Department of Health and Human Services
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
ME  DICARE PAYMENTS 
 
N A
FOR  EWLY  VAILABLE 
 
 
G D  
ENERIC  RUGS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  Daniel R. Levinson    
  Inspector General 
 
January 2011 
OEI-03-09-00510   
   
 E X E C U T I V E   S U M M A R Y  
OBJECTIVES
 
1.  To estimate the financial impact of the two-quarter reimbursement 
lag on Medicare payments for Part B-covered drugs with newly 
available generic versions. 
2.  To estimate when high-expenditure brand-only Part B-covered 
drugs will likely have first-generic versions reach the market. 
BACKGROUND 
Although Medicare Part D covers most prescription drugs, Part B 
continues to cover a limited number of outpatient prescription drugs.  
Payment for most Part B-covered drugs is equal to 106 percent of the 
average sales price (ASP) for all versions of a drug.  Manufacturers are 
required to submit ASP data to the Centers for Medicare & Medicaid 
Services (CMS) within 30 days after the close of each quarter, and the 
data are used to calculate the payment amount for the following 
quarter.  As a result, there is a two-quarter lag between when sales 
occur and when the payment amount reflects those sales.  This 
reimbursement lag is especially problematic when newly available 
generic drugs enter the market, as their ASPs are often substantially 
lower than their brand counterparts, but payment amounts remain at 
the higher brand level for two quarters or more.   
A previous Office of Inspector General (OIG) report highlighted the 
vulnerabilities of the two-quarter lag by estimating the amount that 
Medicare would have saved if reimbursement had been based on actual 
market sales prices for one high-expenditure Part B-covered drug.  OIG 
recommended that CMS explore options to ensure that payment 
amounts reflect actual market prices in a more timely manner.  CMS 
concurred with our recommendation; however, as of May 2010, CMS has 
yet to make any changes to its reimbursement process. 
For this study, we examined the Medicare payment amounts for 16 Part 
B-covered drugs that we identified as having first-generic versions 
reach the market in 2007, 2008, or the first two quarters of 2009.  For 
each of the drugs, we determined how much Part B spending would 
have decreased had there been no two-quarter lag during the initial 
period of generic availability (i.e., the first three quarters in which 
generics were available).  We then totaled these figures to determine the 
net financial impact of the two-quarter lag on Part B and its 
beneficiaries.  To provide context for the future impact of the             
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E X E C U T I V E   S U M M A R Y  
two-quarter lag, we also requested from the Food and Drug 
Administration (FDA) the estimated date of generic approval for the top 
dollar-volume brand drugs covered under Part B. 
FINDINGS 
Medicare could have saved an estimated $111 million had payment 
amounts immediately reflected generic sales prices for 16 drugs.  
The financial impact of the two-quarter reimbursement lag in the period 
of initial generic availability for 16 newly available generic drugs 
totaled approximately $111 million.  These potential savings accounted 
for 25 percent of total expenditures for these drugs during the same 
period.  It is not just the program itself, but also Medicare beneficiaries 
who feel the financial effect of the reimbursement lag (because of cost 
sharing). 
Furthermore, it may take years for Medicare to realize the full savings 
of generic versions.  The average payment amounts for the drugs under 
review continued to decline beyond the period of initial generic 
availability, ending with an average payment amount 2 years after the 
introduction of generics that was nearly 60 percent less than that of the 
original brand-only payment amount.  Additionally, brand drugs were 
initially 3 times more expensive than their generic versions, on average. 
According to FDA, numerous high-expenditure drugs could have 
first-generic versions approved in the next several years.  According 
to FDA, 26 of the 48 top dollar-volume brand drugs covered under    
Part B either already have or could have generic versions approved for 
the first time in the next several years.  These 26 drugs had combined 
Part B expenditures of over $2.8 billion in 2009.  The remaining           
22 drugs are biologics, which comprise nearly half of all current       
high-dollar brand-only Part B drugs, and (because of recent legislation) 
may have generic versions approved in the future.  Part B spending on 
the top 22 biologics totaled over $5.3 billion in 2009. 
Significant obstacles remain in proactively identifying newly 
available generic drugs.  Although FDA publishes the date of approval 
for first generics, this date is often not an accurate indicator of the entry 
of generic versions into the market because issues such as patent 
litigation and marketing agreements may affect the date of generic 
availability.  Our analysis identified a number of drugs with            
FDA-estimated dates of generic approval that did not coincide with the 
generic market entry dates, including two drugs FDA identified as 
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E X E C U T I V E   S U M M A R Y  
 
having first-generic versions but appear to have never reached the 
market.  For another group of drugs, generic manufacturers failed to 
report ASPs in a timely manner, increasing the difficulty in setting 
payment amounts that accurately reflect sales of newly available 
generic drugs. 
RECOMMENDATION 
This is the second OIG report to identify systemic vulnerabilities in  
Part B as a result of the two-quarter lag in payments for newly 
available generic drugs.  We found that Medicare payment amounts 
were significantly higher than market prices for an extended period for 
the newly available generic drugs under review.  In other words, generic 
versions of these drugs were being administered or dispensed to 
beneficiaries, but Medicare was still paying brand prices.  Although 
other government and privately sponsored prescription drug programs 
are designed to take advantage of lower-priced generic drugs, our 
findings demonstrate that the Part B reimbursement system fails to 
capture these potential savings for at least two quarters. 
With more than half of the top dollar-volume brand drugs covered under 
Part B potentially gaining approval in generic form over the next           
4 years, and the creation under the Patient Protection and Affordable 
Care Act of a new approval pathway for generic biologics, this 
vulnerability will likely continue to grow if CMS does not make changes 
to its Part B payment system.  We therefore recommend that: 
CMS work with Congress to require manufacturers of first generics 
to submit monthly ASP data during the period of initial generic 
availability.  By requiring manufacturers of first generics to report ASPs 
on a monthly basis when the generics first become available, CMS could 
substantially reduce the two-quarter lag and make Medicare payment 
amounts more reflective of actual market prices.  If CMS finds this to be 
an effective means for alleviating the financial impact of the              
two-quarter lag, the agency may wish to consider requiring monthly 
ASP submissions for all Part B-covered drugs.  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS did not concur with our recommendation, citing potential problems 
with manufacturer price submissions and increased administrative 
burdens under a proposed monthly ASP reporting requirement.  CMS 
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E X E C U T I V E   S U M M A R Y  
 
also stated that it believes the two-quarter lag protects Medicare and its 
beneficiaries from unchecked price increases and is an incentive for 
faster generic utilization.   
Because of the two-quarter lag, Part B and its beneficiaries are denied 
significant potential savings when generic versions first become 
available.  Therefore, we believe that the savings from a reduced 
reimbursement lag may outweigh any difficulties with implementing a 
monthly ASP reporting system.  Furthermore, we note that the        
ASP-based reimbursement system (in which all versions of a drug 
assigned to one payment code are paid at the same amount) is a natural 
incentive for manufacturers to limit rapid price increases, as well as for 
providers to utilize generic versions. 
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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
  Medicare could have saved an estimated $111 million had          
payment amounts immediately reflected generic sales prices for        
16 drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
  According to FDA, numerous high-expenditure drugs could have    
first-generic versions approved in the next several years. . . . . . . 15 
  Significant obstacles remain in proactively identifying newly  
available generic drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
 
 
R E C O MMEN D A T ION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 
Agency Comments and Office of Inspector General Response . . . 20 
 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 
  A:  Detailed Methodology for Identifying First-Generic Drugs          
and Their Dates of Market Entry. . . . . . . . . . . . . . . . . . . . . . . 23 
  B:  First-Generic Drugs Included in Our Analysis. . . . . . . . . . . . . 25 
  C:  Medicare Payment Amounts for 16 Newly Available Generic  
Drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 
  D:  Estimated Generic Approval Timeline for the Top                         
26 Dollar-Volume Brand-Only Part B Drugs (Biologics     
Excluded), According to FDA . . . . . . . . . . . . . . . . . . . . . . . . . . 28 
  E:  Top 22 Dollar-Volume Biologics Under Part B. . . . . . . . . . . . . 29 
  F:  Comparison of FDAs ANDA Approval Dates and Actual  
               Generic Entry Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 
  G:  Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 
 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36   
   
 I N T R O D U C T I O N  
OBJECTIVES 
1.  To estimate the financial impact of the two-quarter reimbursement 
lag on Medicare payments for Part B-covered drugs with newly 
available generic versions. 
2.  To estimate when high-expenditure brand-only Part B-covered 
drugs will likely have first-generic versions reach the market. 
BACKGROUND 
In 2009, Medicare spent approximately $11 billion on Part B-covered 
drugs.1  Medicare pays for most prescription drugs covered under Part 
B based on manufacturer-reported average sales prices (ASP).  Because 
payment amounts are determined using ASP data from two quarters 
earlier, it may take 6 months or more for Medicare reimbursement to 
reflect any price changes in the marketplace. 
A previous Office of Inspector General (OIG) report2 found that this     
two-quarter reimbursement lag had negative financial consequences for 
the Medicare program and its beneficiaries (through higher 
coinsurance) when lower-priced generic versions of the cancer drug 
irinotecan first reached the market.  In its comments to that report, the 
Centers for Medicare & Medicaid Services (CMS) concurred with our 
recommendation that the agency explore options that would allow 
payment amounts to more accurately reflect new generic prices.  CMS 
stated that it is interested in any suggestions OIG may have to improve 
the methods used to collect and array data under the ASP system.3  
However, CMS has yet to make any changes that would allow Medicare 
to take advantage of the lower prices of newly available generic drugs in 
a more timely manner.  To that end, this study expands on previous 
work by examining the impact of the two-quarter lag on a broader scale.  
Payment for Medicare Part B-Covered Drugs 
Although Medicare Part D covers most outpatient prescription drugs, 
CMS continues to cover a limited number of outpatient prescription 
drugs and biologicals (hereinafter referred to as drugs) under its Part B 
benefit.  Part B-covered drugs generally fall into the following 
 
1 Part B Analytics Reporting (PBAR) (98 percent of claims reported).  Accessed on       
March 29, 2010. 
2 OIG, Medicare Payment for Irinotecan, OEI-03-08-00310, August 2008. 
3 Ibid. 
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categories:  drugs furnished incident to a physicians service             
(e.g., injectable drugs used in connection with the treatment of cancer), 
drugs explicitly covered by statute (e.g., some vaccines and oral 
anticancer drugs), and drugs used in conjunction with durable medical 
equipment (e.g., inhalation drugs).4   
To obtain Medicare payment for Part B-covered drugs, physicians and 
suppliers submit claims, using the Healthcare Common Procedure 
Coding System (HCPCS) codes, to claims-processing contractors.  The 
HCPCS codes provide a standardized system for describing specific 
items and services provided in the delivery of health care.  In the case of 
prescription drugs, each HCPCS code defines the drug ingredient name 
and billing unit size but does not specify the manufacturer or package 
size.  As a result, HCPCS codes for single-source drugs (i.e., drugs with 
no available generic versions) typically include products from only one 
manufacturer, and HCPCS codes for multiple-source drugs (i.e., drugs 
with generic versions) include products from multiple manufacturers.   
CMS pays for most Part B-covered drugs based on their ASPs.5  The 
ASP is defined as a manufacturers sales of a drug to all purchasers in 
the United States in a calendar quarter divided by the total number of 
units of the drug sold by the manufacturer in that same quarter.6  The 
ASP is net of any price concessions, such as volume discounts,     
prompt-pay discounts, cash discounts, free goods contingent on 
purchase requirements, chargebacks, and rebates other than those 
obtained through the Medicaid drug rebate program.7  Sales that are 
nominal in amount are exempted from the ASP calculation, as are sales 
excluded from the determination of best price in the Medicaid drug 
rebate program.8, 9   
Medicare payment amounts for most Part B-covered prescription drugs 
are equal to 106 percent of the volume-weighted ASPs for the HCPCS 
 
4 68 Fed. Reg. 50428, 50429 (Aug. 20, 2003). 
5 Several Part B drugs, including certain vaccines and blood products, are not paid under 
the ASP methodology. 
6 Section 1847A(c) of the Social Security Act (the Act), as added by the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), P.L. 108-173. 
7 Section 1847A(c)(3) of the Act. 
8 Pursuant to section 1927(c)(1)(C)(i) of the Act, best price is the lowest price available 
from the manufacturer during the rebate period to any wholesaler, retailer, provider, health 
maintenance organization, nonprofit entity, or governmental entity within the United 
States, with certain exceptions. 
9 Section 1847A(c)(2) of the Act. 
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codes.  Medicare beneficiaries are responsible for 20 percent of this 
amount in the form of coinsurance. 
Manufacturer Reporting Requirements 
ASP data.  Manufacturers with Medicaid drug rebate agreements in 
effect must, among other things, provide CMS with pricing information, 
including the ASP for each of their Part B-covered drugs and the 
average manufacturer price (AMP) for each of their Medicaid-covered 
drugs.10, 11  Manufacturers report ASPs for Part B-covered drugs by 
national drug codes (NDC), which are 11-digit numeric codes divided 
into three segments identifying (1) the firm that manufactures, 
distributes, or repackages12 the drug product (i.e., the labeler code);     
(2) the specific strength, dosage form, and formulation of the product; 
and (3) the products package size.  Manufacturers are required to 
provide CMS with the ASP and volume of sales for each NDC within   
30 days of the end of each quarter.13  Because Medicare payment for 
Part B-covered drugs is based on HCPCS codes rather than NDCs and 
more than one NDC may meet the definition of a particular HCPCS 
code, CMS has developed a file that crosswalks manufacturers NDCs 
to HCPCS codes. 
Manufacturers may face civil money penalties or suspension of their 
rebate agreements if they knowingly provide false information about 
their ASPs, fail to report ASP data in the required timeframe, or make 
misrepresentations in reporting ASPs.14  The penalties associated with 
late submissions may be increased by up to $10,000 for each day ASP 
data are not provided.15 
The Two-Quarter Lag in Reimbursement for Part B-Covered Drugs 
CMSs ASP payment methodology has an inherent lag between the time 
when sales occur and when the sales become the basis for payment 
amounts.  Manufacturers must provide CMS with the required ASP 
 
10 For Federal payment to be available for covered outpatient drugs provided under 
Medicaid, sections 1927(a)(1) and (b)(1) of the Act mandate that drug manufacturers enter 
into rebate agreements with the Secretary of Health & Human Services and pay quarterly 
rebates to State Medicaid agencies. 
11 Medicaid rebates are based on AMPs.  ASPs are not used in the calculation of 
Medicaid rebates. 
12 A repackager purchases drugs from manufacturers and typically repackages them into 
smaller quantities. 
13 Section 1927(b)(3) of the Act and 42 CFR  414.804(a)(5). 
14 Sections 1927(b)(3)(C)(i) and (ii) of the Act and  1847A(d)(4) of the Act. 
15 Section 1927(b)(3)(C)(i) of the Act. 
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data for each NDC within 30 days after the close of each quarter.  CMS 
then calculates a volume-weighted ASP for each HCPCS code.  This 
ASP becomes the basis for the payment amount for the following 
quarter.  For example, third-quarter 2009 ASP data from 
manufacturers were due to CMS 30 days after the end of the third 
quarter (i.e., October 30, 2009), which CMS used as the basis for      
first-quarter 2010 Medicare payment amounts.  See Table 1 for a 
description of the reimbursement timeline. 
   Table 1:  ASP-Based Reimbursement Timeline 
Quarter in Which 
Manufacturer Sales Period  ASP Data Due to CMS  ASP-Based Payment 
Amount Applied 
First-Quarter 2009  Apr. 30, 2009  Third-Quarter 2009 
Second-Quarter 2009  July 30, 2009  Fourth-Quarter 2009 
Third-Quarter 2009  Oct. 30, 2009  First-Quarter 2010 
Fourth-Quarter 2009  Jan. 30, 2010  Second-Quarter 2010 
    Source:  OIG analysis of ASP-based reimbursement, 2009. 
The two-quarter lag causes Medicare and its beneficiaries to miss out on 
immediate savings anytime a drugs ASP declines, as the payment 
amount to providers (e.g., physicians and pharmacies) remains at the 
previous (higher) level for two quarters or moreeven though these 
providers are acquiring the drug at the recently reduced price.  This is 
especially relevant when generic versions of a drug first become 
available.  Typically, when the first-generic16 version of a drug enters 
the market, its sales prices are substantially lower than those of the 
drugs brand equivalent.  Additionally, generic versions often quickly 
account for the majority of utilization for that drug, overtaking the more 
expensive brand form.  However, because of the two-quarter lag in the 
ASP calculation, the lower prices and increased utilization of generic 
versions are not immediately factored into calculations of the Medicare 
payment amount for the corresponding HCPCS code.  Therefore, 
provider acquisition costs for these drugs will most likely decrease 
substantially in the first quarter of generic availability, although 
Medicare payment amounts will take at least two quarters to reflect the 
change. 
 
16 Hereinafter, the term first generic will refer to the initial generic version(s) of a drug 
approved under an Abbreviated New Drug Application (ANDA) as listed by the Food and 
Drug Administration (FDA) on the First-Time Generic Drug Approvals list.  FDA, ANDA 
(Generic) Drug Approvals.  Accessed at http://www.fda.gov on April 27, 2010. 
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FDAs Generic Approval Process 
Brand drugs are given patent protection by the U.S. Patent and 
Trademark Office for a certain period (generally 20 years from the date 
of filing).17  Upon approval by FDA, manufacturers are also granted 
market exclusivity for the drug, which may or may not run concurrently 
with the patent protection.18  With certain exceptions, generic drugs 
cannot be marketed before the brand drugs patent and market 
exclusivity expire.19, 20  Before marketing a generic version of a brand 
drug, a pharmaceutical company must obtain FDA approval by 
submitting an ANDA.21  Generally, a generic drug must be the same as 
a brand drug with respect to conditions of use (with certain exceptions), 
active ingredient(s), route of administration, dosage form, strength, and 
labeling.22  In addition, with certain exceptions, the generic drug must 
be bioequivalent to (i.e., perform in the same manner as) the brand 
drug. 
Each month, FDA publishes a list of new first-time generic drug 
approvals (note:  the approval of a drug does not mean that it reaches 
the market).23  Furthermore, the FDA Approved Drug Products 
directory (Drugs@FDA) provides each drugs approval history, 
including whether it was approved under an ANDA, thereby indicating 
a generic drug.  Drugs@FDA is searchable by application number, 
proprietary drug name, and active ingredient.24   
Previous OIG Work 
A 2008 OIG report identified vulnerabilities in the Part B payment 
system when the first-generic versions of a prescription drug enter the 
market.25  In that report, we estimated that providers paid $51.59 per  
20 milligrams of irinotecan (a cancer drug that was available in generic 
 
17 U.S. Patent and Trademark Office. General Information Concerning Patents:  Nature 
of Patent and Patent Rights.  Accessed at http://www.uspto.gov on June 7, 2010. 
18 FDA, Frequently Asked Questions on Patents and Exclusivity.  Accessed at 
www.fda.gov on July 28, 2010. 
19 Ibid. 
20 U.S. Patent and Trademark Office, loc. cit. 
21 21 CFR  314.105(d). 
22 21 U.S.C.  355(j)(2) ( 505(j)(2) of the Federal Food, Drug, and Cosmetic Act);            
21 CFR  314.92 and 314.105(c). 
23 FDA, ANDA (Generic) Drug Approvals.  Accessed at http://www.fda.gov on             
April 27, 2010. 
24 Accessed at http://www.fda.gov on March 26, 2010. 
25 OIG, Medicare Payment for Irinotecan, OEI-03-08-00310, August 2008. 
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form beginning in February 2008) in the first quarter of 2008.  The 
Medicare payment amount in the same quarter was more than double 
that amount ($126.31).  We found that Medicare expenditures could 
have been reduced by an estimated $26 million had Medicare 
reimbursement immediately reflected actual market prices between 
March and June 2008 (the period in which payment amounts were still 
fully based on the brand prices). 
We recommended that CMS explore options (including a possible 
legislative change) that would allow payment amounts to more 
accurately reflect new generic prices.  CMS concurred with our 
recommendation and expressed its commitment to ensuring accurate 
payments for drug products under the ASP methodology, including 
working with OIG to improve the methods CMS uses to collect data.  
However, as of May 2010, CMS has not taken any actions to address 
potential overreimbursement for first generics. 
METHODOLOGY 
Data Sources 
The following data sources were used in our analysis to identify newly 
available generic drugs, calculate the financial impact of the              
two-quarter lag, and estimate when high-expenditure brand-only     
Part B-covered drugs will likely have first-generic versions reach the 
market. 
FDAs monthly list of first-generic drug approvals.  Each month, FDA 
publishes on its Web site a list of first-time generic drug approvals.26  
This list contains the drug name, form, strength, and manufacturer of 
each first-generic drug approved in that month.  It does not list the 
NDCs or HCPCS codes for the newly approved drugs. 
FDAs Approved Drug Products directory (Drugs@FDA).  This FDA 
directory contains the approval history of all drugs, including approved 
labels and whether a drug was approved under a New Drug Application 
or ANDA.27  It does not list any of this information by NDC or HCPCS 
code. 
 
26 FDA, ANDA (Generic) Drug Approvals.  Accessed at http://www.fda.gov on             
April 27, 2010. 
27 FDA, FDA Approved Drug Products.  Accessed at http://www.fda.gov on               
March 26, 2010. 
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FDA staff.  We requested information from staff at FDA relating to the 
generic approval status of certain high-expenditure brand-only drugs 
covered under Part B. 
CMSs quarterly crosswalk file.  Each quarter, CMS publishes a file that 
lists all NDCs that correspond to each HCPCS code for drugs paid under 
Part B.28 
CMSs quarterly Part B payment-limit file.  Each quarter, CMS posts a file 
containing the payment amount by HCPCS code for drugs paid under 
Part B.29 
CMSs quarterly ASP background file.  CMS provides OIG with the ASP 
background file each quarter.  This file contains ASP data (including the 
ASP itself and the number of units sold in the quarter) for all NDCs 
(grouped by their corresponding HCPCS codes) that were reported in 
that quarter.  The data in this file are used to calculate the payment 
amount for each HCPCS code as listed in the quarterly Part B  
payment-limit file. 
CMSs monthly AMP file.  CMS provides OIG with a file containing 
manufacturer-reported AMP data each month.  AMP data30 are used in 
the determination of rebates under the Medicaid drug rebate program 
and are reported by the NDC. 
CMSs labeler file.  CMS publishes a file that lists each manufacturer 
with a Medicaid drug rebate agreement, the agreements effective date, 
and the manufacturers labeler code (i.e., the first five digits of the 
NDC).31 
CMSs Part B quarterly utilization data.  Quarterly Part B utilization data 
for prescription drugs are available through CMSs Part B Extract and 
Summary System (BESS) and PBAR system.  These data provide the 
 
28 CMS, ASP NDC-HCPCS Crosswalk.  Accessed at http://www.cms.gov on May 28, 2010. 
29 CMS, ASP Pricing File.  Accessed at http://www.cms.gov on May 28, 2010. 
30 Section 6001(b)(1)(A) of the Deficit Reduction Act of 2005 requires manufacturers, 
beginning January 1, 2007, to report AMPs to CMS on both a monthly and a quarterly 
basis, with monthly submissions due 30 days after the close of each period.  As generally 
defined in section 1927(k)(1) of the Act, as amended by section 2503(a)(2) of the Patient 
Protection and Affordable Care Act (ACA), P.L. 111-148, the AMP is the average price paid 
to manufacturers for drugs in the United States by wholesalers for drugs distributed to 
retail community pharmacies and by retail community pharmacies that purchase drugs 
directly from manufacturers. 
31 CMS, Participating Drug Companies.  Accessed at http://www.cms.hhs.gov on        
April 28, 2010. 
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total units and total amount reimbursed for each HCPCS code during a 
given quarter or year.  
Micromedexs quarterly Red Book file.  The Red Book file is an         
industry-produced compendium containing drug product information 
and pricing data at the NDC level.  OIG receives updated Red Book data 
each quarter. 
Manufacturer online press releases.  Through manufacturer Web sites and 
online trade publications, manufacturers periodically announce the 
launch of recently approved generic drugs. 
Identification of Newly Available Generic Drugs 
We consulted FDAs monthly list of first-generic drug approvals to 
identify all drugs that had first-generic versions potentially become 
available in 2007, 2008, or the first two quarters of 2009.32  We 
compared this list of drugs to CMSs Part B crosswalk files to determine 
which of these first-generic drugs were covered under Part B and 
reimbursed based on the ASP payment methodology. 
Because issues such as patent infringement litigation prevent some 
FDA-approved first generics from becoming available or available 
immediately after approval, we performed the following additional 
checks to determine whether Part B drugs on FDAs list actually 
reached the market in 2007, 2008, or the first two quarters of 2009: 
1. We first used CMSs quarterly ASP background files to determine the 
number of manufacturers that reported sales of potential             
first-generic drugs covered under Part B and the drugs 
corresponding NDCs.  Because manufacturers are required to submit 
quarterly ASP data to CMS, the background files enabled us to 
identify the number of manufacturers that sold each drug in each 
quarter, thereby confirming whether FDAs first-generic approval 
date coincided with the market entry of new manufacturers for each 
drug.  However, because previous OIG work33 found that 
manufacturers do not always report ASPs in a timely manner, we 
 
32 Because there is often a gap between the time when a drug receives FDA approval and 
when it becomes available on the marketplace, we also included drugs from FDAs list of 
generic drugs approved in November and December 2006 if data sources indicated they did 
not become available until 2007. 
33 OIG, Average Sales Prices:  Manufacturer Reporting and CMS Oversight,                
OEI-03-08-00480, February 2010. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  8   
   
I N T R O D U C T I O N  
 
also took additional steps to identify whether and when a product 
reached the market. 
2. We performed similar checks using CMSs monthly AMP files and 
Micromedexs Red Book file to further confirm the date of the first 
reported sales of each generic drug.  By matching the NDCs reported 
by each generic manufacturer in the ASP background files to the 
NDCs listed in the AMP files, we were able to determine the first 
month that generic sales were reported to CMS.  The same NDCs 
were also used to determine the first quarter that generic 
manufacturers reported product information to Red Book, which 
served as an additional confirmation of the date of generic market 
entry.   
3. As a final check, we reviewed generic manufacturer online press 
releases announcing the availability of generic drugs to confirm the 
date of market entrance. 
This process produced a final list of 16 Part B drugs that had           
first-generic versions appear on the market in 2007, 2008, or the first 
two quarters of 2009.34, 35 
For some drugs, not all of these data sources mentioned above provided 
the same date of generic entry.  With most discrepancies, we chose the 
consensus date among most of these data sources.  When there was no 
clear consensus (3 of the 16 drugs), we deferred to the first full month of 
generic sales listed among all data sources.   
In some instances, these date discrepancies indicated a failure of 
manufacturers to report ASPs, as required.  For example, comparing 
NDCs in the quarterly ASP background files to those listed in the 
 
34 Our analysis initially identified 18 first-generic drugs.  Two drugs (levalbuterol 
inhalation solution unit dose and levalbuterol inhalation solution concentrate) reached the 
market, but coding and payment issues created difficulties with any analysis.  In general, 
for much of the review period, Medicare payment amounts for levalbuterol were not based 
solely on its own ASPs, but also on the ASPs for a different drug (albuterol) as well.  The 
removal of these 2 drugs brought the final number of first generics under review to 16.  See 
the OIG report entitled Beneficiary Utilization of Albuterol and Levalbuterol Under 
Medicare Part B, OEI-03-07-00440, August 2009, for a full description of the numerous 
coding and payment changes for levalbuterol since 2003.  
35 We use the term drug here to describe a unique HCPCS code:  the final list included 
16 unique HCPCS codes, representing 14 drug ingredients (granisetron hydrochloride had 
separate HCPCS codes for injection and tablet forms, and dronabinol oral had separate 
HCPCS codes for 2.5 mg and 5 mg), but because each HCPCS code has its own Part B 
payment amount, we considered the total list of first generics to include 16 drugs. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  9   
   
I N T R O D U C T I O N  
 
monthly AMP files enabled us to determine whether generic 
manufacturers were late to report ASPs.  In such cases, we used the 
CMS labeler files to determine whether those manufacturers had a 
Medicaid drug rebate agreement (and thus were required to submit 
ASPs).  See Appendix A for a detailed description of our methodology for 
identifying first generics. 
Financial Impact of the Two-Quarter Lag During Initial Generic Availability 
To determine the financial impact of the reimbursement lag for the      
16 newly available generic drugs, we first calculated the effect the lag 
had on payment amounts in each quarter.  We did this by comparing 
the Part B payment amount from CMSs payment-limit file in the 
quarter under review to the payment amount from two quarters later.  
Because the payment amount from two quarters later was based on 
sales that occurred during the quarter under review, it served as an 
estimate of what the payment amount would have been had there been 
no lag.  To determine the amount spending would have decreased had 
this payment amount been in effect, we (1) calculated the percentage 
difference between the payment amount during the quarter under 
review and the payment amount from two quarters later and               
(2) multiplied the percentage difference by the total amount reimbursed 
in that quarter.36 
We performed this analysis during the initial generic availability period 
of each drug; i.e., the quarter in which generics were first available in 
the market, as well as the subsequent two quartersyielding three 
quarters of analysis for each drug.37  Although payment amounts are 
always based on ASPs from two quarters previous, the initial effects of 
the lag often extend into the third quarter of generic availability.  For 
example, if a first generic did not become available until the middle of a 
quarter (e.g., February 15, 2008), the volume-weighted ASP for that 
quarter (first-quarter 2008) will not reflect a full period of sales of 
generic versionsand consequently, the drugs Medicare payment 
amount in third-quarter 2008 will only reflect partial generic sales.  As 
a result, the effects of the reimbursement lag will still be felt in the 
third quarter of 2008 (i.e., the third quarter of generic availability).  By 
 
36 We obtained utilization data from BESS and PBAR for each quarter and drug under 
review. 
37 For the purpose of this analysis, a two-quarter reimbursement lag is assumed for all 
newly available generic drugs. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  10   
   
II NN TT RR OO DD UU CC TT II OO NN   
  
including the third quarter of generic availability in our financial 
impact analysis, we were able to account for these extended effects. 
In instances in which a first generic was approved after the first month 
of a quarter (and therefore was available for only a portion of the 
quarter), we used proportional utilization data to reflect the amount of 
time the generics were available in that quarter.38   
Once we estimated the financial impact for each drug, we totaled these 
figures to determine the net financial impact of the two-quarter 
reimbursement lag on Part B and its beneficiaries for the 16 drugs over 
their initial periods of generic availability.  We compared the total 
potential savings to the total amount reimbursed for all drugs over the 
same period and determined the proportion of potentially excessive 
expenditures resulting from the two-quarter lag. 
Comparison of generic and brand ASPs.  The volume-weighted ASP for a 
HCPCS code is calculated using the individual ASPs for all 
corresponding NDCs.  Within each HCPCS code, the ASPs for the brand 
and any generic NDCs often vary considerably (even though the 
Medicare payment amount is the same for all NDCs under a HCPCS 
code).  To highlight the difference between generic-only and brand-only 
ASPs when a generic version first becomes available, we used CMSs 
background files to separately calculate the volume-weighted ASP of 
generic and brand versions of each drug in the first quarter in which the 
generics were available.39 
Analysis of payment levels beyond the period of initial generic availability.  
Even after generics become fully accounted for in the Medicare payment 
amount (i.e., after the period of initial generic availability), the         
two-quarter lag may still have a negative effect if market prices 
continue to fall.  Therefore, in addition to quantifying the financial 
impact of the two-quarter lag during the period of initial generic 
availability, we also tracked Medicare payment amounts for the           
16 drugs for up to 2 years40 after their first-generic versions became 
available.  To do so, we compared the Medicare payment amounts 
during the quarter before generics became available to the payment 
 
38 CMSs AMP files allowed us to determine the first month of generic availability. 
39 Data were unavailable for two drugs. 
40 Because three drugs did not reach the market until first- or second-quarter 2009, 
payment amounts for these drugs were not available for the full 2 years. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  11   
   
I N T R O D U C T I O N  
 
amounts 2 years later.41  By comparing the Medicare payment amounts 
before and after generic sales were reflected in the volume-weighted 
ASPs, we were able to illustrate the long-term effect of generics on 
Medicare payment amounts as well as how the two-quarter lag may 
continue to affect payment after the period of initial generic availability. 
Identification of Future First-Generic Drugs 
We provided FDA with a list of the top 48 brand-only drugs (by 
Medicare expenditure) covered under Part B and requested an estimate 
of when each drug was likely to have first-generic versions receive 
approval.42  To compile the list, we researched the top dollar-volume 
drugs covered under Part B in 2008 to determine which drugs were 
available only in brand form.43  FDA provided the estimated date of 
generic approval for each brand drug based on when an ANDA could 
first be approved. 
Limitations 
Our analysis was based on data provided by FDA and CMS, and we did 
not verify the datas accuracy or completeness.  Additionally, FDAs 
generic approval timeline for brand drugs was based only on the 
estimated date of possible ANDA approval and did not take into account 
other factors (e.g., patent litigation) that may affect the date of actual 
market entry. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections approved by the Council of the Inspectors General on 
Integrity and Efficiency. 
 
41 The 2 years varied for each drug, but our analysis did not extend beyond             
second-quarter 2010. 
42 Originally, we provided FDA with a list of 50 brand-only drugs.  We removed two 
drugs from this list after we determined that first-generic versions had been approved by 
FDA.  In the case of mycophenolate mofetil, our data sources contained no evidence at the 
time we originally contacted FDA that generics had reached the market (although they 
subsequently did during the period covered by our review).  In the case of budesonide,   
first-generic versions had been approved and had briefly reached the market; however, as 
the result of patent litigation, no generic versions remained on the market during the period 
covered by our analysis.  This brought the final list to 48 brand-only drugs. 
43 We used CMSs background files, manufacturer Web sites, and FDAs list of generic 
drug approvals to determine whether a drug was brand-only or available in generic form. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  12   
   
 F I N D I N G S  
Had there been no two-quarter 
Medicare could have saved an estimated     
reimbursement lag during the 
$111 million had payment amounts immediately 
period of initial generic 
reflected generic sales prices for 16 drugs 
availability44 for 16 drugs, we 
estimate that Medicare and its 
beneficiaries could have saved $111 million.45, 46  The potential savings 
accounted for 25 percent of Part B expenditures for these drugs in their 
period of initial generic availability.  Three drugs47 each had an 
estimated $20 million or more in total potential savings over the course 
of the three quarters under review.  See Appendix B for a list of each 
drugs potential savings. 
Because of cost-sharing obligations, Medicare beneficiaries also 
experience the financial effect of the reimbursement lag.  For example, 
when the oral version of the antiemetic drug granisetron first became 
available in generic form in first-quarter 2008, providers who purchased 
the generic version paid, on average, $12.89 per milligram (mg).48  The 
Medicare payment amount that quarter ($50.22 per mg), however, was 
based only on brand versions.  As a result, the 20-percent beneficiary 
coinsurance at this time ($10.04 per mg) was only slightly less than the 
entire acquisition cost of the generic drug. 
Because of the reimbursement lag, it may take years for Medicare to 
realize the full savings of generic versions 
The negative effects of the reimbursement lag are not necessarily 
limited to the first three quarters of generic availability.  Medicare 
payment amounts will exceed actual market prices anytime ASPs 
decline.  Therefore, when ASPs for a drug with new generic versions 
 
44 The period of initial generic availability is defined as the first three quarters generic 
versions were available. 
45 Savings estimates for each drug were based on three quarters of analysis (i.e., the 
period of initial generic availability), but because the 16 drugs became available in generic 
form at different times, the three quarters under review varied from drug to drug. 
46 Because generic manufacturers for two of the drugs in our analysis did not report any 
ASPs, we could not calculate the financial impact of new generic versions of these two 
drugs. 
47 These drugs were mycophenolate mofetil oral, albuterol sulfate/ipratropium bromide 
inhalation solution, and irinotecan injection.  Irinotecan may be atypical in that numerous 
generic manufacturers, rather than one generic manufacturer, reported sales in the period 
of initial generic availability. 
48 The volume-weighted ASP for all versions in the HCPCS code was actually $16.20 per 
mg, because some providers at that point were still dispensing the brand version of the 
drug. 
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F I N D I N G S  
 
continue to fall (possibly because of increasing utilization of generic 
versions or more generic versions reaching the market), the two-quarter 
lag has an extended impact because the Medicare payment amount is 
always slow to reflect the continuously decreasing ASP.   
For example, Figure 1 shows the Medicare payment amounts for the 
antiemetic drug ondansetron hydrochloride over a 2-year period 
beginning in the first quarter of 2007.  During the period of initial 
generic availability (i.e., first-quarter 2007 through third-quarter 2007), 
the Medicare payment amount for ondansetron hydrochloride declined 
by 32 percent.  The payment amount continued to decrease each 
subsequent quarter through the third quarter of 2008, when it was      
91 percent less than the payment amount in the first quarter generics 
were available. 
 Figure 1:  Medicare Payment Amounts and ASPs for Ondansetron 
 Hydrochloride (Oral, 8-mg Version) 
  $40.00
  $35.00
  $30.00
  $25.00
Payment amount
$20.00
  ASP + 6 percent
$15.00
 
$10.00
 
$5.00
 
$0.00
 
                           Generics) 2Q07 3Q07* 4Q07 1Q08 2Q08 3Q08 4Q08
        7 (First 
                          Q0
1
       
                        
                         Source:  CMSs posted Part B payment limits. 
                        * Represents the first quarter in which generic sales were reflected in the payment amount. 
Overall, Medicare payment amounts steadily decreased throughout the 
first 2 years of generic availability for the drugs under review.  On 
average, after 2 years, the payment amounts were nearly 60 percent 
less than the original brand-only payment amounts.49  Because our 
 
49 Two full years of data were available for 13 drugs only; 2 of these 13 drugs were 
removed from the savings analysis because generic manufacturers did not report any ASPs. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  14   
   
F I N D I N G S  
savings analysis included only the first three quarters of each drugs 
generic availability, but the decline in payment amounts continued for 
up to 2 years, the potential savings of $111 million underestimate the 
total potential savings that would result if the two-quarter lag were 
eliminated.  See Appendix C for a full list of payment amounts for each 
drug over a 2-year period. 
On average, brand drugs were initially 3 times more expensive than their 
generic versions 
During the first quarter of generic availability for each drug, the brand 
versions ASPs were, on average, 2.85 times that of their generic 
equivalents.50  For 1 drug, the brand ASP was over 10 times that of the 
generic equivalent in the same quarter. 
For three drugs in our analysis, brand versions were priced lower than 
their generic equivalents in the first quarter of generic availability.  
However, the payment amounts for all three drugs still showed gradual 
declines, resulting in potential savings for each.  For example, in the 
first quarter of generic availability, the volume-weighted ASP for brand 
sumatriptan was over 17 percent lower than that of the generic 
versions.  By two quarters later, however, the generic ASP had dropped 
59 percent and the brand ASP had dropped 23 percent, resulting in a 
decrease in overall volume-weighted ASP of 47 percent.  This reflected 
an overall trend in our analysis, as the entry of first-generic versions 
resulted in a decline in prices over time, whether because of the 
emergence of lower-priced generics or the lowering of brand prices. 
 
According to FDA, 26 of the        
According to FDA, numerous high-expenditure 
48 brand-only drugs with the 
drugs could have first-generic versions 
highest Part B expenditures have 
approved in the next several years 
had or may have generic versions 
approved for the first time in the next several years.  Generic versions of 
these 26 drugs are expected to gain approval in gradually increasing 
numbers through 2014.51  These 26 brand drugs had combined Part B 
expenditures of over $2.8 billion and accounted for 25 percent of Part B 
 
50 Data were available for 12 drugs only. 
51 Specifically, 4 of the 26 drugs have become generic since our review began; 4 drugs are 
currently eligible for generic approval; an additional 3 drugs may become generic beginning 
in 2011; 13 drugs may become generic beginning in 2012; 1 drug may become generic 
beginning in 2013; and 1 drug may become generic beginning in 2014. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  15   
   
F I N D I N G S  
drug payments in 2009.  If and when these 26 drugs become available in 
generic form, their payment amounts will be subject to the same two-
quarter lag that exists under the ASP-based system. 
FDA could not provide exact dates for the expected generic approval of 
these drugs.  Instead, it gave an estimate of the earliest possible date of 
ANDA approval.  The date of actual market entry may differ from this 
estimate, as external factors, such as patent litigation, may prolong the 
introduction of generic versions beyond the date of ANDA approval.  See 
Appendix D for a list of these 26 brand-only Part B-covered drugs and 
their FDA-estimated generic approval times. 
Nearly half of the current high-dollar brand-only Part B drugs are biologics; 
the ACA recently created a pathway for generic approval of biological 
products 
The remaining 22 of the top 48 brand-only Part B-covered drugs are 
biologics, including the 7 Part B drugs with the highest Medicare 
expenditures in 2009.  Prior to the passage of the ACA, no pathway 
existed for the approval of generic versions of biologics; however, section 
7002 of the ACA provides for approval of biosimilars (i.e., generic 
biologics).  As a result, generic forms of these 22 drugs may gain 
approval in the future.52  In 2009, these 22 biologics accounted for over 
$5.3 billion in Part B spending.  See Appendix E for a list of the top 22 
biologics under Part B. 
 
Because of issues such as patent 
Significant obstacles remain in proactively 
litigation and marketing 
identifying newly available generic drugs
agreements, the date of FDAs 
approval of generic versions often does not coincide with the date of 
actual generic market entry.  In fact, 3 of the 16 generic drugs in our 
analysis did not reach the market until at least 6 months after FDAs 
date of generic approval.  See Appendix F for a comparison of the dates 
of ANDA approvals and the dates of actual generic entry. 
Two additional drugs not included in our analysis (gemcitabine and 
torsemide) were listed by FDA as having had first-generic versions 
approved during our timeframe (i.e., between first-quarter 2007 and            
 
52 Because of barriers to market entry, the complexities of manufacturing these products, 
and a slightly different payment methodology, biologics may not show the same degree of 
decline in payment amounts when generic versions reach the market, compared to the 
drugs identified in this report. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  16   
   
F I N D I N G S  
 
second-quarter 2009), but no generic versions appeared to have reached 
the market as of the fourth quarter of 2009.53  In the case of another 
drug (budesonide), generic versions were approved by FDA and reached 
the market for a few days, but as a result of patent litigation, generic 
versions ceased being marketed during the period under review.54  
These issues highlight the complications in predicting when generic 
versions are likely to become available, making it difficult to anticipate 
changes in ASPs.  
For a number of drugs, generic manufacturers were late to report ASPs or 
did not report ASPs at all 
The first-generic ASPs for two drugs (albuterol sulfate/ipratropium 
bromide inhalation solution and fomepizole injection) were reported one 
quarter after the actual generic entry date (see Table 2).55  Generic 
manufacturers for two other drugs never reported ASPs to CMS, despite 
the drugs becoming available in generic form.56 
All four drugs with late or unreported generic ASPs were sold by generic 
manufacturers that had Medicaid drug rebate agreements with CMS at 
the time of their market entry and were required to report ASPs in the 
first quarter in which sales occurred.  In instances in which ASPs are 
reported a quarter late or not at all, the Medicare payment amounts 
take even longer to reflect sales of generics.  Had the manufacturers of 
these newly available generic drugs reported ASPs in a timely fashion, 
the potential savings to Part B identified in our analysis could have 
been even greater. 
 
 
 
 
53 Research into CMSs background files and manufacturer press releases yielded no 
evidence of generic versions. 
54 In 2009, Medicare and its beneficiaries paid $265 million for budesonide.  According to 
the settlement agreement with a generic manufacturer, generic budesonide was allowed to 
be marketed again starting on December 15, 2009.  Accessed at http://www.tevapharm.com 
on July 1, 2010. 
55 The manufacturer-reported ASPs for these drugs were determined to have been 
submitted late based on the fact that generic manufacturers reported NDCs in the monthly 
AMP files in the quarter before ASPs were reported in the background files for those same 
NDCs. 
56 No generic ASPs were reported as of the fourth quarter of 2009.  We will refer the 
manufacturers of these two drugs to CMS and work with the agency to undertake 
appropriate action. 
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F I N D I N G S  
 
  Table 2:  First Generics With ASP Reporting Issues 
Period Covered 
FDA Generic  Estimated Actual 
HCPCS  Drug  by First Reported 
Approval Date  Generic Entry Date  Generic ASP1 
Albuterol sulfate/
J7620  ipratropium bromide inh. soln.  Dec. 21, 2006  JulySept. 2007  4Q 2007 
J1451  Fomepizole inj.  Dec. 14, 2007  Jan. 2008  2Q 2008 
Q01672  Dronabinol oral, 2.5 mg  June 27, 2008  July 2008  (none listed)3 
Q01682  Dronabinol oral, 5 mg  June 27, 2008  July 2008  (none listed)3 
   Source:  FDA's ANDA (Generic) Drug Approvals and OIG analysis. 
                                                                1 Based on the first appearance of generic manufacturer NDC(s) in the ASP background file.  See Appendix A for a 
                                           description of this analysis. 
                                         2 These drugs were not included in our potential savings analysis. 
    3 No generic ASPs were reported as of fourth-quarter 2009. 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  18   
   
R E C O M M E N D A T I O N S  
 R E C O M M E N D A T I O N  
 
This is the second OIG report to identify systemic vulnerabilities in  
Part B payments for prescription drugs as a result of the two-quarter 
lag in reimbursement.  We found that payment amounts were 
significantly higher than market prices for an extended period for the 
newly available generic drugs under review.  In other words, during the 
period of initial generic availability, generic versions of these drugs 
were being administered or dispensed to beneficiaries, but Medicare 
was still paying the brand prices. 
Although other government and privately sponsored prescription drug 
programs are designed to take advantage of lower priced generic drugs 
(e.g., mandatory generic substitution policies), our findings demonstrate 
that the Part B reimbursement system fails to capture these potential 
savings for at least two quarters.  CMS has expressed interest in 
exploring options to improve its reimbursement process, but it has yet 
to make specific changes.  With more than half of the top dollar-volume 
brand drugs covered under Part B potentially gaining approval in 
generic form over the next 4 years, and the creation under the ACA of a 
new approval pathway for generic biologics, this vulnerability will likely 
continue to grow if CMS does not make changes to its Part B payment 
system.   
We therefore recommend that: 
CMS work with Congress to require manufacturers of first generics to 
submit monthly ASP data during the period of initial generic availability 
If generic manufacturers were required to submit ASP data by the end 
of each month during the period of initial generic availability, CMS 
could develop a more appropriate drug payment amount that reflects 
those generic sales, and set that payment amount for the following 
quarter.  This would substantially reduce the two-quarter lag and would 
make payment amounts more reflective of actual market prices for 
newly available generic drugs, thereby taking advantage of their lower 
prices.  CMS could also apply the requirement to manufacturers of 
generic biologics, once these products begin to be approved. 
Our findings also demonstrate that the vulnerability posed by the     
two-quarter lag is not limited to periods of initial generic availability, as 
Medicare payment amounts will exceed actual market sales any time 
ASPs decline.  Therefore, if CMS finds that the implementation of a 
monthly ASP reporting requirement for first generics helps alleviate the 
financial impact of the two-quarter lag, the agency may wish to consider 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  19   
   
R E C O M M E N D A T I O N  
transitioning to a monthly ASP reporting system for all Part B-covered 
drugs. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS did not concur with our recommendation.  CMS stated that 
requiring manufacturers to submit monthly ASP data would not be 
feasible for either manufacturers or CMS, and the agency cited the high 
rates of manufacturer price restatements for monthly AMPs (in contrast 
to quarterly ASPs) as evidence of the administrative burden of monthly 
reporting on manufacturers.  CMS noted that OIG had identified a 
number of manufacturers that failed to submit quarterly ASP data, as 
required, and that this problem could be exacerbated by monthly 
reporting requirements.  The agency recommended that OIG contact 
these manufacturers to determine why ASPs were not reported and 
whether any penalties are warranted.  CMS went on to state that it is 
developing a process to identify manufacturers that do not submit 
quarterly ASPs in a timely manner, and then refer these manufacturers 
to OIG when appropriate.   
CMS also supported the two-quarter lag from a policy perspective, 
stating that (1) the lag protects Medicare and its beneficiaries from 
unchecked price increases, as manufacturers may limit raising prices 
based on their awareness of potential provider reimbursement issues, 
and (2) the lag leads to the more rapid utilization of generics, as 
providers have an incentive to quickly switch to lower-priced versions 
during the limited period when the payment spread is at its highest.  
CMS also described methods that the agency had considered to lessen 
the two-quarter lag, and it contended that any policy implementing 
these approaches would be technically infeasible or lead to more 
inaccurate and unstable payment rates. 
Although the administrative feasibility and compliance burden of any 
new reporting requirements should be taken into account, OIG believes 
that the cost savings for Medicare and its beneficiaries that would be 
achieved by reducing the current reimbursement lag may outweigh any 
potential issues for CMS and manufacturers.  Regarding the latter, OIG 
is working closely with CMS to improve compliance with price-reporting 
requirements and recently issued an advisory bulletin notifying 
manufacturers of a new OIG enforcement initiative that addresses late 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  20   
   
R E C O M M E N D A T I O N  
 
and missing data.  As part of this initiative, OIG will consider pursuing 
penalties for manufacturers that fail to report ASPs. 
Furthermore, we do not believe the best protection against price 
inflation should be a reimbursement system that is slow to reflect 
market trends, or that the best encouragement for generic substitution 
is one that causes Medicare and its beneficiaries to pay substantially 
more than provider costs.  Rather, the nature of the volume-weighted 
ASP-based reimbursement system itself (in which all NDCs assigned to 
one HCPCS code are paid at the same amount) is an incentive for 
manufacturers to limit rapid price increases, as well as for providers to 
utilize generic versions.  Yet, because of the two-quarter lag, Part B and 
its beneficiaries are denied significant potential savings when these 
generic versions first become available.  Although we appreciate CMSs 
consideration of alternative price reporting timelines, we note that the 
methods outlined by CMS in its comments are not the only possible 
approaches.  Therefore, the agencys conclusions about feasibility and 
price stability may not apply to other methods that could be used to 
reduce the reimbursement lag.   
CMS also expressed concerns with our savings estimate.  The agency 
stated that: 
  it is not clear from the report that the potential savings of           
$111 million are not annualized savings;   
  almost 95 percent of our estimated savings are attributable to three 
drugs, and therefore not representative of Part B pricing trends 
overall;  
  the savings estimate of $111 million assumes that the lag would be 
completely eliminated, which is administratively impossible; and 
  OIGs finding regarding the future availability of generic biologics 
implies significant potential savings; however, it is uncertain that 
the two-quarter lag would cause payment gaps for these particular 
products. 
As we state in both the methodology and findings sections of the report, 
our overall savings estimate is not intended to be an annualized figure; 
rather the $111 million represents the estimated savings had there been 
no two-quarter lag during the period of initial generic availability     
(i.e., up to three quarters) for 16 drugs.  Because our findings show that 
the ASPs for these drugs continued to drop beyond the three quarters of 
analysis, our estimated savings likely would have been significantly 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  21   
   
R E C O M M E N D A T I O N  
 
greater had we calculated the total cost of the two-quarter lag for the 
entire period from January 2007 to June 2009.   
In addition, CMS is correct that three drugs account for the vast 
majority of the $111 million in potential savings.  However, we disagree 
that this means that our results are not representative.  In 2009,         
64 HCPCS codes accounted for 90 percent of the $11 billion in 
expenditures for  Part B drugs, with only 13 of these codes representing 
the majority (52 percent) of spending.  Therefore, it follows that our 
estimates would be largely driven by the savings attributable to the few 
high-dollar drugs that had new generic versions become available 
during the period under review.  Our findings also illustrate that this 
trend is likely to continue, as 26 brand drugs representing over         
$2.8 billion and 25 percent of Part B spending may become generic in 
the next several years.   
Furthermore, we realize that it may be impossible to completely 
eliminate the reimbursement lag, and that our savings estimate 
presents a best-case scenario.  However, given the high cost and 
substantial expenditures for many Part B drugs, any reduction in the 
two-quarter lag would lead to significant savings to the program and to 
Medicare beneficiaries in the form of reduced coinsurance. 
Finally, even though the two-quarter lag may or may not affect generic 
biologics in the same manner as other Part B drugs, the fact that 
Medicare and its beneficiaries spent $5.3 billion on just 22 biologic 
products in 2009 means that any delay in taking advantage of even 
slightly less expensive generic versions would have a profound impact 
on the program and its beneficiaries. 
For the full text of CMSs comments, see Appendix G. 
 
 
 
 
 
 
 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  22   
   
 A P P E N D I X ~ A  
Detailed Methodology for Identifying First-Generic Drugs and 
Their Dates of Market Entry 
1. The Food and Drug Administrations (FDA) monthly list of first-generic drug 
approvals.  We first compiled a list of all drugs listed under FDAs 
first-generic drug approvals for all months between January 2007 
and June 2009.  Because we were interested in identifying drugs 
which became available within our timeframe, we also included 
drugs in this analysis that were approved within 2 months before our 
timeframe (i.e., November 2006) in case any of those drugs actually 
hit the market starting in January 2007.  The FDA list provided the 
drug name, form, strength, and manufacturer but did not list the 
Healthcare Common Procedure Coding System (HCPCS) code of each 
drug.  Therefore, we had to search the Centers for Medicare & 
Medicaid Services (CMS) crosswalk files by drug name to identify 
the drugs HCPCS code and to determine whether the FDA-listed 
drug was covered under Part B.  If a drug name listed by FDA did 
not clearly match that in the crosswalk file, we did not include it in 
the analysis. 
2. CMSs quarterly background files.  Once we had determined each drugs 
HCPCS code, we searched the background files by HCPCS code to 
identify all manufacturers that reported average sales prices (ASP) 
for each drug in all quarters in our analysis.  Because the first five 
digits of a national drug code (NDC) denote the manufacturer, we 
were able to use the NDCs listed in the background files to identify 
the number of unique manufacturers per drug.  We then ran this list 
of NDCs against the Red Book to exclude any NDCs that the Red 
Book identified as repackagers.  We also excluded any NDCs that 
CMS had flagged in the background file as being problematic or 
excluded from the ASP calculation in that quarter.  Once we repeated 
this process in each quarter, we were able to see when a drug went 
from one manufacturer to multiple manufacturers, thereby 
indicating the entry of generic versions.  The background file also 
lists a variable to denote whether the drug is a brand or generic 
version, and this was used as an additional check to confirm that the 
new manufacturer was marketing a generic version rather than a 
competing brand version. 
3. CMSs monthly average manufacturer price (AMP) files.  We used the 
monthly AMP files to confirm the date of first-generic entry.  Because 
the AMP files list only NDCs and not HCPCS codes, we had to rely 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  23   
   
A P P E N D I X   ~   A  
 
on the NDCs listed in the background files to identify NDCs in the 
AMP files. 
4. Red Book.  We repeated the same process used in the AMP analysis 
to identify the earliest appearance of an NDC in the Red Book.   
5. Manufacturer press releases.  We researched manufacturer press 
releases and Web sites to confirm generic drug NDCs and dates of 
market entry. 
There were often discrepancies in the dates of generic entry given by the 
above data sources.  In most instances of discrepancies, we chose the 
consensus when most of these data sources were in agreement on the 
date of market entry.  When the background file was the only data 
source to report a different date, we took this to mean that the 
manufacturer was late to report ASPs in the background file.  In 
instances in which there was no clear consensus (3 of the 16 drugs), we 
deferred to the earliest listed generic market entry date among all data 
sources.  For example, if a drug was listed in the background files 
starting in first-quarter 2008 but was not listed in the AMP files until 
May 2008, we assumed the date of generic market entry was the first 
quarter of 2008.  If it was not clear whether a drug had first-generic 
versions become available within our timeframe, it was not included in 
the analysis.  We also excluded from our savings analysis drugs from 
manufacturers that failed to report any generic NDCs in the 
background files.   
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  24   
   
 A P P E N D I X ~ B  
 
 
 Table B-1:  First-Generic Drugs Included in Our Analysis 
Part B Expenditures During  Potential Savings During 
HCPCS  Brand  First Generic 
Code  Drug Name  Name  Entry Date1  the ThreGee nQeuraicrt Aervsa oilaf bIniliittiya2l   Initiatlh Ge eTnhereriec  QAuvaairltaebrsil iotyf  
Amifostine, inj.,   
J0207  500 milligrams (mg)  Ethyol  May 2008  $8,479,381  $1,364,634 
Cefepime inj.,  
J0692  500 mg  Maxipime  Jan.Mar. 2008  $567,286  $48,719 
Epoprostenol inj.,   
J1325  0.5 mg  Flolan  May 2008  $19,576,492  $66,109 
Fomepizole inj.,  
J1451  15 mg  Antizol  Jan. 2008  $23  -$2 
Granisetron inj., 
J1626   0.1 mg  Kytril  Jan. 2008  $13,040,208  $1,816,964 
Sumatriptan 
J3030  Succinate inj., 6 mg  Imitrex  Feb. 2009  $957  $75 
Mycophenolate 
Mofetil oral,  
J7517  250 mg  Cellcept  May 2009  $132,035,240  $28,958,160 
Albuterol Sulfate/ 
Ipratropium   
Bromide inh. soln., 
J7620  2.5 mg/0.5 mg  Duoneb  JulySept. 2007  $165,624,799  $32,073,194 
Irinotecan inj.,  
J9206  20 mg  Camptosar  Mar. 2008  $90,705,689  $44,131,109 
Melphalan inj.,  
J9245  50 mg  Alkeran  June 2009  $277,347  $9,909 
Pentostatin inj.,  
J9268  10 mg  Nipent  Aug. 2007  $3,915,369  $273,111 
Granisetron oral,  
Q0166  1 mg  Kytril  Jan. 2008  $649,379  $375,497 
Ondansetron oral,   
Q0179  8 mg  Zofran  Jan.Mar. 2007  $4,296,612  $1,859,387 
Fosphenytoin inj.,   
Q2009  50 mg  Cerebyx  Aug. 2007  $61  $48 
Dronabinol oral,  
Q01673  2.5 mg  Marinol  July 2008  (n/a)  (n/a) 
Dronabinol oral,  
Q01683  5 mg  Marinol  July 2008  (n/a)  (n/a) 
          Total  $439,168,842  $110,976,913 
  Source:  Office of Inspector General analysis of newly available generic drugs, 2009. 
  1 For some drugs, we could not determine from the available data the specific month in which generics first became available.  For these drugs, we 
    provided the first quarter of generic availability (e.g., JanuaryMarch 2008).  
  2 Part B Analytics Reporting (98 percent of claims reported).  Accessed on March 25, 2010. 
  3 Generic manufacturers for these two drugs did not report any average sales prices and were therefore not included in our savings analysis. 
 
 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  25   
   
 A P P E N D I X ~ C  
 
   Table C-1:  Medicare Payment Amounts for 16 Newly Available Generic Drugs 
J0207  J0692  J1325  J1451  J1626  J3030  J7517  J7620 
Quarter  (2Q 2008)1  (1Q 2008)  (2Q 2008)  (1Q 2008)  (1Q 2008)  (1Q 2009)  (2Q 2009)  (3Q 2007) 
Q0 
(Brand Only) 
Payment 
 
Amount  $496.281  $8.026  $14.526 $12.924 $5.792 $72.575 $3.190 $1.148
Q1  
(First Generic 
Reaches Market) 
Payment 
 
Amount  $511.217  $5.718  $14.362 $13.731 $4.721 $74.704 $3.436 $1.105
Q2 Payment 
   
Amount  $511.316  $6.749 $14.368 $14.115 $6.046 $84.495 $3.441 $1.079
Q3 Payment 
Amount2  $424.029  $5.711  $14.332 $14.804 $5.341 $82.659  $2.494 $0.805
Q4 Payment 
Amount3  $386.293  $5.721  $14.355 $11.850 $4.329 $56.559  $2.600 $0.830
Q5 Payment 
Amount  $373.298  $5.249  $14.218  $11.412  $4.053  $43.545  $1.884  $0.581 
Q6 Payment  (data 
   
Amount  $367.756  $4.589 $14.101 $10.100 $3.292 $46.678 unavailable) $0.307
Q7 Payment  (data  (data 
   
Amount  $356.806  $4.417 $14.023 $8.753 $2.344 unavailable) unavailable) $0.273
Q8 Payment  (data  (data 
   
Amount  $340.108  $3.781 $14.032 $8.146 $2.004 unavailable) unavailable) $0.243
    1 Quarter and year in parenthesis denote the first quarter in which generics were available.                                                                           (continued on next page) 
    2 Q3 refers to the quarter in which the Medicare payment amount begins to reflect sales of the first generic(s). 
    3 Q4 refers to the quarter in which the Medicare payment amount fully reflects sales of the first generic(s). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  26   
   
A P P E N D I X   ~   C  
 
 
 
      Table C-1:  Medicare Payment Amounts for 16 Newly Available Generic Drugs (Continued) 
J9206  J9245  J9268  Q0166  Q0179  Q2009  Q01672  Q01682 
Quarter  (1Q 2008)1  (2Q 2009)  (3Q 2007)  (1Q 2008)  (1Q 2007)  (3Q 2007)  (3Q 2008)  (3Q 2008) 
Q0 
(Brand Only) 
Payment 
Amount  $125.800  $1,624.598  $1,934.913  $50.436  $36.064  $5.555  $5.415  $10.835 
Q1  
(First Generic 
Reaches Market) 
Payment 
Amount  $126.309  $1,624.598  $1,977.801  $50.224  $36.829  $5.795  $5.387  $11.711 
Q2 Payment 
Amount  $126.235  $1,624.598  $2,071.219  $46.955  $36.550  $5.813  $5.876  $11.838 
Q3 Payment 
Amount3  $74.753  $1,654.023  $1,858.684  $17.173  $25.029  $3.595  $5.822  $11.508 
Q4 Payment 
Amount4  $36.997  $1,549.472  $1,828.915  $17.877  $18.543  $0.817  $5.824  $11.676 
Q5 Payment 
Amount  $21.715  $1,500.321  $1,741.579  $16.583  $9.169  $1.217  $6.799  $13.515 
Q6 Payment  (data 
   
Amount  $18.296  unavailable) $1,622.651  $9.244  $4.604 $0.728 $6.795  $13.567 
Q7 Payment  (data 
   
Amount  $14.955  unavailable) $1,601.255  $5.261  $3.160 $0.607 $6.809  $13.604 
Q8 Payment  (data 
   
Amount  $13.433  unavailable) $1,447.688 $7.082 $3.938 $0.617 $7.169 $14.165
      Source:  Centers for Medicare & Medicaid Services posted Part B payment limits. 
      1 Quarter and year in parenthesis denote the first quarter in which generics were available. 
    2 Not included in our savings analysis. 
    3 Q3 refers to the quarter in which the Medicare payment amount begins to reflect sales of the first generic(s). 
    4 Q4 refers to the quarter in which the Medicare payment amount fully reflects sales of the first generic(s). 
 
 
 
 
 
  
     
 
 
 
 
  
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  27   
   
 A P P E N D I X ~ D  
Table D-1:  Estimated Generic Approval Timeline for the Top 26 Dollar-Volume Brand-Only Part B 
Drugs (Biologics Excluded), According to FDA 
FDA-Estimated Generic  2009 Part B 2009Part B 
Drug Name  Brand Name  Approval Timeline1  Expenditures2  Rank3
Oxaliplatin  Eloxatin  Approved in generic form4  $307,305,870  8 
Docetaxel  Taxotere  After February 10, 2012  $273,059,887  9 
Zoledronic acid  Zometa  After April 30, 2012  $228,200,463  12 
Pemetrexed  Alimta  Currently eligible for approval  $224,725,011  13 
Gemcitabine hydrochloride  Gemzar  Approved in generic form  $214,841,468  14 
Bortezomib  Velcade  After August 31, 2011  $157,915,565  19 
Leuprolide acetate  Lupron  Approved in generic form  $148,807,207  20 
Palonosetron hydrochloride  Aloxi  After April 30, 2012  $141,432,119  22 
Treprostinil sodium  Remodulin  After April 30, 2012  $112,277,602  26 
Octreotide acetate  Sandostatin Lar Depot  After April 30, 2012  $107,672,719  28 
Azacitidine  Vidaza  After May 19, 2011  $101,648,346  29 
Zoledronic acid  Reclast  After May 18, 2011  $100,768,293  30 
Arformoterol tartrate  Brovana  After March 30, 2012  $77,081,333  32 
Paclitaxel protein-bound  Abraxane  After April 30, 2012  $72,033,094  36 
Currently eligible for approval 
Adenosine  Adenoscan  (legal disputes remain)  $69,316,718  39 
Triptorelin pamoate  Trelstar  After April 30, 2012  $67,684,223  40 
Decitabine  Dacogen  After May 2, 2013  $62,196,704  42 
Doxorubicin hydrochloride liposome  Doxil  After May 17, 2014  $49,619,144  47 
Iloprost  Ventavis  Currently eligible for approval  $48,970,602  48 
Mycophenolate acid  Myfortic  After January 17, 2012  $46,469,720  51 
Sirolimus  Rapamune  After April 30, 2012  $45,449,381  52 
Topotecan hydrochloride  Hycamtin  Approved in generic form  $43,430,255  54 
Fulvestrant  Faslodex  After March 30, 2012  $40,709,396  57 
Ibandronate sodium  Boniva  Currently eligible for approval  $25,710,811  66 
Imiglucerase  Cerezyme  After April 30, 2012  $24,355,150  70 
Verteporfin  Visudyne  After April 30, 2012  $17,308,914  80 
               Total  $2,808,989,996 
Source:  Food and Drug Administration (FDA) analysis of Part B drugs, 2009. 
1 Approximate date of April 30, 2012, is used by FDA to estimate how long it would take to approve an abbreviated new drug application if it is 
  submitted before November 10, 2009, with a Paragraph IV Patent Certification. 
2 Part B Analytics Reporting (98 percent of claims reported).  Accessed on March 29, 2010.  Figures do not add to total because of rounding.  
3 Rankings include single-source drugs, multiple-source drugs, and biologics. 
4 Generic versions of this drug were initially approved and marketed, but litigation brought by the brand manufacturer against the generic 
  manufacturers resulted in the discontinuation of generic sales. 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  28   
   
 A P P E N D I X ~ E  
            
         Table E-1:  Top 22 Dollar-Volume Biologics Under Part B 
   2009 Part B  2009 Part B 
Drug Name  Brand Name  Expenditures1  Rank2 
 
Ranibizumab  Lucentis  $814,869,580  1 
 
Rituximab  Rituxan  $807,136,671  2 
 
Bevacizumab  Avastin  $723,336,581  3 
 
Infliximab  Remicade  $605,603,464  4 
 
Pegfilgrastim  Neulasta  $493,788,366  5 
  Darbepoetin alfa  Aranesp  $426,599,502  6 
  Epoetin alfa  Epogen/Procrit  $332,792,303  7 
  Trastuzumab  Herceptin  $211,603,637  15 
Cetuximab  Erbitux  $165,132,074  18 
 
Abatacept  Orencia  $145,050,591  21 
 
Antihemophilic factor VIII 
  (Recombinant)  (All brands)  $125,289,250  24 
Botulinum toxin type A  Botox  $88,997,730  31 
 
Coagulation factor VIIa  Novoseven  $74,330,848  33 
 
Filgrastim  Neupogen  $69,897,511  38 
 
Natalizumab  Tysabri  $54,497,650  46 
 
Omalizumab  Xolair  $43,285,268  55 
 
Immune globulin  Vivaglobin  $42,709,895  56 
  Immune globulin  Gammagard Liquid  $30,226,662  61   
 
Panitumumab  Vectibix  $27,170,683  63 
   
Coagulation factor IX 
  Recombinant  Benefix  $25,176,467  67   
 
Antihemophilic factor VIII:C 
  Human  (All brands)  $24,453,801  69 
   
Immune globulin, powder  (All brands)  $21,200,286  74 
 
                Total      $5,353,148,820   
 Source:  Food and Drug Administration analysis of Part B drugs, 2009. 
 1 Part B Analytics Reporting (98 percent of claims reported).  Accessed on March 29, 2010. 
 2 Rankings include single-source drugs, multiple-source drugs, and biologics. 
 
   
 
 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  29   
   
 A P P E N D I X ~ F  
 
 
  Table F-1:  Comparison of FDAs ANDA Approval Dates and Actual Generic  
  Entry Dates 
HCPCS  FDA Generic  Estimated Actual 
Drug Name 
Code  Approval Date  Generic Entry Date 
First Generics With Comparable Entry Dates 
J0207  Amifostine, inj.  Mar. 14, 2008  May 2008 
J1325  Epoprostenol inj.  Apr. 23, 2008  May 2008 
J1451  Fomepizole inj.  Dec. 14, 2007  Jan. 2008 
J1626  Granisetron inj.  Dec. 31, 2007  Jan. 2008 
J3030  Sumatriptan succinate inj.  Feb. 6, 2009  Feb. 2009 
J9206  Irinotecan inj.  Feb. 20, 2008  Mar. 2008 
J9245  Melphalan inj.  June 9, 2009  June 2009 
J9268  Pentostatin inj.  Aug. 7, 2007  Aug. 2007 
Q0166  Granisetron oral  Dec. 31, 2007  Jan. 2008 
Q0179  Ondansetron oral  Dec. 26, 2006  Jan.Mar. 2007 
Q2009  Fosphenytoin inj.  Aug. 6, 2007  Aug. 2007 
Q01671  Dronabinol oral, 2.5 mg  June 27, 2008  July 2008 
Q01681  Dronabinol oral, 5 mg  June 27, 2008  July 2008 
 
First Generics With Conflicting Entry Dates
J0692  Cefepime inj.  June 18, 2007  Jan.Mar. 2008 
J7517  Mycophenolate mofetil oral  July 29, 2008  May 2009 
Albuterol sulfate/
J7620  ipratropium bromide inh. soln.  Dec. 21, 2006  JulySept. 2007 
 
FDA-Identified First Generics Which Did Not Come to Market2
(Generics did not 
J92011  Gemcitabine inj.  Dec. 18, 2008  come to market) 
(Generics did not 
J32651  Torsemide inj.  June 10, 2008  come to market) 
FDA-Identified First Generics Which Temporarily Came to Market 
(Products were launched in  
Nov. 2008 and ceased being 
distributed for sale by the generic 
J76261  Budesonide inh. soln.  Nov. 18, 2008  manufacturer later that month) 
  Source:  Food and Drug Administration's (FDA) Abbreviated New Drug Application (ANDA) Generic Drug Approvals and 
    Office of Inspector General analysis. 
                                  1 These drugs were not included in our savings analysis. 
            2 No generics available as of fourth-quarter 2009. 
 
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  30  x 
A  P  PEN  0  G 

Agency Comments 
/-... 
~
(  DEPARTMENT OF HEALTH & HUMAN SERVICES  Cenlers for MedIcare & Medicaid Services 
,~ 
AdministrAtor 
Washington, DC 20201 
OCT 0 7 2010
DATE: 
TO: 	 Daniel R. Levinson 

Inspector General 

FROM: 	 Donald Berwick, M.D. 

Administrator 

SUBJECT: 	 Office of Inspector General (OIG) Draft Report:  Medicare Payments for Newly 
Available Generic Drugs (OEI"03-09-0051 0) 
The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 
respond to the OIG Draft Report entitled, "Medicare Payments for Newly Available Generic 
Drugs" (OEI-03-09-0051 0). We appreciate the OIG's continuing efforts to examine payment 
made under the average sales price (ASP) methodology. 
The OIG report presents findings from a comparison ofMedicare payment amounts to market 
prices for certain newly available generic drugs. The report finds differences between the 
Medicare payment limits and the market prices for the generic drugs and attributes these 
differences primarily to the "two-quarter lag" inherent in the Medicare payment limit calculation 
process. The OIG claims that Medicare could have saved $111 million ifMedicare payment 
limits had reflected sales prices during the period of initial generic availability of 16 different 
drugs, and, therefore, urges that the two quarter lag be eliminated. 
However, this estimate is based on the premise that no time lag would exist between the 
introduction and inclusion of generics in the ASP. Such potential savings could not be achieved 
because any calculation of payment that relies on manufacturer reporting would require a lag 
time to allow manufacturers to calculate and submit their pricing data.  Moreover, the 01G's 
estimate also assumes that providers would immediately switch from branded to generic products 
without factoring the lag time associated with the introduction ofany new product in the market. 
In addition, it is not clear from the report that the $111 million is not an annualized savings 
amount, but instead a sum of potential savings over the course of several years. 
CMS notes that almost 95 percent of the OIG's reported savings are attributed to three drugs and, 
therefore, the 0I0's savings projections may not be accurate. Nearly $105 million of the $111 
million in projected savings is attributed to three products, mycophenolate mofetil (generic 
CeIlCept), albuterol sulfateiipratropium Bromide (generic DuoNeb) and irinotecan (generic 
Camptostar). We do not believe that extrapolating savings projections that are based on such a 
small subset of drugs to all generic drugs correctly represents Part B drug price changes due to 
the introduction ofgeneric drugs. 
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 A C K N O W L E D G M E N T S  
 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and David E. Tawes, Director of the Medicare and 
Medicaid Prescription Drug Unit. 
Kevin McAloon served as lead analyst for this study.  Central office staff 
who contributed include Natasha Franklin, Kevin Manley, and Scott 
Manley.  
 
  OEI-03-09-00510  MEDICARE PAYMENTS FOR NEWLY AVAILABLE GENERIC DRUGS  36   
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.