Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

S  U N D
TATES SE OF  EW  RUG 

P D M
RICING  ATA IN THE  EDICAID 

P
ROGRAM

Daniel R. Levinson

Inspector General 

April 2007

OEI-03-06-00490
 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 all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations.  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.  Specifically, these evaluations focus on preventing fraud, waste, or 
abuse and promoting economy, efficiency, and effectiveness in departmental programs.  
To promote impact, the reports also present practical recommendations for improving 
program operations. 
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers.  The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. OCIG imposes program exclusions and civil 
monetary penalties on health care providers and litigates those actions within HHS. 
OCIG also represents OIG in the global settlement of cases arising under the Civil False 
Claims Act, develops and monitors corporate integrity agreements, develops compliance 
program guidances, renders advisory opinions on OIG sanctions to the health care 
community, and issues fraud alerts and other industry guidance.   E X E C U T I V E   S U M M A R Y  

OBJECTIVE 
To provide an early assessment of whether States are considering using 
new pricing data for Medicaid prescription drug reimbursement. 
BACKGROUND 
All States and the District of Columbia offer prescription drug coverage 
under Medicaid. In 2005, Federal and State expenditures for 
prescription drugs in the Medicaid program reached $41 billion. 
Pursuant to the Deficit Reduction Act of 2005 (DRA), the Centers for 
Medicare & Medicaid Services (CMS) is providing States with   
sales-based drug pricing information that was previously not available 
for their use.  Recent studies have found that published prices, such as 
average wholesale price and wholesale acquisition cost used by States to 
estimate drug acquisition costs, are higher than prices based on actual 
sales transactions.  In July 2006, CMS began sending States average 
manufacturer price (AMP) data monthly.  CMS will also provide retail 
sales price (RSP) data to States starting in early 2007.  However, the 
DRA does not require States to use AMP or RSP data to revise their 
current Medicaid drug reimbursement formulas.  Pursuant to the DRA, 
CMS must promulgate a regulation that clarifies AMP requirements by  
July 1, 2007.1 
To assess whether States are considering using new pricing data for 
Medicaid prescription drug reimbursement, we surveyed Medicaid 
pharmacy directors in all 50 States and the District of Columbia.  We 
asked States whether they are planning to use AMP and/or RSP data 
for Medicaid drug reimbursement. We also asked States to describe any 
factors that are influencing their decisions and indicate what additional 
information they would like to receive before deciding whether to use 
the new drug pricing data. Forty-seven States completed the survey. 
FINDINGS 
Most States have not decided whether to use AMP data for Medicaid 
drug reimbursement. Thirty-nine of forty-seven States have not 
decided whether to use AMP data for Medicaid drug reimbursement. Of 
the remaining eight States, four are planning to use AMP data for 
1 Deficit Reduction Act of 2005, section 6001(c)(3)(B). 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  i  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
Medicaid drug reimbursement but have not yet implemented changes. 
Another three States do not plan to use AMP data. One State indicated 
that it is using AMP data to help determine maximum allowable costs 
(MAC) for most drug products under its MAC program. 
States raised concerns about the AMP data received from CMS. 
States described inconsistencies between the AMP amounts provided by 
CMS and the typical unit definition of the associated drug products. In 
addition, some States reported that several drug products in CMSs data 
file did not have associated AMPs, that there were both unusually high 
and low values (outliers) in the data, or that the AMP data seemed 
unrelated to pharmacy acquisition costs. States also questioned 
whether the vendors that already provide them with drug pricing 
information for claims processing would have access to AMP data. 
States that are undecided about using the AMP would like assurances 
from CMS that the AMP data are accurate and valid. States are 
anticipating CMSs final regulations to clearly explain how the AMP 
will be defined and calculated, including how the AMP would take into 
account price differences among different pharmacy types within the 
retail pharmacy class of trade. 
Few States have decided whether to use RSP data for Medicaid drug 
reimbursement. Of the 47 States, 1 indicated that it plans to use RSP 
data and 3 indicated that they do not. The remaining 43 States have 
not decided whether to use RSP data. 
States had many of the same concerns regarding RSP data that they 
had with AMP data and want assurances that RSP data will be valid 
and accurate. States also want to know how RSP data will be 
determined and defined, how RSP data will be collected, what 
geographic areas the RSP data will represent, and how RSP data will 
compare to other pricing data. 
RECOMMENDATIONS 
Pursuant to the DRA, CMS must promulgate regulations clarifying the 
requirements for the AMP. In a May 2006 report, mandated by the 
DRA, the Office of Inspector General made recommendations to CMS 
regarding the clarification of AMP definitions and the issuance of 
guidance to the States regarding the AMP-related reimbursement 
provisions of the DRA. 
OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  ii  EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY
In this study, we conducted an early assessment of whether States are 
considering using new pricing data for Medicaid prescription drug 
reimbursement. Overall, many States have not decided whether they 
will use either AMP or RSP data for Medicaid drug reimbursement. 
States reported that AMP and RSP data must be accurate, reliable, and 
accessible if they are to use these data in their Medicaid prescription 
drug programs. 
To ensure this, CMS should: 
Explicitly detail AMPs definition and calculation, including the definition 
of retail pharmacy class of trade, when promulgating final regulations 
regarding the AMP. Consistent with our previous recommendations, 
States concerns about how the AMP will take into account different 
types of pharmacies reinforce the need for CMS to clarify requirements 
in regard to the definition of retail pharmacy class of trade. 
Furnish States with interim guidance and/or information regarding AMP 
data. We continue to recommend that CMS issue guidance to States 
that addresses AMP-related reimbursement provisions of the DRA. 
More specifically, based on the concerns raised by States in this review, 
we recommend that CMS provide States with the unit definition for 
drug products in AMP files distributed to States. In addition, before the 
final regulations are published, CMS should work with States to 
address their concerns regarding whether and how data would be 
provided to their vendors for incorporation into their pricing and claims 
processing systems. 
Explicitly detail RSPs definition, calculation, and method of collection 
when distributing RSP data to States. CMS should detail whether and 
how it will take into account differences in prices among pharmacy 
types and within various geographical areas when determining RSPs. 
AGENCY COMMENTSAND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS generally agreed with our recommendations and has taken several 
steps toward addressing them. CMS published a proposed regulation on 
December 22, 2006, addressing the definition, calculation, and method 
of collection for the AMP and reported that it will also address these 
issues when it promulgates the final regulations. CMS also provided 
guidance to State Medicaid directors on December 15, 2006; however, 
the guidance does not address the States concerns regarding whether 
OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  iii  E X E C U T I V E   S U M M A R Y  
and how the new pricing data could be provided to their vendors for 
incorporation into their pricing and claims processing systems. We 
continue to recommend that CMS provide this information to States as 
they consider the use of the new drug prices.  CMS stated that unit 
definitions for AMPs are available on its Web site; however, we 
recommend incorporating this information in the AMP data file to make 
the file a more effective and efficient tool for States. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  iv   T A B L E   O F   C O N T E N T S  

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

Most Stateshave not decided whether touse theAMP  . . . . . . . . .  8

States raised concerns about the AMP data received . . . . . . . . . . .  8

Few Stateshave decided whether to use the RSP. . . . . . . . . . . . . .  9

R E C O MMEN D A T ION S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

Agency Comments andOffice of Inspector General Response . . .  12 

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15
  I N T R O D U C T I O N  

OBJECTIVE 
To provide an early assessment of whether States are considering using 
new pricing data for Medicaid prescription drug reimbursement. 
BACKGROUND 
Pursuant to the Deficit Reduction Act of 2005 (DRA), the Centers for 
Medicare & Medicaid Services (CMS) is providing States with   
sales-based drug pricing information that was previously not available 
for their use.  Recent studies have found that published prices, such as 
average wholesale price and wholesale acquisition cost used by States to 
estimate drug acquisition costs, are higher than prices based on actual 
sales transactions.  In July 2006, CMS began sending States average 
manufacturer price (AMP) data monthly.  CMS will also provide retail 
sales price (RSP) data to States starting in early 2007.  There is the 
potential that States could reduce Medicaid drug expenditures by 
incorporating the new drug pricing data into their reimbursement 
formulas.  This study provides an early look at whether States are 
considering using the new pricing data and it identifies potential 
barriers to States use of the new drug pricing data for Medicaid drug 
reimbursement. 
State Drug Reimbursement Methodologies 
All States and the District of Columbia offer prescription drug coverage 
under the Medicaid program (throughout the report, the District of 
Columbia will be referred to as a State).  Medicaid prescription drugs 
are generally dispensed to beneficiaries through pharmacies that are 
then reimbursed for the drugs by State Medicaid agencies.  In 2005, 
Federal and State expenditures for prescription drugs in the Medicaid 
program reached $41 billion.2 
Federal regulations require, with certain exceptions, that States 
reimburse Medicaid prescription drugs in the aggregate at rates that do 
not exceed the lower of (1) the estimated acquisition cost plus 
reasonable dispensing fees, or (2) the providers usual and customary 
2 Calculated using national summary data for 2005.  Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/SDUD/list.asp. Accessed on 
October 30, 2006. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  1  I N T R O D U C T I O N  
charge to the public for the drug.3  The regulations define estimated 
acquisition cost to be the States best estimate of the price generally 
and currently paid by providers for the drug.4  States have flexibility in 
determining what will constitute an estimated acquisition cost for their 
Medicaid program.  Most States currently use the average wholesale 
price (AWP) discounted by a specified percentage to determine 
estimated acquisition cost. Fewer States use wholesale acquisition cost 
(WAC) plus a markup percentage.5  The AWP and the WAC are drug 
prices that are published in compendia produced by private companies. 
There are several cost containment programs in place that impact 
Medicaid drug spending.  For example, the Federal Upper Limit (FUL) 
program was established to ensure that the Government is a prudent 
purchaser of Medicaid prescription drugs.6  Under the FUL program, at 
the time of our review, reimbursement for drugs that have at least three 
therapeutically equivalent drugs available was capped so that each drug 
is reimbursed at 150 percent of the published price for the lowest cost 
equivalent drug.7  States are required to meet the FUL requirements 
only in the aggregate.  Therefore, a State can pay more than the FUL 
amount for certain products as long as it pays less than the FUL 
amount for other products.  States may also establish Maximum 
Allowable Cost (MAC) programs that stipulate maximum drug prices for 
Medicaid reimbursement.  Compared to the FUL program, States 
generally have more latitude in determining which drugs to include in 
their MAC programs and at what prices to set MACs.  As of fiscal year 
2006, 32 States reported having MAC programs in place to help contain 
their Medicaid drug costs.8 
3 42 CFR  447.331(b).  In December 2006, CMS issued a proposed regulation that 
removes 42 CFR  447.331 but includes the substance of that section in a new section 
designated as 42 CFR  447.512. 
4 42 CFR  447.301.  In the December 2006 proposed regulation, this definition is 
included in a new section designated as 42 CFR  447.502. 
5 Medicaid Prescription Reimbursement Information by State  Quarter Ending 
September 2006.   Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/Downloads/RxReimbursementRate 
September2006Qtr.pdf.  Accessed October 16, 2006. 
6 State Medicaid Manual, section 6305.1. 
7 Section 1927(e)(4) of the Social Security Act and 42 CFR  447.332. 
8 Low Medicaid Spending Growth Amid Rebounding State Revenues, The Kaiser 
Commission on Medicaid and the Uninsured.  Available online at  
http://www.kff.org/medicaid/upload/7569.pdf. Accessed  October 10, 2006. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  2  I N T R O D U C T I O N  
The dispensing fees that States pay in addition to estimated acquisition 
cost currently range from approximately $2 per prescription to $12.50 
per prescription.9 
The Deficit Reduction Act and Medicaid Drug Prices 
Enacted in February 2006, the DRA contains several provisions that 
impact Medicaid reimbursement for prescription drugs.  Pursuant to the 
DRA, AMP and RSP data are to be made available to States for their 
use in Medicaid drug reimbursement.  Furthermore, the DRA modifies 
the way FULs for Medicaid drugs will be calculated. 
Average Manufacturer Prices. Sections 1927(a)(1) and (b)(1) of the Social 
Security Act (the Act) mandate that for Federal payment to be available 
for covered outpatient drugs provided under Medicaid, drug 
manufacturers enter into rebate agreements with the Secretary of the 
Department of Health and Human Services (HHS) and pay quarterly 
rebates to State Medicaid agencies. Under these rebate agreements and 
pursuant to section 1927(b)(3) of the Act, manufacturers must provide 
CMS with the AMP for each of their covered outpatient drugs by the 
national drug code (NDC). Pursuant to section 1927(b)(3)(A) of the Act, 
manufacturers must report AMP data no later than 30 days after the 
last day of the rebate period.  Before the passage of the DRA, CMS did 
not provide AMP data to States.  Although the DRA does not require 
States to use AMP data in their Medicaid drug reimbursement 
formulas, the dissemination of AMP data to States in accordance with 
the DRA would provide States with a new source of pricing data for 
establishing estimated acquisition cost. 
AMP data are based on actual sales transactions and, during the time of 
our review, was defined as 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, after deducting customary prompt 
pay discounts.10  The AMP is calculated as a weighted average of all 
prices for all of a manufacturers package sizes of a covered outpatient 
9 This range excludes dispensing fees for home IV therapy.  Medicaid Prescription 
Reimbursement Information by State  Quarter Ending September 2006.          
Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/Downloads/RxReimbursementRate 
September2006 Qtr.pdf. Accessed October 16, 2006. 
10 Section 1927(k)(1) of the Act.  The DRA (section 6001(c)(1)(C)) modified the AMP 
definition effective January 1, 2007, and requires that AMP calculations be determined 
without regard to customary prompt pay discounts extended to wholesalers. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  3  I N T R O D U C T I O N  
drug sold during a given time period and is reported for the lowest 
identifiable unit of the drug (e.g., 1 milligram, 1 milliliter, 1 tablet,    
1 capsule). 
Section 6001(b) of the DRA mandates that CMS share AMP data with 
States on a monthly basis beginning in July 2006.  As required by the 
DRA, CMS sent AMP data in compact disc (CD) format to States on 
July 5, 2006.11  According to CMS staff, AMP data will be provided to 
the States on an ongoing basis by the 12th of each month. 
The DRA also mandated that the HHS Office of Inspector General (OIG) 
review and report on the requirements for, and the manner in which, 
AMPs are determined under the Act and recommend appropriate 
changes to the Secretary of HHS (hereafter referred to as the Secretary) 
and Congress.12  Pursuant to the DRA, after considering OIGs findings 
and recommendations, the Secretary must promulgate a regulation that 
clarifies AMP requirements by July 1, 2007.13  CMS issued a proposed 
regulation addressing AMP and other issues in December 2006. 
In May 2006, CMS noted pharmacists concerns that AMP data need to 
consistently include prices available to the retail pharmacy class of 
trade before they are used as reference points in setting pharmacy 
reimbursement.  CMS also noted that the more specific definition of 
AMP that is to be included in the forthcoming regulation is not 
reflected in the current AMP data.  CMS stated that it will release 
certain AMP data as the DRA mandates, but only to help States set up 
their billing systems appropriately and not for the purposes of setting 
reimbursements.14 
11 The following disclosure was printed on each CD sent to States, Section 1927(b)(3)(D) 
of the Social Security Act requires that, notwithstanding any other provision of law, these 
AMPs be kept confidential and shall not be disclosed by a State agency (or contractor 
therewith) in a form which discloses the identity of the manufacturer or any prices charged 
for drugs by that manufacturer.  States are restricted from disseminating, distributing, or 
using AMP data, except as specifically authorized by the drug rebate statute. 
12 Deficit Reduction Act of 2005, section 6001(c)(3)(A).  In May 2006, OIG issued a report, 
Determining Average Manufacturer Prices for Prescription Drugs Under the Deficit 
Reduction Act of 2005 (A-06-06-00063). 
13 Deficit Reduction Act of 2005, section 6001(c)(3)(B). 
14 National Community Pharmacists Associations (NCPA) 38th Legislation and 
Government Conference, Remarks of Mark B. McClellan, MD, Ph.D., as delivered to the 
NCPA 38th Legislation and Government Conference, May 22, 2006.  Available online at 
http://www.cms.hhs.gov/apps/media/press/speech.asp?Counter=1866. Accessed July 26, 
2006. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  4  I N T R O D U C T I O N  
Retail Sales Prices. Section 6001(f) of the DRA also contains provisions 
on the collection and dissemination of RSPs to States.  These provisions 
state that the Secretary is permitted to contract with a vendor to collect 
information on RSPs that represent a nationwide average of consumer 
purchase prices, net of all discounts and rebates (to the extent 
information on discounts and rebates is available) for Medicaid covered 
outpatient drugs.15  This vendor will provide RSP data to the Secretary 
on a monthly basis. According to CMS staff, the vendor was selected 
and a kickoff meeting was held on October 5, 2006.  Furthermore, the 
DRA directs the Secretary to provide a means for States to access RSP 
data on at least a monthly basis.16 CMS staff expect that RSP data will 
be made available to States by January or February 2007. 
As outlined in section 6001(f)(3) of the DRA, the Secretary is to compare 
RSP data to Medicaid price data for the 50 most widely prescribed 
Medicaid outpatient drugs by State.  The Secretary is also to ensure 
that annual reports on these rankings are available for review by 
Congress and the States.  The vendor will also produce these annual 
reports and provide them to CMS starting in March 2008.17 
Changes to the Federal Upper Limit. Pursuant to the DRA, the FUL for 
multiple source drugs will be based on 250 percent of the AMP (instead 
of 150 percent of the lowest published price) for the least costly 
therapeutic equivalent effective January 1, 2007.18  The DRA also 
requires that at that time Medicaid drugs have two therapeutic 
equivalents (instead of three) to be included on the FUL list.19 
Related Office of Inspector General Work 
Average Manufacturer Prices and the Deficit Reduction Act. Pursuant to 
DRA requirements, OIG released a report in May 2006, Determining 
Average Manufacturer Prices for Prescription Drugs Under the Deficit 
Reduction Act of 2005 (A-06-06-00063), which concluded, among other 
things, that manufacturers methods of calculating AMPs were 
inconsistent.  Specifically, the report found that manufacturers did not 
consistently define the retail pharmacy class of trade when compiling 
15 Deficit Reduction Act of 2005, section 6001(f)(1).

16 Deficit Reduction Act of 2005, section 6001(f)(1)(E). 

17 The planned timeframe of these annual reports is specified in CMSs request for 

proposals, Survey of Retail Prices; Payment and Utilization Rates; and Performance 
Rankings (RFP-CMS-2006-0010ERD). 
18 Deficit Reduction Act of 2005, section 6001(a). 
19 Ibid. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  5  I N T R O D U C T I O N  
AMP calculations. OIG recommended that the Secretary direct CMS, in 
promulgating AMP regulation, to clarify requirements in regard to the 
definition of retail pharmacy class of trade and the treatment of 
pharmacy benefit manager rebates and Medicaid sales and to consider 
addressing issues raised by industry groups.  OIG also recommended 
that the Secretary direct CMS to issue, in the near future, guidance that 
specifically addresses the implementation of the AMP-related 
reimbursement provisions of the DRA and encourage States to analyze 
the relationship between AMPs and pharmacy acquisition costs to 
ensure that the Medicaid program appropriately reimburses pharmacies 
for estimated acquisition costs.  
Published Prices and Sales-Based Prices. Previous OIG work shows that 
Medicaid reimbursement for prescription drugs often exceeds actual 
pharmacy drug acquisition costs.20  In addition, more recent studies 
have found that published prices (i.e., AWP and WAC) used by States to 
estimate drug acquisition costs are higher than prices based on actual 
sales transactions.21  Specifically, one OIG report found that the AMP is 
59 percent lower than the AWP at the median and 25 percent lower 
than the WAC at the median.22  The report also found that the 
difference between the AMP and published prices currently used by 
States is even more pronounced for generic drugs, for which the AMP is 
70 percent lower than the AWP at the median. 
METHODOLOGY 
Scope and Data Source 
To determine whether States are planning to use the new pricing data 
for Medicaid drug reimbursement, we surveyed Medicaid pharmacy 
directors in all 51 States.   
Data Collection and Analysis 
A survey was e-mailed to State Medicaid pharmacy directors on 
September 7, 2006, and data collection was completed on October 3, 
20 Medicaid Pharmacy  Additional Analyses of the Actual Acquisition Cost of 
Prescription Drug Products (A-06-02-00041, September 2002). 
21 Medicaid Drug Price Comparison: Average Sales Price to Average Wholesale Price 
(OEI-03-05-00200, June 2005) and Medicaid Drug Price Comparisons: Average 
Manufacturer Price to Published Prices (OEI-05-05-00240, June 2005). 
22 Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices 
(OEI-05-05-00240, June 2005). 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA 6  I N T R O D U C T I O N  
2006. Forty-seven pharmacy directors completed the survey, for a 
response rate of 92 percent.   
State pharmacy directors were asked about their review of the AMP 
data provided by CMS, including whether they found the data format 
useful and whether they had noted any potential problems with the 
data file (such as outliers).  We asked pharmacy directors to indicate 
whether their States plan to use AMP data for Medicaid drug 
reimbursement, do not plan to use AMP data, or had not yet decided on 
its use.  Pharmacy directors of States that were planning to use the 
AMP were asked how they plan to use the data, either in their drug 
acquisition cost formulas or State MACs.  These pharmacy directors 
were asked to describe any influencing factors in their decisions to use 
AMP data as well as any obstacles that might prevent their use of the 
data. We asked pharmacy directors what information would help them 
to make decisions about using AMP data for Medicaid drug 
reimbursement.  For pharmacy directors who indicated that their States 
do not plan to use AMP data, we requested reasons that the data would 
not be used.  We also asked pharmacy directors if their States plan to 
use RSP data for Medicaid drug reimbursement when the data became 
available and what information would help them to make decisions 
about using RSP data.  
From the survey data, we determined the frequency counts of closed-
ended survey questions. We reviewed open-ended survey questions and 
categorized the responses for analysis and reporting.  The term State 
is used interchangeably with pharmacy director throughout the report 
to describe the responses of individual State Medicaid pharmacy 
directors who provided information on behalf of their States Medicaid 
programs. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  7  F I N D I N G S  
 F I N D I N G S  
Most States have not decided whether to use  Thirty-nine of forty-seven States 
AMP data for Medicaid drug reimbursement  have not decided whether to use 
AMP data for Medicaid drug 
reimbursement.   Of the remaining eight States, four are planning to 
use AMP data for Medicaid drug reimbursement but have not yet 
implemented changes. Of these four States, two are unsure as to how 
they plan to use AMP data for Medicaid drug reimbursement, one State 
plans to use the AMP for estimated acquisition costs, and another State 
plans to compare its MACs to its current drug prices and to the new 
AMP-based FULs.  Another three States do not plan to use AMP data.  
One State indicated that it is using AMP data to help determine MACs 
for most drug products under its MAC program. 
Fourteen of the thirty-nine States that are undecided reported that they 
would consider using the AMP to determine estimated acquisition costs. 
Four States reported that they would consider using the AMP to 
establish State MACs.  The remaining undecided States either did not 
know or did not indicate how they would consider using AMP data. 
States that are undecided want to perform analysis of AMP data 
Fifteen States that are undecided about using the AMP reported that 
they want to perform an analysis to determine how incorporating the 
AMP into their reimbursement methodology would affect 
reimbursement amounts.  Three of these States would like to further 
determine how a new pricing methodology would compare to current 
methodologies.  States reported that an analysis must be conducted to 
determine the impact of a new reimbursement methodology on State 
budgets, providers, and beneficiaries. 
States raised concerns about the AMP data  Thirty-three of forty-seven States 
received from CMS  expressed at least one concern 
about AMP data. Of the 33 States 
that have data concerns, 30 were undecided about using the AMP, 2 do 
not plan to use the AMP, and 1 plans to use the AMP.  Five States 
described inconsistencies between the AMP units reported by CMS to 
States and the typical unit definition of the associated drug products.  
For example, one of these States commented that there are 
discrepancies between the units used for AMP pricing and the units 
used for other pricing methodologies, and another State commented 
that the AMPs that have been provided appear to have different unit 
definitions than those provided by the drug file vendors.  Nine States 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  8  FF	 II NN DD II NN GG SS  
would like the unit definition on which the AMP is based to be included 
in the AMP files provided by CMS. Five States also questioned whether 
the vendors that already provide them with drug pricing information for 
claims processing would have access to AMP data. States raised other 
concerns about the AMP data they received: 
	 Six States reported that some drug products did not have 
associated AMPs in the data file that CMS provided. For 
example, one pharmacy director reported that approximately 
7 percent (over 2,600) of the NDCs listed have no data supplied. 
	 Four States described problems with both unusually high or low 
values (outliers) in the AMP files. One State pointed out that 
the aberrantly low AMPs that it found in the AMP file are 
problematic because FULs are based on the lowest AMP for the 
drug product. 
	 Four States commented that there was little correlation between 
the AMP data supplied to them and pharmacy acquisition costs. 
For example, one States analysis of AMP data showed that 
values were often far below or far above the average acquisition 
cost they calculate among providers in their State. 
States that are undecided about using the AMP would like assurances 
from CMS that AMP data are accurate and valid. States are 
anticipating CMSs final regulations to clearly explain how the AMP 
will be defined and calculated, including how the AMP would take into 
account price differences among different pharmacy types (e.g., 
independent, chain, long term care, specialty, mail order) within the 
retail pharmacy class of trade. Nine States expressed hesitation about 
using AMP data before CMS has issued final regulations regarding its 
definition. 
Few States have decided whether to use RSP  Of the 47 States, 1 indicated that
data for Medicaid drug reimbursement  it plans to use RSP data and 
3 indicated that they do not. The 
remaining 43 States have not decided whether to use RSP data. Two of 
the three States that do not plan to use the RSP are also not planning to 
use the AMP. Until they received our survey, 16 of the 47 States 
surveyed were not aware that CMS is collecting and will be 
disseminating RSP data. 
OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  9  F	 I N D I N G S  
States want more information about RSP data before making decisions 
States had many of the same concerns regarding RSP data that they 
had regarding AMP data and wanted additional information about the 
RSP: 
	 Twenty States wanted to know how RSP data will be 
determined or defined before they make decisions about their 
use.  Some States emphasized the importance of knowing the 
types of pharmacies that will be included in RSP calculations or 
preferred that RSP data be provided separately for the different 
pharmacy types.   
	 Nine States wanted information about the methods that will be 
used to collect RSP data or how frequently RSP data will be 
updated.  For example, one pharmacy director asked whether 
RSP information will be gathered by phone surveys, walk-in, 
[or] e-mail or whether pharmacies would be aware that they 
are being surveyed. 
	 Seven States reported that they want assurances that RSP data 
are valid and accurate before using them for Medicaid drug 
reimbursement. 
	 Seven States wanted to know the geographical area that will be 
represented by the RSP data, with a few States specifying that 
they want the data to be representative of their States before 
deciding on their use. 
	 Six States commented that, before deciding whether to use the 
data, they would want to evaluate how RSPs compare to their 
current drug prices.  Three States would want to evaluate how 
RSPs compare to AMPs. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  10   R E C O M M E N D A T I O N S  

RECOMMENDATIONS 
Pursuant to the DRA, CMS must promulgate regulations clarifying the 
requirements for the AMP and make the AMP and the RSP available to 
States for their use in Medicaid drug reimbursement.  In a May 2006 
report, mandated by the DRA, OIG made recommendations to CMS 
regarding the clarification of AMP definitions and the issuance of 
guidance to the States regarding AMP-related reimbursement 
provisions of the DRA. 
In this study, we conducted an early assessment of whether States are 
considering using new pricing data for Medicaid prescription drug 
reimbursement.  Overall, many States have not decided whether they 
will use either AMP or RSP data for Medicaid drug reimbursement. 
Many of these States have concerns regarding AMP and RSP data.  
Concerns about the AMP were focused both on the quality of the AMP 
data provided and on the need for clearly defined CMS regulations. 
States want the AMP and the RSP to be defined appropriately and 
consistently before using the data to implement Medicaid drug 
reimbursement changes.  States reported that AMP and RSP data must 
be accurate, reliable, and accessible if they are to use these data in their 
Medicaid prescription drug programs.   
To ensure this, CMS should: 
Explicitly detail AMPs definition and calculation, including the definition 
of retail pharmacy class of trade, when promulgating final regulations 
regarding the AMP.  Consistent with our previous recommendations, 
States concerns about how the AMP will take into account different 
types of pharmacies reinforce the need for CMS to clarify requirements 
in regard to the definition of retail pharmacy class of trade. 
Furnish States with interim guidance and/or information regarding AMP 
data. We continue to recommend that CMS issue guidance to States 
that addresses AMP-related reimbursement provisions of the DRA. 
More specifically, based on the concerns raised by States in this review, 
we recommend that CMS provide States with the unit definition for 
drug products in AMP files distributed to States.  In addition, before the 
final regulations are published, CMS should work with States to 
address their concerns regarding whether and how data would be 
provided to their vendors for incorporation into their pricing and claims 
processing systems. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  11  R E C O M M E N D A T I O N S  
Explicitly detail RSPs definition, calculation, and method of collection 
when distributing RSP data to States. CMS should detail whether and 
how it will take into account differences in prices among pharmacy 
types and within various geographical areas when determining the 
RSP. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS believes the timing of our report caused inconclusive results 
because it would have been premature for States to have made decisions 
about the use of the new drug prices as early as September 2006.  
However, CMS generally agreed with our recommendations and has 
taken several steps toward addressing them. CMS published a 
proposed regulation on December 22, 2006, addressing the definition, 
calculation, and method of collection for the AMP and reported that it 
will also address these issues when it promulgates the final regulations. 
CMS stated that it provided guidance to State Medicaid directors on  
December 15, 2006, concerning AMP issues and provides the unit 
definition of the AMP on its Web site.  CMS also reported it will provide 
sufficient detail regarding the RSP when those data are provided to 
States. The full text of CMSs comments is provided in the Appendix. 
While CMS believes this study was premature, OIG believes it was 
important to conduct this study to provide an early assessment of 
States plans and concerns regarding the new drug pricing data, so that 
CMS could address these concerns in its regulations and other guidance. 
CMS has taken steps toward addressing our first two recommendations; 
however, we recommend additional actions in those areas.  The 
guidance provided by CMS in December does not address the States 
concerns regarding whether and how the new pricing data could be 
provided to their vendors for incorporation into their pricing and claims 
processing systems.  We continue to recommend that CMS provide this 
information to States as they consider the use of the new drug prices.  
Also, while unit definitions are available on CMSs Web site, we 
recommend incorporating this information in the AMP data file to make 
the file a more effective and efficient tool for States. 
  OEI-03-06-00490  STATES  USE OF NEW DRUG PRICING DATA  12   
   
 A P P E N D I X    
 
Agency Comments 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  13   
   
A P P E N D I X    
 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  14   A C K N O W L E D G M E N T S  

This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and Linda M. Ragone, Deputy Regional Inspector 
General. 
Tanaz Dutia and Tara Bernabe served as the team leaders for this 
study. Other principal Office of Evaluation and Inspections staff from 
the Philadelphia regional office who contributed to this report include 
Diane Epstein, and central office staff who contributed include Sarah 
Craren, Kevin Farber, Melissa Montgomery, and Cynthia Thomas. 
  OEI-03-06-00490  STATES USE OF NEW DRUG PRICING DATA  15