OFFICE OF INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
 
 
  M P B D P :
EDICARE  ART    RUG  AYMENTS  
 
I P S B
MPACT OF  RICE  UBSTITUTIONS  ASED   
 
2014 A S P  
ON    VERAGE  ALES  RICES
 
 
 
 
 
                     Suzanne Murrin 
Deputy Inspector General 
 
 
 
              OEI-03-16-00540 
                      August 2017   
Report in Brief 
of  
August 2017 
 
OEI-03-16-00540 
 
Why OIG Did This Review   Medicare Part B Drug Payments:  Impact of Price 
When Congress established average sales 
Substitutions Based on 2014 Average Sales Prices 
price (ASP) as the basis for Medicare 
Part B drug reimbursement, it also 
What OIG Found 
provided a mechanism for monitoring 
market prices and limiting potentially    CMS lowered Part B reimbursement for 14 drugs on the basis of 
excessive payment amounts.  The Social  2014 data. 
Security Act mandates that the Office of 
Inspector General (OIG) compare ASPs    CMSs price-substitution policy saved Medicare and its beneficiaries 
with average manufacturer prices  $24 million over 1 year based on 2014 data. 
(AMPs).  If OIG finds that the ASP for a 
  Medicare and its beneficiaries could have saved up to an additional 
drug exceeds the AMP by a certain 
percentage (currently 5 percent), the Act  $9 million over 1 year by expanding the price-substitution criteria to 
directs the Secretary of Health and  include drugs that exceeded the 5-percent threshold in a single quarter. 
Human Services to substitute the 
  Exhibit 1:  Results of the Medicare Part B 
ASP-based payment amount with a lower 
Price-Substitution Policy 
calculated rate.  Through regulation, the 
 
Centers for Medicare & Medicaid 
 Services (CMS) outlined that it would 
make this substitution only if the ASP for 
 
a drug exceeds the AMP by 5 percent in 
the 2 previous quarters or 3 of the 
 
previous 4 quarters.   
Over the last decade, OIG has produced   
annual reports aggregating the results of 
 
our mandated quarterly ASP-to-AMP 
comparisons.  This annual report   
quantifies the savings to Medicare and its 
 
beneficiaries that are a direct result of 
CMSs price-substitution policy based on   
2014 average sales prices, and this report 
 
also offers ways for additional savings.    Source:  OIG analysis of ASP and AMP data from 2014 
 
How OIG Did This Review 
What OIG Recommends   
To determine the effects of the 
Because of the potential for savings to Medicare beneficiaries and the program, 
price-substitution policy, we determined 
OIG recommends that CMS expand the price-substitution policy.  CMS did not 
the difference between ASP-based 
payment and AMP-based payment for  concur with the recommendation.  However, CMS stated that as additional data 
each drug with a price substitution.  We  becomes available and as it continues to gain experience with the 
then applied this difference to the 
price-substitution policy, it will consider further changes as necessary.  OIG 
Medicare utilization for each of these 
recognizes that CMS, in setting policy for payment substitution, needs to 
drugs.  To account for a 3-quarter lag 
achieve an important balance between safeguarding access to drugs and 
between the reporting of pricing data 
and applying price substitutions, we used  ensuring that Medicare and its beneficiaries do not overpay for drugs.  To 
drug utilization data for the fourth  provide greater flexibility and achieve this continued balance, any future 
quarter of 2014 through the third quarter  expansion of the payment-substitution policy could contain a provision that 
of 2015 to calculate the savings based on 
would prevent a price substitution when there are indications that the 
2014 ASP data.   
substitution amount is below the provider acquisition cost.  
Full report can be found at http://oig.hhs.gov/oei/reports/oei-03-16-00540.asp   
 
BACKGROUND 
When Congress established average sales price (ASP) as the basis for Medicare Part B drug 
reimbursement, it also provided a mechanism for monitoring market prices and adjusting ASP-based 
payments in certain situations.  Specifically, the Social Security Act (the Act) mandates that the Office of 
Inspector General (OIG) compare ASPs with average manufacturer prices (AMPs).1  If OIG finds that the 
ASP for a drug exceeds the AMP by a certain percentage (currently 5 percent), the Act directs the 
Secretary of Health and Human Services (after being 
notified by OIG) to substitute the payment amount with 
 
  Drug Pricing Terms  the lesser of the widely available market price (if any) 
or 103 percent of the AMP.2, 3    
Manufacturers Average Sales Price (ASP) 
Payments for Prescription Drugs Under 
In general, the manufacturers ASP for 
Medicare Part B 
a unit of drug that is sold is defined as the 
Medicare Part B covers a limited number of outpatient 
manufacturers sales of a drug to all 
prescription drugs.  These drugs are usually 
purchasers in the United States in 
administered in a physicians office or other outpatient 
a calendar quarter divided by the total 
setting and include, for example, drugs used to treat 
number of units of the drug sold by the 
cancer.  To obtain reimbursement for Part B drugs, 
manufacturer in that same quarter. 
health care providers submit claims to Medicare 
contractors using Healthcare Common Procedure 
Average Manufacturer Price (AMP) 
Coding System (HCPCS) codes.  (Hereafter in this report, 
In general, AMP is defined as the average 
we refer to HCPCS codes as drugs.4)      
price paid to the manufacturer for the drug 
CMS calculates the payment amount for these drugs 
in the United States by (1) wholesalers for 
using information provided by manufacturers.  Certain 
drugs distributed to retail community 
manufacturers must provide CMS with the ASP and 
pharmacies and (2) retail community 
volume of sales for each of their national drug codes 
pharmacies that purchase drugs directly 
(NDCs) on a quarterly basis.5, 6  CMS then calculates an 
from the manufacturer. 
ASP-based payment amount for the drug, which 
National Drug Code (NDC)  includes all of the NDCs associated with the drug.7  
An NDC is a code used to identify a drug  Under the ASP pricing methodology, the Medicare 
based on its manufacturer, product, and  reimbursement for most Part B drugs is equal to 
package size.    106 percent of the volume-weighted ASP for the drug.8  
However, under sequestration legislation, the payment 
Healthcare Common Procedure Coding 
System (HCPCS) Code  amount for most drugs is reduced by 2 percent.9   
A HCPCS code is a standardized billing code  Quarterly reimbursement amounts are not based on 
that is used primarily to identify products,  current quarter data because there is a 2-quarter lag 
supplies, and other services.  A HCPCS code  between the sales period for which ASPs are reported 
specifies the name and the amount of the  and the effective date of the reimbursement amounts.  
drug and may represent one or more  For example, manufacturers ASPs from the first 
NDCs.  quarter of 2014 were used to establish reimbursement 
amounts for the third quarter of 2014. 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  1  
OEI-03-16-00540     
Manufacturer Reporting of AMPs 
In addition to providing quarterly ASPs, certain manufacturers must provide CMS quarterly with the 
AMP for each of their NDCs.10, 11  The AMP is generally calculated as a weighted average of prices for all 
of a manufacturers package sizes of a drug and is reported for the lowest identifiable quantity of the 
drug, e.g., 1 milliliter, one tablet, one capsule.   
AMP-Based Price Substitutions 
Through regulation, CMS established the criteria under which it would implement a price substitution 
for a drug.  CMS may substitute 103 percent of the AMP for the ASP-based reimbursement amount 
when OIG identifies a drug that exceeds the 5-percent threshold in the two previous quarters or three 
of the previous four quarters.12  CMS implemented the AMP substitution policy in April 2013.  Because 
CMS believes that comparisons based on partial AMP data may not adequately reflect market trends, 
the agency will consider lowering reimbursement amounts only when corresponding AMP data is 
available for each of the NDCs used to determine the published reimbursement amount for a drug.13  
To prevent the price-substitution policy from inadvertently raising Medicare reimbursement amounts, 
CMS does not substitute prices when the substituted amount is greater than the ASP-based payment 
amount calculated for the quarter in which the price substitution takes effect.14  CMS also does not 
substitute prices when a drug is identified by the Food and Drug Administration (FDA) as being in short 
supply.15  Price substitutions take effect in the quarter after OIG shares the results of its most recent 
pricing comparison and remain in effect for one quarter.16   
Because of the 2-quarter lag between the ASP reporting period and the effective date of 
reimbursement amounts, and the additional quarter that is necessary for OIG to complete its pricing 
comparison, there is a 3-quarter lag between the ASP reporting period and the effective date of the 
price substitutions.  As shown in Exhibit 2, price substitutions that took effect in the fourth quarter of 
2014 were based on comparisons of ASPs and AMPs from the first quarter of 2014. 
  Exhibit 2:  Timeline for AMP-Ba sed Price Substitutions in 2014 
 Manufacturers collect ASPs and AMPs from the first quarter of 2014 for their drugs sold during 
  First   that quarter 
Quarter  
2014 
Manufacturers send ASPs and AMPs from the first quarter of 2014 to CMS by April 30, 2014 
  Second   CMS sends first quarter 2014 ASP and AMP data to OIG by end of June 2014 
Quarter  
2014 
  OIG identifies the drugs that meet the price substitution criteria and provides them to CMS by 
August 15, 2014 
  Third 
 CMS publishes Part B drug reimbursement rates for the fourth quarter of 2014, including price 
Quarter  
substitution for drugs that met the criteria based on data from the first quarter  of 2014  
2014 
 CMS uses AMP-based reimbursements for Part B drugs that met criteria based on  data from 
  Fourth  the first quarter of 2014 
Quarter  
2014 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  2  
OEI-03-16-00540     
OIG Monitoring of ASPs and AMPs 
To comply with its statutory mandate, OIG has provided CMS with pricing comparisons since the 
January 2005 implementation of the ASP reimbursement methodology for Part B drugs.  OIG issued 
six annual public reports for the years prior to CMSs April 2013 implementation of the AMP 
price-substitution policy.  These reports estimated that Medicare and its beneficiaries would have 
saved $35 million if CMS implemented AMP price substitutions.  OIGs 2013 annual report was the first 
to provide annual savings that were a direct result of CMSs price-substitution policy.  CMSs price 
 
substitutions based on 2013 data saved Medicare and its beneficiaries an estimated $13 million.
RESULTS 
CMSs price-substitution policy saved Medicare and its beneficiaries $24 million 
over 1 year  
CMS initiated price substitutions for 14 drugs based on 2014 data.  Price substitutions for these drugs 
saved Medicare and its beneficiaries $24 million over the 1-year period between the fourth quarter of 
2014 and the third quarter of 2015.  Exhibit 3 lists the 14 drugs, the quarter(s) during which the price 
substitution occurred, and the savings.  
Exhibit 3:  Drugs With Price Substitutions Based on 2014 Data 
    Quarter(s) in Which Price Substitutions Occurred   
Drug  Description  Fourth  First  Second  Third  Savings 
  Quarter  Quarter  Quarter  Quarter 
2014  2015  2015  2015 
       
J0132  Acetylcysteine injection  $48 
       
J0717  Certolizumab pegol injection  $7,548,763 
       
J1650  Enoxaparin sodium injection  $7,706 
       
J2400  Chloroprocaine HCl injection  $1,777 
       
J2675  Progesterone injection  $233 
       
J2820  Sargramostim injection  $172,016 
       
J3070  Pentazocine injection  $950 
       
J3415  Pyridoxine HCl injection  $36,307 
       
J7507  Tacrolimus immediate release oral  $2,702,226 
       
J7626  Budesonide noncompounded  $13,296,014 
       
J9200  Floxuridine injection  $19,920 
       
J9263  Oxaliplatin  $69,012 
       
J9280  Mitomycin injection  $63,706 
       
Q0167  Dronabinol oral  $3,457 
             Total  $23,922,135 
Source:  OIG analysis of ASP and AMP data from 2014 
 
   
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  3  
OEI-03-16-00540     
Expanding the price-substitution criteria could have generated up to $9 million 
in additional savings for Medicare and its beneficiaries   
CMS has maintained a cautious approach to price substitutions.  However, this cautious approach may 
restrict the Governments ability to limit potentially excessive payment amounts based on ASPs.  If CMS 
had expanded its price-substitution criteria to include certain other Part B drugs in 2014, Medicare and 
its beneficiaries could have saved up to an additional $9 million over 1 year. 
Millions could be saved by expanding the substitution criteria to include drugs that exceeded the 
5-percent threshold in a single quarter.  Nineteen drugs with complete AMP data exceeded this 
threshold in at least 1 quarter of 2014 but were not eligible for price substitution in that quarter 
because they did not meet CMSs duration criteria, i.e., they did not exceed the threshold in the 
2 previous quarters or 3 of the previous 4 quarters.17  If the 19 drugs had been eligible for price 
reductions on the basis of data from a single quarter only, Medicare and its beneficiaries could have 
saved up to an additional $9 million between the fourth quarter of 2014 and the third quarter of 2015.     
Previously, CMS has expressed concern that price substitutions based on results from a single quarter 
may represent 1 aberrant quarter of pricing rather than a market trend. 18  However, price 
discrepancies for the majority of the 19 drugs do not appear to have resulted from isolated 
fluctuations.  According to 2013 and 2014 data, 11 of these 19 drugs exceeded the 5-percent threshold 
more than once over the 2-year period.19  Over the 2-year period, 6 of the 19 exceeded the threshold in 
2 of the 8 quarters, and another 5 drugs exceeded the threshold three or four times in the 8 quarters.       
If CMS would prefer to employ a more cautious approach than substitution based on a single quarter of 
data, it could expand its price-substitution criteria to include drugs that exceed the 5-percent threshold 
in 2 of the previous 6 quarters.  Under this approach, 6 drugs would have been eligible for price 
substitutions, and Medicare and its beneficiaries could have saved an estimated $3 million on these 
6 drugs.   
CONCLUSION AND RECOMMENDATION 
Under the current price-substitution policy, 14 drugs were subject to reimbursement reductions on the 
basis of data from 2014, saving Medicare and its beneficiaries $24 million between the fourth quarter 
of 2014 and the third quarter of 2015.  The agency could achieve even greater savings for Medicare and 
its beneficiaries by expanding its criteria for AMP-based price substitutions.   
OIG has previously recommended that CMS expand the price-substitution criteria.  CMS indicated that 
it does not concur with expanding the price-substitution policy and continues to believe that more 
experience with this policy is needed before it can be expanded.  CMS also expressed concern that 
expanding price-substitution criteria may impede physician and beneficiary access to drugs.  OIG agrees 
that access to prescription drugs should always be considered when contemplating pricing policies and 
supports current safeguards to prevent substitutions for drugs that are identified by FDA as being in 
short supply.  However, OIG continues to believe that CMS can achieve a better balance between 
safeguarding access to drugs and ensuring that Medicare and its beneficiaries do not overpay for drugs.  
To provide CMS with greater flexibility, any revisions that CMS makes to its price-substitution policy 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  4  
OEI-03-16-00540     
could contain a provision that would prevent a price substitution when there are indications that the 
substitution amount would be below provider acquisition costs. 
Therefore, we continue to recommend that CMS: 
  Expand the price-substitution policy  
To more effectively limit excessive payment amounts based on ASPs and to generate greater 
savings for Medicare and its beneficiaries, CMS should consider broadening its 
price-substitution criteria to include at least some additional drugs.  For example, a more 
expansive policy might include drugs with complete AMP data that exceed the 5-percent 
threshold in a single quarter.  However, CMS also could consider a more modest expansion of 
the policy that better captures drugs that repeatedly exceed the threshold.  It could expand the 
criteria to include drugs with complete AMP data that exceed the 5-percent threshold in 
2 of 6 quarters.    
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL RESPONSE 
CMS did not concur with our recommendation.  However, CMS stated that as additional data becomes 
available and as it continues to gain experience with the price-substitution policy, it will consider 
further changes as necessary.  CMS believes the current policy safeguardswhich identify drugs that 
exceed the 5-percent threshold for 2 consecutive quarters or 3 of 4 quartersidentify situations in 
which AMP consistently exceeds ASP.  
OIG continues to believe that expanding the policy can achieve a balance between safeguarding access 
to drugs and ensuring that Medicare and its beneficiaries do not overpay for drugs.  Our examination of 
2014 data shows that if the policy had been expanded to include the 19 drugs that exceeded the 
5-percent threshold in a single quarter, up to an additional $9 million could have been saved by 
beneficiaries and the program.  The majority of the 19 drugs we identified for these potential savings 
exceeded the threshold multiple times over a 2-year period.  Expanding the policy to capture drugs that 
exceed the threshold in a single quarter could increase the savings to beneficiaries and the program 
and still ensure access to drugs.   
To help ensure that CMS has sufficient information for its consideration regarding the 
price-substitution policy, OIG will continue to provide CMS with the results from our quarterly pricing 
comparisons, along with annual reports on the impact of the price-substitution policy.  
For the full text of CMSs comments, see the Appendix B. 
 
   
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  5  
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APPENDIX A:  METHODOLOGY 
Data Collection and Analysis  
We obtained NDC-level ASP data and AMP data for Part B drugs from CMS for 2014.  We also obtained 
ASP-based reimbursement amounts and Part B drug utilization for the quarters in which price 
substitutions occurred, i.e., the fourth quarter of 2014 through the third quarter of 2015.  In addition, 
we obtained the drugs that had price substitutions based on data from 2014. 
For each quarter of 2014, we calculated volume-weighted AMPs for drugs consistent with CMSs 
methodology for calculating volume-weighted ASPs.  We then compared the volume-weighted ASPs 
and AMPs and identified all drugs with ASPs that exceeded the AMPs by at least 5 percent.  We also 
identified drugs that exceeded the 5-percent threshold but did not meet CMSs duration criteria for 
price substitution, i.e., they did not exceed the threshold in the 2 previous quarters or 3 of the previous 
4 quarters. 
To calculate the savings associated with price substitutions or potential price substitutions that could 
be made by expanding the policy, we first reduced AMP-based and ASP-based reimbursement amounts 
(103 percent of the volume-weighted AMP and 106 percent of the volume-weighted ASP, respectively) 
by the 2-percent reduction required by sequestration legislation.  We then subtracted the AMP-based 
reimbursement from the ASP-based reimbursement amount for the quarter in which the price 
substitution occurred20 and multiplied the difference by the Part B utilization for each drug in the 
respective quarter that the price substitution occurred.  We used this same method to calculate savings 
for potential price substitutions that could be made if CMS expanded the price-substitution policy. 
Limitations 
We did not verify the accuracy of manufacturer-reported ASP and AMP data, nor did we verify the 
underlying methodology used by manufacturers to calculate ASPs and AMPs.  We also did not verify the 
accuracy of CMSs calculations of Part B drug reimbursement amounts. 
Manufacturers are required to submit their quarterly ASP and AMP data to CMS within 30 days after 
the close of the quarter.  We did not determine whether manufacturers provided any updated data to 
CMS at a later date. 
Standards 
This study was conducted in accordance with the Quality Standards for Inspection and Evaluation 
issued by the Council of the Inspectors General on Integrity and Efficiency.  
   
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  6  
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APPENDIX B:  AGENCY COMMENTS 
 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  7  
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ENDNOTES 
 
1 Section 1847A(d)(2)(B) of the Act. 
2 Section 1847A(d)(3) of the Act. 
3 Pursuant to  1847A(d)(3)(B)(ii) of the Act, the threshold percentage has been maintained at 5 percent. 
4 A HCPCS code for a drug defines the drug name and the amount of the drug represented by the HCPCS code but 
does not specify the manufacturer or package size. 
5 Section 1927(b)(3) of the Act. 
6 An NDC is a drug code that represents a specific manufacturer, product, and package size. 
7 Section 1847A(c) of the Act.  Certain types of sales are exempted from ASP, and ASP is net of any price 
concessions (with limited exceptions). 
8 Section 1847A(b)(1) of the Act.  Medicare beneficiaries are responsible for 20 percent of this amount in the form 
of coinsurance. 
9 Part B claims dated on or after April 1, 2013, incur a reduction in payment in accordance with the Budget 
Control Act of 2011 and the American Taxpayer Relief Act of 2012 (see CMS Medicare FFS Provider e-News, 
Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) Program Sequestration, March 8, 2013).  
Under this mandatory payment reduction, the payment rate for most Part B drugs is reduced by 2 percent.  This 
reduction does not apply to the coinsurance portion of the Medicare allowed amount for Part B drugs.   
10 Section 1927(b)(3) of the Act. 
11 Section 1927(k)(1) of the Act. 
12 42 CFR  414.904(d)(3). 
13 Ibid.   
14 Ibid. 
15 Ibid. 
16 Ibid. 
17 These 19 drugs were not identified by FDA as being in short supply and did not have AMP-based substitution 
amounts that were greater than the ASP-based reimbursement amounts in the quarters during which the 
substitutions would have occurred.     
18 76 Fed. Reg. 73026, 73288 (Nov. 28, 2011). 
19 This analysis is based on pricing comparison results for the 2-year period between the first quarter of 2013 and 
the last quarter of 2014. 
20 AMP-based price substitutions based on data from the first through fourth quarters of 2014 were applied in the 
fourth quarter of 2014 through the third quarter of 2015, respectively. 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  8  
OEI-03-16-00540     
ACKNOWLEDGMENTS 
Conswelia McCourt served as the team leader for this study.  Office of Evaluation and Inspections staff 
who provided support include Joe Chiarenzelli, Althea Hosein, Meghan Kearns, and Christine Moritz.  
This report was prepared under the direction of Linda Ragone, Regional Inspector General for 
Evaluation and Inspections in the Philadelphia regional office, and Edward Burley, Deputy Regional 
Inspector General. 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To obtain additional information concerning this report or to obtain copies, contact the Office of Public 
Affairs at Public.Affairs@oig.hhs.gov. 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2014 Average Sales Prices  9  
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