Department of Health and Human Services
 
OFFICE OF  

INSPECTOR GENERAL  

C M
OMPARISON OF  EDICAID  

F U L
EDERAL  PPER  IMIT  

A A
MOUNTS TO  VERAGE  

M P
ANUFACTURER  RICES 

Daniel R. Levinson 

Inspector General  

June 2005  

OEI-03-05-00110 
 Office of Inspector General 
 
http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs. This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management 
and program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs. 
Office of Investigations 
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. The OI also oversees 
state Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department. The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops compliance program guidances, renders advisory opinions on OIG sanctions to 
the health care community, and issues fraud alerts and other industry guidance.    E X E C U T I V E   S U M M A R Y   
  
OBJECTIVE 
To (1) determine how prices for drugs set under the Medicaid Federal 
upper limit program compare to reported average manufacturer prices 
(AMP) and (2) estimate the savings that could be achieved if Federal 
upper limit amounts were based on reported AMPs. 
BACKGROUND 
The Federal upper limit program was put in place to ensure that the 
Federal Government acts as a prudent payer by taking advantage of 
current market prices for multiple-source drugs.  Statutory and 
regulatory criteria generally require the Centers for Medicare & 
Medicaid Services (CMS) to include a drug on the Federal upper limit 
list if: (1) at least three versions of the drug are rated as therapeutically 
equivalent by the Food and Drug Administration (FDA), and (2) the 
drug has at least three suppliers listed in current editions of national 
compendia. The Federal upper limit amount for a drug is set at    
150 percent of the published price for the least costly, therapeutically 
equivalent product found in national compendia plus a reasonable 
dispensing fee. 
For the covered outpatient drugs of a manufacturer to be eligible for 
Federal matching funds under Medicaid, the manufacturer must enter 
into a rebate agreement with CMS and pay quarterly rebates to State 
Medicaid agencies.  Under these rebate agreements and the law, 
manufacturers must provide CMS with the AMPs for each of their 
covered drugs on a quarterly basis. Pursuant to Federal statute, AMP 
is the average price paid to a manufacturer for a drug in the United 
States by wholesalers for drugs distributed to the retail pharmacy class 
of trade, net of customary prompt pay discounts.  The Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 
recognizes AMP as a potential measure to be substituted in Medicare 
reimbursement calculations. 
We obtained the third-quarter 2004 version of the Federal upper limit 
list and third-quarter 2004 AMP data from CMS. For each drug on the 
Federal upper limit list, we determined the minimum AMP, average 
AMP, and maximum AMP.  To follow current procedures prescribed by 
Federal regulation, we limited the calculation to products that (1) were 
rated therapeutically equivalent by FDA, and (2) were available in the 
most commonly listed package size. We also limited the analysis to 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  i  E X E C U T I V E   S U M M A R Y  
products with Medicaid utilization in the third quarter of 2004.  We 
calculated the percentage difference between the Federal upper limit 
amount and the minimum, average, and maximum AMPs. 
To determine the potential implications of using AMPs rather than 
published prices to set Federal upper limit amounts, we multiplied the 
minimum and average AMPs for the drugs by 150 percent.  We then 
subtracted 150 percent of the minimum and average AMPs from the 
average Medicaid reimbursement amount in the third quarter of 2004.  
Finally, we multiplied the difference by the number of units of the drug 
product reimbursed during the time period. 
FINDINGS 
Federal upper limit amounts were five times higher than the average 
AMP.  Overall, Federal upper limit amounts were five times higher than 
the average AMPs for generic drug products in the third quarter of 
2004. Among individual generic drug products, Federal upper limits 
exceeded average AMPs by as much as 19 times.  During the same 
period, the Federal upper limit amount was, on average, 22 times 
higher than the lowest reported AMP, and usually exceeded even the 
highest reported AMP. 
Medicaid could save hundreds of millions of dollars per year by 
basing Federal upper limit amounts on reported AMPs. If Medicaid 
based Federal upper limit amounts on 150 percent of the average AMP, 
the financial implications would be substantial.  In the third quarter of 
2004, the program could have saved an estimated $161 million (or 
almost $650 million in 1 year) had Medicaid used the average AMP 
instead of the lowest published price when calculating Federal upper 
limits. 
Furthermore, if Medicaid based Federal upper limit amounts on 
150 percent of the lowest reported AMP rather than 150 percent of the 
lowest published price, the program may have saved up to $300 million 
in just one quarter of 2004.  This figure represents 75 percent of the 
$396 million spent on generic versions of Federal upper limit drugs 
during that period.  Assuming spending in the following three quarters 
would be similar to the previous quarter, basing Federal upper limit 
amounts on 150 percent of the lowest reported AMP rather than    
150 percent of the lowest published price could save Medicaid up to  
$1.2 billion per year. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  ii  E X E C U T I V E   S U M M A R Y 
   
RECOMMENDATION 
The Centers for Medicare & Medicaid Services should work with 
Congress to set Federal upper limit amounts that more closely 
approximate acquisition costs. In the past several months, the 
President, Congress, and individual Medicaid State agencies have 
expressed renewed interest in reducing excessive Medicaid 
reimbursement for prescription drugs.  The original purpose of the 
Federal upper limit program was to do just that by allowing Medicaid to 
take advantage of current market prices for generic drugs. However, 
the applicable regulation requires Federal upper limit amounts to be 
based on prices published in the national drug compendia.  As studies 
by the Office of Inspection General and numerous other entities have 
shown, published prices for many products bear little or no resemblance 
to the actual prices paid by providers.  Because the already inflated 
published prices are multiplied by 150 percent when calculating Federal 
upper limit amounts, Medicaid reimbursement for qualified products 
has the potential to greatly exceed acquisition costs.  The findings of 
this report further illustrate this point. 
We understand that pharmacies need to make some profit from the 
drugs they supply.  In addition, we realize that reimbursement 
amounts should be sufficient to provide pharmacies with incentives to 
dispense lower-cost generic drugs rather than the more expensive 
brand name versions.  However, that Federal upper limit amounts are 
typically 5 times higher (and as much as 19 times higher) than the 
average AMP seems excessive. 
Therefore, we recommend that CMS work with Congress to set Federal 
upper limit amounts that more closely approximate acquisition costs. 
At a time when States are trying to most effectively allocate resources 
due to shrinking Medicaid budgets, revised Federal upper limit laws 
and regulations would allow States and the Federal Government to 
share in the cost savings that should be associated with lower-priced 
generic drugs.  Subsequently, these cost savings should help States to 
continue providing needed care to Medicaid beneficiaries. 
Agency Comments 
CMS concurred with our recommendation, stating that Congress should 
take action to ensure that Medicaid reimbursement amounts more 
closely relate to actual transaction prices. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  iii    T A B L E   O F   C O N T E N T S   
  
EXECUTIVE SUMMARY ......................................... i 
 
INTRODUCTION ................................................ 1 
 
F I N D IN G S 
  
Federal upper limits five times higher than the average AMP .... 8 
 
Savings from using AMPs could exceed $1 billion per year  ...... 9 
 
RECOMMENDATION ........................................... 11  

APPENDICES 
A:  Methodology ............................................ 13  

B: Centers for Medicare & Medicaid Services Comments ....... 16 

ACKNOWLEDGMENTS ......................................... 19  
   I N T R O D U C T I O N   
  
OBJECTIVE 
To (1) determine how prices for drugs set under the Medicaid Federal 
upper limit program compare to reported average manufacturer prices 
(AMP) and (2) estimate the savings that could be achieved if Federal 
upper limit amounts were based on reported AMPs. 
BACKGROUND 
Medicaid Program. 
Medicaid is a jointly funded, Federal and State health insurance 
program for certain low-income and medically needy people.  Individual 
States establish eligibility requirements, benefits packages, and 
payment rates for their Medicaid programs under broad Federal 
standards administered by the Centers for Medicare & Medicaid 
Services (CMS).  Medicaid requirements mandate that States provide 
basic services to beneficiaries to receive Federal matching funds.  States 
may also receive Federal funding if they provide other optional services. 
One universally offered optional service is prescription drug coverage.  
All 50 States and the District of Columbia currently offer prescription 
drug coverage under the Medicaid program.  In calendar year 2003, 
CMS estimates that Medicaid payments for prescription drugs totaled 
over $34 billion.1 
Medicaid Drug Reimbursement Methodology. 
Each State is required to submit a Medicaid State plan to CMS 
describing its payment methodology for covered drugs.  Federal 
regulations require, with certain exceptions, that each States 
reimbursement for a drug not exceed the lower of its estimated 
acquisition cost plus a reasonable dispensing fee or the providers usual 
and customary charge to the public for the drug.   
CMS allows States flexibility to define estimated acquisition cost. Most 
States base their calculation of estimated acquisition cost on a drugs 
average wholesale price (AWP) discounted by a certain percentage.  As 
of the first quarter of 2005, this discount ranged from 5 to 50 percent of 
AWP.  A small number of States use wholesale acquisition costs plus a 
percentage markup rather than, or in addition to, discounted AWPs 
when determining estimated acquisition cost. 
1 This amount includes both the Federal and State shares of payments.  Rebates collected 
under the Medicaid Drug Rebate program have not been subtracted from the total. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  1  I N T R O D U C T I O N  
For certain drugs, States also use the Federal upper limit and/or State 
maximum allowable cost programs in determining reimbursement 
amounts.  CMS has established Federal upper limit amounts for more 
than 400 drugs.  In addition, numerous States have implemented a 
maximum allowable cost program to limit reimbursement amounts for 
certain drugs.  Individual States determine the types of drugs that are 
included in their maximum allowable cost programs and the methods by 
which the maximum allowable cost for a drug is calculated. 
In summary, States use a variety of mechanisms when setting drug 
reimbursement amounts.  In most cases, States reimburse for a drug at 
the lower of the estimated acquisition cost, the Federal upper limit 
amount, or the State maximum allowable cost, plus a reasonable 
dispensing fee. 
Federal Upper Limit Program. 
According to CMSs State Medicaid Manual, the Federal upper limit 
program was created to ensure that the Federal Government acts as a 
prudent payer by taking advantage of current market prices for 
multiple-source drugs. Under 42 CFR  447.332, CMS is to establish a 
Federal upper limit amount for a drug when:  (1) all formulations of a 
drug have been rated as therapeutically equivalent by the Food and 
Drug Administration (FDA), and (2) at least three suppliers of the drug 
are listed in current editions (or updates) of published compendia of cost 
information for drugs available for sale nationally.  The Omnibus 
Budget Reconciliation Act of 1990 (OBRA 90) established new criteria 
requiring a drug to be included on the Federal upper limit list when 
three or more versions of a drug had been rated therapeutically and 
pharmaceutically equivalent by FDA, regardless of the ratings of other 
versions.2  FDA designates drugs that are therapeutically equivalent as 
A-rated. 
Federal regulation (42 CFR  447.332) sets the Federal upper limit 
amount at 150 percent of the published price for the least costly, 
therapeutically equivalent product that can be purchased by 
pharmacists in quantities of 100 tablets or capsules plus a reasonable 
2 According to the State Medicaid Manual, the language of OBRA 90 augments the 
upper limits established by the regulation and creates new criteria for adding drugs to 
the Federal upper limit list.  CMS has not modified the language of the regulation since it 
was promulgated in 1987, nor has the regulation been withdrawn. In practice, CMS relies 
on the language of the regulation and the OBRA 90 provisions in establishing Federal 
upper limits. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  2  II NN TT RR OO DD UU CC TT II OO NN
dispensing fee. If the drug is not typically available in quantities of 
100 or if the drug is a liquid, the Federal upper limit amount is based on 
a commonly listed size. 
CMS applies an additional standard in determining which drugs should 
be subject to Federal upper limits. According to CMS staff, only drugs 
for which a Federal upper limit could potentially lead to savings should 
be included on the Federal upper limit list. Therefore, if a drug does not 
have a published price that, when multiplied by 150 percent, is lower 
than the AWP, CMS does not include the product. 
CMS publishes the Federal upper limit list on its Web site at 
www.cms.hhs.gov/medicaid/drugs/drug10.asp and in the State 
Medicaid Manual. Any revisions to the Federal upper limit list are 
typically noted on the Web site as well. CMS establishes an upper limit 
for specific forms and strengths for each multiple-source drug on the 
list. The Federal upper limit list also provides the source of the pricing 
information used to calculate the upper limit amount for each drug. 
The Medicaid Drug Rebate Program and Average Manufacturer Price. 
For the covered outpatient drugs of a manufacturer to be eligible for 
Federal matching funds under Medicaid, section 1927(a)(1) of the Social 
Security Act mandates that drug manufacturers enter into rebate 
agreements with CMS and pay quarterly rebates to States. Under these 
rebate agreements and the law, manufacturers must provide CMS with 
the AMP for each of their covered drugs on a quarterly basis. Pursuant 
to section 1927(k)(1) of the Social Security Act, AMP is defined as the 
average price paid to a manufacturer for a drug in the United States by 
wholesalers for drugs distributed to the retail pharmacy class of trade, 
net of customary prompt pay discounts. The AMP is calculated as a 
weighted average of prices for all of a manufacturers package sizes of a 
drug sold during a given quarter. Section 1927(b)(3)(D) of the Social 
Security Act requires that, subject to certain exceptions, AMPs reported 
to CMS not be publicly disclosed. 
In a December 2004 report, the Congressional Budget Office used AMP 
to estimate what pharmacies pay to acquire drugs. While the 
acquisition costs for pharmacies that buy through wholesalers rather 
than directly from manufacturers may exceed AMP, the wholesaler 
markup is estimated to be a small proportion (approximately 3 percent) 
OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  3  I N T R O D U C T I O N  
of the actual price.3  The Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) also recognizes AMP as a 
potential measure to be substituted in Medicare reimbursement 
calculations.4 
Related Work by the Office of Inspector General. 
In December 2004, the Office of Inspector General (OIG) issued 
Addition of Qualified Drugs to the Medicaid Federal Upper Limit List 
(OEI-03-04-00320) as requested by a Congressional subcommittee.  OIG 
found that CMS does not add qualified drugs to the Federal upper limit 
list in a timely manner.  Of the 252 first-time generic drugs approved 
between January 2001 and December 2003, 109 drugs met the criteria 
for inclusion on the Federal upper limit list; however, only 25 of these 
drugs were actually added.  For the 25 that were added, CMS took an 
average of 36 weeks to place the products on the Federal upper limit list 
once they were qualified for inclusion.  CMSs not adding qualified drugs 
in a timely manner cost the Medicaid program an estimated 
$167 million between 2001 and 2003.  We recommended that CMS 
establish an administrative procedure and schedule to govern the 
determination and publication of Federal upper limits. 
In February 2004, OIG issued Omission of Drugs from the Federal 
Upper Limit List in 2001 (OEI-03-02-00670).  OIG found that 90 drug 
products were not included on the Federal upper limit list in 2001 
despite meeting the criteria established by Federal law and regulation.  
Medicaid could have saved $123 million in 2001 by adding 55 of the   
90 drug products to the Federal upper limit list. OIG recommended 
that CMS take steps to ensure that all drugs meeting the criteria are 
included on the Federal upper limit list. 
In October 2003, OIG issued State Strategies to Contain Medicaid Drug 
Costs (OEI-05-02-00680).  OIG found that States employ three main 
drug cost containment strategies:  (1) limiting Medicaid reimbursement 
for drugs, (2) shifting use from higher to lower cost drugs, and     
(3) limiting the amount of prescription drugs a beneficiary can obtain.  
States reported facing challenges in their attempts to maximize drug 
3 As reported by the National Association of Chain Drug Stores in the Congressional Budget 
Office report, Medicaids Reimbursement to Pharmacies for Prescription Drugs. 
4 Medicare typically uses manufacturer-reported average sales price (ASP) plus 6 percent as 
the basis for drug reimbursement.  However, if the ASP for a drug exceeds the AMP by a 
threshold percentage, section 303 of MMA allows the program to base reimbursement on 
103 percent of AMP instead.  In 2005, this threshold percentage is 5 percent. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  4  I N T R O D U C T I O N  
cost savings, including a lack of accurate drug price information and 
stakeholder opposition to cost containment efforts. 
Recent Interest in Medicaid Drug Pricing Issues. 
In December 2004, the United States House Committee on Energy and 
Commerce Subcommittee on Oversight and Investigations held a 
hearing entitled Medicaid Prescription Drug Reimbursement:   Why 
the Government Pays Too Much.  Representatives from OIG, CMS, 
several State Medicaid agencies, and the drug industry testified at this 
hearing.  The role that Federal upper limits play in reducing costs for 
prescription drugs was a key area of interest to the subcommittee. 
In addition, the Presidents 2006 budget proposes changes that would 
cause Medicaid reimbursement amounts to more closely approximate 
pharmacy acquisition costs. Specifically, the budget recommends that 
Medicaid reimbursement for prescription drugs be at 106 percent of a 
drugs ASP. 
Prior to 2005, Medicare, like Medicaid, based drug reimbursement on 
published AWPs.  However, due in part to numerous reports by OIG 
and the Government Accountability Office that found that AWPs were 
significantly inflated, Congress required that Medicare begin basing 
reimbursement amounts on 106 percent of ASP instead.  Section 303 of 
MMA defines ASP as the manufacturers sales to all purchasers (with 
certain exemptions) divided by the number of units sold.  The ASP is to 
be net of chargebacks, discounts, rebates, and other price concessions. 
The ASPs are reported to CMS by drug manufacturers. 
METHODOLOGY 
Identifying Drugs on the Federal Upper Limit List. 
We obtained a list of drugs subject to Federal upper limits as of the 
third quarter of 2004 from the CMS Web site.  Using data obtained from 
the publisher of a national drug compendium, we compiled a list of all 
the national drug codes (NDC) associated with generic versions of each 
drug product. 
Obtaining Medicaid Utilization Data. 
We downloaded 50 State Medicaid payment and utilization files for 2004 
from CMSs Web site.  We limited our analysis to utilization occurring in 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  5  I N T R O D U C T I O N  
the third quarter of 2004.5  We calculated the average Medicaid 
reimbursement amount for each of the 415 drugs on the Federal upper 
limit list by dividing the total reimbursement for the product (net of 
dispensing fees) by the total number of units reimbursed.6 
Determining AMPs for Drugs Subject to Federal Upper Limits. 
We obtained third-quarter 2004 AMP data from CMS.  We matched the 
AMP data with the Medicaid utilization data to verify that all products 
on which the comparisons would be made had actually been reimbursed 
by Medicaid. Consistent with Federal regulations, we removed any 
NDCs that represented drug products that were not A-rated, and also 
removed any NDCs that did not match the most commonly listed 
package size.  We then determined the minimum, average, and 
maximum AMPs among the remaining NDCs for each of the drug 
products.  We did not verify that the AMPs reported to CMS were 
correct. 
Comparing Federal Upper Limit Amounts to AMPs. 
We compared the third-quarter 2004 Federal upper limit amounts to the 
third-quarter 2004 AMPs. We calculated the percentage difference 
between the Federal upper limit amount and the minimum, average, 
and maximum AMPs for each of the 415 drug products under review.  
We then calculated an overall percentage difference weighted by 
Medicaid reimbursement. We will not be reporting the actual dollar 
differences between the Federal upper limit amounts and AMPs for 
individual drug products due to confidentiality issues. 
Estimating Potential Savings. 
To determine the potential impact of using AMPs rather than published 
prices to set Federal upper limit amounts, we: 
(1) multiplied the minimum and average AMPs for the drugs on the 
Federal upper limit list by 150 percent (consistent with current 
regulation), 
5 Third-quarter data for seven States were not yet available, and an additional State had no 
data in the system because its drug benefit is provided completely through managed care 
organizations.  Therefore, our analysis is limited to information from 42 States and the 
District of Columbia. 
6 As of the third quarter of 2004, there were 419 drug products on the Federal upper limit 
list. Four of these drug products were removed from the analysis for reasons detailed in 
Appendix A, leaving 415 drugs in our review. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  6  I N T R O D U C T I O N  
(2) subtracted 150 percent of the minimum and average AMPs from the 
average Medicaid reimbursement amount in the third quarter of 
2004, and7 
(3) multiplied the difference calculated in step two by the number of 
units of the drug product reimbursed during the time period. 
A complete discussion of our methodology is presented in Appendix A. 
This evaluation was conducted in accordance with the Quality 
Standards for Inspections issued by the Presidents Council for 
Integrity and Efficiency and the Executive Council for Integrity and 
Efficiency. 
7 In calculating potential savings, we used average Medicaid reimbursement amounts 
rather than Federal upper limit amounts.  Because of State maximum allowable cost 
programs, some States may reimburse substantially less than the Federal upper limit 
amount for certain drugs.  Therefore, using Federal upper limit amounts in our 
calculations would tend to exaggerate potential savings.  Using average Medicaid 
reimbursement amounts provides a much more accurate estimate of the potential savings. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  7    F I N D I N G S 
   
Overall, Federal upper limit 
Federal upper limit amounts were five times 
amounts were five times higher 
higher than the average AMP 
than the average AMPs for 
generic drug products in the third 
quarter of 2004.  Among individual generic drug products, Federal 
upper limits exceeded average AMPs by as much as 19 times ($1.20 per 
tablet compared to $0.063 per tablet).  For 327 of the 415 drug products 
reviewed, the Federal upper limit amount was at least double the 
average generic AMP, with Federal upper limits being more than    
4 times higher in 131 cases.  The Federal upper limit amount was below 
the average AMP for just 13 of the 415 drug products during the third 
quarter of 2004. 
Among the 20 reviewed drug products with the highest total Medicaid 
reimbursement, the Federal upper limit amount was between 2 and    
14 times higher than the average generic AMP during the third quarter 
of 2004.8  Ten of the top twenty drug products had a Federal upper limit 
amount that was at least 5 times more than the average generic AMP. 
On average, Federal upper limit amounts were more than 20 times higher 
than the lowest reported AMPs. 
During the third quarter of 2004, the Federal upper limit amount for 
415 drug products was, on average, 22 times higher than the minimum 
generic AMP reported by drug manufacturers. For 29 drug products, 
the Federal upper limit amount exceeded the minimum reported AMP 
for generic versions by at least 40 times.  All but 12 of the 415 drug 
products had Federal upper limit amounts that were at least double the 
minimum generic AMP.  
For the 20 drug products with the highest total Medicaid 
reimbursement, Federal upper limit amounts ranged from 4 times more 
than the minimum AMP up to 61 times more than the minimum AMP. 
The drug with highest total reimbursement during the third quarter of 
2004, albuterol inhalation aerosol, had a Federal upper limit amount 
that was 36 times higher than the lowest reported generic AMP. 
8 These 20 drugs accounted for 36 percent of total Medicaid reimbursement for generic 
versions of Federal upper limit drugs during the third quarter of 2004.  A list of these 
drugs is presented in Table 1 on page 10. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  8  F I N D I N G S  
Federal upper limit amounts were usually greater than even the highest 
reported AMPs. 
On average, Federal upper limit amounts were more than double the 
highest reported generic AMPs during the third quarter of 2004.  Only 
75 of the 415 drugs under review had a Federal upper limit amount that 
was less than the maximum AMP.  In the case of the drug product with 
the highest total Medicaid reimbursement, albuterol inhalation aerosol, 
the Federal upper limit amount was approximately five times more 
than the maximum reported AMP among generic versions of the 
product. 
Medicaid could save hundreds of millions of  If Medicaid based Federal upper 
dollars per year by basing Federal upper limit  limit amounts on 150 percent of 
the average AMP, the program 
amounts on reported AMPs 
could have saved an estimated 
$161 million in the third quarter of 2004.9 Assuming spending in the 
following three quarters would be similar to the previous quarter, 
basing Federal upper limit amounts on 150 percent of the average AMP 
rather than 150 percent of the lowest published price could save 
Medicaid almost $650 million per year.10  Table 1 (see page 10) shows 
the potential savings for the 20 drugs with the highest total Medicaid 
reimbursement in the third quarter of 2004.  The potential savings for 
these 20 drugs alone exceeded $75 million for the quarter. 
If Medicaid based Federal upper limit amounts on 150 percent of the 
lowest reported AMP rather than 150 percent of the lowest published 
price, the program may have saved up to $300 million in just a single 
quarter.  This figure represents 75 percent of the $396 million spent on 
generic versions of Federal upper limit drugs during the third quarter of 
2004. Assuming spending in the following three quarters would be 
similar to the previous quarter, basing Federal upper limit amounts on 
150 percent of the lowest reported AMP rather than 150 percent of the 
lowest published price could save Medicaid up to $1.2 billion per year. 
9 All savings in this report represent estimates for 42 States and the District of Columbia 
only.  We did not perform calculations for eight states without third-quarter data. 
10 The Presidents 2006 budget recommends using 106 percent of ASP as the basis for 
Medicaid drug reimbursement, an identical method to Medicare Part B.  The ASP for 
most of the drugs included in this review are not provided to CMS since they are not 
covered under Medicare Part B. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  9  FF II NN DD II NN GG SS  
Table 1: Potential Savings Based on Average AMP for 20 Drugs With Highest Reimbursement 
Medicaid Reimbursement  Savings at 150% of 
Generic Name  7/1/2004 -9/30/2004  Average AMP 
Albuterol aerosol 90 mcg/act  $16,391,640  $12,105,942 
Metformin HCl tab 500 mg  $13,430,697  $6,354,068 
Fluoxetine HCl cap 40 mg  $9,292,817  $6,711,161 
Tramadol HCl tab 50 mg  $8,921,358  $5,141,661 
Tizanidine HCl tab 4 mg  $7,785,526  $4,286,990 
Ranitidine HCl tab 150 mg  $7,570,846  $5,954,356 
Albuterol sulfate solution 0.083%  $7,180,644  $3,553,728 
Lorazepam tab 1 mg  $6,409,259  $4,204,818 
Lisinopril tab 20 mg  $6,358,915  $3,590,489 
Hydrocodone-acetaminophen tab 10-500 mg  $5,873,425  $3,099,228 
Hydroxyzine HCl tab 25 mg  $5,737,177  -$555,585 
Amiodarone HCl tab 200 mg  $5,550,813  $3,759,315 
Propoxyphene-N w/APAP tab 100-650 mg  $5,464,571  $109,935 
Famotidine tab 20 mg  $5,428,734  $4,474,399 
Lisinopril tab 10 mg  $5,373,003  $2,752,882 
Lisinopril tab 40 mg  $5,164,975  $2,527,996 
Baclofen tab 10 mg  $5,116,346  $2,347,817 
Lovastatin tab 40 mg  $5,007,263  $2,808,319 
Lorazepam tab 0.5 mg  $4,934,603  $2,601,946 
Cephalexin cap 500 mg  $4,670,980  $2,492,166 
Total  $141,663,592  $78,321,631 
Source: Third-Quarter 2004 CMS Federal Upper Limit and AMP Data; OIG Analysis, April 2005. 
OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  10  The Centers for Medicare & Medicaid Services should work with 
Congress to set Federal upper limit amounts that more closely 
approximate acquisition costs. 
In the past several months, the President, Congress, and individual 
Medicaid State agencies have expressed renewed interest in reducing 
excessive Medicaid reimbursement for prescription drugs. The original 
purpose of the Federal upper limit program was to do just 
that by 
allowing Medicaid to take advantage of current market prices for 
generic drugs. However, the applicable regulation requires Federal 
upper limit amounts to be based on prices published in the national 
drug compendia. As studies by the Offce of Inspector General and 
numerous other entities have shown, published prices for many 
products bear little or no resemblance to the actual prices paid by 
providers. Because the already inflated published prices are multiplied 
by 150 percent when calculating Federal upper limit amounts
, Medicaid 
reimbursement for qualified products has the potential to greatly exceed 
acquisition costs. The findings of this report further 
ilustrate this 
point. 
We understand that pharmacies need to make some profit from the 
drugs they supply. In addition, we realize that reimbursement 
amounts should be suffcient to provide pharmacies with incentives to 
dispense lower cost generic drugs rather than the more expensive 
brand name versions. However, that Federal upper limit amounts are 
typically 5 times higher (and as much as 19 times higher) than the 
average AMP seems excessive. 
Therefore, we recommend that CMS work with Congress to set 
Federal upper limit amounts that more closely approximate 
acquisition costs. At a time when States are trying to more effectively 
allocate resources due to shrinking Medicaid budgets
, revised Federal 
upper limit laws and regulations would allow States and the Federal 
Government to share in the cost savings that should be associated 
with lower priced generic drugs. Subsequently, these cost savings 
should help States to continue providing needed care to Medicaid 
beneficiaries. 
Agency Comments 
CMS concurred with our recommendation, stating that Congress 
should take action to ensure that Medicaid reimbursement amounts 
more closely relate to actual transaction prices. CMS notes that 
OEI-03. 05. 00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  R E C O M M E N D A T I O N  
Congress recently acted to reform Medicares payment methodology 
for prescription drugs based on similar pricing issues, and goes on to 
state, Congress should now enact similar legislation to ensure that 
Medicaid payment for drugs is related to actual prices paid by 
pharmacies.  The full text of  CMSs comments is presented in 
Appendix B. 
OIG Response 
OIG appreciates CMSs comments on this report, and looks forward to 
assisting CMS and Congress in their efforts reform Medicaids current 
reimbursement methodology. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  12    A P P E N D I X   ~   A   
  
METHODOLOGY 
Identifying Drugs on the Federal Upper Limit List. 
We obtained a list of drugs subject to Federal upper limits as of the 
third quarter of 2004 from the CMS Web site.  At that time, 419 drug 
products (i.e., individual dosage forms and sizes of a generic drug 
ingredient) were included on the Federal upper limit list. 
Using data obtained from the publisher of a national drug compendium, 
we compiled a list of all the national drug codes (NDC) associated with 
generic versions of each of the 419 drug products.  Each individual drug 
product manufactured or distributed in the United States has a unique 
NDC.  An NDC identifies the manufacturer or labeler of the drug 
product, the product dosage form, and the package size. For each NDC, 
compendia provide published prices (usually average wholesale prices 
and wholesale acquisition costs), manufacturer information, and FDA 
therapeutic equivalency data.  The compendia also identify whether the 
individual drug product is a brand name or generic version. According 
to the compendium used in our analysis, 2 of the 419 drug products on 
the Federal upper limit list did not have any matching generic NDCs. 
The remaining 417 drug products were represented by 17,945 generic 
NDCs. 
Obtaining Medicaid Utilization Data. 
To ensure that the comparisons between Federal upper limit amounts 
and AMPs were meaningful, we verified that all products upon which 
the comparisons were based had actually been reimbursed by Medicaid.  
We downloaded 50 State Medicaid payment and utilization files for 
2004 from CMSs Web site.11  Each file contained variables representing 
total State reimbursement, number of units reimbursed, and number of 
prescriptions written for every NDC by calendar quarter. 
We limited our analysis to utilization occurring in the third quarter of 
2004. CMS had third-quarter utilization figures available for 42 States 
and the District of Columbia.12 Of the 17,945 NDCs subject to 
11 Arizonas data were not available for download because the States drug benefit is 
administered completely through managed care organizations and not the traditional 
fee-for-service system.   
12 The seven States without third-quarter data on CMSs Web site were Colorado, Georgia, 
Kansas, Louisiana, Ohio, Vermont, and Washington. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  13  A P P E N D I X ~ A  
Federal upper limits, 4,699 had Medicaid utilization in the third quarter 
of 2004. 
The total State reimbursement amount listed in the State utilization 
files included both the payments made for the NDC and the dispensing 
fees paid to the pharmacy.  To determine a States reimbursement for 
only the drug product during the third quarter of 2004, we: 
(1) 	  calculated the total amount paid in dispensing fees for the NDC by 
multiplying the States dispensing fee by the number of 
prescriptions written for the NDC in each State, 
(2) 	  subtracted total dispensing fees from the total reimbursement for 
the NDC in each State, 
(3) 	  aggregated reimbursement (net of dispensing fees) and the 
number of units reimbursed for each NDC for all States, and 
(4) 	  summarized the data from step 3 to obtain reimbursement and 
utilization totals for each of the 417 drug products. 
We then calculated the average Medicaid reimbursement amount for 
each of the drugs by dividing the total reimbursement for the product 
(without the dispensing fee) by the total number of units reimbursed. 
Determining AMPs for Drugs Subject to Federal Upper Limits. 
We obtained third-quarter 2004 AMP data from CMS.  We matched the 
AMP data with the Medicaid utilization data to verify that all products 
on which the comparisons would be made had actually been reimbursed 
by Medicaid. We determined that 4,526 NDCs that were subject to 
Federal upper limits appeared on both the AMP file and Medicaid 
utilization files that quarter. 
Federal regulations require that the prices on which Federal upper limit 
amounts are based be for therapeutically equivalent (A-rated) products 
in common package sizes.  Therefore, we removed from the analysis any 
NDCs that represented drug products that were not A-rated. At this 
point, we removed another drug from the analysis because the drug did 
not have any A-rated versions with third-quarter 2004 utilization. For 
the 416 remaining drug products, we determined the most common 
package size listed in the compendia.  We removed from our analysis 
any NDCs that did not match this package size. We then determined 
the minimum, average, and maximum AMPs for the remaining NDCs 
for each of the 416 drug products.  We did not verify that the AMPs 
reported to CMS were correct. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  14  A P P E N D I X ~ A  
Comparing Federal Upper Limit Amounts to AMPs. 
We compared third-quarter 2004 Federal upper limit amounts to the 
third-quarter 2004 AMPs. We first ensured that the unit (i.e., tablet, 
gram, etc.) upon which the Federal upper limit was based equaled the 
unit amount upon which AMP was based.  For one product, the unit 
differed significantly and we could not readily determine an appropriate 
conversion factor.  This drug product was removed from the analysis, 
leaving 415 products in our review.   
We calculated the percentage difference between the Federal upper 
limit amount and the minimum, average, and maximum AMP for each 
of the 415 drug products. We then calculated an overall percentage 
difference weighted by Medicaid reimbursement.  We will not report the 
actual dollar differences between the Federal upper limit amounts and 
AMPs for individual drug products due to confidentiality issues. 
Estimating Potential Savings. 
To determine the potential savings of using AMPs rather than 
published prices to set Federal upper limit amounts, we:  
(1) 	 multiplied the minimum and average AMPs for the 415 drugs on 
the Federal upper limit list by 150 percent (consistent with 
current regulation),  
(2) 	 subtracted 150 percent of the minimum and average AMPs from 
the average Medicaid reimbursement amount in the third quarter 
of 2004, and 13 
(3) 	  multiplied the difference calculated in step 2 by the number of 
units of the drug product reimbursed during the time period. 
This evaluation was conducted in accordance with the Quality 
Standards for Inspections issued by the Presidents Council for 
Integrity and Efficiency and the Executive Council for Integrity and 
Efficiency. 
13 In calculating potential savings, we used average Medicaid reimbursement amounts 
rather than Federal upper limit amounts.  Because of State maximum allowable cost 
programs, some States may reimburse substantially less than the Federal upper limit 
amount for certain drugs.  Therefore, using Federal upper limit amounts in our 
calculations would tend to exaggerate potential savings.  Using average Medicaid 
reimbursement amounts provides a much more accurate estimate of the potential 
savings. 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  15    A P P E N D I X   ~   B   
  
Comments from the Centers for Medicare & Medicaid Services 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  16 
 A P P E N D I X ~ B   

  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  17 
 A P P E N D I X ~ B   

  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  18 
   A C K N O W L E D G M E N T S   
  
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and Linda M. Ragone, Deputy Regional Inspector 
General. Other principal Office of Evaluation and Inspections staff who 
contributed include: 
David Tawes, Team Leader 
Linda Boone Abbott, Program Specialist 
  OEI-03-05-00110  COMPARISON OF FEDERAL UPPER LIMIT AMOUNTS TO AVERAGE MANUFACTURER PRICES  19