Department of Health and Human Services
OFFICE OF 
 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
A C M
  OMPARISON OF  EDICAID 
 
 
F U L A
EDERAL  PPER  IMIT  MOUNTS 
 
A  C ,
TO  CQUISITION  OSTS  
 
M P A ,
EDICA  RE  AYMENT  MOUNTS  
 
R P  
AND  ETAIL  RICES
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
August 2009 
OEI-03-08-00490   
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  
OBJECTIVES
 
1. To determine how Federal upper limit (FUL) amounts calculated 
under the current method compare to (a) pharmacy acquisition costs, 
(b) Medicare Part D payment amounts, and (c) retail prices under 
discount generic programs. 
2. To estimate the financial impact on the Medicaid program of 
continuing to calculate FUL amounts using the current method. 
3. To determine how FUL amounts calculated under the method 
required by the Deficit Reduction Act of 2005 (DRA) compare to the 
pricing points under review. 
BACKGROUND 
Federal regulations require, with certain exceptions, that each State 
Medicaid agencys reimbursement for a covered outpatient drug not 
exceed (in the aggregate) the lower of the estimated acquisition cost 
plus a reasonable dispensing fee or the providers usual and customary 
charge to the public for the drugs.  For certain drugs, States also use the 
FUL program or State maximum allowable cost programs in setting 
reimbursement.   
The FUL program was established to help ensure that Medicaid takes 
advantage of lower market prices for multiple-source drugs.  However, 
previous Office of Inspector General (OIG) work consistently found that 
the published prices used to set Medicaid FUL amounts often greatly 
exceeded prices in the marketplace.  Based in part on this work, the 
DRA required that, beginning January 1, 2007, FULs be based on      
250 percent of the lowest average manufacturer price (AMP) rather 
than 150 percent of the lowest price published in national compendia.   
In connection with a lawsuit filed by two trade associations representing 
retail pharmacies, a Federal judge issued a preliminary injunction 
preventing the Centers for Medicare & Medicaid Services (CMS) from 
moving forward with AMP-based reimbursement under Medicaid.  In 
addition, the Medicare Improvements for Patients and Providers Act of 
2008 statutorily delayed the implementation of the new FUL 
methodology until October 2009.  As a result, CMS is still basing FULs 
on the pre-DRA method as of August 2009.   
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  i 
   
   
E X E C U T I V E   S U M M A R Y  
We compared FUL amounts calculated under the current pre-DRA 
method and the proposed AMP-based method to three pricing points:  
(1) estimated fourth-quarter 2007 pharmacy acquisition costs for the   
50 FUL drugs with the highest total Medicaid expenditures in 2007,   
(2) average Part D pharmacy reimbursement amounts for all FUL drugs 
in the fourth quarter of 2007, and (3) retail pricing for any FUL drugs 
included in selected companies discount generic programs.  We 
estimated pharmacy acquisition costs based on information obtained 
from wholesale distributors of prescription drugs.  To estimate the 
financial impact of continuing to base FUL amounts on the current 
method, we compared actual Medicaid expenditures for the FUL drugs 
under review to the amount Medicaid would have spent had 
reimbursement been set at the other three pricing points. 
FINDINGS 
The FUL amounts calculated under the current method continue to 
be substantially higher than other pricing points.  In the aggregate, 
the FUL amounts were more than four times higher than average 
pharmacy acquisition costs in the fourth quarter of 2007.  Among 
individual products, the FUL amount was more than double the average 
pharmacy acquisition cost for 46 of the 50 highest-expenditure FUL 
drugs (for 24 of these, the FUL amount was at least five times higher). 
In addition, aggregate FUL amounts in the fourth quarter of 2007 were 
almost three times higher than average Part D payment amounts.  
Among individual products, the FUL amount was more than double the 
average Part D payment amount for 335 of 572 drugs (for 51 of these, 
the FUL amount was at least five times higher).  
Finally, in the aggregate, the FUL amounts were two times higher than 
prices available through retail discount generic programs in the fourth 
quarter of 2007.  Among individual products, the FUL amount was more 
than double the $4.00 retail price for a monthly supply of 129 of the    
291 drugs included in these programs. 
Despite the fact that States often pay less than the FUL amount for 
multiple-source drugs, the current calculation method is still costing 
Medicaid hundreds of millions of dollars per year.  The FUL amounts 
do not always represent the actual prices paid by Medicaid, because 
State maximum allowable cost programs as well as usual and 
customary charge provisions may further lower payments for  
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  ii 
   
   
EEE XXX EEE CCC UUU TTT III VVV EEE     SSS UUU MMM MMM AAA RRR YYY    
multiple-source drugs.  Even allowing for these reductions, average 
Medicaid payment amounts still exceeded the other pricing points we 
reviewed.  As a result, if Medicaid had paid for 50 high-expenditure 
FUL drugs based on the average pharmacy acquisition cost, the 
program would have reduced expenditures by an estimated $105 million 
in a single quarter (or more than $400 million in 1 year).  Similarly, if 
Medicaid had paid for 572 FUL drugs at the average Part D payment 
amount, the program would have reduced expenditures by an estimated 
$138 million in a single quarter.  Finally, if Medicaid had paid all 
pharmacies for 291 FUL drugs at the $4.00 per 30-day price available 
through retail discount generic programs, the program would have 
reduced expenditures by an estimated $87 million in a single quarter. 
In the aggregate, AMP-based FUL amounts were much closer to 
other pricing points; however, for some drugs, these FUL amounts 
may be below acquisition costs.  For the 50 FUL drugs with the 
highest total Medicaid expenditures, fourth-quarter 2007 AMP-based 
FUL amounts (not including dispensing fees) were 50 percent higher, in 
the aggregate, than average pharmacy acquisition costs.  For 26 of these 
drugs, AMP-based FUL amounts were below average pharmacy 
acquisition costs.  However, for 38 of the 50 drugs, the new FUL 
amounts were higher than the lowest reported acquisition costs.  In 
other words, pharmacies would typically have been able to purchase at 
least one version of these drugs from a particular distributor for less 
than the AMP-based FUL amount.  These figures do not take into 
account that in addition to being reimbursed by Medicaid for the cost of 
the drug itself (i.e., the FUL amount, the maximum allowable cost), 
pharmacies also receive a dispensing fee from Medicaid each time a 
prescription is filled. 
In addition, aggregate AMP-based FUL amounts (not including 
dispensing fees) were 2 percent below average Part D payment amounts 
(not including dispensing fees) in the fourth quarter of 2007.  For 337 of 
the 542 drugs, the AMP-based FUL amount was less than the average 
Part D payment. 
Finally, approximately half of the drugs with an AMP-based FUL in the 
fourth quarter of 2007 were also included in at least one of the        
$4.00 discount generic programs under review.  The AMP-based FUL 
amounts for a 30-day supply of these same drugs averaged $2.20, before 
any dispensing fees were applied.  However, given that only one State 
had a dispensing fee that was less than $2.00 per prescription         
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  iii 
   
   
E X E C U T I V E   S U M M A R Y  
(New Hampshire was $1.75), aggregate Medicaid payment amounts 
including the dispensing fee would still exceed the retail price under the 
discount programs. 
RECOMMENDATION 
The findings of this report demonstrate that the current method for 
setting FUL amounts continues to result in substantially inflated 
Medicaid payments for many drugs.  These FULs are frequently double 
(and often more than five times) other prices in the marketplace.  As a 
result, Medicaid could be overpaying by hundreds of millions of dollars 
per year for these drugs.  
Our findings also show that AMP-based FULs calculated under the 
DRA-prescribed methodology significantly lessen the gap between FUL 
amounts and the other prices we examined.  In the aggregate, the  
AMP-based FULs seem to cover acquisition costs, and are very similar 
to overall Part D reimbursement.  However, despite the aggregate 
numbers, we have some concerns that for a number of individual drugs 
the AMP-based FUL amounts were substantially below average 
acquisition costs and Part D payment amounts.   
Notwithstanding these concerns, the inflated payments resulting from 
the pre-DRA methodology that we observed in this review once again 
illustrate the flaws in the current FUL calculation.  We also understand 
that without a legislative change and the lifting of the injunction, CMSs 
options are limited at this time.  However, it is critical that Medicaid set 
payment rates that are fair and appropriate to both the government and 
providers.  Therefore, we recommend that: 
CMS should continue to work with Congress to identify strategies that 
would lower inflated Medicaid payments for multiple-source drugs. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with our recommendation.  CMS also stated that our 
findings support the agencys belief that AMP-based FULs more 
accurately reflect acquisition costs and prices used in other programs.  
However, the agency expressed concerns with certain aspects of our 
methodology.   
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  iv 
   
   
E X E C U T I V E   S U M M A R Y  
Specifically, CMS stated that actual pharmacy acquisition costs are 
likely to be lower than the estimates used in our report because two of 
the four responding distributors failed to provide data on price 
concessions (i.e,. discounts, rebates, and other price adjustments).  CMS 
noted that our findings understate Medicaid payment rates because we 
did not include dispensing fees that are paid when Medicaid 
prescriptions are filled.  The agency also noted that FULs are required 
to be met only in the aggregate and that States have the authority to 
pay more than the FUL amount for certain drugs.     
OIG agrees that had all distributors included information on price 
concessions, our estimate of the number of drugs available at prices 
below the AMP-based FUL amounts may have increased.  However, 
based on our data, this limitation does not fundamentally change the 
underlying issue surrounding the availability of individual drugs.  In 
addition, because this study focused primarily on the costs of the drugs 
themselves, it would not have been appropriate to include dispensing 
fees in most pieces of our analysis.  Finally, we agree that FULs apply 
only in the aggregate.  However, it is important to balance the goal of 
lower aggregate payment levels with the need to ensure that FUL 
amounts cover acquisition costs for as many drugs as possible. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  v 
   
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DU C T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
F I N D ING S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
FUL amounts calculated under the current method continue to         
be substantially higher than other pricing points. . . . . . . . . . . . . 16 
Despite the fact that States often pay less than the FUL amount      
for multiple-source drugs, the current calculation method is still 
costing Medicaid hundreds of millions of dollars per year . . . . . . 19 
In the aggregate, AMP-based FUL amounts were much closer to   
other pricing points; however, for some drugs, these FUL        
amounts may be below acquisition costs . . . . . . . . . . . . . . . . . . . . 22 
 
R E C OMME N DA TIO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 
  Agency Comments and Office of Inspector General 
   Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 
 
  A:  Fifty Federal Upper Limit Drugs With Highest Total 
               Medicaid Expenditures in 2007 . . . . . . . . . . . . . . . . . . . . . . . . 29 
 
  B:  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 
 
 
 
A CKN OW LEDGMEN TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 
   
   
 I N T R O D U C T I O N  
OBJECTIVES 
1. To determine how Federal upper limit (FUL) amounts calculated 
under the current method compare to (a) pharmacy acquisition costs, 
(b) Medicare Part D payment amounts, and (c) retail prices under 
discount generic programs. 
2. To estimate the financial impact on the Medicaid program of 
continuing to calculate FUL amounts using the current method. 
3. To determine how FUL amounts calculated under the method 
required by the Deficit Reduction Act of 2005 (DRA) compare to the 
pricing points under review. 
BACKGROUND 
The FUL program was established to help ensure that Medicaid takes 
advantage of lower market prices for multiple-source drugs.1  However, 
previous Office of Inspector General (OIG) work consistently found that 
the published prices used to set Medicaid FUL amounts often greatly 
exceeded prices available in the marketplace.2  Based in part on this 
work, provisions of the DRA, P.L. No. 109-171, substantially changed 
the method for calculating FUL amounts.  However, pharmacy groups 
have expressed concern that the new FUL amounts calculated under 
the DRA-based method may not adequately reimburse providers for 
their costs, thereby limiting access to certain drugs.3   
In December 2007, in connection with a lawsuit filed by two trade 
associations representing retail pharmacies, a Federal judge issued a 
preliminary injunction preventing the Centers for Medicare & Medicaid 
Services (CMS) from using the DRA-based calculation method to change 
Medicaid reimbursement rates for retail pharmacies.  Subsequently, 
section 203 of the Medicare Improvements for Patients and Providers 
Act of 2008 (MIPPA), P.L. No. 110-275, barred CMS from implementing 
 
1 Generally a drug is considered to be multiple-source if generic versions are available. 
2 Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer 
Prices, OEI-03-05-00110, June 2005. 
3 See the National Association of Chain Drug Stores, Implications of Federal Medicaid 
Generic Drug Payment Reductions for State Policymakers, May 2007 Issue Brief.  
Available online at http://www.nacds.org/user-assets/pdfs/gov_affairs/issues/Medicaid/ 
ImplicationsFederalMedicaidGenericDrugPaymentReductionsStatePolicymakers.pdf.  
Accessed on April 17, 2009. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  1 
   
   
I N T R O D U C T I O N  
 
the new FUL calculation method until October 1, 2009.  As of May 2009, 
CMS is still calculating FUL amounts using the pre-DRA methodology. 
Medicaid Reimbursement for Prescription Drugs  
Currently, all 50 States and the District of Columbia (hereinafter 
referred to as States) offer prescription drug coverage under Medicaid.  
In 2007, Medicaid payments for prescription drugs totaled 
approximately $22 billion.4 
Federal regulations require, with certain exceptions, that each State 
Medicaid agencys reimbursement for a covered outpatient drug not 
exceed (in the aggregate) the lower of the estimated acquisition cost 
plus a reasonable dispensing fee or the providers usual and customary 
charge to the public for the drugs.5 6  CMS allows States the flexibility 
to define estimated acquisition cost, with most States basing their 
calculations on list prices published in national compendia.   
For certain drugs, States also use the FUL or State maximum allowable 
cost programs in setting reimbursement.  As of the fourth quarter of 
2008, 45 States have implemented maximum allowable cost programs to 
limit reimbursement for certain multiple-source drugs.7  Individual 
States determine the types of drugs that are included in their maximum 
allowable cost program, and the methods by which the maximum 
allowable cost is calculated. 
The FUL Program 
According to CMSs Web site, the FUL program was created to ensure 
that the Federal Government acts as a prudent buyer by taking 
advantage of current market prices for multiple-source drugs.8  CMS 
 
4 Calculated using national summary data for 2007.  This amount includes both Federal 
and State payments.  Rebates collected by States under the Medicaid drug rebate program 
were not subtracted from this figure.  National and State utilization data are available 
online at http://www.cms.hhs.gov/MedicaidDrugRebateProgram/SDUD/list.asp.  Accessed 
on September 17, 2008. 
5 42 CFR  447.512.  
6 At the time of our review, State dispensing fees to retail pharmacies for generic drugs 
generally ranged from $1.75 to $7.25 per prescription, with fees in more than two-thirds of 
States falling between $3.50 and $5.00.  Source:  CMS, Medicaid Prescription 
Reimbursement Information by State  Quarter Ending December 2007. 
7 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2008. 
8 CMS, Transmittal No. 37  Federal Upper Limit Drug List,  Available online at 
http://www.cms.hhs.gov/Reimbursement/05_FederalUpperLimits.asp.  Accessed on 
September 17, 2008. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  2 
   
   
I N T R O D U C T I O N  
 
calculates a FUL amount for specific forms and strengths for each 
multiple-source drug that meets the established criteria.  As of 
December 31, 2007, there were 576 drugs included on the FUL list.  
According to CMS data, these drugs accounted for 8 percent             
($1.8 billion) of Medicaid prescription drug expenditures in 2007. 
Prior to the DRA, section 1927(e)(4) of the Social Security Act (the Act) 
and 42 CFR  447.332 generally required CMS to establish a FUL 
amount for a drug when:  (1) three or more formulations of the drug 
were rated as therapeutically equivalent by the Food and Drug 
Administration and (2) at least three suppliers of the drug were listed in 
current editions of published compendia of cost information for drugs 
available for sale nationally.  As originally set forth in 42 CFR                
 447.332, FUL amounts are equal to 150 percent of the price published 
in national compendia for the least costly therapeutically equivalent 
product that can be purchased by pharmacists in quantities of  
100 tablets or capsules, plus a reasonable dispensing fee.9 10  States are 
required to meet the FUL requirements only in the aggregate, i.e., a 
State may pay more than the FUL amount for certain products as long 
as these payments are balanced out by lower payments for other 
products.  
The most commonly used published prices in setting FULs are 
wholesale acquisition costs (WAC), average wholesale prices (AWP), and 
direct prices.  National compendia, such as Redbook, publish these 
figures based on information provided by drug manufacturers.  
Although the definition of WAC is prescribed by Federal law, neither 
AWP nor direct price is defined in statute or regulation.11    
Changes to the FUL Program Under the Deficit Reduction Act of 2005 
Due in part to OIG work that showed FULs based on published prices 
were significantly higher than other prices in the marketplace,12 the 
 
9 For liquid drugs or drugs not typically available in quantities of 100, the FUL amount 
is based on the price for a commonly listed size of the product. 
10 42 CFR  447.332 has been removed, and regulatory provisions relating to FULs for 
multiple-source drugs are now found in 42 CFR  447.514. 
11 Pursuant to section 1847A(c)(6)(B) of the Act, WAC is generally defined as the drug 
manufacturers list price to wholesale distributors or direct purchasers, not including 
prompt pay or other discounts, rebates, or reductions in price, as reported in wholesale price 
guides or other publications of drug or biological pricing data. 
12 Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer 
Prices, OEI-03-05-00110, June 2005. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  3 
   
   
I N T R O D U C T I O N  
DRA made significant changes to the FUL program.  Pursuant to 
section 6001(a) of the DRA, FUL amounts would be based on              
250 percent of the lowest reported average manufacturer price (AMP) 
for each drug rather than 150 percent of the lowest price published in 
national compendia.  
As generally defined in section 1927(k)(1) of the Act, AMP is the average 
price paid to the manufacturer for the drug in the United States by 
wholesalers for drugs distributed to the retail pharmacy class of trade.  
The AMP is generally calculated as a weighted average of prices for a 
manufacturers package sizes of a drug sold during a given quarter and 
is reported for the lowest identifiable quantity of the drug.  Prior to the 
passage of the DRA, section 1927(b)(3) of the Act required 
manufacturers to provide CMS with the AMP for each of their covered 
drugs on a quarterly basis, with submissions due 30 days after the close 
of each quarter.  Under the DRA provisions, manufacturers must also 
report AMPs on a monthly basis, with submissions due 30 days after the 
end of each month.13  The DRA provisions require CMS to disclose AMP 
data to both States and the public, thereby allowing States the option of 
using the AMP when setting reimbursement rates for covered drugs.14 
The DRA also expanded the criteria for including a drug in the FUL 
program.  Pursuant to section 6001(a) of the DRA, for a FUL to be set 
for a drug, only two therapeutically equivalent versions are required.   
Implementation of FUL Amounts Based on AMPs 
In July 2007, CMS published a final rule that among other things, 
implemented the DRA provisions related to FULs.15  For example,       
42 CFR  447.504 of the regulation outlines the manner in which the 
AMP is to be determined, and 42 CFR  447.514 addresses the new 
criteria for the establishment of FUL amounts.  Pursuant to 42 CFR      
 447.514(c), CMS will exclude the lowest AMP from the FUL 
calculation if it is an outlier.  CMS defines an outlier as a lowest AMP 
that is less than 40 percent of the second-lowest AMP (i.e., a lowest 
AMP that is more than 60 percent below the second lowest AMP), with 
 
13 DRA,  6001(b)(1)(A). 
14 DRA,  6001(b).  Prior to the DRA, section 1927(b)(3)(D) of the Act guaranteed the 
confidentiality of AMP data reported by manufacturers (with certain exceptions).   
15 72 Fed. Reg. 39142, 39244 (July 17, 2007). 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  4 
   
   
II NN TT RR OO DD UU CC TT II OO NN   
certain exceptions.16  According to CMS, the outlier policy is designed to 
help ensure that two or more drug products can be purchased at or 
below the FUL amount.17   
In addition, in the preamble to the regulation, CMS explained that it 
intends to use monthly AMPs when calculating FUL amounts.18  The 
monthly AMP-based FULs will represent transactions that occurred      
3 months previously.19  For example, had the new DRA requirements 
been in effect during December 2008, FULs published for that month 
would have been based on AMPs submitted by manufacturers for sales 
in September 2008. 
Although the final regulation took effect on October 1, 2007, CMS has 
yet to use AMP data when establishing FUL amounts (as of  
August 2009).  Initially, CMS planned to issue the first AMP-based 
FULs on December 30, 2007.20  However, on December 19, 2007, the 
U.S. District Court for the District of Columbia issued a preliminary 
injunction which prevented CMS from implementing its final rule 
concerning AMPs to the extent that the rule affects Medicaid 
reimbursement rates for retail pharmacies.  In July 2008, the MIPPA 
further delayed the implementation of new FULs based on AMPs.  
Consistent with sections 203(a) and (b) of the MIPPA, CMS must not 
take action to implement AMP-based FUL amounts or publicly disclose 
AMP data before October 1, 2009.  Until at least that time, AMPs will 
not be publicly disclosed and FUL amounts will continue to be 
calculated using the pre-DRA methodology, i.e., 150 percent of the 
lowest published price.21  In addition, as of August 2009, CMS has not 
yet implemented the expanded DRA criteria for including  
multiple-source drugs on the FUL list. 
Pharmacy Acquisition of Prescription Drugs 
In most cases, Medicaid beneficiaries obtain covered drugs from 
pharmacies.  Pharmacies typically purchase drugs through wholesale 
 
16 Pursuant to 42 CFR  447.514(c)(3), the outlier policy will not apply when the FUL 
group includes only the brand name drug and the first new generic or authorized generic 
drug that has entered the market.   
17 72 Fed. Reg. 39142, 39216 (July 17, 2007). 
18 72 Fed. Reg. 39142, 39207 (July 17, 2007). 
19 CMS, Average Manufacturer Price/Federal Upper Limits Timeline. 
20 Ibid. 
21 MIPPA,  203(a) and (b). 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  5 
   
   
II NN TT RR OO DD UU CC TT II OO NN   
distributors or directly from manufacturers.  According to industry 
reports, three companies (AmeriSource Bergen, Cardinal Health, and 
McKesson) account for between 90 percent and 95 percent of the drug 
wholesale distributor market share, and four out of every five drugs sold 
in the United States are obtained through one of these three 
companies.22   
Medicare Part D Payment for Prescription Drugs 
The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, P.L. No. 108-173, established Medicare Part D to provide 
prescription drug coverage to Medicare beneficiaries.  While Medicaid is 
administered by State Medicaid agencies, CMS contracts with private 
companies to administer Part D prescription drug plans. 
Pharmacy reimbursement under Medicare Part D is based, in part, on 
negotiated prices.  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.23  Negotiated prices 
are typically based on agreements between manufacturers, plan 
sponsors, and affiliated contractors (e.g., pharmacy benefit managers).  
Although negotiated prices are a basis for pharmacy reimbursement, 
they do not reflect all costs to the Government for Part D.24  
Medicare beneficiaries typically obtain prescription drugs from 
pharmacies, which contract with Part D sponsors to obtain 
reimbursement for these drugs.  According to CMS staff, negotiated 
 
22 Growing Share of Big Three Gets Federal Attention.  Market Watch.  May 30, 2007.  
Available online at http://www.marketwatch.com/news/story/growing-share-big-three-
drug/story.aspx?guid=%7B9F3862C1-7E3A-4D82-94B7-A8E4AE5DAE6A%7D.  Accessed on 
April 7, 2009. 
23 Ibid. 
24 The program costs of Medicare Part D are determined by plan bids and reconciliation 
payments.  Once a year, each plan sponsor submits a bid, which is an estimate of the 
average cost to provide the basic benefit per beneficiary.  Throughout the year, CMS makes 
prospective payments to sponsors for three subsidies based on sponsors approved bids. 
These subsidies are:  (1) the direct subsidy, (2) the reinsurance subsidy, and (3) the          
low-income cost-sharing subsidy.  Plan sponsors and CMS then reconcile actual costs and 
prospective payments at the end of the year.  Source:  CMS, 2006 Prescription Drug Event 
Data Training Participant Guide. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  6 
   
   
I N T R O D U C T I O N  
prices used for pharmacy reimbursement are usually based on the AWP 
discounted by a specified percentage or maximum allowable cost plus a 
dispensing fee. 
Retail Chain Generic Prescription Drug Programs 
Several large retail chain stores sponsor prescription drug programs 
where a selected number of multiple-source drugs are sold at a set price.  
For example, as of March 2009, Wal-Mart offers more than 300 different 
multiple-source drugs at $4.00 for a 30-day supply and $10 for a 90-day 
supply.  Similarly, other retail chains have comparable plans that offer 
30-day or 90-day supplies of multiple-source drugs for prices similar to 
Wal-Mart.25  Many of the drugs offered by these chains are covered by 
Medicaids FUL program. 
Based on Medicaids usual and customary charge provisions, if a 
beneficiary obtains a drug through one of these retail generic programs, 
the program should generally reimburse the pharmacy at the 
discounted price, i.e., $4.00 for the 30-day supply (assuming that price is 
lower than the FUL amount, maximum allowable cost, etc.).26  In these 
cases, Medicaid would not pay an additional dispensing fee to the 
pharmacy because the $4.00 amount represents the total charge 
associated with the beneficiarys receipt of the drug. 
Previous OIG Work on the FUL Program 
In our June 2005 report, Comparison of Medicaid Federal Upper Limit 
Amounts to Average Manufacturer Prices (OEI-03-05-00110), we found 
that FUL amounts were five times higher than average AMPs.  At that 
time, we recommended that CMS work with Congress to set FUL 
amounts that more closely approximate pharmacy acquisition costs. 
In June 2007, OIG released a report assessing the potential effect of 
AMP-based FULs entitled Deficit Reduction Act of 2005:  Impact on the 
Medicaid Federal Upper Limit Program (OEI-03-06-00400).  We found 
that pre-DRA FUL amounts substantially exceeded estimated average 
pharmacy acquisition costs for 25 selected drugs in the second quarter 
of 2006, but would decrease considerably under the new calculation 
 
25 At the time of our review, other retail chains with $4.00/30-day discount prescription 
drug programs included Kroger, Target, Safeway, Delhaize, Bashas, and Giant Eagle.  
Several other companies offered similar programs for 90-day supplies only. 
26 If the pharmacy charges a fee to join their discount generic program, CMS does not 
have a stated policy as to whether the prices charged under that program would meet the 
definition of a usual and customary charge to the public. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  7 
   
   
I N T R O D U C T I O N  
method established by the DRA.  In fact, pharmacies would only have 
been able to purchase 6 of the 25 reviewed drugs for less than the new 
FUL amount, on average. 27  We recommended that CMS take steps to 
identify when a new FUL amount was not representative of a drugs 
acquisition cost, and in these cases, determine a proper course of action. 
In OIGs February 2009 report, Comparing Pharmacy Reimbursement: 
Medicare Part D to Medicaid (OEI-03-07-00350), we found that the 
average Medicaid pharmacy reimbursement amounts typically exceeded 
the average Part D reimbursement amounts for selected multiple-source 
drugs.  Specifically, for the 14 FUL drugs included in that review, the 
average Medicaid reimbursement amount for all but one 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.  In addition, we found that 
Medicaid dispensing fees in the five States under review exceeded 
average Part D dispensing fees for multiple-source drugs by at least    
55 percent.   
METHODOLOGY 
Scope 
This study compared the FUL amounts calculated under both the 
current pre-DRA method and the AMP-based method to several pricing 
points:   
1.  estimated fourth-quarter 2007 pharmacy acquisition costs for 
the 50 FUL drugs with the highest total Medicaid expenditures 
in 2007,  
2.  average Part D pharmacy payment amounts for nearly all FUL 
drugs in the fourth quarter of 2007, and  
3.  retail pricing for any FUL drugs included in selected companies 
discount generic programs.   
The 50 drugs in the first comparison accounted for 52 percent          
($941 million) of total Medicaid expenditures for the FUL drugs in 2007. 
 
27 At the time OIG conducted its assessment, CMS had not fully developed its outlier 
policy.  Therefore, for the purposes of that report, the FUL amounts were calculated without 
regard to outlier AMPs. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  8 
   
   
I N T R O D U C T I O N  
Because many States pay less than the FUL amount for drugs through 
maximum allowable cost programs and usual and customary charge 
provisions, we also calculated average Medicaid payment amounts for 
each drug on the FUL list in the fourth quarter of 2007.  We compared 
the average Medicaid payment amounts to each of the three pricing 
points described above. 
We estimated pharmacy acquisition costs for the fourth quarter of 2007 
based on information obtained from wholesale distributors of 
prescription drugs.  Responding distributors represent approximately  
90 percent to 95 percent of the pharmaceutical distribution industrys 
market share and revenue.  We limited our analysis of retail chain 
discount pricing to 30-day supplies of drugs, although some programs 
did offer 90-day supplies for a lower per-unit price. 
To estimate the financial impact of continuing to base the FUL amounts 
on the current method, we compared actual Medicaid expenditures for 
the FUL drugs under review to the amount Medicaid would have spent 
had reimbursement been set at the other three pricing points. 
FUL Amounts and Medicaid Payments 
Current FUL amounts.  Using information in the drug compendium 
Redbook, we obtained CMS-calculated FUL amounts for all 576 drugs 
included on the FUL list in the fourth quarter of 2007.  We verified the 
Redbook information by comparing drug name and FUL amount data to 
the FUL listings on CMSs Web site.   
AMP-based FUL amounts.  We also obtained from CMS a file listing the 
December 2007 FUL amounts as calculated under the unimplemented 
DRA methodology (i.e., 250 percent of the lowest AMP).  Although CMS 
is currently prohibited from reimbursing based on this method, the 
agency is still calculating AMP-based FUL amounts for internal use.  
CMS applied its outlier policy when determining these FUL amounts.  
CMS had calculated AMP-based FULs for 542 of the 576 drugs included 
on the FUL list in the fourth quarter of 2007.28 
Average Medicaid payment amounts.  We obtained the 2007 Medicaid 
drug utilization file from CMSs Web site.  This file provides the total 
Medicaid expenditures (ingredient costs and dispensing fees), the total 
 
28 Under the expanded DRA criteria, CMS has calculated AMP-based FUL amounts for a 
total of 1,207 drugs. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  9 
   
   
II NN TT RR OO DD UU CC TT II OO NN   
number of prescriptions, and the total number of units dispensed by 
each State for prescription drugs in each quarter of 2007.  Using this 
data, we calculated an average Medicaid payment per unit in the fourth 
quarter of 2007 for each drug on the FUL list by dividing the total 
expenditures by the total units.  Because the total expenditure data 
includes a dispensing fee, we also calculated a second average Medicaid 
payment for the ingredient cost portion only.29   
Pharmacy Acquisition Costs 
Determining pharmacy acquisition costs.  Using data from the Medicaid 
drug utilization file, we identified the 50 FUL drugs with the highest 
total Medicaid expenditures in 2007 (please refer to Appendix A for a 
list of the 50 drugs).  We sent data requests for fourth-quarter 2007 
pricing and sales data to the three largest national distributors 
(AmerisourceBergen, McKesson, and Cardinal Health) and two smaller 
regional distributors (Mutual Drug Company and Burlington Drug 
Company).  Each distributor was asked to provide the total dollar 
amount sold; the amount of any price concessions (e.g., discounts, 
rebates, and other price adjustments) paid to purchasers; the net dollar 
amount sold; the total number of units sold; and the average selling 
price during the fourth quarter of 2007 for all national drug codes 
associated with the 50 highest-expenditure FUL drugs.30  
Four of the five distributors (three national and one regional) responded 
to our request in time for their cost data to be included.  Because of the 
highly sensitive nature of the data, we are not listing average 
acquisition costs for individual FUL drugs.  Only two of the four 
distributors provided information on price concessions. 
To estimate average pharmacy acquisition costs per unit for each of the 
50 selected highest-expenditure drugs, we totaled the dollar amount 
sold (net of any price concessions, when provided) by the four 
 
29 We could only calculate this cost for States that had relatively simple formulas for 
determining the dispensing fees paid to retail pharmacies (e.g., $4.00 per generic 
prescription).  For the 45 States that had a relatively simple dispensing fee, we calculated 
the unit Medicaid ingredient cost for each drug by subtracting the total dispensing fees paid 
from total expenditures in the fourth quarter of 2007.  To calculate total dispensing fees, we 
multiplied the States dispensing fee from the fourth quarter of 2007 by the total number of 
prescriptions for each drug.  For each FUL drug, we then divided the total ingredient costs 
by the total number of units dispensed. 
30 National drug codes are unique 11-digit identifiers that indicate the manufacturer, 
product dosage form, and package size of a drug. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  10 
   
   
II NN TT RR OO DD UU CC TT II OO NN   
responding distributors and divided this amount by the total number of 
units sold.  For the purpose of this report, these estimates will 
hereinafter be referred to as average pharmacy acquisition costs.  We 
also determined the lowest unit price reported to OIG by the 
distributors for any version (i.e., national drug code) of each drug. 
Comparing pharmacy acquisition costs to Medicaid.  For each of the        
50 drugs, we compared the average pharmacy acquisition costs to the 
current FULs, AMP-based FULs, and average Medicaid payment 
amounts.  We also compared the AMP-based FULs to the lowest costs 
reported by the distributors.  Because FULs apply in the aggregate, we 
also determined an overall difference between acquisition costs and the 
two FUL amounts.  To calculate aggregate differences, we determined 
how much Medicaid would have spent for each drug if it had paid at 
acquisition cost by multiplying the acquisition cost by the number of 
units of the drug reimbursed by Medicaid in the fourth quarter of 2007. 
We compared the result to potential spending under the pre-DRA and 
AMP-based FUL methodologies (which were calculated using the same 
methodFUL amounts multiplied by Medicaid fourth-quarter 2007 
utilization).  All the comparisons described above only addressed the 
ingredient cost of the drugs and not any dispensing fees.    
Estimating potential costs.  We estimated the potential costs to Medicaid 
of continuing to use the current calculation method in setting the FUL 
amounts by comparing the total amount Medicaid actually spent on the 
FUL drugs under review in the fourth quarter of 2007 (net of dispensing 
fees) to aggregate spending had reimbursement been set at the average 
pharmacy acquisition cost.   
Medicare Part D Payment Amounts 
Determining Part D payment amounts.  For all drugs included in the FUL 
program, we obtained fourth-quarter 2007 prescription drug event 
(PDE) records from CMS.  A PDE record contains the ingredient cost 
and the dispensing fee paid to the pharmacy for each claim.  In the 
fourth quarter of 2007,  572 of the 576 drugs on the FUL list had been 
reimbursed under Part D.31  To determine the average Part D payment 
amount per unit for each FUL drug, we totaled the dollar amount 
reimbursed for the ingredient cost portion and divided this amount by 
the number of units reimbursed.   
 
31 All 542 drugs with AMP-based FULs had Part D reimbursement that quarter. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  11 
   
   
II NN TT RR OO DD UU CC TT II OO NN   
Comparing Part D payment amounts to Medicaid.  We then compared the 
average Part D payment amounts to the current FULs, AMP-based 
FULs, and average Medicaid payment amounts for each of the drugs.  
Because FULs apply in the aggregate, we also determined an overall 
difference between Part D payment amounts and the two FUL amounts.  
To calculate aggregate differences, we determined how much Medicaid 
would have spent for each drug if it had paid at the average Part D 
amount by multiplying the Part D payment amount by the number of 
units of the drug reimbursed by Medicaid in the fourth quarter of 2007. 
We compared the result to potential spending under the pre-DRA and 
AMP-based FUL methodologies (which were calculated using the same 
methodFUL amounts multiplied by Medicaid fourth-quarter 2007 
utilization).  All the comparisons described above only addressed the 
ingredient cost of the drugs and not any dispensing fees.    
Estimating potential costs.  We estimated the potential costs to Medicaid 
of continuing to use the current calculation method in setting the FUL 
amounts by comparing the total amount Medicaid actually spent on the 
FUL drugs under review in the fourth quarter of 2007 (net of dispensing 
fees) to aggregate spending had reimbursement been set at the Part D 
payment amount. 
Prices Under Retail Generic Programs 
Determining drugs included in programs.  We selected seven retail chain 
pharmacies that offered a $4.00/30-day discount generic program:  
WalMart, Target, Safeway, GiantEagle, Kroger, Bashas, and 
Delhaize.32  From each chain companys Web site, we obtained 
information on each program including a list of the covered drugs and 
the quantity dispensed for a 30-day supply.33  In total, 291 FUL drugs 
were included in at least one companys discount generic program.34  
The prices offered by these programs are the final cost for the drugs, 
i.e., no additional dispensing fee is paid by the customer/payor. 
Comparing retail prices to Medicaid.  The price for all 291 drugs included 
in the selected retail discount generic programs was $4.00 for a 30-day 
 
32 Bashas actually charged $3.99 per month.  For analysis purposes, we rounded this 
amount to $4.00 
33 Discount generic program information was obtained from company Web sites during 
the third and fourth quarters of 2008.  We could not determine whether any of the drugs 
included in these programs had changed since the fourth quarter of 2007.  
34 CMS had calculated AMP-based FULs for 279 of these 291 drugs. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  12 
   
   
I N T R O D U C T I O N  
supply.  In comparing FULs to retail generic programs, we based our 
calculations on a 30-day cost of the drugs rather than per-unit prices.  
To determine the corresponding FUL amount for a 30-day supply for 
each of the 291 drugs included in at least one discount generic program, 
we multiplied the per-unit FUL amount by the number of units in a   
30-day supply of the drugs.35  We compared the results to the          
$4.00 prices offered under the discount generic programs.   
Because FULs apply in the aggregate, we also determined an overall 
difference between retail prices and the two FUL amounts.  To calculate 
aggregate differences, we determined how much Medicaid would have 
spent for each drug if it had paid all pharmacies at the price available 
through the retail generic programs by multiplying the $4.00 retail 
price by the number of 30-day supplies of the drug reimbursed by 
Medicaid in the fourth quarter of 2007.  We compared the result to 
potential spending under the pre-DRA and AMP-based FUL 
methodologies (which were calculated using the same methodFUL 
amounts multiplied by Medicaid fourth-quarter 2007 utilization).  
Because the retail prices under these programs are the total prices paid, 
the comparisons described above would underestimate actual price 
differences given that the FUL amounts represent ingredient costs only 
and do not include dispensing fees. 
Estimating potential costs.  We estimated the potential costs to Medicaid 
of continuing to use the current calculation method in setting the FUL 
amounts by comparing the total amount Medicaid actually spent on the 
FUL drugs under review in the fourth quarter of 2007 to aggregate 
spending at these retail prices.  Because we were able to include 
dispensing fees in this particular comparison (i.e., the total Medicaid 
expenditures used in this calculation included dispensing fees), the 
potential costs figure is based on total costs under both pricing points, 
and does not underestimate potential program savings. 
Tables 1 and 2 in the next page summarize the number of drugs used in 
each comparison and whether or not dispensing fees were included in 
the analysis. 
 
35 For 47 drugs, the number of units (e.g., pills), in a 30-day supply was not identical for 
each company.  To be conservative, in analyzing costs for these drugs, we used the lowest 
number of units listed by any company. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  13 
   
   
I N T R O D U C T I O N  
Table 1:  Number of Drugs Included in Each Comparison 
Average  Medicare Part D   Retail Discount Generic 
Method  Acquisition Cost  Payment Amounts  Program Prices 
Current FUL  50  572  291 
AMP-Based FUL  50  542  279 
 
Table 2:  Inclusion of Dispensing Fee in Analysis 
Average  Medicare Part D   Retail Discount Generic   
Method  Acquisition Cost  Payment Amounts  Program Prices 
FUL is Ingredient Cost Only  
Current FUL  Ingredient Cost Only  Ingredient Cost Only  Retail is Total Cost 
FUL is Ingredient Cost Only  
AMP-Based FUL  Ingredient Cost Only  Ingredient Cost Only  Retail is Total Cost 
Total Cost (Ingredient Cost 
Average Medicaid Cost/Savings  Ingredient Cost Only  Ingredient Cost Only  and Dispensing Fee) 
 
Limitations 
Our analysis is limited to drugs listed by CMS as being included in the 
FUL program in the fourth quarter of 2007.  CMS has not yet 
implemented the DRAs expanded criteria (i.e., two therapeutically 
equivalent versions instead of the current three therapeutically 
equivalent versions).  
For both the pre-DRA and AMP-based FULs, we used the amounts 
calculated by CMS.  We did not verify that pre-DRA FUL amounts were 
actually set at 150 percent of the lowest published price, or that the 
AMP-based FULs were set at 250 percent of the lowest AMP (excluding 
outliers).  
Four of the five distributors responded to our data request in time to be 
included in the analysis.  Two of the four responding distributors did not 
provide data on price concessions.  Therefore, pharmacies bottom-line 
costs for some drugs may be lower than the estimates used in the 
report.  In addition, we did not determine whether the prices reported 
by the distributors were nationally available to all pharmacies. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  14 
   
   
I N T R O D U C T I O N  
The percentage differences between FULs and other pricing points are 
limited to the drugs included in each comparison, and are not 
projectable to all drugs covered under the Medicaid FUL program.   
We did not verify the accuracy or completeness of sales data from 
wholesalers used to estimate pharmacy acquisition costs, PDE data, 
or data received from retail chain pharmacies Web sites.  In addition, 
we analyzed Medicaid utilization data summarized by drug, i.e., we 
did not analyze claims-level data. 
We did not verify whether drugs purchased at pharmacies with discount 
generic programs were billed and reimbursed at the usual and 
customary charge (i.e., $4.00) rather than the FUL amount or State 
maximum allowable cost plus a dispensing fee. 
We did not include rebates available to States through the Medicaid 
drug rebate program or any post-point-of-sale price concessions 
available to Part D plan sponsors, pharmacies, or beneficiaries in this 
analysis. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections approved by the Council of the Inspectors General on 
Integrity and Efficiency. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  15 
   
   
F I N FD II NN GD SI  N G S  
Consistent with previous OIG 
FUL amounts calculated under the current 
findings, the FUL amounts under 
method continue to be substantially higher than 
the pre-DRA methodology (i.e.,        
other pricing points   150 percent of the lowest 
published price) substantially 
exceeded other prices in the marketplace.  In the fourth quarter of 2007, 
the FUL amounts, both in the aggregate and for many individual drugs, 
were often several times higher than average pharmacy acquisition 
costs, Part D payment amounts, and retail generic program prices. 
In the aggregate, FUL amounts calculated under the current methodology 
were more than four times higher than average pharmacy acquisition costs 
in the fourth quarter of 2007 
For the 50 FUL drugs with the highest total Medicaid expenditures, 
fourth-quarter 2007 FUL amounts were 4.32 times higher, in the 
aggregate, than average pharmacy acquisition costs.  This figure does 
not take into account that in addition to being reimbursed by Medicaid 
for the cost of the drug itself (i.e., the FUL amount, the maximum 
allowable cost), pharmacies usually receive a dispensing fee from 
Medicaid each time a prescription is filled.36 
Among individual products, 47 of the 50 drugs under review had FUL 
amounts that exceeded average pharmacy acquisition costs.  In all but 
one of these cases, the FUL amounts were more than double average 
pharmacy acquisition costs.  For almost half of the drugs under review 
(24 of 50), the FUL amount was at least five times greater than the 
average pharmacy acquisition cost.  For example, pharmacies were able 
to purchase Gabapentin 300 milligrams (mg) (the product with the 
second-highest total Medicaid payments among FUL drugs) for an 
average of $0.08 per capsule in the fourth quarter of 2007; at that time, 
the FUL amount was $1.31 per capsule.  Table 3 provides a summary of 
the difference between the FUL amounts and the average pharmacy 
acquisition costs in the fourth quarter of 2007 for the drugs under 
review. 
Actual dollar differences between the FUL amounts and the average 
pharmacy acquisition costs varied substantially, depending on a drugs 
cost and the amount of a drug represented by one unit (e.g., 1 tablet,     
 
36 Pharmacies would not receive a dispensing fee if they were reimbursed at their usual 
and customary charge rather than the FUL or the maximum allowable cost. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  16 
   
   
F I N D I N G S  
1 milliliter of liquid, 1 gram of cream).  Differences ranged from $0.02 to 
$6.08 per unit, with 32 of the 50 drugs having a unit price difference of 
less than $0.50.      
Table 3:  Comparison of Pre-DRA FUL Amounts to Average Pharmacy Acquisition
Costs in the Fourth Quarter of 2007   
  Number of  Percentage of 
Difference  Drugs  Drugs 
FUL amount less than average pharmacy acquisition cost  3  6 percent 
FUL amount between 0.01 and 2 times higher than average pharmacy acquisition cost  1  2 percent 
FUL amount between 2.01 and 5 times higher than average pharmacy acquisition cost  22  44 percent 
FUL amount between 5.01 and 10 times higher than average pharmacy acquisition cost  10  20 percent 
FUL amount more than 10 times higher than average pharmacy acquisition cost  14  28 percent 
     Total Drugs   50  100 percent 
     Aggregate Amount Higher Than Average Pharmacy Acquisition Cost  4.32 times 
Source:  OIG analysis of CMS FUL Data and Distributor Sales Data. 
In the aggregate, the FUL amounts calculated under the current 
methodology were almost three times higher than average Part D payment 
amounts in the fourth quarter of 2007 
Fourth-quarter 2007 FUL amounts were 2.91 times higher, in the 
aggregate, than average Part D payment amounts.  This figure does not 
take into account that both Medicaid and Part D usually pay a 
dispensing fee in addition to the ingredient cost payment.37 
Among individual products, the FUL amount was higher than the 
average Part D payment for 546 out of the 572 drugs reviewed            
(95 percent).   In 335 cases (59 percent), the FUL amount was more than 
double the Part D payment, and for 51 of these, the FUL amount was at 
least five times higher.  Table 4 provides a summary of the difference 
between the FUL amounts and the average Part D payment amounts in 
the fourth quarter of 2007 for the drugs under review. 
 
37 As previously stated, in a February 2009 OIG report (OEI-03-07-00350), we found that 
Medicaid dispensing fees in the five States under review exceeded Part D dispensing fees 
for multiple-source drugs by at least 55 percent.   
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  17 
   
   
F I N D I N G S  
Actual dollar differences ranged from less than $0.01 to $6.98 per unit, 
with 434 of the 572 drugs having a unit price difference of less than 
$0.50.   
Table 4:  Comparison of Pre-DRA FUL Amounts to Average Part D Payment 
Amounts in the Fourth Quarter of 2007  
  Number of  Percentage of 
Difference  Drugs  Drugs 
FUL amount less than average Part D payment amount  26  5 percent 
FUL amount between .01 and 2 times higher than average Part D payment amount  211  37 percent 
FUL amount between 2.01 and 5 times higher than average Part D payment amount  284  50 percent 
FUL amount between 5.01 and 10 times higher than average Part D payment amount  46  8 percent 
FUL amount more than 10 times higher than average Part D payment amount  5  1 percent 
     Total Drugs   572  100 percent* 
     Aggregate Amount Higher Than Average Part D Payment Amount  2.91 times 
* Individual totals displayed in table do not add up to 100 percent because of rounding.   
 
Source:  OIG analysis of CMS FUL Data and Retail Chain Pricing. 
 
In the aggregate, the FUL amounts calculated under the current 
methodology were double the prices available through retail discount 
generic programs 
Fourth-quarter 2007 FUL amounts were 1.97 times higher, in the 
aggregate, than prices available through retail discount generic 
programs.  Approximately half (291) of the drugs included on the FUL 
list in the fourth quarter of 2007 were also included in at least one of 
the discount generic programs under review.38  Under the discount 
programs, each of these drugs had a retail price of $4.00 for a 30-day 
supply (total cost to the consumer).  In the aggregate, the FUL amounts 
for a 30-day supply of these same drugs averaged $7.87 before any 
dispensing fees were applied.39 
 
38 However, only 18 of the 50 FUL drugs with the highest total Medicaid expenditures 
were included in at least one discount program. 
39 As previously stated, the majority of States have dispensing fees between $3.50 and 
$5.00 per prescription. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  18 
   
   
F I N D I N G S  
Among individual products, 212 of the 291 drugs had monthly FUL 
amounts that were above the $4.00 retail price, with 129 exceeding 
$8.00 (see Table 5).  For Fluoxetine 40 mg capsules, the FUL amount for 
a 30-day supply was $120, or 30 times higher than the retail price.  
Table 5:  Comparison of Pre-DRA FUL Amounts to Retail Prices Under   
$4.00/30-day Discount Generic Programs 
  Number of  Percentage of 
Difference  Drugs  Drugs 
FUL amount for 30-day supply less than or equal to $4.00  79  27 percent 
FUL amount for 30-day supply between $4.01 and $8.00  83  29 percent 
FUL amount for 30-day supply between $8.01 and $20.00  94  32 percent 
FUL amount for 30-day supply between $20.01 and $100.00  29  10 percent 
FUL amount for 30-day supply more than $100.00  6  2 percent 
     Total Drugs   291  100 percent 
     Aggregate Retail Price for 30-Day Supply  $7.87 
* $4.00 retail prices represent a total cost.  The FUL amount only represents the ingredient cost for the drug.  Pharmacies without discount 
generic programs usually would also receive a dispensing fee in addition to reimbursement for the ingredient cost portion.  
 
Source:  OIG analysis of CMS FUL Data and PDE Data. 
 
The FUL amounts do not always 
Despite the fact that States often pay less than 
represent the actual prices paid by 
the FUL amount for multiple-source drugs, the 
Medicaid, because State maximum 
current calculation method is still costing 
allowable cost programs as well as 
Medicaid hundreds of millions of dollars per  usual and customary charge 
year  provisions may further lower 
payments for multiple-source drugs.  
In other words, the percentage differences described in the previous 
finding, while accurate in relation to the FUL amounts, may overstate 
actual differences between Medicaid payments and these other pricing 
points in practice.  However, even allowing for this fact, average 
Medicaid payment amounts still exceeded the other pricing points we 
reviewed by a substantial margin, potentially costing the program 
hundreds of millions of dollars per year. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  19 
   
   
F   I N D I N G S  
IIff  MMeeddiiccaaiidd  hhaadd  ppaaiidd  ffoorr  5500  FFUULL  ddrruuggss  bbaasseedd  oonn  tthhee  aavveerraaggee  pphhaarrmmaaccyy  
aaccqquuiissiittiioonn  ccoosstt,,  tthhee  pprrooggrraamm  wwoouulldd  hhaavvee  rreedduucceedd  eexxppeennddiittuurreess  bbyy                  
$$110055  mmiilllliioonn  iinn  aa  ssiinnggllee  qquuaarrtteerr  
EEvveenn  ccoonnssiiddeerriinngg  ppaayymmeenntt  rreedduuccttiioonnss  uunnddeerr  mmaaxxiimmuumm  aalllloowwaabbllee  ccoosstt  
pprrooggrraammss  oorr  uussuuaall  aanndd  ccuussttoommaarryy  cchhaarrggee  pprroovviissiioonnss,,  SSttaatteess  ssttiillll  ppaaiidd,,  iinn  
tthhee  aaggggrreeggaattee,,  aann  eessttiimmaatteedd  22..77  ttiimmeess  mmoorree  tthhaann  tthhee  aavveerraaggee  pphhaarrmmaaccyy  
aaccqquuiissiittiioonn  ccoosstt  ffoorr  tthhee  5500  hhiigghh--eexxppeennddiittuurree  ddrruuggss  uunnddeerr  rreevviieeww  
((ccoommppaarreedd  ttoo  44..3322  ttiimmeess  hhaadd  SSttaatteess  aaccttuuaallllyy  ppaaiidd  aatt  tthhee  FFUULL  aammoouunnttss))..    
FFuurrtthheerrmmoorree,,  tthhiiss  ddooeess  nnoott  ttaakkee  iinnttoo  aaccccoouunntt  tthhaatt  pphhaarrmmaacciieess  uussuuaallllyy  
rreecceeiivvee  aa  ddiissppeennssiinngg  ffeeee  eeaacchh  ttiimmee  aa  ddrruugg  iiss  ddiissppeennsseedd,,  mmeeaanniinngg  tthhaatt  tthhee  
ggaapp  bbeettwweeeenn  MMeeddiiccaaiidd  ppaayymmeenntt  aanndd  pphhaarrmmaaccyy  ccoosstt  iiss  wwiiddeerr  tthhaann  
ddeessccrriibbeedd..  
MMeeddiiccaaiidd  wwoouulldd  hhaavvee  ssppeenntt  aann  eessttiimmaatteedd  $$110055  mmiilllliioonn  lleessss  iinn  tthhee  ffoouurrtthh  
qquuaarrtteerr  ooff  22000077  oonn  tthhee  5500  ddrruuggss  uunnddeerr  rreevviieeww  hhaadd  SSttaatteess  ppaaiidd  aatt  tthhee  
aavveerraaggee  pphhaarrmmaaccyy  aaccqquuiissiittiioonn  ccoosstt..4400    AAssssuummiinngg  pprriicciinngg  aanndd  uuttiilliizzaattiioonn  
wwaass  ccoonnssttaanntt  aaccrroossss  aallll  qquuaarrtteerrss  ooff  22000077,,  MMeeddiiccaaiidd  eexxppeennddiittuurreess  ffoorr  
tthheessee  5500  ddrruuggss  ccoouulldd  hhaavvee  bbeeeenn  rreedduucceedd  bbyy  mmoorree  tthhaann  $$440000  mmiilllliioonn  oovveerr  
tthhee  eennttiirree  yyeeaarr  ((sseeee  TTaabbllee  66))..  
IIff  MMeeddiiccaaiidd  hhaadd  ppaaiidd  ffoorr  557722  FFUULL  ddrruuggss  aatt  tthhee  aavveerraaggee  PPaarrtt  DD  ppaayymmeenntt  
aammoouunntt,,  tthhee  pprrooggrraamm  wwoouulldd  hhaavvee  rreedduucceedd  eexxppeennddiittuurreess  bbyy  $$113388  mmiilllliioonn  iinn  aa  
ssiinnggllee  qquuaarrtteerr  
EEvveenn  ccoonnssiiddeerriinngg  ppaayymmeenntt  rreedduuccttiioonnss  uunnddeerr  mmaaxxiimmuumm  aalllloowwaabbllee  ccoosstt  
pprrooggrraammss  oorr  uussuuaall  aanndd  ccuussttoommaarryy  cchhaarrggee  pprroovviissiioonnss,,  SSttaatteess  ssttiillll  ppaaiidd,,  iinn  
tthhee  aaggggrreeggaattee,,  aann  eessttiimmaatteedd  8844  ppeerrcceenntt  mmoorree  tthhaann  PPaarrtt  DD  ffoorr  tthhee                
557722  ddrruuggss  uunnddeerr  rreevviieeww  ((ccoommppaarreedd  ttoo  119911  ppeerrcceenntt  mmoorree  hhaadd  SSttaatteess  
aaccttuuaallllyy  ppaaiidd  aatt  tthhee  FFUULL  aammoouunnttss))..4411    MMeeddiiccaaiidd  wwoouulldd  hhaavvee  ssppeenntt  aann  
eessttiimmaatteedd  $$113388  mmiilllliioonn  lleessss  iinn  tthhee  ffoouurrtthh  qquuaarrtteerr  ooff  22000077  oonn  tthhee  FFUULL  
ddrruuggss  hhaadd  SSttaatteess  ppaaiidd  tthhee  ssaammee  aass  PPaarrtt  DD..    AAssssuummiinngg  pprriicciinngg  aanndd  
uuttiilliizzaattiioonn  wwaass  ccoonnssttaanntt  aaccrroossss  aallll  qquuaarrtteerrss  ooff  22000077,,  MMeeddiiccaaiidd  
eexxppeennddiittuurreess  ffoorr  tthheessee  557722  ddrruuggss  ccoouulldd  hhaavvee  bbeeeenn  rreedduucceedd  bbyy  mmoorree  tthhaann  
$$550000  mmiilllliioonn  oovveerr  tthhee  eennttiirree  yyeeaarr..  
  
4400  IIff  SSttaatteess  cchhoossee  ttoo  rraaiissee  ddiissppeennssiinngg  ffeeeess  ttoo  ooffffsseett  lloowweerr  iinnggrreeddiieenntt  ccoosstt  ppaayymmeennttss,,  tthheessee  
savings would be reduced. 
41 This does not take dispensing fees into account.  Given that Medicaid tends to pay 
higher dispensing fees than Part D, the difference in reimbursement between Medicaid and 
Medicare Part D is likely greater than the estimated 84 percent. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  20 
   
   
F I N D I N G S  
If Medicaid had paid all pharmacies for 291 FUL drugs at the price available 
through retail discount generic programs, the program would have reduced 
expenditures by $87 million in a single quarter 
States paid, in the aggregate, an estimated two times more than retail 
prices for the 291 drugs included in discount generic programs.  The 
average Medicaid payment amount for a 30-day supply of these drugs 
was $8.01, including dispensing fee.  Each drug could be purchased for a 
total cost of $4.00 at one or more of the retail chain pharmacies included 
in our review.  
Medicaid would have spent an estimated $87 million less in the fourth 
quarter of 2007 on these drugs had States paid all pharmacies at the 
$4.00/30-day price.  Assuming pricing and utilization was constant 
across all quarters of 2007, Medicaid expenditures for these 291 FUL 
drugs could have been reduced by almost $350 million over the entire 
year. 
It is important to note that if a Medicaid beneficiary obtained any of 
these 291 drugs from a pharmacy with a discount generic program, 
usual and customary charge provisions would generally apply.  In other 
words, Medicaid should (and may) have reimbursed the pharmacy no 
more than a total of $4.00 total for the drug, with no additional 
dispensing fee applied. 
 
Table 6:  Potential Costs to Medicaid of Current FUL Methodology in the Fourth 
Quarter of 2007 
  Retail Discount 
 
Average Pharmacy  Average Part D  Generic Program 
Acquisition Costs*   Payment Amounts*  Prices 
Number of drugs  50 572  291
Actual fourth quarter 2007 Medicaid payments 
$167.7 million $301.3 million  $174.5 million
under pre-DRA method 
Estimated fourth quarter 2007 Medicaid 
$62.8 million $163.7 million  $87.1 million
payments under other pricing point 
Difference (estimated quarterly savings)  $104.9 million $137.6 million  $87.4 million
*Figures for the pharmacy and Part D comparisons are based only on the ingredient cost portion of total Medicaid payments, and do not reflect 
dispensing fees.  
 
Source:  OIG analysis of CMS FUL Data and Utilization Data, Distributor Sales Data, PDE Data, and Retail Chain Pricing. 
 
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  21 
   
   
F I N D I N G S  
In the fourth quarter of 
In the aggregate, AMP-based FUL amounts were 
2007, the FUL amounts 
much closer to other pricing points; however, 
calculated under the      
for some drugs, these FUL amounts may be 
DRA-mandated method (i.e., 
below acquisition costs 
250 percent of the lowest 
AMP) were, in the aggregate, 66 percent below the FUL amounts based 
on published prices, and 47 percent below the average Medicaid 
payment amounts.42  Taken as a whole, these AMP-based FUL amounts 
were much closer to pharmacy acquisition costs, Part D payment 
amounts, and retail generic program prices.  However, for a number of 
individual drugs, the DRA-based changes to the calculation 
methodology led to FUL amounts that were substantially below these 
other pricing points. 
In the aggregate, AMP-based FUL amounts were 50 percent higher than 
average pharmacy acquisition costs in the fourth quarter of 2007; however, 
the FUL amounts for a number of drugs were less than acquisition costs 
For the 50 FUL drugs with the highest total Medicaid expenditures, 
fourth-quarter 2007 AMP-based FUL amounts were 50 percent higher, 
in the aggregate, than average pharmacy acquisition costs.  This figure 
does not take into account that in addition to being reimbursed by 
Medicaid for the cost of the drug itself (i.e., the FUL amount, the 
maximum allowable cost), pharmacies usually receive a dispensing fee 
from Medicaid each time a prescription is filled. 
Among individual products, fourth-quarter 2007 AMP-based FUL 
amounts were less than average pharmacy acquisition costs for 26 of the 
50 drugs under review.  In eight cases, the FUL amount was less than 
half of the average acquisition cost, meaning pharmacies could pay 
much more than the new payment limit when acquiring these drugs.   
In contrast, 24 of the 50 drugs had AMP-based FUL amounts that 
exceeded average acquisition costs, including 6 of the 7 FUL drugs with 
the highest Medicaid expenditures in 2007.  Eight drugs had  
AMP-based FUL amounts that were still more than double their 
average acquisition costs.  Table 7 provides a summary of the difference 
between AMP-based FUL amounts and average pharmacy acquisition 
costs in the fourth quarter of 2007 for the drugs under review. 
 
42 Taking into account what Medicaid actually paid for the drugs, aggregate spending 
would have been $140 million less under the AMP-based calculation method that quarter. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  22 
   
   
F I N D I N G S  
Table 7:  Comparison of AMP-Based FUL Amounts to Average Pharmacy 
Acquisition Costs in the Fourth Quarter of 2007   
Number of  Percentage of 
Percentage Difference  Drugs  Drugs 
FUL amount more than 80 percent below average pharmacy acquisition cost  2  4 percent 
FUL amount between 50.01 and 80 percent below average pharmacy acquisition cost  6  12 percent 
FUL amount between 20.01 and 50 percent below average pharmacy acquisition cost  11  22 percent 
FUL amount between 0.01 and 20 percent below average pharmacy acquisition cost  7  14 percent 
FUL amount equal to average pharmacy acquisition cost  0  0 percent 
FUL amount between 0.01 and 20 percent above average pharmacy acquisition cost  2  4 percent 
FUL amount between 20.01 and 50 percent above average pharmacy acquisition cost  6  12 percent 
FUL amount between 50.01 and 100 percent above average pharmacy acquisition cost  8  16 percent 
FUL amount more than 100 percent above average pharmacy acquisition cost  8  16 percent 
     Total Drugs   50  100 percent 
Source:  OIG analysis of CMS FUL Data and Distributor Sales Data. 
 
We also examined the lowest average costs reported by any wholesale 
distributor for any single version (i.e., national drug code) of a FUL 
drug.  In the aggregate, AMP-based FUL amounts were more than 
double the lowest acquisition costs.  For 38 of the 50 drugs, the  
AMP-based FUL amounts were higher than the lowest costs reported by 
wholesale distributors.  In other words, pharmacies may have been able 
to purchase these versions from a particular distributor for less than the 
AMP-based FUL amount.   
In the aggregate, AMP-based FUL amounts were 2 percent below average 
Part D payment amounts in the fourth quarter of 2007 
For the 542 drugs included in this portion of the analysis, fourth-
quarter 2007 AMP-based FUL amounts were 2 percent below average 
Part D payment amounts, in the aggregate.  This figure does not take 
into account that both Medicaid and Part D usually pay a dispensing fee 
in addition to the ingredient cost payment.  Given that Medicaid tends 
to pay higher dispensing fees than Part D, State payments to 
pharmacies under the AMP-based FULs may actually exceed Part D 
payments (in the aggregate) once dispensing fees are considered. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  23 
   
   
F I N D I N G S  
Among individual products, the AMP-based FUL amount was less than 
the average Part D payment amount for 337 of 542 drugs (62 percent) 
(see Table 8).  The FUL amount was less than half of the Part D 
payment in 161 of these cases.  In contrast, the AMP-based FUL 
amount was more than double the Part D payment for 50 of the          
542 drugs.   
Table 8:  Comparison of AMP-Based FUL Amounts to Average Part D Payment 
Amounts in the Fourth Quarter of 2007  
 
Number of  Percentage of 
Percentage Difference  Drugs  Drugs 
FUL amount more than 80 percent below average Part D payment amount  34  6 percent 
FUL amount between 50.01 and 80 percent below average Part D payment amount  127  23 percent 
FUL amount between 20.01 and 50 percent below average Part D payment amount  103  19 percent 
FUL amount between .01 and 20 percent below average Part D payment amount  73  13 percent 
FUL amount equal to average Part D payment amount  0  0 percent 
FUL amount between 0.01 and 20 percent above average Part D payment amount  57  11 percent 
FUL amount between 20.01 and 50 percent above average Part D payment amount  51  9 percent 
FUL amount between 50.01 and 100 percent above average Part D payment amount  47  9 percent 
FUL amount more than 100 percent above average Part D payment amount   50  9 percent 
     Total Drugs   542  100 percent* 
* Individual totals displayed in table do not add up to 100 percent because of rounding.  
 
Source:  OIG analysis of CMS FUL Data and PDE Data. 
 
In the aggregate, AMP-based FUL amounts plus a dispensing fee would still 
exceed retail prices available through discount generic programs  
Approximately half (279) of the drugs with an AMP-based FUL in the 
fourth quarter of 2007 were also included in at least one of the discount 
generic programs under review.  Under the discount programs, each of 
these drugs had a retail price of $4.00 for a 30-day supply (total cost, 
with no additional dispensing fees).  The AMP-based FUL amounts for a 
30-day supply of these same drugs averaged $2.20, before any 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  24 
   
   
F I N D I N G S  
dispensing fees were applied.43  However, given that only one State had 
a dispensing fee that was less than $2.00 per prescription (New 
Hampshire was $1.75), the average total Medicaid payment for these 
drugs, including the dispensing fee, would still exceed the retail prices 
under the discount generic programs. 
As previously stated, if a Medicaid beneficiary obtained any of these   
279 drugs from a pharmacy with a discount generic program, usual and 
customary charge provisions would generally apply.  In other words, 
Medicaid should (and may) have reimbursed the pharmacy no more 
than a total of $4.00 total for the drug, with no additional dispensing fee 
applied. 
 
 
43 As previously stated, State dispensing fees to retail pharmacies for generic drugs 
ranged from $1.75 to $7.25 per prescription, with fees in 30 States falling between $3.50 
and $5.00. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  25 
   
   
 R E C O M M E N D A T I O N  
Based in part on OIG work that consistently found that the published 
prices used to set FUL amounts often greatly exceed prices available in 
the marketplace, the DRA included provisions to base FUL amounts on 
the AMP, rather than the prices published in national compendia.  
However, an injunction from a Federal judge, as well as provisions in 
the MIPPA, delayed the implementation of the AMP-based FULs.  
Therefore, CMS is still basing Medicaid FUL amounts on published 
prices until at least October 1, 2009. 
The findings of this report demonstrate that the current method for 
setting the FUL amounts continues to result in substantially inflated 
Medicaid payments for many multiple-source drugs.  The FUL amounts 
for individual drugs are frequently double (and often more than five 
times) the acquisition costs for pharmacies, the payment amounts under 
Part D, and even the prices charged by retail chain pharmacies.  As a 
result, Medicaid could be overpaying by hundreds of millions of dollars 
per year for these drugs. 
Our findings show that AMP-based FULs calculated under the DRA 
prescribed methodology significantly lessen the gap between the FUL 
amounts and the other prices we examined.  In the aggregate, the  
DRA-based FULs seem to cover acquisition costs, and are very similar 
to overall Part D reimbursement.  Considering that Medicaids 
dispensing fees for multiple-source drugs tend to be higher than those 
paid by Part D plans, it is likely that pharmacies will continue to 
receive higher aggregate payments under Medicaid if and when the 
AMP-based FUL methodology takes effect.  
Despite the aggregate numbers, we have concerns that for a number of 
individual drugs the AMP-based FUL amounts were substantially below 
average acquisition costs and Part D payment amounts.  If this is the 
case, pharmacies may face difficulties in providing certain drugs to 
Medicaid beneficiaries.  However, if and when CMS is permitted to 
publicly disclose AMP data, the resulting transparency should help 
ensure that the AMP-based FUL amounts are more accurate reflections 
of actual market prices.  Furthermore, as CMS stated in a response to a 
previous OIG report, pharmacies will seek out the lowest-cost versions 
of the FUL drugs, meaning that looking at how average costs compare 
may not always reflect market realities.  To that end, our analysis 
showed that 38 of the 50 drugs we reviewed were available from at least 
one source at a price below the AMP-based FUL amount. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  26 
   
   
R E C O M M E N D A T I O N  
Notwithstanding these concerns, the inflated payments resulting from 
the pre-DRA methodology that we observed in this review once again 
illustrate the flaws in the current FUL calculation.  We also understand 
that without a legislative change and the lifting of the injunction, CMSs 
options are limited at this time.  However, it is critical that Medicaid set 
payment rates that are fair and appropriate to both the government and 
providers.  Therefore, we recommend that: 
CMS should continue to work with Congress to identify strategies that 
would lower inflated Medicaid payments for multiple-source drugs.  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with our recommendation.  CMS also stated that our 
findings support the agencys belief that AMP-based FULs more 
accurately reflect acquisition costs and prices used in other programs.  
However, the agency expressed concerns with certain aspects of our 
methodology.  
Specifically, CMS stated that actual pharmacy acquisition costs are 
likely to be lower than the estimates used in our report because two of 
the four responding distributors failed to provide data on price 
concessions.  CMS believes that if all distributors had reported these 
price concessions, we would have found that more drugs had been 
obtainable at the AMP-based FUL amounts.  CMS also noted that our 
findings understate Medicaid payment rates because we did not include 
dispensing fees that are paid when Medicaid prescriptions are filled. 
Despite these issues, CMS recognized that for certain multiple-source 
drugs, acquisition costs may exceed the AMP-based FULs.  However, 
the agency noted that FULs are required to be met only in the 
aggregate and that States have the authority to pay more than the FUL 
amount for certain drugs as long as total payments remain below the 
aggregate limit.  In addition, CMS also stated that publicly disclosing 
AMP data will bring transparency to prices and assist pharmacies in 
purchasing drugs at less than the FUL amounts. 
OIG acknowledged in the Limitations section on page 14 that two 
distributors did not provide data on price concessions, and therefore 
pharmacies bottom-line costs for some drugs may be lower than the 
estimates used in the report.  We agree that had these two distributors  
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  27 
   
   
R E C O M M E N D A T I O N  
included information on price concessions, our estimate of the number of 
drugs available at prices below the AMP-based FUL amounts may have 
increased.  However, based on our data, this limitation does not 
fundamentally change the underlying issue surrounding the availability 
of individual drugs.  As Table 7 on page 23 shows, the AMP-based FUL 
amount was less than the average acquisition cost for 26 of the selected 
drugs; in 19 of these cases, the difference between the two amounts was 
greater than 20 percent.  In other words, for many of these drugs, the 
AMP-based FUL amounts would likely have still been below average 
acquisition costs even if all distributors had reported price concessions. 
In addition, except for one circumstance involving prices charged under 
discount retail programs, OIG did not consider dispensing fees in its 
pricing comparison.  Medicaid FUL amounts are meant to reimburse 
pharmacies for the acquisition costs of the drugs themselves, while 
dispensing fees are separate payments that cover the additional costs of 
dispensing drugs.  Because this study did not focus on these additional 
costs, it would not have been appropriate to include dispensing fees in 
most pieces of our analysis. 
Finally, we agree that because FULs apply only in the aggregate, States 
have the flexibility to raise payment amounts for individual drugs (and 
lower payment amounts for others) if and when FUL amounts appear to 
be too low.  However, in practice, it may prove challenging for States to 
try to determine the adequacy of individual FUL amounts for hundreds 
of drugs and make appropriate adjustments.  Therefore, it is important 
to balance the goal of lower aggregate payment levels with the need to 
ensure that FUL amounts cover acquisition costs for as many drugs as 
possible. 
For the full text of CMSs comments, see Appendix B.  
 
 
 
  
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  28 
   
   
 A P P E N D I X   ~   A  
 
Fifty Federal Upper Limit Drugs With Highest Total Medicaid Expenditures in 
2007 
Drug  Strength  Form 
ACETAMINOPHEN/CODEINE  300 MG-30 MG  TAB 
ACETAMINOPHEN/HYDROCODONE BITARTRATE  500 MG-10 MG  TAB 
ACETAMINOPHEN/HYDROCODONE BITARTRATE  500 MG-5 MG  TAB 
ACETAMINOPHEN/HYDROCODONE BITARTRATE  500 MG-7.5 MG  TAB 
ALBUTEROL SULFATE  0.083%  SOL 
ALPRAZOLAM  0.5 MG  TAB 
ALPRAZOLAM  1 MG  TAB 
AMOXICILLIN  500 MG  CAP 
AMOXICILLIN  250 MG/5 ML  PDR 
AMOXICILLIN/CLAVULANATE POTASSIUM  400 MG/5 ML-57 MG/5 ML  PDR 
BACLOFEN  10 MG  TAB 
BETAMETHASONE/CLOTRIMAZOLE  0.05%-1%  CRE 
CEFPROZIL  250 MG/5 ML  PDR 
CEPHALEXIN  500 MG  CAP 
CLONAZEPAM  0.5 MG  TAB 
CLONAZEPAM  1 MG  TAB 
CLONIDINE HCL  0.1 MG  TAB 
CYCLOBENZAPRINE HCL  10 MG  TAB 
FLUOXETINE HCL  20 MG  CAP 
FLUOXETINE HCL  40 MG  CAP 
FOLIC ACID  1 MG  TAB 
GABAPENTIN  300 MG  CAP 
GABAPENTIN  400 MG  CAP 
GABAPENTIN  600 MG  TAB 
GABAPENTIN  800 MG  TAB 
GLYBURIDE/METFORMIN HCL  5 MG-500 MG  TAB 
HYDROXYZINE HCL  25 MG  TAB 
IBUPROFEN  800 MG  TAB 
LISINOPRIL  20 MG  TAB 
LORAZEPAM  0.5 MG  TAB 
LORAZEPAM  1 MG  TAB 
LORAZEPAM  2 MG  TAB 
METFORMIN  1000 MG  TAB 
METFORMIN  500 MG  TAB 
MUPIROCIN  2%  OIN 
OMEPRAZOLE  20 MG  ECC 
OXYCODONE HCL  20 MG  TER 
OXYCODONE HCL  40 MG  TER 
OXYCODONE HCL  80 MG  TER 
OXYCODONE/ACETAMINOPHEN  325 MG-5 MG  TAB 
OXYCODONE/ACETAMINOPHEN  650 MG-10 MG  TAB 
Table Continued on Next Page 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  29 
   
   
A P P E N D I X ~ A  
 
  
 
Fifty Federal Upper Limit Drugs With Highest Total Medicaid Expenditures in 
2007 (continued) 
PAROXETINE  20 MG  TAB 
PAROXETINE  40 MG  TAB 
POTASSIUM CHLORIDE  20 MEQ  TER 
PROPOXYPHENE NAPSYLATE & ACETAMINOPHEN  650 MG-100 MG  TAB 
RANITIDINE HCL  150 MG  TAB 
RIBAVIRIN  200 MG  CAP 
SULFAMETHOXAZOLE/TRIMETHOPRIM  800 MG-160 MG  TAB 
TRAMADOL HCL  50 MG  TAB 
ZONISAMIDE  100 MG  CAP 
Source:  Office of Inspector General Analysis of Medicaid Utilization Data. 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  30 
  x 
A  P  PEN  0  B 

Agency Comments 
DEPARTMENT OF HEALTH & HUMAN SERVICES  Cente,s'fo, Medica,. & Medicaid Service. 
Administrator 
W.'hlnglo~,DC ~201 
:;',  t;S  ,p 
\,::  ,il
JUL  IHIIB 
DATE: 
TO: 	 Daniel R. Levlnsdn 
Inspector General 
FROM~  ffilfrlene Frl,z7Afll 
Acting Administrator 
SUBJECT:  Office ofInspector General (010) Draft Report: "A Comparison of Medicaid 
Federal Upper Limit Amounts to' Acquisition Costs, Medicare Payment Aniounts, 
and Retail Prices" (OEI.03-08-00490) 
Thank you for the opportunity to review and comment on the subject draft report. In this draft 
report, thc OIG-"(1) Detemlines how the current pre-Deficit Reduction Act of2005 (ORA, P.L. 
109-171) Federal upper limit (PUL) amounts compare to pharmacy acquisition costs, Medicare 
Part D pllymcnt amounts; and retail priCeS Under djcount.gcneric programs; (2) Estimates the 
financial impact on the Medicaid program df continuing to calculate FULam6unts using the 
current method; and (3) Deterntines how FUL Ilmounts based on,avetage manufacturer prices 
(AMPs) calculated under the method required by the DRA compare to the pricing points under 
review. 
TheDRA required FUL amounts for multiple source drugs to be based on 250 percent of the 
loweslreported AMP in a FUL group. However, a preliminary injunction issued by the U.S. 
District Court for the District of Columbia and a moratorium in the' Medicare Improvements for 
Patients and Providers Act ,02008 (P.L. 110-275) prevented the Centers for Medicare & 
Mediaaid'Services (eMS) from implementing the AMP-based FUL methodology until at Ie8$! 
October 1, 2009. As a resu.It, CMS is Qurrently calcul~ting FUL amounts under the pre-ORA 
methodology. 
GIG Findings 
Using rourth,quarter 2007 MedicaiddtugutiIization data,. the O1G reviewe~ the top 50 drugs 

, with the highesHotal Medicaid,expemfitures. The OIG found the following for the current, pre-

DRAFULs.  ' 

 	 In the aggregate, the .FUt amounts calculated under the current methodology were 4.32 
times more thf!ll average pharmacy acquisition costs in the, fourth quarter of 2007. For 
allnost haIf ofthe drugs und.cr rllView, the FULarnounts calculllted !Ii1d'er the current 
metho;dology were, at le,fjstJive times greater than the average pharmacy acq\.lisition costs 
in the foUrth quarter of2007. 
31 
OEI,03-08,00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS   
   
A P P E N D I X   ~   B  
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  32 
   
   
A P P E N D I X   ~   B  
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  33 
   
   
A P P E N D I X   ~   B  
 
 
 
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  34 
   
   
A P PA ECNKD NI XO   W~ L  AE  D G M E N T S  
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and David E. Tawes, Director of the Medicare and 
Medicaid Prescription Drug Unit.   
Eric M. Biersmith served as lead analyst for this study.  Other central 
office staff who contributed include Eddie Baker, Jr., and Scott Manley.  
 
  
  OEI-03-08-00490  COMPARISON OF MEDICAID FEDERAL UPPER LIMIT AMOUNTS TO OTHER PRICING POINTS  35