The Veterans 
Health Care Act of 1992 amended the rebate program to correct that disadvantage. 
Congress changed the rebate formula to exclude certain government purchasers from the 
Best Price calculation in order to secure better drug prices for those programs. The 
VHCA of 1992 also increased the rebate percentage from 12.5 percent to 15.7 percent off 
of AMP in the last quarter of 1992 and then incrementally lowered it to 15.1 percent. 
We propose that CMS examine how another legislative amendment could ameliorate 
Medicaids purchasing disadvantage to generate program savings for the 16 drugs 
examined. We offer two suggestions for further research, which are linked to the 
23 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  reimbursement option that CMS pursues. If CMS chooses to base reimbursement 
calculations upon average manufacturer price, as outlined by either Option 2 or Option 3 
of the previous recommendation, then we suggest the following: 
<  Option 1: Increase the rebate percentage of average manufacturer price 
Ensuring that Medicaid's net costs more closely resemble the costs of other Federal 
purchasers requires an increase in the Medicaid unit rebate. The current Medicaid 
rebate is statutorily based upon a 15.1 percent discount off of AMP.23  One of the 
reasons that the Federal ceiling price is much lower than the Medicaid net price is 
because the Federal ceiling price statutorily receives a 24 percent discount off of 
average manufacturer price. Regardless of improvements to the reimbursement 
formula, the Medicaid net price would still exceed the Federal ceiling price 
because the Federal ceiling price receives a greater discount off of average 
manufacturer price. Increasing the percentage off of AMP used for the rebate 
calculation would allow Medicaid to access greater program savings. 
On the other hand, if CMS continues to base reimbursement on average wholesale price, as 
outlined by Option 1 of the reimbursement recommendations, then we suggest the following: 
<	 Option 2: Base rebates on average wholesale price rather than average 
manufacturer price 
Another potential means to achieve these savings involves changing the basis of 
the Medicaid rebate calculation from average manufacturer price (AMP) to 
average wholesale price (AWP). In May 1998, the OIG issued "Need to Establish 
Connection between the Calculation of Medicaid Drug Rebates and 
Reimbursement for Medicaid Drugs" (A-06-97-00052). This report recommended 
a legislative change requiring that Medicaid rebates be based upon AWP. Despite 
concurring with the administrative benefits, CMS disagreed that such a proposal 
was feasible. We suggest that CMS re-evaluate this recommendation to determine 
whether it would achieve program savings. 
As discussed, the current disconnection between reimbursement based on AWP 
and rebates based on AMP creates an incentive for manufacturers to use average 
wholesale price inflation as a profit-based incentive for providers to choose their 
drug. Using average wholesale price for rebate calculations would minimize 
manufacturers' incentives to inflate AWP because their rebate obligations would 
increase as AWP increased. Furthermore, the rebate program guarantees an 
additional rebate when drugs prices increase at a faster rate than inflation, as 
measured by the consumer price index. This mechanism also discourages artificial 
price inflation. If Medicaid reimbursement methodology continues to use average 
wholesale price, then this change could both improve the accuracy of 
reimbursement and increase the unit rebates. 
24 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  One concern, however, that CMS should consider involves this susceptibility of 
AWP to manipulation. Average wholesale price listings are not currently indexed 
to actual transactions, so conceivably, manufacturers could artificially lower AWP 
in the same way that they can artificially inflate it. A lower AWP could reduce 
Medicaid reimbursement expenditures, but it would also reduce unit rebate 
amounts. These circumstances complicate the forecasting of net program savings 
through this option. 
Implications for Broader Medicaid Drug Benefit 
While our findings and recommendations pertain only to antiretroviral drugs, numerous 
other Inpector General reports have concluded that Medicaid pays more than other Federal 
and private purchasers for a wide variety of drugs. In 1997, the IG estimated that the 
actual acquisition cost for brand name drugs averaged 18.3 percent below AWP. The 
difference between actual acquisition cost and generic drugs averaged 42.5 percent. For a 
complete list of the findings and recommendations of these reports, please consult 
Appendix F. 
As part of a larger effort to examine the problems plaguing Medicaid drug reimbursement 
and rebate policies, our recommendations build off the recommendations made in 
previous OIG reports. Future work in this area may, in turn, find that the 
recommendations presented in this report for antiretrovirals drugs may have broader 
applicability. 
25 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  A G E N C Y  C O M M E N T S  
The CMS provided comments on the draft report in which they agreed with the overall 
intent of our recommendations but expressed reservations with many of the specific 
suggestions we offered for achieving them. The complete text of CMSs comments can be 
found in Appendix E. Primarily, CMS felt that they did not have the statutory authority to 
make the suggested changes. Since reducing prices for HIV/AIDS medications is so 
crucial to ensuring access to these drugs, we encourage CMS to seek any legislation 
necessary to accomplish the task. However, we continue to believe that most of the 
options delineated in the report can be undertaken without amending current law. Below 
we review CMSs concerns and offer some specific suggestions on how our recommended 
options could be operationalized under current law. 
In response to the first option related to Medicaid reimbursement, CMS stated that there 
are already safeguards in place to protect AWP from price manipulation. The CMS points 
out that the law gives States the authority to establish their own payment methodologies 
for prescription drugs. Consequently, CMS believes that States retain the responsibility 
for implementing any necessary safeguards, with CMS encourag[ing] states to be 
proactive in monitoring the pharmaceutical marketplace. Finally, CMS stated that their 
guidance to the States regarding the calculation of estimated acquisition cost was clear and 
that further guidance would constitute Federal price controls. 
While it is true that some safeguards protecting Medicaid from AWP inflation are in 
place, considerable evidence points to the fact that AWP is still very vulnerable to price 
manipulations. Appendix F lists several other OIG reports that, like this report, document 
on-going problems with AWP calculations resulting in higher prices to the Medicaid 
program. Federal and State prosecutors are currently investigating numerous drug 
companies regarding alleged inflation of AWP for Medicaid-covered drugs. In January 
2001, the Bayer Corporation agreed to pay $14 million to settle charges of alleged AWP 
inflation and other alleged wrongdoing. Even CMS has demonstrated an awareness of the 
problems with AWP validity through support of legislative proposals to replace AWP with 
actual acquisition cost and through correspondence with the House Commerce Committee. 
The persistence of these problems indicates that this issue has not yet been sufficiently 
addressed. 
The OIG agrees that CMS should not impose price controls, and our recommendations do 
not suggest price controls. Rather, our options to safeguard AWP suggest that CMS 
provide more specificity in the guidelines that it already imposes. While we agree with 
CMS that States retain responsibility for defining their EAC methodology, CMS also 
retains the responsibility of oversight for that methodology through the State plan 
approval process. The CMS has demonstrated the authority to provide boundaries of 
acceptability of EAC calculations. In the State Medicaid Manual, CMS already requires 
that States must include a significant discount off of AWP in order for a States 
26 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  reimbursement methodology to be accepted. Given the preponderance of evidence that 
demonstrates AWP still overstates prices, we believe that CMS should further clarify the 
requirements of an acceptable use of AWP by specifying that the AWP should be derived 
in a way that reflects actual market transactions. 
The CMS disagreed with our second option related to Medicaid reimbursement, to create a 
national EAC for the States based on the AMP, and our third option, to share AMP data 
with States to set Medicaid reimbursement rates. In both cases, they cited the statutorily 
protected confidentiality of AMP. The CMS did agree to examine the current dispensing 
fee as part of their state plan amendment review process and will do so whenever a State 
proposes a fee change. 
We continue to believe that the creation of a national estimated acquisition cost based on 
AMP is workable on a drug-by-drug basis without disclosing AMP information. This 
recommendation applies to only 16 very specific drugs, namely, antiretrovirals to treat 
HIV/AIDS. We believe that the CMS could develop an estimated acquisition cost for the 
States for these 16 drugs based upon AMP plus a markup percentage. The CMS could 
share the calculated EAC for these 16 drugs without revealing the formula from which the 
EAC was derived much the way they currently share unit rebate amounts with States 
without revealing AMP. 
Our interpretation of the confidentiality provision for AMP leads us to believe that CMS 
could legally share AMP with the State Medicaid programs. The confidentiality provision 
mandates that AMP information provided by the manufacturer will not be disclosed by 
the Secretary or State Medicaid agency in a form which reveals the Manufacturer or prices 
charged by the Manufacturer.24  The specific inclusion of the State Medicaid agencies in 
that mandate implies a legislative assumption that those agencies would have access to 
AMP information. In September 1995, CMS addressed this issue and expressed an 
interpretation of this provision more similar to our own. In the Federal Register (60 FR 
48442), CMS stated that although they would not disclose AMP to the States at that time, 
they maintained that the statute contemplates the disclosure of this manufacturer pricing 
data to the States.25 
Our second recommendation called for CMS to initiate a review of Medicaid rebates for 
the 16 HIV/AIDS drugs examined in this study. The CMS agreed with the first option of 
increasing the rebate percentage of AMP and plans to include this recommendation when 
they consider legislative changes for the Medicaid program. 
The CMS disagreed with our second option, basing the rebates on AWP rather than AMP, 
citing comments to an OIG report from 1998, Need to Establish Connection Between the 
Calculation of Medicaid Drug Rebates and Reimbursement for Medicaid Drugs 
(A-06-97-00052). In these comments, CMS stated that a legislative change was not 
feasible at the time the report was issued and expressed concern with AWP validity. We 
share this concern, and our recommendation advised CMS to consider the susceptibility of 
AWP to manipulation if they chose this option. 
27 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  In the 1998 CMS comments, CMS stated that they were planning to examine the 
calculation of AWP, including issues such as, how AWP is defined; how to safeguard 
against manipulation of AWPs to maximize reimbursement or minimize rebates; how to 
verify the accuracy of AWPs; the need for an indexing factor; and differences in AWPs 
for brand name versus generic drugs.26  We support such an examination. We agree that 
these issues warrant CMSs attention, and these concerns strengthen our belief that the 
CMS should provide greater guidance to the States regarding acceptable use of AWP. 
We hope that this additional discussion of our recommendations is helpful to CMS. We 
encourage them to reconsider the feasibility of each option to accomplish the ultimate goal 
of assuring that Medicaid pays reasonable prices for the 16 antiretroviral drugs we 
reviewed. Reducing prices for these life-saving antiretrovirals is an essential step in 
helping the Medicaid program meet the demands of expanded eligibility for people living 
with HIV. 
28 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX A 
Glossary of Terms 
Estimated Acquisition Cost (EAC)   State Medicaid agencys best estimate of the price 
generally and currently paid by pharmacies for a drug.2  This figure is meant to represent 
pharmacies actual acquisition cost (AAC). 
Average Wholesale Price (AWP)  The published manufacturers suggested list price for a 
wholesaler to charge a pharmacy for a drug.3 
Wholesale Acquisition Cost (WAC)  the price paid by the wholesaler for drugs purchased 
from the manufacturer. Publicly listed WAC amounts may not reflect all available discounts.4 
Actual Acquisition Cost (AAC)  The net cost at which the pharmacy acquires a drug.5 
Average Manufacturer Price (AMP)   The average price paid by wholesalers to the 
manufacturer for drugs distributed to the retail pharmacy class of trade.6 
Best Price (BP)   The lowest price available for a drug from the manufacturer to any purchaser 
with the exception of Federal agencies and State pharmaceutical assistance programs. 7 
2 State Medicaid Manual, Part 6, Section 6305.1 
3 Prescription Drug Trends -- A Chartbook. The Henry J. Kaiser Family Foundation, July 2000. 
4 Ibid. 
5 Ibid. 
6 42 USC Sec. 1396r-8(k)(1) 
7 42 USC Sec. 1396r-8(c)(1)(C) 
29 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX B 
List of Antiretroviral Pharmaceuticals

Activity 
Pharmaceutical  Manufacturer  Chemical / Mechanistic Class 
Class 
Crixivan (Indinavir)  Merck  Antiviral  Protease Inhibitor 
Invirase (Saquinavir)  Hoffmann-La Roche  Antiviral  Protease Inhibitor 
Non-Nucleoside 
Sustiva (Efavirenz)  DuPont  Antiviral 
Reverse Transcriptase Inhibitor 
Norvir (Ritonavir)  Abbott Laboratories  Antiviral  Protease Inhibitor 
Agouron 
Viracept (Nelfinavir)  Antiviral  Protease Inhibitor 
Pharmaceuticals 
Retrovir (AZT)  Nucleoside 
Glaxo Wellcome  Antiviral 
(Zidovudine)  Reverse Transcriptase Inhibitor 
Nucleoside 
Epivir (3TC)  Glaxo Wellcome  Antiviral 
Reverse Transcriptase Inhibitor 
Nucleoside 
Videx (ddl)  Bristol Myers-Squibb  Antiviral 
Reverse Transcriptase Inhibitor 
Nucleoside 
D4T (Zerit)  Bristol Myers-Squibb  Antiviral 
Reverse Transcriptase Inhibitor 
Nucleoside 
Combivir (AZT/3TC)  Glaxo Wellcome  Antiviral 
Reverse Transcriptase Inhibitor 
Fortovase (Saquinavir)  Hoffmann-La Roche  Antiviral  Protease Inhibitor 
Hivid  Nucleoside 
Hoffmann-La Roche  Antiviral 
(Zalcitabine, ddC)  Reverse Transcriptase Inhibitor 
Boehringer Ingelheim  Non-Nucleoside 
Viramune (Nevirapine)  Antiviral 
Pharmaceuticals, Inc/  Reverse Transcriptase Inhibitor 
Non-Nucleoside 
Rescriptor (Delavirdine)  Pharmacia & Upjohn  Antiviral 
Reverse Transcriptase Inhibitor 
Ziagen (abacavir)  Nucleoside 
Glaxo Wellcome  Antiviral 
Reverse Transcriptase Inhibitor 
Agenerase (amprenavir) 
Glaxo Wellcome  Antiviral  Protease Inhibitor 
30 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX C 
Sampled States Formulas for Estimating Acquisition Cost

State  EAC Calculation 
California  AWP - 5% or Direct Price8 
Florida  AWP - 13.25% 
Georgia  AWP - 10% 
Illinois  AWP - 10% 
Maryland  lower of: AWP-10%, WAC+10%, 
Direct+10%9 
Massachusetts  WAC + 10% 
New Jersey  AWP - 10% 
New York  AWP - 10% 
Pennsylvania  AWP - 10% 
Texas  lower of : AWP - 15.5% or WAC + 
12% 
8	 California has negotiated agreements with certain drug manufacturers to purchase drugs directly 
from the manufacturer. These agreements cover four of the drugs in our study, namely, Crixivan, 
Norvir, D4T and Rescriptor. Including these discounts, California Medicaid administrators 
estimate their average reimbursement formula is AWP- 12 percent. 
9  Direct Price is the price at which the manufacturer sells directly to the pharmacy. 
31 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX D 
Sampled States Dispensing Fees

State  Dispensing Fee to Pharmacies 
California  $3.80 
Florida  $4.23 
Georgia  $4.33-$4.63 
Illinois  10.4% of drug cost up to $15.40 
maximum10 
Maryland  $4.21 
Massachusetts  $2.50 + $0.50 beneficiary co-pay 
New Jersey  $3.73-$4.07 
New York  $3.50 
Pennsylvania  $4.00 
Texas  $5.27 + 2% of drug cost 
10	 For prescriptions that cost less than $37.50, Illinois pays a flat fee of $3.45. All of the drugs in 
our study cost more than $37.50 per prescription. 
32 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX E 
Agency Comments

33 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  34 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  35 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  36 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX F 
Related Office of Inspector General Report Summaries

Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and 
Reimbursement for Medicaid Drugs (A-06-97-00052) 
Findings  Recommendations 
Manufacturers use inconsistent methods to calculate  Submit a legislative proposal requiring rebates to be 
AMP. Using AWP in place of AMP could have  based upon AWP. 
resulted in 1.15 billion more in drug rebates for 100 
brand name drugs in each CY of 1994 through 1996. 
There is no direct financial connection between the  Establish safeguards to ensure that manufacturers do 
calculation of drug rebates and reimbursements to  not raise AWP if a proposal is enacted. 
pharmacies 
Requiring drug manufacturers to pay rebates based on  Study other viable alternatives to the current program 
AWP would reduce the administrative burden at  of using AMP to calculate the Medicaid rebates such 
HCFA and manufacturers.  as the establishment of a flat percentage of 
manufacturers gross sales. 
Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products 
(A-06-97-00011) 
Findings  Recommendations 
Pharmacies pay an average of 42.5 percent less than  HCFA11  should work to ensure that States reimburse 
AWP for generic drugs sold to Medicaid beneficiaries.  the ingredient portion of Medicaid drugs in a manner 
more consistent with the findings of this report 
If reimbursement had been based on the estimates of  HCFA should study any of the other factors, such as 
this report, Medicaid could have saved $145.5 million  dispensing fees, which they believe could significantly 
for CY 1994 and 1995 for 200 drugs.  impact pharmacy reimbursement. 
11 HCFA is the acronym for the Health Care Financing Administration. In June 2001, the Health Care 
Financing Administration was renamed the Centers for Medicare and Medicaid Services (CMS). 
37 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand 
Name Drugs (A-06-97-00030) 
Findings  Recommendations 
The actual acquisition cost for brand name drugs is  HCFA should work to ensure that States reimburse the 
estimated to be a national average of 18.3 percent  ingredient portion of Medicaid drugs in a manner more 
below AWP.  consistent with the findings of this report 
If reimbursement had been based on the estimates of  HCFA should study any of the other factors, such as 
this report, Medicaid could have saved $225 million  dispensing fees, which they believe could significantly 
for 100 drugs in CY 1994.  impact pharmacy reimbursement 
Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid 
Prescription Drug Program of CA, D.C., DE, FL, MD, MO, MT, NE, NJ, NC, VA 
(A-06-95-00062 through A-06-95-00072) 
(This nationwide audit resulted in 11 separate, State-specific reports. ) 
Findings  Recommendations 
The estimates of the extent that AWP  The State Agencies should consider the results of their audit in 
exceeded pharmacy purchase invoice prices  determining any future changes to pharmacy reimbursement. 
for brand name drugs and generic drugs were: 
State  Brand Name  Generic 
CA  17.5%  41.4% 
DC  17.3%  43.8% 
DE  19.3%  37% 
FL  20.2%  41.5% 
MD  18.7%  41.9% 
MO  18.5%  42.5% 
MT  16.2%  48.5% 
NC  16.9%  45.2% 
NE  18.7%  44.9% 
NJ  19.8%  42.5% 
VA  17.2%  45.1% 
38 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide 
Additional Guidance to Drug Manufacturers to Better Implement the Program 
(A-06-91-00092) 
Findings  Recommendations 
Manufacturers calculations of AMP are inconsistent.  HCFA should survey manufacturers to identify the 
variations in determining AMP and develop a more 
specific policy for manufacturers. 
There are significant differences among  Establish requirements which provide for unrestricted 
manufacturers policies on the OIGs right of access to  access by Federal oversight agencies to manufacturers 
company records.  records pertaining the rebate program 
There are significant differences among manufacturers  Establish requirements which direct drug 
in the length of time records relating to drug rebates  manufacturers to retain rebate records for a period of 2 
are retained.  years. 
39 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX G 
Related Office of Inspector General Reports 
Excessive Medicare Payments for Prescription Drugs (OEI-03-97-00290) 
Medicare Reimbursement of Albuterol (OEI-03-00-00311) 
Medicare Reimbursement of End Stage Renal Disease Drugs (OEI-03-00-00020) 
Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and

Reimbursement for Medicaid Drugs (A-06-97-00052)

Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products (A-06-97-

00011)

Medicaid Managed Care and HIV/AIDS (OEI-05-97-00210)

Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand Name

Drugs (A-06-96-00030)

Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid Prescription

Drug Program of _______

California Department of Health Services (A-06-95-00062)

Montana Dept. Of Public Health and Human Services (A-06-95-00068)

Florida Agency for Health Care Administration (A-06-95-00065)

North Carolina Department of Human Resources (A-06-95-00071)

Delaware Department of Health and Social Services (A-06-95-00063)

Virginia Department of Medical Assistance (A-06-95-00072)

New Jersey Department of Human Services (A-06-95-00070)

Nebraska Department of Social Services (A-06-95-00069)

Missouri Department of Social Services (A-06-95-00067)

District of Columbia Department of Human Services (A-06-95-00064)

Maryland Department of Health and Mental Hygiene (A-06-95-00066)

Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide Additional

Guidance to Drug Manufacturers to Better Implement the Program (A-06-91-00092)

Medicaid Drug Rebates: Inaccurate Reporting of Medicaid Drug Data by Pharmacies (A-06-91-

00056)

Medicaid Drug Rebates: Improvements Needed in the Health Care Financing Administrations

Procedures to implement the Medicaid Drug Rebate Program (A-06-91-00102) 

40 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  APPENDIX H 
End Notes

1.	 Federal HIV/AIDS Spending: A Budget Chartbook. Fiscal Year 2000. The Henry J. Kaiser Family 
Foundation. 
2.	 National Center for HIV, STD and TB Prevention, Division of HIV/AIDS Prevention, Centers for Disease 
Control and Prevention, HIV/AIDS Among US Women: Minority and Young Women at Continuing 
Risk. 
3.	 Owens, J., Chief, Medicaid Program Integrity, State of Florida, New Approaches to Combat Fraud and 
Abuse in the Medicaid Prescribed Drug Program. Presented at Medicaid Drug Rebate Program 
Conference, Salt Lake City, September 2000. 
4.	 42 USC 1396r-8(d) regulates and defines the states rights to restrict drugs or to impose preauthorization 
requirements. 
5.  42 CFR 447.301 
6.	 National Pharmaceutical Council, "Pharmaceutical Benefits Under State Medical Assistance Programs" 
1999, p. 4-57. 
7.	 Section 1927(c)(1)(C) of the Social Security Act defines best price 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, excluding: (1) any prices charged to the Indian Health 
Service, the Department of Veteran Affairs, the Department of Defense, the Public Health Service (PHS), 
and PHS-covered entities; (2) any prices charged under the Federal Supply Schedule; (3) any prices used 
under state pharmaceutical assistance program prices; and (4) any depot and single award contract prices. 
8.  Centers for Disease Control and Preventions HIV/AIDS Surveillance Report 
9.	 Federal Ceiling prices limit the pharmaceutical prices paid by the Department of Veterans Affairs, 
Department of Defense, Public Health Service and the Coast Guard. 
10  The full complexity of these formulas are not represented. Only the basic elements have been included in 
order to more vividly portray the fundamental differences between the various formulas. For instance, the 
Medicaid rebate is actually the greater of 15.1 percent of AMP or AMP minus the manufacturers Best 
Price. 
11.  Veterans Health Care Act of 1992, Title VI, Sec. 603(h)(5) 
12.  [SSA 1927] 42 USC Sec. 1396r-8(k)K1) 
13.  State Medicaid Manual, Part 6, Section 6305.1 
41 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611  14.	 Massachusetts Medicaid agency pays a dispensing fee of $2.50 but beneficiaries pay a $.50 copayment. 
Thus, the pharmacy receives $3.00 per prescription. 
15.	 The 25 percent is based upon a total expenditure calculation that we made using data provided by each 
State for expenditures on each drug in our sample. Our survey also asked States to estimate their total 
spending on antiretrovirals, and this survey question yielded a lower total expenditure estimate. The $51 
million savings represents 28 precent of this lower estimated expenditure total. 
16.	 National Center for HIV, STD and TB Prevention, Division of HIV/AIDS Prevention, Centers for Disease 
Control and Prevention, HIV/AIDS Among US Women: Minority and Young Women at Continuing 
Risk. 
17.  Indianapolis Star. Director Proposes Cuts in Medicaid by Kevin Corcoran. January 24, 2001. 
18.	 This is an estimate based on people with HIV/AIDS who are in regular care. Most of these people rely on 
public sector insurance programs -- estimates range from 68 percent to 83 percent. Bozzette, S.A., et al., 
The Care of HIV-infected Adults in the United States, New England Journal of Medicine, Vol. 339, No. 
26, 1998. 
19.	 Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and Reimbursement for 
Medicaid Drugs (A-06-97-00052), Attachment 2. 
20.  42 CFR 447.333 
21.  42 USC 1396r-8(b)(3)(D) 
22.  60 FR 48442 
23.	 The full complexity of the formula is not represented here, but it is explained fully in the Background. The 
rebate formula also accounts for Best Price and an inflation indexing methodology. 
24.  42 USC 1396r-8(b)(3)(D) 
25.  60 FR 48442 
26.	 Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and Reimbursement for 
Medicaid Drugs (A-06-97-00052), Attachment 2. 
42 
Medicaid HIV/AIDS Drug Cost Containment  OEI-05-99-00611