U.S. Department of Health & Human Services 
Office of Inspector General 
 
Medicare Part B 
Drug Payments: 
Impact of Price 
Substitutions 
Based on 2016 
Average Sales 
Prices 
 
OEI-03-18-00120 
August 2018 
Suzanne Murrin 
 
Deputy Inspector General 
oig.hhs.gov  Report in Brief  U.S. Department of Health & Human Services 
August 2018 
Office  of Inspector General 
OEI-03-18-00120 
 
 
Medicare Part B Drug Payments: Impact of Price 
Why OIG Did This Review 
Substitutions Based on 2016 Average Sales Prices  When Congress established average sales 
price (ASP) as the basis for Medicare 
Part B drug reimbursement, it also 
What OIG Found 
provided a mechanism for monitoring 
 The Centers for Medicare & Medicaid Services (CMS) lowered Part B 
market prices and limiting potentially 
reimbursement for 16 drugs on the basis of 2016 data. 
excessive payment amounts.  The Social 
 CMSs price-substitution policy saved Medicare and its beneficiaries 
Security Act mandates that the Office of 
$13.1 million over 1 year.  
Inspector General (OIG) compare ASPs 
 Medicare and its beneficiaries could have saved up to an additional 
with average manufacturer prices (AMPs).  
$2.7 million over 1 year if CMS implemented a more expansive 
If OIG finds that the ASP for a drug 
price-substitution policy that, for example, allowed substitution for drugs 
exceeds the AMP by a certain percentage 
that exceeded the 5-percent threshold in a single quarter.  (currently 5 percent), the Act directs the 
Secretary of Health and Human Services 
Exhibit 1:  Results of the Medicare Part B Price-Substitution Policy  to substitute the ASP-based payment 
amount with a lower calculated rate.  
Through regulation, CMS outlined that it 
would make this substitution only if the 
ASP for a drug exceeds the AMP by 
5 percent in the previous 2 quarters or 
3 of the previous 4 quarters.  
Over the last decade, OIG has produced 
annual reports aggregating the results of 
our mandated quarterly ASP-to-AMP 
comparisons.  This annual report 
quantifies the savings to Medicare and its 
beneficiaries that are a direct result of 
CMSs price-substitution policy based on 
2016 ASPs, and this report also offers 
recommendations for achieving additional 
Source:  OIG analysis of average sales price (ASP) and  savings. 
average manufacturer price (AMP) data from 2016 
How OIG Did This Review 
What OIG Recommends 
To determine the effects of the 
Because of the potential for savings to Medicare beneficiaries and the 
price-substitution policy, we calculated the 
program, OIG recommends that CMS expand the price-substitution policy.  
difference between ASP-based payment 
CMS did not concur with the recommendation, instead stating that as 
and AMP-based payment for each drug 
additional data become available and as it continues to gain experience with 
with a price substitution.  We then applied 
the price-substitution policy, it will consider further changes as necessary.  
this difference to the Medicare utilization 
OIG recognizes that CMS, in setting policy for payment substitution, needs to  for each of these drugs.  To account for 
balance safeguarding access to drugs and ensuring that Medicare and its  a 3-quarter lag between the reporting of 
beneficiaries do not overpay for drugs.  To provide greater flexibility and  pricing data and the application of price 
achieve this continued balance, any future expansion of the payment- substitutions, we used drug utilization 
substitution policy could contain a provision that would prevent a price  data for the fourth quarter of 2016 
substitution when there are indications that the substitution amount is below  through the third quarter of 2017 to 
the provider acquisition costs.  calculate the savings based on 2016 data. 
Full report can be found at http://oig.hhs.gov/oei/reports/oei-03-18-00120.asp   
TABLE OF CONTENTS 
BACKGROUND  1 
Methodology  3 
   
FINDINGS   
CMSs price-substitution policy saved Medicare and its beneficiaries $13.1 million over 1 year  5 
Expanding the price-substitution criteria could have generated up to $2.7 million in additional  6 
savings for Medicare and its beneficiaries 
   
CONCLUSION AND RECOMMENDATIONS   
Expand the price-substitution policy  7 
Agency Comments and OIG Response  8 
   
APPENDIXES   
A: Detailed Methodology  9 
B: Agency Comments  10 
   
ACKNOWLEDGMENTS  12 
 
   
BACKGROUND 
Objectives 
1.  To quantify the Medicare savings resulting from price 
substitutionsbased on 2016 average sales prices (ASPs)for 
certain Part B-covered drugs.   
2.  To estimate the financial impact of expanding the Centers for 
Medicare & Medicaid Services (CMS) criteria for price substitution.  
When Congress established ASP as the basis for Medicare Part B drug 
Drug Pricing Terms  reimbursement, it also provided a mechanism for monitoring market prices 
and adjusting ASP-based payments in certain situations.  Specifically, the 
Manufacturers Average Sales 
Price (ASP)  Social Security Act (the Act) mandates that the Office of Inspector 
General (OIG) compare ASPs with average manufacturer prices (AMPs).1  
In general, the manufacturers ASP 
for a unit of drug that is sold is  If OIG finds that the ASP for a drug exceeds the AMP by a certain 
defined as the manufacturers sales  percentage (currently 5 percent), the Act directs the Secretary of Health and 
of a drug to all purchasers in the 
Human Services (after being notified by OIG) to substitute the payment 
United States in a calendar quarter 
amount with the lesser of the widely available market price (if any) or 103 
divided by the total number of units 
percent of the AMP.2, 3  
of the drug sold by the manufacturer 
in that same quarter. 
Payments for Prescription Drugs Under Medicare Part B  
Average Manufacturer Price 
(AMP)  Medicare Part B covers a limited number of outpatient prescription drugs.  
These drugs are usually administered in a physicians office or other 
In general, AMP is defined as the 
average price paid to the  outpatient setting and include, for example, drugs used to treat cancer.  
manufacturer for the drug in the  To obtain reimbursement for Part B drugs, health care providers submit 
United States by (1) wholesalers for 
claims to Medicare contractors using Healthcare Common Procedure 
drugs distributed to retail 
Coding System (HCPCS) codes.  (Hereinafter in this report, we refer to 
community pharmacies and (2) retail 
community pharmacies that  HCPCS codes as drugs.4)  
purchase drugs directly from the 
CMS calculates the payment amount for these drugs using information 
manufacturer. 
provided by manufacturers.  Certain manufacturers must provide CMS 
National Drug Code (NDC) 
quarterly with the ASP and volume of sales for each of their National Drug 
An NDC is a code used to identify a  Codes (NDCs).5, 6  CMS then calculates an ASP-based payment amount for 
drug based on its manufacturer, 
the drug; this amount includes all of the NDCs associated with the drug.7  
product, and package size.   
Under the ASP pricing methodology, the Medicare reimbursement for most 
Healthcare Common Procedure 
Coding System (HCPCS) Code 
 
A HCPCS code is a standardized  1 Section 1847A(d)(2)(B) of the Social Security Act (the Act). 
billing code that is used primarily to  2 Section 1847A(d)(3) of the Act. 
3 Pursuant to  1847A(d)(3)(B)(ii) of the Act, the threshold percentage has been maintained at 5 percent. 
identify products, supplies, and other 
4 A HCPCS code for a drug defines the drug name and the amount of the drug represented by the 
services.  A HCPCS code specifies the 
HCPCS code but does not specify the manufacturer or package size. 
name and the amount of the drug 
5 Section 1927(b)(3) of the Act. 
and may represent one or more  6 See sidebar for the definition of an NDC. 
NDCs.  7 Section 1847A(c) of the Act.  Certain types of sales are exempted from ASP, and ASP is net of any price 
concessions (with limited exceptions). 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2016 Average Sales Prices  1 
OEI-03-18-00120   
Part B drugs is equal to 106 percent of the volume-weighted ASP for the 
drug.8  However, under sequestration legislation, Medicares portion of the 
payment amount for most drugs is reduced by 2 percent.9    
Quarterly reimbursement amounts are not based on current quarter data 
because there is a 2-quarter lag between the sales period for which ASPs 
are reported and the effective date of the reimbursement amounts.  For 
example, manufacturers ASPs from the first quarter of 2016 were used to 
establish reimbursement amounts for the third quarter of 2016. 
Manufacturer Reporting of AMPs 
In addition to providing quarterly ASPs, certain manufacturers must provide 
CMS quarterly with the AMP for each of their NDCs.10  The AMP is generally 
calculated as a weighted average of prices for all of a manufacturers 
package sizes of a drug and is reported for the lowest identifiable quantity 
of the drug, e.g., 1 milliliter, one tablet, one capsule. 
AMP-Based Price Substitutions 
Through regulation, CMS established the criteria under which it would 
implement a price substitution for a drug.  CMS may substitute 103 percent 
of the AMP for the ASP-based reimbursement amount when OIG identifies 
a drug that exceeds the 5-percent threshold in the previous 2 quarters or 
3 of the previous 4 quarters.11  CMS implemented the AMP substitution 
policy in April 2013.  Because CMS believes that comparisons based on 
partial AMP data may not adequately reflect market trends, the agency will 
consider lowering reimbursement amounts only when corresponding AMP 
data is available for each of the NDCs used to determine the published 
reimbursement amount for a drug.12  To prevent the price-substitution 
policy from inadvertently raising Medicare reimbursement amounts, CMS 
does not substitute prices when the substituted amount is greater than the 
ASP-based payment amount calculated for the quarter in which the price 
substitution takes effect.13  CMS also does not substitute prices when the 
Food and Drug Administration (FDA) has identified a drug as being in short 
supply.14  Price substitutions take effect in the quarter after OIG shares the 
 
8 Section 1847A(b)(1) of the Act.  Medicare beneficiaries are responsible for 20 percent of this amount in 
the form of coinsurance. 
9 Part B claims dated on or after April 1, 2013, incur a reduction in payment in accordance with the 
Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012 (see CMS Medicare FFS 
Provider e-News, Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) Program 
Sequestration, March 8, 2013).  Under this mandatory payment reduction, Medicares portion of the 
payment rate for most Part B drugs is reduced by 2 percent.  This reduction does not apply to the 
coinsurance portion of the Medicare allowed amount for Part B drugs. 
10 Section 1927(b)(3) of the Act. 
11 42 CFR  414.904(d)(3). 
12 Ibid. 
13 Ibid. 
14 Ibid. 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2016 Average Sales Prices  2 
OEI-03-18-00120   
results of its most recent pricing comparison and remain in effect for 
1 quarter.15 
Because of the 2-quarter lag between the ASP reporting period and the 
effective date of reimbursement amounts, and the additional quarter that is 
necessary for OIG to complete its pricing comparison, there is a 3-quarter 
lag between the ASP reporting period and the effective date of the price 
substitutions.  As shown in Exhibit 2, price substitutions that took effect in 
Exhibit 2:  Timeline for AMP-Based Price Substitutions in 2016 
First    Manufacturers collected ASPs and AMPs for their drugs sold during the first quarter of 2016  
 
Quarter  
2016 
Manufacturers sent ASPs and AMPs from the first quarter of 2016 to CMS by April 30, 2016 
  Second   CMS sent first-quarter 2016 ASP and AMP data to OIG by end of June 2016 
Quarter  
2016 
  OIG identified the drugs that met the price-substitution criteria and provided them to CMS by August 15, 2016 
Third   CMS published Part B drug reimbursement rates for the fourth quarter of 2016, including price substitutions for 
 
Quarter   drugs that met the criteria based on data from the first quarter of 2016  
2016 
 CMS used AMP-based reimbursements for Part B drugs that met criteria based on data from the first quarter 
Fourth 
  of 2016 
Quarter  
2016 
the fourth quarter of 2016 were based on comparisons of ASPs and AMPs 
from the first quarter of 2016. 
OIG Monitoring of ASPs and AMPs 
To comply with its statutory mandate, OIG has provided CMS with pricing 
comparisons since the January 2005 implementation of the ASP 
reimbursement methodology for Part B drugs.  OIG issued six annual 
reports for the years prior to CMSs April 2013 implementation of the AMP 
price-substitution policy.  Only four of these reports calculated estimated 
savings.  These four reports estimated that Medicare and its beneficiaries 
would have saved $35 million from 2009 through 2012 if CMS had 
implemented the AMP price substitutions.  OIGs 2013 annual report was the 
first to provide annual savings that were a direct result of CMSs 
price-substitution policy.  
Methodology  To determine the effects of the price-substitution policy, we calculated the 
difference between ASP-based payment and AMP-based payment for each 
drug with a price substitution.  We then applied this difference to the 
Medicare utilization for each of these drugs.  To account for a 3-quarter lag 
between the reporting of pricing data and the application of price 
 
15 Ibid. 
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OEI-03-18-00120   
substitutions, we used drug utilization data from the fourth quarter of 2016 
through the third quarter of 2017 to calculate the savings based on 
2016 ASP data.  Appendix A provides a more detailed methodology. 
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. 
   
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OEI-03-18-00120   
FINDINGS 
CMSs  CMS initiated price substitutions for 16 drugs based on 2016 data.  Price 
substitutions for these drugs saved Medicare and its beneficiaries 
price-substitution 
$13.1 million over the 1-year period between the fourth quarter of 2016 
policy saved 
and the third quarter of 2017, as shown in Exhibit 4.  Since CMS instituted 
Medicare and its  its price-substitution policy in 2013, Medicare and its beneficiaries have 
saved $55.4 million, including the $13.1 million for 2016.   
beneficiaries 
$13.1 million over   
1 year 
Exhibit 4:  Price substitutions saved Medicare and its beneficiaries $13.1 million 
    Quarter(s) in Which Price   
Substitutions Occurred 
Drug  Description  Fourth  First  Second  Third  Savings 
Quarter  Quarter  Quarter  Quarter 
2016  2017  2017  2017 
J0636  Calcitriol injection          $31 
J0670  Mepivacaine HCl injection          $802 
J0834  Cosyntropin cortrosyn injection          $2,816 
J0878  Daptomycin injection          $1,605,561 
J1568  Octagam injection          $5,292,644 
J1570  Ganciclovir sodium injection          $89,282 
J2400  Chloroprocaine HCl injection          $243 
J2501  Paricalcitol          $477 
J2700  Oxacillin sodium injection          $3,678 
J7520  Sirolimus oral          $5,967,216 
J9178  Epirubicin HCl injection          $5,640 
J9190  Fluorouracil injection          $92,260 
J9200  Floxuridine injection          $638 
J9209  Mesna injection          $3,941 
Q0166  Granisetron HCl oral          $3,281 
Q0167  Dronabinol oral          $3,875 
          Total  $13,072,385 
Source:  OIG analysis of A P and AMP data from 2016 
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OEI-03-18-00120   
Expanding the  CMS has maintained a cautious approach to price substitutions.  However, 
this cautious approach may restrict the Governments ability to limit 
price-substitution 
potentially excessive payment amounts based on ASPs.  If CMS had 
criteria could have 
expanded its price-substitution criteria to include certain other Part B drugs 
generated up to  in 2016, Medicare and its beneficiaries could have saved up to an additional 
$2.7 million in  $2.7 million over 1 year. 
additional savings  Millions could be saved by expanding the substitution criteria to include 
drugs that exceeded the 5-percent threshold in a single quarter.  
for Medicare and its 
Nineteen drugs with complete AMP data exceeded this threshold in at least 
beneficiaries   
1 quarter of 2016 but were not eligible for price substitution in that quarter 
because they did not meet CMSs duration criteria, i.e., did not exceed the 
threshold in the previous 2 quarters or 3 of the previous 4 quarters.  If the 
19 drugs had been eligible for price reductions on the basis of data from 
a single quarter only, Medicare and its beneficiaries could have saved up to 
an additional $2.7 million between the fourth quarter of 2016 and the 
third quarter of 2017.16  Since 2014, Medicare and its beneficiaries could 
have saved up to an additional $22.2 million, including the $2.7 million for 
2016, if CMS had expanded its criteria to include drugs that exceeded the 
5-percent threshold in a single quarter.   
Previously, CMS has expressed concern that price substitutions based on 
results from a single quarter may represent one aberrant quarter of pricing 
rather than a market trend.17  However, price discrepancies for over half of 
the 19 drugs do not appear to have resulted from isolated fluctuations.  
According to 2015 and 2016 data, 11 of these 19 drugs exceeded the 
5-percent threshold more than once over the 2-year period.18  Specifically, 
8 of the 19 exceeded the threshold in 2 of the 8 quarters, and another 
3 drugs exceeded the threshold three or more times in the 8 quarters.  
If CMS would prefer to employ a more cautious approach than substitution 
based on a single quarter of data, it could expand its price-substitution 
criteria to include drugs that exceed the 5-percent threshold in 2 of the 
previous 6 quarters.  Under this approach, three drugs would have been 
eligible for price substitutions.  Medicare and its beneficiaries could have 
saved an estimated $64,000 on these three drugs. 
   
 
16 These 19 drugs were not identified by FDA as being in short supply and did not have AMP-based 
substitution amounts that were greater than the ASP-based reimbursement amounts in the quarters 
during which the substitutions would have occurred.  Three of these drugs did not have any allowed 
Part B utilization during the reviewed period; therefore, the estimated savings for these drugs was $0.  
17 76 Fed. Reg. 73026, 73288 (Nov. 28, 2011). 
18 This analysis is based on pricing comparison results for the 2-year period between the first quarter of 
2015 and the last quarter of 2016. 
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CONCLUSION AND RECOMMENDATION 
Under the current price-substitution policy, 16 drugs were subject to 
reimbursement reductions on the basis of data from 2016, saving Medicare 
and its beneficiaries $13.1 million between the fourth quarter of 2016 and 
the third quarter of 2017.  Since the inception of price substitution, Medicare 
and its beneficiaries have saved $55.4 million.  Thus, price substitution 
continues to be an important mechanism for CMS to employ in ensuring 
reasonable payments for Medicare Part B drugs.   
CMS could achieve even greater savings for Medicare and its beneficiaries 
by expanding its criteria for AMP-based price substitutions.  OIG has 
previously recommended that CMS expand the price-substitution criteria.  
Since 2014, Medicare and its beneficiaries could have saved up to an 
additional $22.2 million if CMS had expanded its criteria.  CMS stated that it 
did not concur with expanding the price-substitution policy and expressed 
concern that expanding price-substitution criteria may impede physician 
and beneficiary access to drugs.  OIG agrees that access to prescription 
drugs should always be considered when contemplating pricing policies and 
supports current safeguards to prevent substitutions for drugs that FDA has 
identified as being in short supply.  However, OIG continues to believe that 
CMS can achieve a better balance between safeguarding access to drugs 
and ensuring that Medicare and its beneficiaries do not overpay for drugs.  
To provide greater flexibility and achieve this continued balance, any future 
expansion of the payment substitution policy could contain a provision that 
would prevent a price substitution when there are indications that the 
substitution amount would be below provider acquisition costs. 
Therefore, we continue to recommend that CMS: 
Expand the price-substitution policy 
To more effectively limit excessive payment amounts based on ASPs and to 
generate greater savings for Medicare and its beneficiaries, CMS should 
consider broadening its price-substitution criteria to include at least some 
additional drugs.  A more expansive policy might include drugs with 
complete AMP data that exceed the 5-percent threshold in a single quarter.  
However, CMS also could consider a more modest expansion of the policy 
that better captures drugs that repeatedly exceed the threshold.  For 
example, CMS could expand the criteria to include drugs with complete 
AMP data that exceed the 5-percent threshold in 2 of 6 quarters. 
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AGENCY COMMENTS AND OIG RESPONSE 
CMS did not concur with our recommendation, instead stating that as 
additional data becomes available and as it continues to gain experience 
with the price-substitution policy, it will consider further changes as 
necessary.  CMS believes the current policy safeguardswhich identify 
drugs that exceed the 5-percent threshold for 2 consecutive quarters or 
3 of 4 quartersidentify situations in which AMP consistently exceeds ASP. 
OIG continues to believe that expanding the policy can achieve a balance 
between safeguarding access to drugs and ensuring that Medicare and its 
beneficiaries do not overpay for drugs.  Our examination of 2016 data 
shows that if the policy had been expanded to include the 19 drugs that 
exceeded the 5-percent threshold in a single quarter, up to an additional 
$2.7 million could have been saved by beneficiaries and the program.  The 
majority of the 19 drugs we identified for these potential savings exceeded 
the threshold multiple times over a 2-year period.  Expanding the policy to 
capture drugs that exceed the threshold in a single quarter could increase 
the savings to beneficiaries and the program and still ensure access to 
drugs.  
To help ensure that CMS has sufficient information for its consideration 
regarding the price-substitution policy, OIG will continue to provide CMS 
with the results from our quarterly pricing comparisons, along with annual 
reports on the impact of the price-substitution policy.  
For the full text of CMSs comments, see Appendix B. 
 
   
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APPENDIX A:  Detailed Methodology 
We obtained NDC-level ASP data and AMP data for Part B drugs from CMS 
for 2016.  We also obtained ASP-based reimbursement amounts and Part B 
drug utilization for the quarters in which price substitutions occurred, 
i.e., the fourth quarter of 2016 through the third quarter of 2017.  In 
addition, we obtained the drugs that had price substitutions based on data 
from 2016.   
For each quarter of 2016, we calculated the volume-weighted AMP for 
drugs in a manner consistent with CMSs methodology for calculating 
volume-weighted ASPs.  We then compared the volume-weighted ASPs and 
AMPs and identified all drugs with ASPs that exceeded the AMPs by at least 
5 percent.  We also identified drugs that exceeded the 5-percent threshold 
but did not meet CMSs duration criteria for price substitution, i.e., they did 
not exceed the threshold in the previous 2 quarters or 3 of the previous 
4 quarters. 
To calculate the savings associated with price substitutions or potential price 
substitutions19  that could be made by expanding the policy, we first 
reduced AMP-based and ASP-based reimbursement amounts (103 percent 
of the volume-weighted AMP and 106 percent of the volume-weighted ASP, 
respectively) by the 2-percent reduction required by sequestration 
legislation.  We then subtracted the AMP-based reimbursement amount 
from the ASP-based reimbursement amount for the quarter in which the 
price substitution occurred20 and multiplied the difference by the Part B 
utilization for each drug in the respective quarter that the price substitution 
occurred.   
Limitations 
We did not verify the accuracy of manufacturer-reported ASP and AMP 
data, nor did we verify the underlying methodology used by manufacturers 
to calculate ASPs and AMPs.  We also did not verify the accuracy of CMSs 
calculations of reimbursement amounts for Part B drugs. 
Manufacturers are required to submit their quarterly ASP and AMP data to 
CMS within 30 days after the close of the quarter.  We did not determine 
whether manufacturers provided any updated data to CMS at a later date.  
   
 
19 There were two drugs that would have met the criteria to be included in our analysis of potential 
price substitutions.  However, manufacturers subsequently provided CMS with revised AMPs and unit 
types for these drugs.  As a result of these revisions, these drugs no longer met the criteria for 
inclusion in our analysis and we therefore removed them.     
20 AMP-based price substitutions based on data from the first through fourth quarters of 2016 were 
applied in the fourth quarter of 2016 through the third quarter of 2017, respectively. 
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APPENDIX B:  Agency Comments 
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Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2016 Average Sales Prices  11 
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ACKNOWLEDGMENTS 
Conswelia McCourt served as the team leader for this study.  Office of 
Evaluation and Inspections staff who provided support include 
Joe Chiarenzelli, Althea Hosein, Christine Moritz, and Meghan Riggs.  
This report was prepared under the direction of Linda Ragone, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia regional 
office, and Edward Burley, Deputy Regional Inspector General.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To obtain additional information concerning this report or to obtain copies, 
contact the Office of Public Affairs at Public.Affairs@oig.hhs.gov.  
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2016 Average Sales Prices  12 
OEI-03-18-00120   
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