Department of Health and Human Services
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
C   P
OMPARING  HARMACY 
 
R :  
  EIMBURSEMENT   
 
M P D M
EDICARE  ART   TO  EDICAID
 
 
 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
February 2009  
OEI-03-07-00350   
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 Office of Audit Services (OAS) provides 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.  These assessments help reduce waste, abuse, and 
mismanagement and promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud, waste, or abuse and promoting 
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 
of fraud and misconduct related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI utilizes its resources 
by actively coordinating with the Department of Justice and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to criminal 
convictions, administrative sanctions, and/or civil monetary penalties. 
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 for OIGs internal operations.  OCIG represents OIG in all civil and 
administrative fraud and abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program guidance, publishes fraud alerts, and provides other 
guidance to the health care industry concerning the anti-kickback statute and other OIG 
enforcement authorities.   
   
 
 E X E C U T I V E   S U M M A R Y  
OBJECTIVE
 
1.  To compare Medicare Part D and Medicaid pharmacy 
reimbursement amounts for selected drugs at the national level.   
2.  To compare the components of Part D and Medicaid pharmacy 
reimbursement amounts (i.e., ingredient cost and dispensing fee) 
for selected drugs in five States.  
BACKGROUND 
This study compares pharmacy reimbursement for two Federal health 
care programs:  Medicare Part D and Medicaid.  It does not compare 
total program expenditures and does not examine the impact of 
rebates or post-point-of-sale price concessions.  
Medicare Part D coverage is provided through private drug plans 
offered by plan sponsors.  Under Federal guidelines, Part D sponsors 
independently negotiate pharmacy reimbursement and price 
concessions with manufacturers and pharmacies.  Unlike Part D, 
State Medicaid agencies administer Medicaid and reimburse 
pharmacies for drugs.  States, in conjunction with the Federal 
Government, determine pharmacy reimbursement under broad 
Federal guidelines.  States also receive federally mandated Medicaid 
drug rebates and may negotiate with manufacturers for additional 
rebates.   
Beneficiaries enrolled in Medicares voluntary drug benefit typically 
obtain drugs from pharmacies.  Pharmacy reimbursement under  
Part D is based on negotiated prices.  Negotiated prices are made up 
of three elements:  ingredient cost, dispensing fee, and sales tax.  
Ingredient costs are usually based on the average wholesale price 
(AWP) discounted by a specified percentage or maximum allowable 
cost set by the plan sponsors.   
Medicaid beneficiaries also typically receive covered drugs through 
pharmacies, which are reimbursed for these drugs by State Medicaid 
agencies.  Most States typically calculate reimbursement based upon 
the AWP discounted by a specified percentage plus a dispensing fee.  
For certain drugs, States also use the Federal upper limit or State 
maximum allowable cost programs, which establish ceiling prices for 
certain multiple-source drugs. 
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E X E C U T I V E   S U M M A R Y  
The Deficit Reduction Act of 2005 (DRA) would have (1) expanded the 
number of drugs subject to Federal upper limit amounts, (2) changed 
the basis for the calculation of Federal upper limit amounts to 
average manufacturer prices (AMP), and (3) required the Centers for 
Medicare & Medicaid Services (CMS) to share AMP data with States.  
However, an injunction from a Federal district court and the July 
2008 passage of the Medicare Improvements for Patients and 
Providers Act of 2008 (MIPPA) delayed the implementation of these 
new requirements.  Therefore, Federal upper limits are calculated 
using the prior formula based on the lowest published price (i.e., AWP 
or wholesale acquisition cost), which the Office of Inspector General 
(OIG) has found to result in inflated payments. 
We compared the average unit reimbursement amount (the sum of 
ingredient costs and dispensing fees) between Part D and Medicaid at 
the national level (i.e., data from all States).  We also compared the 
individual components of reimbursement amount (i.e., ingredient 
costs and dispensing fees) between Part D and Medicaid for five 
selected States.  For this review, we selected 40 single-source         
(i.e., drugs available from one manufacturer) and 39 multiple-source 
(i.e., drugs available from more than one manufacturer) drugs with 
high Part D and/or Medicaid expenditures in the third and fourth 
quarters of 2006.   
FINDINGS 
Nationally, the average Part D and Medicaid pharmacy 
reimbursement amounts were similar for most selected        
single-source drugs.  Based on data from all States, there was less 
than a 5-percent difference between Medicare Part D and Medicaid 
pharmacy reimbursement amounts for most single-source drugs 
under review (34 of 40).  At the median, the Medicaid reimbursement 
amount was 0.6 percent less than the Part D amount for the selected 
drugs. 
The average unit ingredient costs of both Medicaid and Part D were 
also very similar for the single-source drugs in the five States under 
review.  However, Medicaid dispensing fees in each of the five States 
exceeded the average Part D dispensing fees for these single-source 
drugs by at least 40 percent.   
 
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Nationally, the average Medicaid pharmacy reimbursement amounts 
typically exceeded the average Part D reimbursement amounts for 
selected multiple-source drugs.  Based on data from all States, 
Medicaid pharmacy reimbursement amounts exceeded Part D pharmacy 
reimbursement amounts by at least 10 percent for 28 of the                        
39 multiple-source drugs under review.  Medicaid reimbursed less than 
Part D, on average, for just three of these drugs.  At the median, the 
Medicaid reimbursement amount was 17 percent greater than the  
Part D amount for the 39 selected multiple-source drugs.   
In all five selected States, the Medicaid ingredient cost exceeded the 
average Part D ingredient cost for more than half of the multiple-source 
drugs under review.  Some factors that may contribute to the differences 
between Medicaid and Part D pharmacy reimbursement in the five 
States include differences in pharmacy reimbursement methodologies 
and in the use of maximum allowable cost programs.   
For all five States, the Medicaid dispensing fee exceeded the average 
Part D dispensing fee for these multiple-source drugs by at least                
55 percent.  In two of five States, the Medicaid dispensing fee was more 
than double the average Part D dispensing fee. 
CONCLUSION 
We found that Part D and Medicaid pharmacy reimbursement amounts 
for most of the single-source drugs that we reviewed were similar; 
however, Medicaid reimbursement amounts for the multiple-source 
drugs that we reviewed were typically higher than Part D amounts.   
Congress took action to reduce reimbursement for multiple-source 
drugs in the Medicaid program through provisions in the DRA.  These 
provisions would have expanded the number of drugs subject to 
Federal upper limits and reduced the Federal upper limit amounts for 
these multiple-source drugs (including 14 under review in this study).  
The provisions would have also granted States access to AMP data.  
However, a Federal judge issued an injunction to prevent the 
implementation of AMP-based Federal upper limits and State access 
to AMP data.  In addition, because of MIPPA, CMS is prohibited from 
establishing Federal upper limit amounts based on AMPs or sharing 
AMP data prior to October 1, 2009.  As a result, Federal upper limits 
and Medicaid reimbursement amounts are still based on published 
prices, which previous OIG work has found to result in inflated 
payments for multiple-source drugs. 
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E X E C U T I V E   S U M M A R Y  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS agreed with the methodology and concurred with the findings in 
this report.  CMS reiterated that the DRA mandated that Federal upper 
limit amounts be based on AMPs and that those AMPs be publicly 
posted to ensure transparency.  CMS stated that it believes that as a 
result, until the DRA provisions are implemented, Medicaid pharmacy 
reimbursement will continue to be inflated.  However, CMS noted that 
provisions of MIPPA prohibit it from posting AMPs publicly until 
October 1, 2009, and require it to continue calculating Federal upper 
limit amounts based on published prices.  In addition, CMS stated that 
further work by OIG on dispensing fees would be beneficial.   
CMS made one technical comment on the report regarding the 
classification of a single-source drug.  Based on this comment, we 
conducted additional analysis and made revisions to the report, where 
appropriate. 
     
     
 
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  iv   
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DUC T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
F I N D IN G S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 
Nationally, the average Part D and Medicaid pharmacy 
reimbursement amounts were similar for most selected  
single-source dugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 
 
  Nationally, the average Medicaid pharmacy reimbursement  
  amounts typically exceeded the average Part D  
  reimbursement amounts for selected multiple-source drugs . . . . 13 
 
 
CONC LUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
Agency Comments and Office of Inspector General Response . . . 17 
 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 
  A:  Medicare Part D Drug Coverage. . . . . . . . . . . . . . . . . . . . . . . . 18 
 
  B:  Medicaid Pharmacy Reimbursement and Dispensing Fees 
for Selected States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 
 
  C:  Differences in Pharmacy Reimbursement for Selected  
Single-Source and Multiple-Source Drugs. . . . . . . . . . . . . . . . 22 
   
  D:   Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 
 
 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26   
   
 I N T R O D U C T I O N  
OBJECTIVE 
1.  To compare Medicare Part D and Medicaid pharmacy 
reimbursement amounts for selected drugs at the national level.   
2.  To compare the components of Part D and Medicaid pharmacy 
reimbursement amounts (i.e., ingredient cost and dispensing fee) 
for selected drugs in five States.  
BACKGROUND 
This study compares pharmacy reimbursement for two Federal health 
care programs:  Medicare Part D and Medicaid.  It does not compare 
total program expenditures and does not examine the impact of 
rebates or post-point-of-sale price concessions.  
Medicare Part D coverage is provided through private drug plans 
offered by plan sponsors.  Under Federal guidelines, Part D sponsors 
independently negotiate pharmacy reimbursement and price 
concessions with manufacturers and pharmacies.  Unlike Part D, 
State Medicaid agencies administer Medicaid and reimburse 
pharmacies for drugs.  States, in conjunction with the Federal 
Government, determine pharmacy reimbursement under broad 
Federal guidelines.  States also receive federally mandated Medicaid 
drug rebates and may negotiate with manufacturers for additional 
rebates.   
Medicare Part D Drug Coverage 
The Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 created the Medicare Prescription Drug Program, known 
as Medicare Part D, to provide an optional drug benefit for all 
Medicare beneficiaries.  Part D sponsors provide drug coverage to the 
25 million beneficiaries who had enrolled in the program as of 
January 2008.1  Part D expenditures totaled more than $49 billion in 
2007, the second year of the benefit.2   
 
1 Part D 2008 Enrollment Information.  Available online at 
http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/.  Accessed June 3, 2008.  
2 2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and 
Federal Supplementary Medical Insurance Trust Funds, p. 5.  Available online at 
http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2008.pdf.  Accessed April 16, 
2008.   
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I N T R O D U C T I O N  
Part D sponsors offer benefits through (1) stand-alone prescription 
drug plans (PDP) and (2) Medicare Advantage prescription drug plans 
(MA-PD), which provide integrated medical coverage, including drugs, 
through managed care.  See Appendix A for a more detailed 
description of drug coverage under Medicare Part D. 
Medicare Part D Drug Reimbursement 
Beneficiaries enrolled in Medicares voluntary drug benefit typically 
obtain drugs from pharmacies.  Pharmacy reimbursement under  
Part D is based on negotiated prices.  The Centers for Medicare & 
Medicaid Services (CMS) defines negotiated prices (or point-of-sale 
prices) as prices for covered Part D drugs that:  (1) are available to 
beneficiaries at the point of sale at network pharmacies; (2) are 
reduced by those discounts, direct or indirect subsidies, rebates, other 
price concessions, and direct or indirect remunerations that the  
Part D sponsor has elected to pass through to Part D enrollees at the 
point of sale; and (3) include any pharmacy dispensing fees.3  These 
prices are typically based on agreements between manufacturers, 
plan sponsors, and their affiliated contractors.4  Negotiated prices, or 
pharmacy reimbursement, include two main elements: 5  
1.  Ingredient cost.  The ingredient cost is the amount paid to the 
pharmacy for the drug itself.  Dispensing fees or other costs are 
not to be included in this amount. 
2.  Dispensing fee.  The dispensing fee is the amount paid to the 
pharmacy for dispensing the drug.  This amount includes only 
those activities related to the transfer of the drug from the 
pharmacy to the beneficiary, including charges associated with 
mixing the drug, delivery, and overhead.6   
The negotiated price that the sponsors and beneficiaries pay 
pharmacies for the ingredient cost of the drug is usually based on the 
average wholesale price (AWP) discounted by a specified percentage 
 
3 42 CFR  423.100. 
4 There may be additional price concessions between plan sponsors, manufacturers, and 
other stakeholders that are not included in the negotiated price (e.g., rebates).  These price 
concessions are not typically shared with the pharmacy.   
5 Negotiated prices for Medicare Part D also include a data element for sales tax.  
However, we did not include sales tax in our price comparison. 
6 Requirements for Submitting Prescription Drug Event Data.  Available online at  
http://www.cms.hhs.gov/DrugCoverageClaimsData/Downloads/PDEGuidance.pdf.  Accessed 
July 15, 2008.   
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or maximum allowable cost plus a dispensing fee, according to CMS 
staff.7  The portion of the negotiated price paid by the plan sponsor 
and the portion paid by the beneficiary are determined by the plans 
cost-sharing rules. 
Medicaid Drug Coverage 
Title XIX of the Social Security Act (the Act) established Medicaid, a 
program administered by States and financed with State and Federal 
funds.  Medicaid pays for medical and health-related assistance for 
certain vulnerable and needy individuals and families.     
All 50 States and the District of Columbia provide coverage for drugs 
under the Medicaid program.  Medicaid expenditures for drugs 
totaled over $21 billion in 2006.8   
Medicaid Drug Reimbursement 
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are reimbursed for these drugs by State Medicaid 
agencies.  Federal regulations require, with certain exceptions, that 
each State Medicaid agencys reimbursement for covered outpatient 
drugs not exceed (in the aggregate) the lower of the estimated 
acquisition cost for drugs (i.e., the ingredient cost) plus a reasonable 
dispensing fee or the providers usual and customary charge to the 
public for the drugs.9   
1.  Ingredient costs.  Medicaid payment for ingredient costs is based 
on the estimated acquisition cost.  Regulations define estimated 
acquisition cost to be the States best estimate of the price 
generally and currently paid by providers for the drug.10  CMS 
allows States flexibility in determining what constitutes the 
ingredient cost of drugs covered by their Medicaid programs; 
therefore, Medicaid reimbursement varies across States.  Most 
States calculate the estimated acquisition cost based on the AWP 
 
7 AWPs are listed in commercial publications, derived from manufacturer-reported data 
for both brand and generic drugs, and not defined in law or regulation.  Previous Office of 
Inspector General (OIG) work found that AWPs are often significantly higher than the 
prices that drug manufacturers, wholesalers, and similar entities actually charge the 
physicians and suppliers that purchase these drugs.   
8 This amount is calculated using national summary data for 2006 and includes both 
Federal and State payments.  Rebates collected by States under the Medicaid drug rebate 
program (section 1927 of the Act) were not subtracted from this figure.   
9 42 CFR  447.512.  
10 42 CFR  447.502.   
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discounted by a specified percentage.11 12  For certain drugs, 
States also use the Federal upper limit or State maximum 
allowable cost programs in setting reimbursement amounts.   
2.  Dispensing fees.  State Medicaid agencies also pay reasonable 
dispensing fees to pharmacies for pharmacy services.  Each State 
determines its Medicaid dispensing fees, which range from      
$1.75 to $12.50 per prescription.13  
Federal upper limit program.  The Federal upper limit program was 
created to ensure that the Federal Government acts as a prudent buyer 
of drugs by taking advantage of current market prices for               
multiple-source drugs (i.e., drugs available from more than one 
manufacturer).14  This program establishes a ceiling price that, in the 
aggregate, limits Medicaid payments.  Prior to January 1, 2007, Federal 
regulation set the Federal upper limit amount at 150 percent of the 
lowest price published in the national compendia for therapeutically 
equivalent products that can be purchased by pharmacists in quantities 
of 100 tablets or capsules, plus a reasonable dispensing fee.15   
OIG has found that the published prices on which Federal upper limit 
amounts were based often substantially exceeded the acquisition 
costs.16  Based in part on OIGs work, section 6001(a) of the Deficit 
Reduction Act of 2005 (DRA) required significant changes to the 
Federal upper limit program, including changes to the calculation of 
Federal upper limit amounts.  In January 2008, Federal upper limit 
amounts were to be based on 250 percent of the lowest reported 
 
11 Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2006.  Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/downloads/RxReimbursementRate 
December2006.pdf.  Accessed July 15, 2008. 
12 A small number of States base Medicaid reimbursement on wholesaler acquisition cost 
plus a markup percentage.   
13 This range excludes dispensing fees for home IV therapy.  Medicaid Prescription 
Reimbursement Information by State  Quarter Ending December 2006.  Available online 
at  
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/downloads/RxReimbursementRate 
December2006.pdf.  Accessed on July 15, 2008. 
14 Available online at http://www.cms.hhs.gov/FederalUpperLimits.  Accessed June 2, 
2008. 
15 42 CFR  447.332. 
16 Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer 
Prices, OEI-03-05-00110, June 2005; Deficit Reduction Act of 2005:  Impact on the 
Medicaid Federal Upper Limit Program, OEI-03-06-00400, June 2007.   
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I N T R O D U C T I O N  
average manufacturer price (AMP) for each drug rather than           
150 percent of the lowest price published in national compendia.  
AMP is a statutorily defined price, which is based on actual sales 
transactions.17  Additional provisions in the DRA would have 
expanded the number of drugs subject to Federal upper limit amounts 
and required CMS to share AMP data with States.   
However, in December 2007, a Federal judge issued a preliminary 
injunction to prevent the implementation of AMP-based Federal 
upper limits.18  Further, on July 15, 2008, the Medicare 
Improvements for Patients and Providers Act of 2008 (MIPPA),     
P.L. No. 110-275, was enacted.  As a result of this legislation, CMS is 
prohibited from establishing Federal upper limit amounts based on 
AMPs or sharing AMP data with States prior to October 1, 2009.    
State maximum allowable cost programs.  Many States have implemented 
maximum allowable cost programs to limit reimbursement amounts for 
certain drugs.  A maximum allowable cost is a ceiling price that applies 
to a group of multiple-source drugs.  Individual States determine which 
drugs are included in their programs and the methods by which the 
maximum allowable cost for a drug is calculated. 
Rebates.  For Federal payments to be available for covered outpatient 
drugs provided under Medicaid, section 1927(a)(1) of the Act requires 
drug manufacturers to enter into rebate agreements with the Secretary 
of the Department of Health and Human Services and pay quarterly 
rebates to State Medicaid agencies.  Under these rebate agreements, 
manufacturers must provide CMS with the AMP for each of their 
national drug codes.  The quarterly rebate for single-source drugs is 
generally based on the greater of 15.1 percent of the AMP or the 
difference between the AMP and the best price.19  The rebate amount 
for generic drugs is 11 percent of the AMP. 
 
 
17 Section 1927(k)(1) of the Act defines AMP as the average price paid to the 
manufacturer by wholesalers in the United States for drugs distributed to the retail 
pharmacy class of trade. 
18 Civil Action No. 1:07cv02017 (RCL). 
19 Pursuant to section 1927(c)(1)(C) of the Act, best price is the lowest price available 
from the manufacturer during the rebate period to any wholesaler, retailer, provider, health 
maintenance organization, nonprofit entity, or government entity within the United States, 
with certain exceptions.  Further, the Federal Medicaid rebate formula for brand name 
drugs also includes an additional calculation using an inflation factor. 
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Related Office of Inspector General Work 
Federal upper limit program.  In 2004 and 2005, OIG issued four reports 
detailing potential problems with the Federal upper limit program.20  
These reports focused on two main concerns:  (1) qualified drugs were 
not being included on the Federal upper limit list in a timely manner 
and (2) Federal upper limit amounts often greatly exceeded pharmacy 
acquisition costs.  For example, we found that Federal upper limit 
amounts were five times higher than average AMPs (a figure that we 
used as an estimate of pharmacy acquisition costs) in the third quarter 
of 2004.  Based in part on this work, the DRA required that Medicaid 
Federal upper limits be based on 250 percent of the lowest AMP rather 
than on 150 percent of the lowest price published in the national 
compendia.   
A June 2007 OIG report assessed the potential effect of AMP-based 
Federal upper limits.21  According to this report, pre-DRA Federal 
upper limit amounts substantially exceeded estimated average 
pharmacy acquisition costs for 25 selected drugs in the second quarter 
of 2006 and would decrease considerably under the new calculation 
method established by the DRA.22   
Part D payment.  A January 2008 OIG report (1) analyzed the 
relationship between Part D payments to pharmacies and the 
pharmacies drug acquisition costs and (2) estimated Part D dispensing 
fees and compared them with Medicaid dispensing fees.23  This report 
found that Medicare Part D payments, excluding dispensing fees, 
exceeded the pharmacies drug acquisition costs by an estimated  
18 percent when including rebates that drug wholesalers paid to 
pharmacies.  In addition, the average Medicaid dispensing fee was  
$2 more than the average Part D dispensing fee.   
 
20 Omission of Drugs From the Federal Upper Limit List in 2001 (OEI-03-02-00670, 
February 2004); Addition of Qualified Drugs to the Federal Upper Limit List  
(OEI-03-04-00320, December 2004); Comparison of Medicaid Federal Upper Limit 
Amounts to Average Manufacturer Prices (OEI-03-05-00110, June 2005); and How 
Inflated Published Prices Affect Drugs Considered for the Federal Upper Limit List  
(OEI-03-05-00350, September 2005). 
21 Deficit Reduction Act of 2005:  Impact on the Medicaid Federal Upper Limit Program 
(OEI-03-06-00400, June 2007).   
22 At the time OIG conducted its assessment, CMS had not fully developed its outlier 
policy.  Therefore, for the purposes of OIGs report, Federal upper limit amounts were 
calculated without regard to outlier AMPs. 
23 Review of the Relationship Between Medicare Part D Payments to Local, Community 
Pharmacies and the Pharmacies Drug Acquisition Costs (A-06-07-00107), January 2008. 
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METHODOLOGY 
Scope 
This study compared Part D and Medicaid pharmacy reimbursement 
for selected drugs by (1) comparing the average total reimbursement 
amount (the sum of ingredient costs and dispensing fees) between 
Part D and Medicaid at the national level (i.e., data from all              
States24) and (2) comparing the individual components of the total 
reimbursement amount (i.e., ingredient costs and dispensing fees) 
between Part D and Medicaid for five selected States.   
For this review, we selected 25 single-source (i.e., drugs available 
from one manufacturer) and 25 multiple-source (i.e., drugs available 
from more than one manufacturer) drugs with the highest Medicare 
Part D expenditures as well as 25 single-source drugs and  
25 multiple-source drugs with the highest Medicaid expenditures in 
the third and fourth quarters of 2006.  Because of overlap in the 
selected drugs, there were initially 43 single-source and  
37 multiple-source drugs to be included in this review.25 26  However, 
after the drugs were selected, it was determined that three drugs 
identified by the compendium as single-source products actually had 
generic versions available during most of the review period.  
Therefore, for this analysis, we considered these to be multiple-source 
drugs.  Similarly, it was determined that one drug identified by the 
compendium as multiple-source was actually a single-source drug.  
This particular drug would not have been selected had it been 
initially classified as single-source and was removed from our 
 
24 Arizona does not participate in the Medicaid Drug Rebate Program; therefore, there 
are no Medicaid data from this State included in this analysis.  Further, we identified 
errors in Medicaid utilization data from two additional States.  We excluded Medicaid 
utilization data from these two States from this analysis.   
25 We excluded from this review drugs that could not be identified, could not be identified 
as single source or multiple source, or did not have utilization in both programs (i.e., they 
had Part D utilization but no Medicaid utilization).   
26 For our initial selection of single-source and multiple-source drugs, we used drug-type 
data from Red Book, a national drug compendium that contains drug product and pricing 
information. 
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I N T R O D U C T I O N  
analysis.27  As a result the final selection included 40 single-source 
drugs and 39 multiple-source drugs.28   
We examined Part D reimbursement by PDPs only; we did not 
examine reimbursement data from MA-PDs and we excluded 
noncovered drugs.     
Data Collection 
Medicare Part D.  We first obtained prescription drug event (PDE) 
records with dates of service in the third and fourth quarters of 2006 
from CMS for all States.29  We then aggregated the data to identify 
total pharmacy reimbursement by drug.  The PDE records contained 
only final action claims and data for both the ingredient cost and the 
dispensing fee for each claim.  We identified the Part D drugs with 
the highest expenditures (i.e., the sum of ingredient cost plus 
dispensing fee) using the PDE data and drug type data from the 
national drug compendium, known as the Red Book.   
Medicaid.  We first downloaded State Medicaid payment, utilization, 
and dispensing fee data for all States with dates of service in the third 
and fourth quarters of 2006 from CMSs Web site.  We then 
aggregated the data to determine national payment and utilization by 
drug.  We identified the multiple-source drugs with the highest total 
pharmacy reimbursement (i.e., the sum of ingredient cost plus 
dispensing fee) using the Medicaid data and drug type data from the 
Red Book.   
Data Analysis 
National analysis.  We first calculated the average unit reimbursement 
amount for selected drugs with dates of service in the third and fourth 
quarters of 2006 based on data from all States.  To calculate the 
national Medicare Part D average unit cost for selected drugs, we 
divided the total reimbursement (i.e., the sum of ingredient cost plus 
 
27 This drug would not have been selected because the total expenditure threshold for the 
25 single-source drugs was substantially higher than the threshold for multiple-source 
drugs.   
28 The drugs selected for this report accounted for 37 percent of total Part D expenditures 
and 30 percent of total Medicaid expenditures during the third and fourth quarters of 2006. 
29 Every time a beneficiary fills a prescription covered under Part D, plans must submit 
a summary called the PDE record.  The PDE record contains drug cost and payment data 
that enable CMS to administer the Part D benefit.  See Appendix A for a more detailed 
description of PDE data. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  8   
   
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dispensing fee) by the number of units dispensed for each drug.30  We 
calculated the national average Medicaid unit payment amount for 
each selected drug (i.e., based on data from all States) by dividing 
total reimbursement (i.e., the sum of ingredient cost plus dispensing 
fees) by the number of units dispensed for each drug.   
We compared the average Part D and Medicaid drug reimbursement 
amount for the selected drugs and calculated the percentage 
difference between programs for each drug.  In addition, we 
calculated the median percentage difference for all single-source and 
all multiple-source drugs.   
State analysis.  We calculated the average unit ingredient cost and 
average dispensing fee for selected drugs based on data from five 
States:  Arkansas, Hawaii, Illinois, New York, and Wyoming.  We 
chose these States because they (1) had relatively straightforward 
reimbursement methodologies for determining ingredient costs and 
dispensing fees, (2) represented a range of reimbursement levels for 
ingredient costs, (3) varied in total Medicaid reimbursement for 
drugs, and (4) represented different geographic regions.31  See 
Appendix B for information on each of these States.    
To calculate the average unit ingredient cost and average dispensing 
fee under Part D, we first identified all PDE data for the selected 
drugs in the selected States.  We then calculated the average unit 
ingredient cost for Part D drugs in each State by dividing total 
ingredient cost by total units dispensed for each selected drug.  We 
calculated the average Part D dispensing fee per prescription for each 
State for single-source and multiple-source drugs by dividing total 
dispensing fees by total number of prescriptions.32   
Medicaid utilization data aggregate ingredient cost and dispensing 
fees but do not provide separate data on each.  Therefore, we 
calculated the total Medicaid ingredient cost for each drug by 
subtracting total dispensing fees from total expenditures.  To 
 
30 For most drugs in this review, unit refers to a pill (e.g., tablet, capsule).   
31 These States have one reimbursement amount and dispensing fee for all drugs or a 
small number of reimbursement amounts and dispensing fees based on whether the drug is 
a brand or generic product.  One State has an additional reimbursement amount for drugs 
dispensed at specialized pharmacies.    
32 For the analysis of PDE data from five States, we excluded all PDE records where the 
dispensing fee was equal to zero.   
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calculate total dispensing fees, we multiplied the States dispensing 
fee from the fourth quarter of 2006 by the total number of 
prescriptions for each drug.33  We calculated the average State 
Medicaid ingredient cost by dividing total ingredient cost by the total 
units dispensed for the selected drugs.    
We compared average Part D ingredient costs and average dispensing 
fees for each of the selected drugs to average Medicaid unit ingredient 
costs and Medicaid dispensing fees for five selected States.  We 
calculated the percentage difference for each amount between the 
programs.34  We also examined Part D and Medicaid reimbursement 
for drugs with Federal upper limit amounts.   
Limitations 
This study compares pharmacy reimbursement for two Federal health 
care programs:  Medicare Part D and Medicaid.  It compares only the 
amounts paid to pharmacies for selected drugs under both programs.  
The study does not compare total program expenditures and does not 
examine the impact of rebates or post-point-of-sale price concessions.   
The findings in this report apply only to the 40 single-source and       
39 multiple-source drugs we reviewed.  The findings are not 
projectable to all drugs covered under Part D and Medicaid.  We did 
not verify the accuracy or completeness of CMSs data or the accuracy 
of data in the national compendium.  In addition, we analyzed 
Medicaid data summarized by drug; i.e., we did not analyze  
claims-level data.  Therefore, we were unable to analyze the effect of 
usual and customary charges in the Medicaid program.     
Standards 
This study was conducted in accordance with the Quality Standards 
for Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
 
33 The Medicaid dispensing fees for the five States included in this review were the same 
for both the third and fourth quarters of 2006.  Further, for the two States with more than 
one dispensing fee, we used the brand drug dispensing fee for single-source drugs and the 
generic dispensing fee for multiple-source drugs.   
34 We compared reimbursement only for drugs that had both Part D and Medicaid 
utilization in all five States (i.e., if one State did not have both Part D and Medicaid 
utilization for a particular drug, we excluded that drug from all State data in our 
comparison).  As a result, the State comparison included 39 single-source drugs and           
34 multiple-source drugs. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  10   
   
 F I N D I N G S  
Based on data from all States, 
Nationally, the average Part D and Medicaid 
there was less than a 5-percent 
pharmacy reimbursement amounts were similar 
difference between Medicare Part D 
for most selected single-source drugs   and Medicaid pharmacy 
reimbursement amounts for most of 
the single-source drugs under review in the third and fourth quarters of 
2006.  At the median, the Medicaid reimbursement amount was          
0.6 percent less than the Part D amount for the selected drugs.   
For 34 of the 40 single-source drugs under review, the difference 
between the Medicare Part D and Medicaid reimbursement amount was 
no more than 5 percent (18 of these had a difference of 1 percent or 
less).  Only 1 of 40 single-source drugs included in our analysis had a 
difference between Part D and Medicaid reimbursement that exceeded 
10 percent.  Table 1 illustrates the differences between Part D and 
Medicaid reimbursement for the 40 single-source drugs that we 
reviewed.  For additional details concerning how pharmacy 
reimbursement for individual single-source drugs compared in both 
percentage and dollar terms, please see Appendix C.  
Table 1.  Comparison of Average Medicare Part D and Medicaid Unit 
Reimbursement Amounts for the 40 Single-Source Drugs Under Review 
Single-Source 
Difference in Medicare Part D and Medicaid Reimbursement 
Drugs
Medicaid > 50% higher than Part D 0
25% < Medicaid <50% higher than Part D 0
10% < Medicaid <25% higher than Part D 0
5% < Medicaid <10% higherthan Part D 1
1% < Medicaid <5% higher than Part D 6
0.01% < Medicaid <1% higher than Part D 9
Medicaid reimbursement equal to Part D reimbursement* 1
0.01% < Medicaid <1% lower than Part D 8
1% < Medicaid <5% lower than Part D  10
5% < Medicaid<10% lower than Part D 4
10% < Medicaid <25% lower than Part D 1
Medicaid > 25% lower than Part D 0
        Total number of drugs  40
 
*Difference between Medicaid and Part D pharmacy reimbursement was less than one-tenth of one cent.   
 
Source:  OIG analysis of third- and fourth-quarter 2006 Medicaid utilization and Part D PDE data. 
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  11   
   
FF II NN DD II NN GG SS   
Pharmacy reimbursement for ingredient costs was similar for both programs 
in the five selected States   
Overall, the average ingredient cost for both Medicaid and Part D 
pharmacy reimbursement was similar for single-source drugs under 
review in the five States.  For over four-fifths of the selected          
single-source drugs in each State, the difference between Medicaid and 
Part D ingredient costs was less than 10 percent.   
However, Medicaid dispensing fees exceeded average Part D dispensing 
fees in the five selected States   
In each of the five States, Medicaid dispensing fees exceeded the average 
Part D dispensing fees for the selected single-source drugs by at least        
40 percent.  In two of the five States, the Medicaid dispensing fee was 
more than double the average Part D dispensing fee.  However, because of 
the relatively high cost of most single-source drugs, dispensing fees 
typically account for a very small percentage of total cost for these drugs.35  
See Table 2 for a more detailed comparison of Medicaid and Part D 
dispensing fees for single-source drugs.    
 
 
Table 2.  Dispensing Fees for the Single-Source Drugs Under Review 
 
Percentage Difference 
Medicaid Dispensing Fees  for  Average Part D Dispensing Fees  Between Medicaid and Part D 
State  Single-Source Drugs  for Single-Source Drugs  Dispensing Fees 
Arkansas  $5.51  $2.54  117% 
Hawaii  $4.67  $3.01  55% 
Illinois  $3.40  $2.42  40% 
New York  $3.50  $2.43  44% 
Wyoming  $5.00  $2.20  127% 
 
Source:  CMSs Web site and OIG analysis of third- and fourth-quarter 2006 Part D PDE data. 
 
 
 
 
 
35 Part D dispensing fees for selected single-source drugs in these five States accounted 
for only 2 percent of pharmacy reimbursement (i.e., ingredient cost and dispensing fee) for 
these drugs.  Similarly, Medicaid dispensing fees for selected single-source drugs accounted 
for only 2 percent of pharmacy reimbursement for the five States.    
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  12   
   
FF II NN DD II NN GG SS   
Nationally, the average Medicaid pharmacy  Based on data from all States, the 
average Medicaid pharmacy 
reimbursement amounts typically exceeded the 
reimbursement amount exceeded 
average Part D reimbursement amounts for 
the average Part D pharmacy 
selected multiple-source drugs 
reimbursement amount by at least          
10 percent for 28 of the 39 multiple-source drugs under review.  
Medicaid reimbursed less than Part D, on average, for just three of 
these 39 drugs.  At the median, the Medicaid reimbursement amount 
was 17 percent greater than the Part D amount for selected  
multiple-source drugs.  Table 3 illustrates the reimbursement 
differences for the 39 multiple-source drugs under review.  For 
additional details concerning how pharmacy reimbursement for 
individual multiple-source drugs compared in both percentage and 
dollar terms, please see Appendix C. 
Fourteen of the thirty-nine multiple-source drugs in this review are 
included on the Federal upper limit list.  The average Medicaid 
reimbursement amount for all but one of the Federal upper limit drugs 
exceeded the average Part D reimbursement amount.  At the median, 
the Medicaid reimbursement amount was 32 percent greater than the 
Part D reimbursement amount for these 14 drugs.   
Table 3.  Comparison of Average Medicare Part D and Medicaid Unit 
Reimbursement Amounts for the 39 Multiple-Source Drugs Under Review 
Multiple-
Difference in Medicare Part D and Medicaid Reimbursement 
Source Drugs
Medicaid > 50% higher than Part D 4
25% < Medicaid <50% higher than Part D 12
10% < Medicaid <25% higher than Part D 12
5% < Medicaid <10% higher than Part D 4
1% < Medicaid <5% higher than Part D 3
0.01% < Medicaid <1% higher than Part D 1
Medicaid reimbursement equal to Part D reimbursement 0
0.01% < Medicaid <1% lower than Part D 1
1% < Medicaid <5% lower than Part D  0
5% < Medicaid <10% lower than Part D 0
10% < Medicaid <25% lower than Part D 1
25% < Medicaid <50% lower than Part D 0
Medicaid > 50% lower than Part D  1
        Total number of drugs  39
Source:  OIG analysis of third- and fourth-quarter 2006 Medicaid utilization and Part D PDE data. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  13   
   
F I N D I N G S  
In all five selected States, Medicaids ingredient cost was higher than the 
average Part D ingredient cost for the multiple-source drugs under review   
In all five States, the Medicaid ingredient cost for more than half of the 
multiple-source drugs under review exceeded the average Part D 
ingredient cost.  At the median, the Medicaid ingredient cost in these 
States was between 2 percent and 29 percent greater than the Part D 
cost for selected drugs.   
Several factors may contribute to the variation across the five States in 
Part D and Medicaid pharmacy reimbursement for multiple-source 
drugs.  Each State develops its own Medicaid reimbursement formula; 
therefore, Medicaid reimbursement amounts vary across States.  In 
addition, States have the flexibility to establish maximum allowable 
cost programs to set a cap on pharmacy reimbursement for certain 
drugs.     
Medicaid dispensing fees for the multiple-source drugs under review 
exceeded average Part D dispensing fees in all five selected States         
In each of the five States, the Medicaid dispensing fee exceeded the 
average Part D dispensing fee for multiple-source drugs by at least     
55 percent.  In two of the five States, the Medicaid dispensing fee was 
more than double the average Part D dispensing fee.  Because 
reimbursement amounts for multiple-source drugs are typically lower 
than those for single-source drugs, dispensing fees make up a larger 
percentage of total cost.36  See Table 4 on the next page for a more 
detailed comparison of Medicaid and Part D dispensing fees for the  
multiple-source drugs under review. 
 
36 Part D dispensing fees for the selected multiple-source drugs in the five selected States 
accounted for 5 percent of total pharmacy reimbursement (i.e., ingredient cost and 
dispensing fee).  Medicaid dispensing fees for these multiple-source drugs accounted for        
8 percent of total pharmacy reimbursement. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  14   
   
F I N D I N G S  
 
Table 4.  Dispensing Fees for the Multiple-Source Drugs Under Review 
 
Percentage Difference 
Medicaid Dispensing Fees  for  Average Part D Dispensing Fees  Between Medicaid and Part D 
State  Multiple-Source Drugs  for Multiple-Source Drugs  Dispensing Fees 
Arkansas  $5.51  $2.66  107% 
Hawaii  $4.67  $3.00  56% 
Illinois  $4.60  $2.59  78% 
New York  $4.50  $2.72  65% 
Wyoming  $5.00  $2.43  106% 
Source:  CMSs Web site and OIG analysis of third- and fourth-quarter 2006 Part D PDE data. 
 
 
 
 
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F I N D I N G S  
 CC OO NN CC LL UU SS II OO NN S   
 
This study compares pharmacy reimbursement for two Federal health 
care programs:  Medicare Part D and Medicaid.  It compares only the 
amount paid to pharmacies for selected drugs under both programs.  
This study does not compare total program expenditures and does not 
examine the impact of rebates or post-point-of-sale price concessions. 
We compared total reimbursement (ingredient cost plus dispensing fee) 
between Medicare Part D and Medicaid based on data from all States.  
We also compared Part D and Medicaid ingredient costs and dispensing 
fees for five selected States.  We found that Part D and Medicaid 
pharmacy reimbursement amounts for most single-source drugs that we 
reviewed were similar; however, Medicaid reimbursement amounts for 
multiple-source drugs that we reviewed were typically higher than   
Part D amounts.  In all five States under review, the average Medicaid 
ingredient costs of most multiple-source drugs under review exceeded 
the average Part D ingredient costs.  In addition, we found that 
Medicaid dispensing fees were substantially higher than the average 
Part D dispensing fee for the single and multiple-source drugs under 
review in all five States. 
Congress took action to reduce multiple-source drug prices in the 
Medicaid program through provisions in the DRA.  These provisions 
would have expanded the number of drugs subject to Federal upper 
limits and reduced the Federal upper limit amounts for these    
multiple-source drugs (including 14 under review in this study).  These 
provisions would have also granted States access to AMP data which, in 
turn, would have allowed States to base Medicaid drug reimbursement 
on AMPs.  However, a Federal judge issued a preliminary injunction to 
prevent the implementation of AMP-based Federal upper limits and 
AMP-based Medicaid reimbursement amounts.  In addition, because of 
MIPPA, CMS is prohibited from establishing Federal upper limit 
amounts based on AMPs or sharing AMP data with States prior to 
October 1, 2009.  As a result, Federal upper limits and Medicaid 
reimbursement amounts are still based on published prices, which 
previous OIG work has found to result in inflated payments for 
multiple-source drugs. 
 
 
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  16   
   
C O N C L U S I O N  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS agreed with the methodology and concurred with the findings in 
this report.  CMS reiterated that the DRA mandated that Federal upper 
limit amounts be based on AMPs and that those AMPs be publicly 
posted to ensure transparency.  CMS stated that it believes that as a 
result, until the DRA provisions are implemented, Medicaid pharmacy 
reimbursement will continue to be inflated.  However, CMS noted that 
provisions of MIPPA prohibit it from posting AMPs publicly until 
October 1, 2009, and require it to continue calculating Federal upper 
limit amounts based on published prices.  In addition, CMS stated that 
further work by OIG on dispensing fees would be beneficial.   
CMS made one technical comment on the report regarding the 
classification of a single-source drug.  Based on this comment, we 
conducted additional analysis and made revisions to the report, where 
appropriate. 
The full text of CMSs comments is provided in Appendix D.   
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  17   
   
 A P P E N D I X ~ A  
Medicare Part D Drug Coverage 
Part D sponsors are required by the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 to offer, at a minimum, 
a basic prescription drug benefit that is either the standard 
prescription drug benefit (described below) or is actuarially equivalent 
to the standard benefit.37  Most beneficiaries who elect Part D 
coverage are responsible for certain costs, which may include a 
monthly premium, an annual deductible, and coinsurance.  
In 2008, the standard drug benefit had a beneficiary deductible of 
$275.  In the initial phase of the Part D benefit, after beneficiaries 
pay the deductible, they contribute 25-percent coinsurance toward 
their drug costs and the plan pays the remaining 75 percent until 
combined beneficiary and plan payments reach $2,510.  After 
combined payments reach $2,510, beneficiaries enter the coverage gap 
phase of the benefit in which they are responsible for 100 percent of 
their drug costs.  The catastrophic coverage phase begins when a 
beneficiarys out-of-pocket costs reach $4,050.  This amount includes a 
beneficiarys deductible and coinsurance payments.  Once 
beneficiaries reach $4,050 in out-of-pocket costs, they contribute 
approximately 5 percent in coinsurance toward their drug costs.  Of 
the remaining 95 percent of drug costs, the Part D sponsors are 
responsible for approximately 15 percent and Medicare pays              
80 percent. 
Part D plans may also offer enhanced plan benefit packages.  
Enhanced plans include benefits such as lower (or no) deductibles and 
coverage during the coverage gap phase.   
Plan Bids and Subsidy Payments 
Before the beginning of the plan year, sponsors are required to submit 
a bid for each plan that they intend to offer.38  The bid is an estimate 
of the average costs to provide the basic benefit per beneficiary.   
Throughout the year, the Centers for Medicare & Medicaid Services 
(CMS) makes prospective payments to sponsors for three subsidies 
based on sponsors approved bids.  These subsidies are:  (1) the direct 
 
37 Actuarially equivalent means that the plans benefit must be at least of a dollar 
value equivalent to that of the standard benefit. 
38 42 CFR  423.265. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  18   
   
A P P E N D I X ~ A  
subsidy, (2) the reinsurance subsidy, and (3) the low-income          
cost-sharing subsidy. 
Direct subsidy.  The direct subsidy, together with beneficiary 
premiums, is designed to cover the sponsors cost of providing the 
benefit to each beneficiary.   
Reinsurance subsidy.  The reinsurance subsidy covers the Federal 
Governments share of drug costs for beneficiaries who have reached 
catastrophic coverage. 
Low-income cost-sharing subsidy.  The low-income cost-sharing subsidy 
covers the Federal Governments portion of the cost-sharing payments 
for certain low-income beneficiaries. 
At the end of the plan year, CMS reconciles these prospective 
payments with the actual costs incurred by the plan sponsors.39   
Prescription Drug Event Data 
As a condition of payment, all Part D plan sponsors submit data and 
information necessary for CMS to determine and make payment.40  
Every time a beneficiary fills a prescription covered under Part D, 
plans must submit a summary called the prescription drug event 
(PDE) record.  The PDE record contains drug cost and payment data 
that enable CMS to administer the Part D benefit.41  Part D plan 
sponsors submit one PDE record each time a Part D covered drug is 
dispensed to its enrollees, including those events in which enrollees 
have 100 percent cost sharing (i.e., they are in the coverage gap or 
deductible phase).  
CMS uses the National Council for Prescription Drug Programs 
industry standard for collecting PDE data.  The PDE data contain 
information on the beneficiary, plan, pharmacy, and prescribing 
physician, as well as information about the event including the date, 
quantity dispensed, number of days supplied, national drug code, 
control number, and the amount reimbursed to the pharmacy by the 
plan.  The amount reimbursed to the pharmacy (i.e., negotiated price) 
 
39 42 CFR  423.343. 
40 Social Security Act,  1860D-15(c)(1)(C) and (d)(2), 42 CFR  423.322. 
41 Requirements for Submitting Prescription Drug Event Data.  Available online at  
http://www.cms.hhs.gov/DrugCoverageClaimsData/Downloads/PDEGuidance.pdf.  Accessed 
May 29, 2008.   
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  19   
   
A P P E N D I X ~ A  
consists of three fields:  ingredient cost paid, dispensing fee paid, and 
total amount attributed to sales tax. 
Dual Eligibles 
In 2006, more than 6 million Medicare beneficiaries were full-benefit 
dual eligibles, i.e., beneficiaries enrolled in both Medicare and 
Medicaid.  Until December 31, 2005, dual eligibles received outpatient 
drug benefits through Medicaid.  However, on January 1, 2006, 
Federal financial participation ended for Medicaid drug coverage for 
dual eligibles.42  Instead, dual eligibles now receive drug coverage 
under Part D through either a prescription drug plan or a Medicare 
Advantage Prescription Drug Plan. 
 
42 42 U.S.C.  1396u-5 (2003). 
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 A P P E N D I X ~ B  
 
 
Medicaid Pharmacy Reimbursement and Dispensing Fees for Selected States 
 
Basis for State  Maximum  State Rank by Total 
State  Medicaid  Dispensing Fee  Allowable Cost  Medicaid Drug 
Reimbursement*   Program  Expenditures** 
Average wholesale 
price (AWP)-20% 
(generic) 
Arkansas  AWP-14% (brand)  $5.51                              Yes  21 
Hawaii  AWP-10.5%  $4.67  Yes  42 
AWP-25% (generic)  $4.60 (generic) 
Illinois  AWP-12% (brand)  $3.40 (brand)                              Yes  7 
AWP-12.75% (brand) 
AWP-16.5% 
(generic) 
AWP-12% 
(specialized HIV  $4.50 (generic) 
New York  pharmacies)   $3.50 (brand)                              No  1 
Wyoming  AWP-11%  $5.00                              Yes  45 
 
Sources:  Centers for Medicare & Medicaid Services Web site and Office of Inspector General (OIG) analysis of State Medicaid expenditures for  
drugs. 
 
*This is the method that each State uses to calculate the ingredient cost portion for Medicaid reimbursement. 
 
**Denotes State rank by total Medicaid expenditures for drugs in the third and fourth quarters of 2006 according to OIG analysis. 
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  21   
   
 A P P E N D I X ~ C  
Differences in Pharmacy Reimbursement for Selected Single-Source Drugs*   
Percentage Difference per  Dollar Difference per 
Unit Between Medicaid and  Unit Between Medicaid   
Part D Pharmacy  and Part D Pharmacy 
Drug  Reimbursement**  Reimbursement**   
Alendronate Sodium 70 mg  0.85%  $0.153 
Amlodipine Besylate 5 mg  0.16%  $0.002   
Amlodipine Besylate 10 mg  1.96%  $0.041 
 
Aripiprazole 5 mg  -5.03%  -$0.555 
Aripiprazole 10 mg  -3.40%  -$0.374 
 
Aripiprazole 15 mg  -2.23%  -$0.245 
Atorvastatin Calcium 20 mg  0.39%  $0.014   
Atorvastatin Calcium 40 mg  0.41%  $0.014 
Atorvastatin Calcium 10 mg  0.44%  $0.011   
Celecoxib 200 mg  1.13%  $0.034 
 
***Clopidogrel Bisulfate 75 mg  8.08%  $0.302 
Divalproex Sodium 500 mg  -3.47%  -$0.083 
 
Divalproex Sodium 500 mg (extended release)  -2.72%  -$0.062 
Donepezil Hydrochloride 10 mg  -8.23%  -$0.412   
Emtricitabine/Tenofovir Disoproxil Fumarate 200 mg-300 
mg  1.19%  $0.308 
 
Esomeprazole Magnesium 40 mg  1.78%  $0.080 
Ezetimibe 10 mg  0.68%  $0.018   
Fluticasone Propionate/Salmeterol Xinafoate  0.49%  $0.013 
Insulin Glargine, Recombinant 100 U/mL  -0.10%  -$0.007   
Lansoprazole 30 mg  -0.39%  -$0.018 
 
Lopinavir/Ritonavir 200 mg-50 mg  3.54%  $0.197 
Memantine Hydrochloride 10 mg  -9.33%  -$0.217 
 
Montelukast Sodium 5 mg  0.19%  $0.006 
Montelukast Sodium 10 mg  1.27%  $0.039   
Olanzapine 10 mg  -0.98%  -$0.102 
Olanzapine 15 mg  -0.82%  -$0.127   
Olanzapine 20 mg  0.00%  -$0.001 
 
Palivizumab 100 mg/mL  -15.49%  -$216.212 
Pantoprazole Sodium 40 mg  -0.82%  -$0.030 
 
Quetiapine Fumarate 100 mg  -1.93%  -$0.061 
Quetiapine Fumarate 200 mg  -1.10%  -$0.065   
Quetiapine Fumarate 300 mg  -0.58%  -$0.045 
Risedronate Sodium 35 mg  -2.26%  -$0.409   
Risperidone 1 mg  -4.64%  -$0.178 
 
Risperidone 2 mg  -1.23%  -$0.077 
Risperidone 3 mg  -0.91%  -$0.067 
 
Rosiglitazone Maleate 4 mg  0.49%  $0.015 
Tamsulosin Hydrochloride 0.4 mg  -0.70%  -$0.015   
Topiramate 100 mg  -5.69%  -$0.270 
Zolpidem Tartrate 10 mg  -1.18%  -$0.043   
 
*Some of the selected single-source products had generic versions become available after the time period under review.     
**For most drugs in this review, unit refers to one pill.  Negative numbers indicate that Part D pharmacy reimbursement exceeded 
Medicaid pharmacy reimbursement.   
***Clopidogrel bisulfate had a generic version approved in January 2006.  The manufacturer marketed the generic version of this drug   
beginning on August 8, 2006.  However, litigation between the brand and generic manufacturers resulted in an injunction on  
August 31, 2006, barring additional sales by the manufacturer of the generic drug.  Because the generic drug was sold by the   
manufacturer for less than 1 out of the 6 months under review, it is classified as a single-source drug for the period under review. 
Source:  Office of Inspector General analysis of third- and fourth-quarter 2006 Medicaid utilization data and Part D prescription drug 
event data. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  22   
   
A P P E N D I X ~ C  
 
Differences in Pharmacy Reimbursement for Selected Multiple-Source Drugs 
Percentage Difference per  Dollar Difference per   
Unit Between Medicaid and  Unit Between Medicaid 
Part D Pharmacy  and Part D Pharmacy 
Drug  Reimbursement*  Reimbursement* 
Acetaminophen/Oxycodone Hydrochloride 325 mg-10 mg  13.68%  $0.137 
Albuterol 0.09 mg/Actuation  25.69%  $0.210 
Albuterol Sulfate 0.083%  -21.85%  -$0.028 
Amoxicillin/Clavulanate Potassium 600 mg/5 mL-42.9 
mg/5 mL  14.04%  $0.051 
Amoxicillin/Clavulanate Potassium 875 mg-125 mg  33.44%  $0.778 
Azithromycin 250 mg  38.82%  $1.784 
Bupropion Hydrochloride 150 mg  17.12%  $0.198 
Clozapine 100 mg  14.47%  $0.295 
Desmopressin Acetate 0.2 mg  0.33%  $0.011 
Diltiazem Hydrochloride 240 mg  7.85%  $0.095 
Ethinyl Estradiol/Norgestimate  15.55%  $0.158 
Fentanyl 75 mcg/HR  29.67%  $8.270 
Fentanyl 100 mcg/HR  30.39%  $10.992 
Fentanyl 50 mcg/HR  32.50%  $5.813 
Fexofenadine Hydrochloride 180 mg  16.27%  $0.282 
Fluticasone Propionate 0.05 mg/Actuation  20.64%  $0.722 
Gabapentin 600 mg  63.33%  $0.602 
Gabapentin 300 mg  123.25%  $0.465 
Immune Globulin 100 mg/mL  36.35%  $3.270 
Insulin Human Isophane (NPH) 100 U/mL  2.99%  $0.101 
Insulin Human Isophane/Insulin Human Regular 70 U/mL-
30 U/mL  3.62%  $0.123 
Lisinopril 20 mg  39.25%  $0.119 
Loratadine 10 mg  -83.77%  -$2.245 
Lorazepam 1 mg  13.13%  $0.038 
Lovastatin 40 mg  39.72%  $0.379 
Megestrol Acetate 40 mg/mL  5.87%  $0.023 
Metformin Hydrochloride 500 mg  56.74%  $0.104 
Nifedipine 60 mg  19.46%  $0.312 
Omeprazole 20 mg  44.64%  $0.525 
Oxycodone Hydrochloride 40 mg  5.75%  $0.177 
Oxycodone Hydrochloride 80 mg  10.03%  $0.597 
Paroxetine Hydrochloride 20 mg  81.70%  $0.728 
Phenytoin Sodium, Extended 100 mg  3.18%  $0.009 
Polyethylene Glycol 3350 17 GM/Dose  -0.92%  -$0.001 
Potassium Chloride 20 MEQ  24.88%  $0.073 
Sertraline Hydrochloride 100 mg  9.01%  $0.204 
Simvastatin 20 mg  25.96%  $0.916 
Simvastatin 40 mg  27.16%  $0.955 
Warfarin Sodium 5 mg  12.67%  $0.054 
 
*For most drugs in this review, unit refers to one pill.  Negative numbers indicate that Part D pharmacy reimbursement exceeded 
Medicaid pharmacy reimbursement.   
Source:  Office of Inspector General analysis of third- and fourth-quarter 2006 Medicaid utilization data and Part D prescription drug 
event data. 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  23   
   
 A P P E N D I X ~ D  
 
Agency Comments 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  24   
   
AA PP PP EE NN DD II XX ~~ DD   
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  25   
   
A P P E N D I X ~ D  
 A C K N O W L E D G M E N T S  
 
This report was prepared under the direction of Robert A. Vito,  
Regional Inspector General for Evaluation and Inspections in the 
Philadelphia regional office, and David E. Tawes, Director, Prescription 
Drug Pricing Unit.   
Edward K. Burley served as the team leader for this study.  Other 
principal Office of Evaluation and Inspections staff from the 
Philadelphia regional office who contributed to the report include      
Eric M. Biersmith; other central office staff who contributed include 
Eddie Baker, Jr., Dave J. Graf, Kevin Manley, Matthew S. McMullen, 
and Cynthia Thomas.  
 
  OEI-03-07-00350  COMPARING PHARMACY REIMBURSEMENT:  MEDICARE PART D TO MEDICAID  26