Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
A  C
NALYZING  HANGES TO 
 
M   F U
EDICAID  EDERAL  PPER 
 
L A  
IMIT  MOUNTS 
 
Daniel R. Levinson  
Inspector General 
 
October 2012 
OEI-03-11-00650   
   
EXECUTIVE SUMMARY:  ANALYZING CHANGES TO MEDICAID FEDERAL 
UPPER LIMIT AMOUNTS 
OEI-03-11-00650 
 
 
WHY WE DID THIS STUDY  
 
Prior Office of Inspector General (OIG) work consistently found that the published prices 
used to set Medicaids Federal upper limit (FUL) amounts often greatly exceeded prices 
available in the marketplace.  Partly because of OIG work, provisions of the Deficit 
Reduction Act of 2005, P.L. 109-171, were crafted to substantially change the method for 
calculating FULs and most likely would have resulted in lower FUL amounts; however, these 
changes were never implemented because of an injunction against the Centers for Medicare & 
Medicaid Services (CMS) and subsequent changes in the law.  The Affordable Care Act 
(ACA), P.L. 111-148, enacted in March 2010, also includes provisions that seek to change 
FUL amounts.  In September 2011, CMS began releasing the new FUL amounts to the public 
in draft form.  Given our previous findings that FUL amounts based on published prices 
greatly exceeded pharmacy acquisition costs and that the new FUL amounts have not taken 
effect, we compared FUL amounts based on published prices to FUL amounts based on 
average manufacturer prices (AMP) and then compared both FUL amounts to pharmacy 
acquisition costs.   
 
HOW WE DID THIS STUDY 
 
We compared aggregate pharmacy acquisition costs for selected drugs to (1) FUL amounts 
based on published prices and (2) FUL amounts based on post-ACA AMPs.  We also 
compared FUL amounts based on published prices to FUL amounts based on post-ACA 
AMPs and calculated the difference for each drug.   
 
WHAT WE FOUND 
 
We found that FUL amounts based on published prices were more than four times greater 
than sampled pharmacy acquisition costs.  We also found that FUL amounts based on AMPs 
were 61 percent lower than FUL amounts based on published prices, at the median.  Despite 
the reduction in proposed reimbursement, FUL amounts based on AMPs still exceed sampled 
pharmacy acquisition costs by 43 percent in the aggregate.  CMS had not implemented FUL 
amounts based on AMPs as of August 2012.  Although CMS has taken steps to implement 
FUL amounts based on AMPs by calculating the new amounts and issuing draft files for 
review, FUL amounts continued to be based on published prices as of August 2012.        
 
WHAT WE RECOMMEND 
 
Given the results of the body of OIG work and the potential reduction in Medicaid 
expenditures, we recommend that CMS complete the implementation of the post-ACA    
AMP-based FUL amounts.  CMS concurred with our recommendation and stated that it plans 
to implement FUL amounts based on AMPs in the near future.   
   
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 
Background ..................................................................................................1 
Methodology ................................................................................................6 
Findings........................................................................................................9 
FUL amounts based on published prices were more than four  
times total pharmacy acquisition costs ............................................9 
FUL amounts based on AMPs were 61 percent lower than FUL 
amounts based on published prices, at the median ..........................9 
Even with the reductions resulting from the new methodology, 
FUL amounts based on AMPs would still have exceeded   
pharmacy acquisition costs in the aggregate ..................................10 
CMS had not completed implementation of AMP-based FUL 
amounts as of August 2012 ............................................................10 
Conclusion and Recommendation .............................................................12 
Agency Comments and Office of Inspector General Response .....12 
Appendixes ................................................................................................13 
A:  Detailed Sampling Plan............................................................13 
B:  Agency Comments ...................................................................14 
Acknowledgments......................................................................................16 
 
   
   
OBJECTIVES 
1.  To compare pharmacy acquisition costs for selected drugs to Federal 
upper limit (FUL) amounts based on published prices. 
2.  To determine how FUL amounts would change under the average 
manufacturer price (AMP)-based methodology required by the 
Affordable Care Act (ACA), P.L. 111-148. 
3.  To compare pharmacy acquisition costs for selected drugs to FUL 
amounts based on AMPs.   
4.  To assess the Centers for Medicare & Medicaid Services (CMS) 
implementation of FUL amounts based on AMPs.   
BACKGROUND 
The FUL program was established to ensure that Medicaid takes 
advantage of lower market prices for multiple-source drugs.1  Prior Office 
of Inspector General (OIG) work consistently found that the published 
prices used to set FUL amounts often greatly exceeded prices available in 
the marketplace.  Partly because of OIG work, provisions of the Deficit 
Reduction Act of 2005 (DRA), P.L. 109-171, were crafted to substantially 
change the method for calculating FULs and most likely would have 
resulted in lower FUL amounts; however, these changes were never 
implemented because of an injunction against CMS and subsequent 
changes in the law.  The ACA, enacted in March 2010, includes provisions 
that seek to change FUL amounts.  In September 2011, CMS began 
releasing files containing draft FUL amounts based on the new 
methodology required by the ACA.     
Medicaid Reimbursement for Prescription Drugs 
Medicaid, established under Title XIX of the Social Security Act (the Act), 
is administered by States and financed using State and Federal funds.  All 
50 States and the District of Columbia (hereinafter referred to as States) 
offer prescription drug coverage as part of their Medicaid benefit 
packages.  Medicaid expenditures for prescription drugs totaled 
approximately $29 billion in 2010.2   
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are reimbursed by State Medicaid agencies.  Federal 
regulations require, with certain exceptions, that each State Medicaid 
 
1 Generally, a drug is considered multiple-source if generic versions are available.   
2 Medicaid expenditures were calculated using data from CMSs Medicaid Budget and 
Expenditure System.  This total does not reflect rebates collected through the Medicaid 
drug rebate program. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  1   
   
agencys reimbursement for a covered outpatient drug not exceed (in the 
aggregate) the lower of (1) the estimated acquisition cost plus a reasonable 
dispensing fee or (2) the providers usual and customary charge to the 
public for the drug.3  CMS allows States flexibility to define estimated 
acquisition cost; most States base their calculations on average wholesale 
prices (AWP) or wholesale acquisition costs (WAC).4, 5   
CMS is collecting national average drug acquisition cost data to develop a 
new reimbursement benchmark for State Medicaid agencies that is more 
reflective of pharmacies acquisition costs.  To develop this benchmark, 
CMS will obtain actual pharmacy drug acquisition costs from a random 
sample of pharmacies using a monthly nationwide survey.     
Medicaid FUL Program 
To reduce expenditures for Medicaid prescription drugs, CMS and the 
States have implemented certain cost containment measures, including the 
FUL program.6  The FUL program limits Medicaid reimbursement for 
certain multiple-source drugs and seeks to ensure that the Federal 
Government acts as a prudent buyer by taking advantage of market prices 
for these drugs.  CMS calculates a FUL amount for specific forms and 
strengths for each multiple-source drug that meets the established  
criteria.7, 8  According to CMS data, FUL drugs accounted for $2.4 billion 
in Medicaid expenditures in 2010.9   
 
3 42 CFR  447.512.  CMS issued a proposed rule in February 2012 that would replace 
estimated acquisition cost with actual acquisition cost as the basis of Medicaid pharmacy 
reimbursement.  In the proposed rule, CMS states that the data used to calculate actual 
acquisition costs will be more reflective of pharmacies purchase prices.  See 77 Fed. 
Reg. 5318, 53205321 (Feb. 2, 2012).   
4 The majority of States obtained AWPs from the publisher First DataBank.  However, 
First DataBank stopped publishing AWPs as of September 2011.  This has forced many 
States to reevaluate their reimbursement methodologies.  See OIG, Replacing Average 
Wholesale Price:  Medicaid Drug Payment Policy (OEI-03-11-00060), July 2011.   
5 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2011.  Accessed at http://www.cms.hhs.gov on February 17, 2012.  
6 Other examples of cost containment measures include State maximum allowable cost 
(MAC) programs and the Medicaid drug rebate program.   
7 CMS, Transmittal No. 37  Federal Upper Limit Drug List.  Accessed at 
http://www.cms.hhs.gov on July 15, 2011.  
8 Section 1927(e)(4) of the Act generally requires CMS to establish a FUL amount when 
three or more formulations of the drug were rated as therapeutically and pharmaceutically 
equivalent by the Food and Drug Administration.  Additional requirements as set forth in                
42 CFR  447.332 include that at least three suppliers of the drug are listed in current 
editions (or updates) of published compendia of cost information for drugs available for 
sale nationally.   
9 Medicaid expenditures were calculated from CMSs 2010 Medicaid Drug Rebate 
Program Utilization Data.  This total does not include rebates.   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  2   
   
Calculating FUL Amounts 
Historically, CMS set FUL amounts equal to 150 percent of the price 
published in national compendia for the least costly therapeutically 
equivalent product that could be purchased by pharmacists in quantities of 
100 tablets or capsules, plus a reasonable dispensing fee.  (If the drug is 
not commonly available in quantities of 100, the package size commonly 
listed is used; in the case of liquids, the commonly listed size is used.)10   
The most commonly used published prices in setting FULs are WACs, 
AWPs, and direct prices.11  National compendia, such as Redbook, publish 
these figures based on information provided by drug manufacturers.  
Previous OIG work consistently found that the published prices used to set 
Medicaid FUL amounts often greatly exceeded prices available in the 
marketplace.12   
Proposed Changes to FUL Amounts Under the DRA.  Partly because OIG 
work showed that FUL amounts based on published prices were 
significantly higher than AMPs, the DRA proposed significant changes to 
the FUL program.13  Section 6001(a) of the DRA changed the basis of 
FUL amounts from 150 percent of the lowest price published in national 
compendia to 250 percent of the lowest reported AMP.14   
In July 2007, CMS promulgated a final rule that implemented the DRA 
provisions related to FULs.15  The final regulation took effect on     
October 1, 2007, and CMS planned to issue the first AMP-based FULs on 
December 30, 2007.  However, two trade associations representing retail 
pharmacies filed a lawsuit because they were concerned that the proposed 
FUL amounts calculated using the DRA method might not adequately 
reimburse providers for their costs, thereby limiting access to certain 
 
10 See, for example, 42 CFR  447.332.  This regulation has been removed.  However, as 
of May 2012, CMS continues to use the FUL criteria found in 42 CFR  447.332. 
11 Although the definition of WAC is prescribed by Federal law (at 42 U.S.C.                   
 1395w-3a (c)(6)), neither AWP nor direct price is defined in statute or regulation. 
12 For example, see OIG, A Comparison of Medicaid Federal Upper Limit Amounts to 
Acquisition Costs, Medicare Payment Amounts, and Retail Prices (OEI-03-08-00490), 
August 2009.   
13 OIG, Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer 
Prices (OEI-03-05-00110), June 2005.   
14 Before October 2010, the AMP was generally defined by statute (at 42 U.S.C.              
 1396r-8(k)(1)) to be 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.  
Pursuant to  1927 (b)(3) of the Act, for Federal payment to be available for their covered 
outpatient drugs under Medicaid, manufacturers must provide AMPs to CMS monthly 
and quarterly. 
15 72 Fed. Reg. 39142, 39244 (July 17, 2007).  42 CFR  447.504 of the 2007 regulation 
outlined the manner in which the AMP is to be determined, and 42 CFR  447.514 
addressed the new criteria for the establishment of FUL amounts. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  3   
   
drugs.16  In December 2007, a Federal judge issued a preliminary 
injunction preventing CMS from implementing the DRA-mandated AMP-
based FUL amounts.  In July 2008, the Medicare Improvements for 
Patients and Providers Act (MIPPA), P.L. 110-275, further delayed 
implementation of the DRA-mandated AMP-based FUL amounts.17   
CMS formally withdrew the regulations implementing the DRA-based 
changes to FULs, effective December 2010, and the injunction against 
CMS was lifted in the same month.18  
Proposed Changes to FUL Amounts Under the ACA.  Section 2503 of the 
ACA amended section 1927(e) of the Act by revising FUL amounts to be 
no less than 175 percent of the weighted average of the most recently 
reported monthly AMPs.19  This section of the ACA also amended section 
1927(k) of the Act by revising the definition of AMP.20, 21   
As of August 2012, CMS has continued to base FUL amounts on           
150 percent of the lowest published price.22  However, CMS has issued 
draft FUL amounts based on AMPs for review and comment.23               
Table 1 summarizes the proposed and actual methodology for calculating 
FUL amounts.   
 
 
 
16 National Association of Chain Drug Stores (NACDS) and National Community 
Pharmacists Association (NCPA), Frequently Asked Questions (FAQs) Lawsuit Filed by 
NACDS and NCPA Against CMS Challenging AMP Rule.  November 7, 2007.  Accessed 
online at http://www.ncpanet.org on December 2, 2011.   
17 Consistent with  203(a) and (b) of the MIPPA, CMS could not implement          
AMP-based FUL amounts or publicly disclose AMP data before October 2009.   
18 See 75 Fed. Reg. 69591, 69597 (Nov. 15, 2010).  See National Association of Chain 
Drug Stores, et al., v. U.S. Department of Health and Human Services, et al., Civil 
Action No. 1:07cv02017, order dated December 15, 2010. 
19 Changes to the FUL amount in the ACA superseded the DRA changes.     
20 Under the ACA provisions, the new definition of AMP is the average price paid to the 
manufacturer for the drug in the United States by (1) wholesalers for drugs distributed to 
retail community pharmacies and (2) retail community pharmacies that purchase drugs 
directly from the manufacturer. 
21 Pursuant to  1927(k)(10) of the Act, retail community pharmacy means an 
independent, chain, supermarket, or mass-merchandiser pharmacy that is licensed as a 
pharmacy by the State and that dispenses medications to the general public at retail 
prices.  Such term does not include a pharmacy that dispenses prescription medications to 
patients primarily through the mail; nursing home, long-term care, or hospital 
pharmacies; clinics; charitable or not-for-profit pharmacies; government pharmacies; or 
pharmacy benefit managers.   
22 CMS has calculated FUL amounts based on the requirements set forth in ACA, 
although it has not yet implemented them. 
23 CMS, Draft Affordable Care Act Federal Upper Limit.  Accessed at 
http://www.cms.gov on February 9, 2012. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  4   
   
Table 1:  Methodology for Calculating FUL Amounts 
Timeframe  Statutory Methodology  Methodology Used 
Pre-DRA (before October 1, 2007)  150% of the lowest published price  150% of the lowest published price 
150% of the lowest published price 
Post-DRA, Pre-ACA (October 1, 2007
250% of the lowest AMP  (changes not implemented because 
September 30, 2010)  
of injunction and MIPPA) 
 
Post-ACA (October 1, 2010August  No less than 175% of the weighted  150% of the lowest published price 
2012)  average AMP  (interim methodology)  
 
 
Source:  OIG analysis of CMS FUL methodology, 2012.   
Previous OIG and Government Accountability Office Work 
An August 2009 OIG report found that FUL amounts based on published 
prices were substantially higher than acquisition costs, Medicare payment 
amounts, and retail prices, causing Medicaid to overpay hundreds of 
millions of dollars per year.  OIG recommended that CMS continue to 
work with Congress to identify strategies that would lower inflated 
Medicaid payments for multiple-source drugs.24  CMS concurred with this 
recommendation.   
A September 2010 OIG report found that the majority of drug 
manufacturers did not comply with CMSs requirements for reporting 
monthly AMP data (i.e., the basis for FUL amounts required by the ACA).  
Because AMP data play a critical role in Medicaid payments for 
prescription drugs, OIG recommended that CMS take action against 
manufacturers that do not comply with AMP data submission 
requirements.25  CMS concurred with this recommendation.  In accordance 
with an enforcement initiative announced in September 2010, OIG has 
begun imposing civil money penalties (CMP) on certain manufacturers 
that fail to report timely AMPs. 
A December 2010 Government Accountability Office (GAO) report found 
that FUL amounts based on AMPs were lower than FUL amounts based on 
published prices (i.e., pre-ACA FUL amounts) but still significantly higher 
than average retail pharmacy acquisition costs.26  However, that study did 
not incorporate the new definition of AMP, and the retail pharmacy 
acquisition costs did not include rebates that pharmacies may receive from 
wholesalers or manufacturers.  
 
24 OIG, A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, 
Medicare Payment Amounts, and Retail Prices (OEI-03-08-00490), August 2009.   
25 OIG, Drug Manufacturers Noncompliance With Average Manufacturer Price 
Reporting Requirements (OEI-03-09-00060), September 2010.   
26 GAO, Medicaid Outpatient Prescription Drugs:  Estimated Changes to Federal Upper 
Limits Using the Formula under the Patient Protection and Affordable Care Act (GAO-
11-141R), December 2010. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  5   
   
METHODOLOGY 
Data Sources and Collection  
FULs.  We obtained the November 2010, July 2011, and September 2011 
draft files from CMS containing FUL amounts based on AMPs (i.e., the 
FUL amounts that would have been in effect had the ACA methodology 
been implemented).27  We also obtained first- and fourth-quarter 2011 
Redbook files containing FUL amounts based on published prices (i.e., the 
FUL amounts in effect).  We also obtained CMSs policies and procedures 
regarding the FUL program.   
Medicaid Utilization Data.  We obtained a file from CMS containing     
2010 State Medicaid expenditure (ingredient costs and dispensing fees), 
payment, and utilization data.28 
Pharmacy Acquisition Cost.  We collected drug acquisition cost data from 
a stratified random sample of pharmacies.29  To obtain these data, we sent 
letters to 120 pharmacies in January 2011.  We asked each pharmacy to 
provide drug acquisition costs by submitting its largest invoice for 
November 2010 from each source of supply.30  Sources of supply include 
wholesalers, chain warehouse distribution centers, and generic 
distributors; and we also obtained data for direct manufacturer purchases.  
We received data from 117 of the 120 sampled pharmacies.  We asked 
pharmacies to report any discounts applicable to the invoices provided.  
See the Appendix for a detailed description of the sampling design.   
Data Analysis 
We reviewed all of CMSs policies and procedures regarding the FUL 
program.  We compared aggregate pharmacy acquisition costs in 
November 2010 to aggregate FUL amounts based on published prices  
(i.e., pre-ACA FUL amounts that were in effect as reported in the first-
quarter 2011 Redbook file) and FUL amounts based on AMPs                   
(i.e., post-ACA AMP-based FUL amounts as reported in the November 
2010 draft CMS file).  First, we identified all drugs associated with FUL 
amounts purchased by sampled pharmacies and totaled the pharmacy 
acquisition costs for these drugs.  Then we estimated how much 
pharmacies would have been reimbursed by Medicaid for these drugs by 
 
27 CMS publicly released the first draft FUL amounts based on AMPs in September 2011; 
however, the agency internally calculated draft FUL amounts based on AMPs starting in 
November 2010.   
28 This file included data from 48 States.  Three States (Alabama, Nevada, and Rhode 
Island) were not included in CMSs data at the time we obtained the file.   
29 The Office of Audit Services collected drug acquisition cost data from the sampled 
pharmacies.  See Review of Drug Costs to Medicaid Pharmacies and Their Relation to 
Benchmark Prices (A-06-11-00002), October 2011.   
30 We defined largest invoice as that with the largest number of legend drug line items.   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  6   
   
multiplying the number of units purchased by FUL amounts based on 
published prices, as well as by FUL amounts based on AMPs, and totaled 
these respective amounts.31  Finally, we compared actual pharmacy 
acquisition costs to estimated reimbursement amounts under both 
methodologies.   
To determine how FULs would change under the ACA, we compared FUL 
amounts based on published prices from the fourth-quarter 2011 Redbook 
file to FUL amounts based on AMPs from the September 2011 draft CMS 
file and calculated the difference for each drug.  We determined the 
number of drugs for which the FUL amount was higher and the number of 
drugs for which the FUL amount was lower under the new methodology.  
We also calculated the median percentage difference between the FUL 
amounts.   
Further, we estimated how much Medicaid expenditures would have been 
reduced in November 2010 if reimbursement had been based on the draft 
FUL amounts from that month.  State Medicaid expenditure data include 
dispensing fees; therefore, we calculated expenditures for the ingredient 
cost portion only.32, 33  Because Medicaid utilization data are reported 
quarterly, we first calculated the quarterly expenditures for ingredient cost 
only and then divided by three to determine monthly expenditures.34  We 
multiplied FUL amounts based on AMPs by the drugs fourth quarter-2010 
utilization, summed the total, divided by three, and compared the estimate 
to actual November 2010 Medicaid expenditures based on ingredient cost 
only.   
Finally, we examined CMSs ability to calculate FUL amounts based on 
AMPs by determining the availability of manufacturer-reported pricing 
data.  See Table 2 for a description of the number of drugs included in 
each portion of our analysis.   
 
31 These totals do not include dispensing fees.   
32 In addition to the three States without any 2010 data, four other States did not have any 
utilization data for the fourth quarter of 2010 and were excluded from this analysis.   
33 We could only calculate ingredient costs for States that had relatively simple formulas 
for determining dispensing fees paid to pharmacies (e.g., $5 for generic drugs).  Thirty-
six of the 44 States included in this analysis had a relatively simple dispensing fee 
formula; we excluded the remaining 8 States from this portion of the analysis.  For the 36 
States, we calculated the total Medicaid ingredient cost for FUL drugs by subtracting the 
total dispensing fees paid from total expenditures in the fourth quarter of 2010.  To 
calculate dispensing fees, we multiplied the States dispensing fee from the fourth quarter 
of 2010 by the total number of prescriptions for each FUL drug.   
34 This calculation assumes utilization was consistent from 1 month to the next.   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  7   
   
                         Table 2:  Number of Drugs Included in Analysis 
Analysis  Number of Drugs 
Comparison of pharmacy acquisition costs to 
601 
FUL amounts based on published prices 
Comparison of FUL amounts based on 
published prices to FUL amounts based on  518 
AMPs 
Comparison of actual Medicaid expenditures to 
estimated Medicaid expenditures had post-ACA 
416 
AMPs served as the basis for FUL amounts 
(ingredient cost only) 
Comparison of pharmacy acquisition costs to 
328 
FUL amounts based on AMPs 
                                 Source:  OIG analysis of CMS and Redbook files, 2012.   
Limitations 
We are not projecting these results to the population of pharmacies in 
November 2010.  The acquisition cost data were for the largest invoices in 
November 2010 and may not necessarily be representative of average 
invoices from sampled pharmacies.  We reported our findings in the 
aggregate and not for each drug because of the small amount of data for 
some drugs collected from sampled pharmacies.  Therefore, we did not 
determine, for individual drugs, whether acquisition costs exceeded FULs.  
We did not verify the completeness or accuracy of self-reported 
acquisition cost data from responding pharmacies.  We did not attempt to 
identify any discounts, rebates, or price incentives not reflected in the 
invoice prices.   
Further, we did not verify the completeness or accuracy of CMSs FUL 
amounts.  The FUL amounts based on AMPs provided by CMS have not 
been used for Medicaid reimbursement.  The number of drugs included in 
each portion of the analysis varied depending upon the availability of data 
in each source for the time periods under review.  The estimated reduction 
in November 2010 Medicaid expenditures was calculated using FUL 
amounts based on AMPs from 1 month and assumes that these FUL 
amounts would remain consistent throughout the quarter.  If FUL amounts 
were higher or lower during the other months in the quarter, the savings 
associated with FUL amounts based on AMPs would have been different.   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency. 
   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  8   
   
FINDINGS 
FUL amounts based on published prices were more 
than four times total pharmacy acquisition costs  
In November 2010, FUL amounts based on published prices were more 
than 4 times greater than sampled pharmacy acquisition costs for            
601 drugs, in the aggregate.  During that month, pharmacy acquisition 
costs for these drugs among sampled pharmacies totaled $139,949; 
pharmacy reimbursement by Medicaid for these drugs would have totaled 
$607,376 using the FUL amounts in effect at the time.35     
FUL amounts based on AMPs were 61 percent lower 
than FUL amounts based on published prices, at the 
median 
CMSs September 2011 draft FUL file and the fourth-quarter 2011 
Redbook file included 518 drugs with FUL amounts based on both       
post-ACA AMPs and published prices.  Implementing the AMP-based 
methodology required by the ACA would lower FUL amounts for most 
drugs.  At the median, FUL amounts based on AMPs were 61 percent 
lower than FUL amounts based on published prices.  FUL amounts were 
lower under the new methodology for 461 of the 518 individual drugs.  
Further, for 72 percent (330 of 461) of these drugs, the FUL amount based 
on AMP is less than half the FUL amount based on published prices.  See 
Table 3 for the range of differences in FUL amounts.   
Table 3:  Comparison of FUL Amounts Based on AMPs to FUL Amounts 
Based on Published Prices  
Difference Between FUL Amounts Based on AMPs and   
FUL Amounts Based on Published Prices  Number of Drugs 
More than 50.01% lower   330 
Between 25.01% and 50% lower   81 
Between 0.01% and 25% lower   50 
Total Drugs for which  FUL amounts based on AMPs < FUL amounts based on published prices        461 
Between 0.01% and 25% higher   21 
Between 25.01% and 50% higher   9 
More than 50.01% higher   27 
Total Drugs for which FUL amounts based on AMPs > FUL amounts based on published prices           57 
     Total  518 
    Source:  OIG analysis of 2011 FUL amounts.   
 
35Actual Medicaid reimbursement for these drugs can be lower because of other cost 
containment measures, such as State MAC programs.  This total does not include 
dispensing fees. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  9   
   
We also calculated the potential reduction in November 2010 Medicaid 
expenditures if reimbursement had been based on post-ACA FULs (i.e., 
FUL amounts based on AMPs) from that month.  We estimate that 
Medicaid expenditures would have been 29 percent ($19 million) lower in 
that month had FUL amounts based on AMPs been used for 
reimbursement.36, 37  Given that this estimate is based only on 36 States 
and includes only the 416 drugs associated with FUL amounts based on 
AMPs in CMSs draft file, total savings would likely be different.   
Even with the reductions resulting from the new 
methodology, FUL amounts based on AMPs would 
still have exceeded pharmacy acquisition costs in the 
aggregate 
Despite the reduction in proposed reimbursement for most drugs,         
post-ACA FUL amounts based on AMPs still exceed sampled pharmacy 
acquisition costs in the aggregate.  For 328 drugs under review, FUL 
amounts based on AMPs were 43 percent higher than sampled pharmacy 
acquisition costs from November 2010, in the aggregate.  During this 
period, pharmacy acquisition costs for these drugs among sampled 
pharmacies totaled $80,922; had acquisition costs for these drugs been 
based on post-ACA FULs (i.e., FUL amounts based on AMPs), 
expenditures would have totaled $115,812.38, 39  In other words, the 
reduced FUL amounts required by the ACA are still greater than pharmacy 
acquisition costs in the aggregate.   
CMS had not completed implementation of            
AMP-based FUL amounts as of August 2012 
CMSs withdrawal of the previous FUL and AMP rules related to the 
DRA took effect in December 2010; the Federal injunction against the 
agency was lifted in the same month.  As a result, CMS was able to begin 
implementation of the ACA-required FUL amounts based on AMPs by 
calculating the new amounts and issuing draft files for review.  However, 
as of August 2012, FUL amounts are still based on published prices.   
 
36 This estimate is based on 1 month of FUL amounts and assumes that they were 
consistent from 1 month to the next.   
37 This total is based on ingredient costs and utilization from 36 States with reported 
Medicaid utilization for the fourth quarter of 2010 and a simple formula for calculating 
dispensing fees (e.g., $5 for generic drugs).  This total includes only the 416 drugs 
associated with an AMP-based FUL amount in CMSs November 2010 draft file.  
Additionally, this total represents one-third (i.e., 1 month) of the quarterly utilization.   
38 We are unable to compare AMP-based FUL amounts to pharmacy acquisition costs for 
individual drugs because of the sample size.   
39 This total does not include dispensing fees.   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  10   
   
Manufacturer reporting of AMP data improved between 2010 
and 2011  
CMSs draft FUL files indicate that manufacturer reporting of AMP data 
improved substantially between 2010 and 2011.  CMS staff attribute the 
increase to manufacturers learning how to calculate post-ACA AMPs.  
Additionally, in accordance with an enforcement initiative announced in 
September 2010, OIG has begun imposing CMPs on certain manufacturers 
for not reporting pricing data (including AMPs) or reporting them late.       
CMSs November 2010 draft file contained FUL amounts based on AMPs 
for 416 drugs.  However, an additional 435 drugs were included in the 
draft file that did not have a FUL amount based on AMPs because 
manufacturers associated with at least one of the national drug codes 
(NDC) did not report AMP data.  
The number of drugs associated with FUL amounts based on AMPs in the 
July and September 2011 draft files increased substantially (719 and                  
826 drugs, respectively).  Conversely, the number of drugs that did not 
have a FUL amount based on AMP because of missing AMP data from 
November 2010 to September 2011 fell 95 percent (from 435 to 22 drugs).  
See Figure 1 for the difference in availability of FUL amounts based on 
AMPs between 2010 and 2011.    
Figure 1:  Availability of FUL Amounts Based on AMPs 
900
826 
800
719 
700
s 600
g
u
r
D500
of  416  435  AMP-Based FUL Amount
r 
be400 Missing AMP Data
m
u
N300
212 
200
100
22 
0
November 2010 July 2011 September 2011
  Source:  OIG analysis of CMS draft FUL files November 2010, July 2011, and September 2011.   
  
 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  11   
   
CONCLUSION AND RECOMMENDATION 
A series of OIG reports consistently found that the published prices used 
to set FUL amounts (and the related Medicaid reimbursement) frequently 
exceeded prices available in the marketplace by substantial margins.  Our 
findings in this report indicate that FUL amounts based on published 
prices exceed not only sampled pharmacy acquisition costs but FUL 
amounts based on AMPs as well, albeit by a much smaller margin.  We 
also found that despite the substantial reduction in proposed 
reimbursement, FUL amounts based on AMPs are still greater than 
sampled pharmacy acquisition costs, in the aggregate.   
CMS has started to implement FUL amounts based on AMPs by releasing 
draft files, but has yet to complete implementation as required by the 
ACA.  During this process, CMS has ensured transparency by releasing 
several draft files for public review and comment.  Given the results of the 
body of OIG work and the potential reduction in Medicaid expenditures, 
we recommend that CMS: 
Complete the Implementation of the Post-ACA AMP-based FUL 
Amounts 
    
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with our recommendation and stated that it plans to 
implement FUL amounts based on AMPs in the near future.  CMS noted 
that FUL reimbursement continues to be established in the aggregate and 
that States maintain the right to adjust reimbursement on a drug-by-drug 
basis.  CMS also stated that 175 percent of weighted monthly AMPs 
should yield adequate reimbursement for pharmacies while achieving 
Medicaid cost savings.   
We will continue to monitor CMSs efforts to implement FUL amounts 
based on AMPs as well as the relationship between pharmacy acquisition 
cost and FULs.        
We did not make any changes to the report based on CMSs comments.  
For the full text of CMSs comments, see Appendix B.   
 
   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  12   
   
APPENDIX A 
 
Detailed Sampling Plan 
We identified a stratified random sample of 120 traditional retail 
pharmacies from a sampling frame of 58,545 pharmacies selected by the 
Office of Inspector Generals Office of Audit Services (OAS).40  The 
sampling frame for this analysis includes all traditional retail pharmacies 
for 49 States and the District of Columbia (Arizona is not included)41 that 
were open for business as of November 10, 2010, and listed in the 
National Council for Prescription Drug Programs dataQ Pharmacy 
Database file.  The sampling frame excludes pharmacies identified as 
government, managed care, or nontraditional.  We selected a stratified 
sample with 4 strata and selected 30 pharmacies from each stratum for a 
total of 120 pharmacies.  See Table A-1 for a description of the sampling 
frame.   
                        Table A-1:  Sampling Frame 
Stratum  Description  Universe Size 
1  Urban independent  17,362 
2  Urban chain  36,452 
3  Rural independent   2,798 
4  Rural chain  1,933 
  Total  58,545 
                Source:  OAS final amended sampling plan for Review of Drug Costs to Medicaid Pharmacies and Their Relation to  
                Benchmark Prices (A-06-11-00002). 
 
 
 
 
40 We are using data that were previously collected for work related to pharmacy 
acquisition cost and Medicaid reimbursement for prescription drugs.  See Review of Drug 
Costs to Medicaid Pharmacies and Their Relation to Benchmark Prices (A-06-11-
00002), October 2011.   
41 Arizona had a managed care system for providing drugs to Medicaid beneficiaries at 
the time OAS collected pharmacy acquisition costs.  After discussions with CMS, OAS 
chose to omit Arizona from its review.   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  13  APPENDIX 8 
Agency Comments 
t.::i-	
,.l.tl'JYICF.t, 
<"""  ""
DEPARTMENT OF HEALTH & HUMAN SERVICES  Centers for Medicare & Medicaid Services 
Administrator 
Washington, DC 20201 
DATE:  AUG  0 8 2012 
TO: 	 Daniel R. Levinson 

Inspector General 

FROM: 	 Marilyn TAI\ceriner 

Acting Atlmmistrator 

SUBJECT: 	 Office of Inspector General (OIG) Draft Report:  "Analyzing Changes to Medicaid 
Federal Upper Limit Amounts" (OEI-03-11-00650) 
The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 
comment on the OIG draft report entitled ''Analyzing Changes to Medicaid Federal Upper Limit 
Amounts. " This report provides an analysis of Medicaid pharmacy reimbursement comparing federal 
upper limit (FUL) amounts based on published prices to FUL amounts based on average 
manufacturer prices (AMP) currently in statute. Further, this report provides analysis of both 
published pricing and AMP-based FUL<> to pharmacy acquisition costs. 
Prior to the enactment of the Deficit Reduction Act of 2005 (DRA), FUI..s were established based on 
commercial compendia pricing. The DRA revised section 1927 of the Social Security Act (the Act) 
to require that the Secretary establish the FUI..s using AMP, a pricing methodology based on actual 
sales data.  However, CMS was enjoined from implementing the FUI..s using this methodology. The 
Affordable Care Act again revised the Act to require that the Secretary calculate the FUL at no less 
than 175 percent of the weighted average of monthly AMPs for pharmaceutically and therapeutically 
equivalent multiple source drugs that are available for purchase on a nationwide basis. Beginning in 
September 2011, we issued draft FUI...s based on the current statutory requirements for review and 
comment only. In addition, we have posted the draft methodology used to calculate the FUL<>.  These 
draft FUL prices are based on the most recently reported monthly AMP and AMP unit data, as 
required by statute. 
OIG Findings 
The OIG found that FUL amounts based on compendia prices were more than four times greater than 
sampled pharmacy acquisition costs for 601 drugs in the aggregate. This confirmed findings from 
prior OIG reports which consistently found that using compendia prices to set FUL amounts 
frequently exceeded prices available in the marketplace by substantial margins. OIG also found that 
the AMP-based FUL amounts were 61 percent lower than FUL amounts based on compendia prices 
at the median. OIG concluded that the AMP-based FUL amounts exceeded sampled pharmacy 
acquisition costs in the aggregate. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11 -00650)  14   
   
Agency Comments (continued) 
   
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  15   
   
ACKNOWLEDGMENTS 
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, Regional Inspector General in the 
Baltimore regional office.   
Edward K. Burley served as the team leader for this study.  Other Office of 
Evaluation and Inspections staff from the Philadelphia regional office who 
conducted the study include Eric Merron.  Central office staff who 
provided support include Althea Hosein, Kevin Manley, Debra Roush, and 
Tasha Trusty.  Office of Audit Services staff who provided support include 
Paul Chesser.  
 
 
 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650)  16   
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.