Department of Health & Human Services 
OFFICE OF 
   
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
R   A
EPLACING  VERAGE 
 
W P : M
HOLE  SALE  RICE    EDICAID 
 
D P P  
RUG  AYMENT  OLICY
 
 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
July 2011 
OEI-03-11-00060 
     
  
 E X E C U T I V E   S U M M A R Y  
OBJECTIVES
 
1.  To determine how States will set reimbursement for Medicaid 
prescription drugs after First DataBank stops publishing average 
wholesale prices (AWP) in September 2011. 
2.  To determine the role that States would prefer the Centers for 
Medicare & Medicaid Services (CMS) to play in developing 
Medicaid reimbursement methodologies for prescription drugs. 
BACKGROUND 
Federal regulations require, with certain exceptions, that Medicaid 
reimbursement amounts for prescription drugs not exceed (in the 
aggregate) the lower of (1) the estimated acquisition cost plus a 
dispensing fee or (2) the providers usual and customary charge to the 
public for the drug.  CMS allows States flexibility in determining the 
estimated acquisition cost.  In the first quarter of 2011, 45 States 
estimated the acquisition cost based on AWP; 37 of these States 
obtained AWP data from the pricing compendium published by First 
DataBank.  However, Office of Inspector General reports have 
consistently found that the fundamentally flawed nature of AWP-based 
reimbursement has caused Medicaid to pay too much for certain drugs. 
Following the filing of a lawsuit, First DataBank decided to stop 
publishing AWPs no later than September 26, 2011.  This presents 
States with an opportunity to implement new reimbursement 
methodologies that more closely approximate pharmacy acquisition 
costs.  States have a variety of other pricing options, such as obtaining 
AWP from a different source or replacing AWP with average sales price, 
average manufacturer price, average acquisition cost, or wholesale 
acquisition cost (WAC).   
In January 2011, we surveyed all 50 States and the District of Columbia 
(hereinafter referred to as States) and received responses from each.  
We asked States whether they intend to change their reimbursement 
methodologies once AWPs are no longer published by First DataBank.  
We then asked the States to describe any plans to replace AWP, the 
timeframe for implementation, and the actions necessary for 
implementation.  We also asked States to describe the role they would 
prefer CMS to play in developing Medicaid reimbursement 
methodologies and whether States would prefer that CMS develop a 
single national benchmark.   
  OEI-03-11-00060  REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  i       
E X E C U T I V E   S U M M A R Y  
We interviewed CMS staff in February 2011 to determine whether the 
agency had provided guidance to all States regarding recent AWP 
issues.  We also asked CMS to describe any guidance it is planning to 
provide States about this topic. 
FINDINGS 
Twenty States had not developed any definitive plans for 
prescription drug reimbursement after First DataBank stops 
publishing AWPs.  Of the 45 States with AWP-based reimbursement 
methodologies in the first quarter of 2011, 20 had not made any 
definitive plans regarding reimbursement for Medicaid prescription 
drugs after September 2011 (all 20 had obtained AWPs from First 
DataBank in the first quarter of 2011).  Eight of the twenty States had 
not decided whether they will continue to use AWP (from another 
source) or instead select another benchmark.  Among the remaining    
12 States, 6 intend to discontinue using AWP but had not yet taken any 
steps to select a new benchmark, 3 intend to continue using AWP but 
had not selected the publishing source for AWP data, and 3 are 
considering whether to use AWP from another source or to replace AWP 
with WAC. 
Fifteen States have relatively well-developed plans to move away 
from AWP-based reimbursement.  Of the 45 States, 15 have relatively 
well-developed plans to implement new reimbursement methodologies 
that replace AWP with another benchmark.  Among these 15 States,      
3 plan to replace AWP with average acquisition cost and 12 plan to 
replace AWP with WAC.   
Ten States will continue using AWP to set reimbursement, at least in 
the short term.  Of the 45 States, 10 plan to continue using the AWP 
after September 2011.  This number includes 4 of the 37 States that 
currently obtain AWPs from First DataBank and now plan to obtain 
AWP data from another source (Medi-Span and/or Micromedex).  The 
other six States that will continue using AWP were already getting the 
data from one of these other sources.   
Forty-four States would like CMS to develop a national benchmark 
to set Medicaid reimbursement for prescription drugs.  Most States 
(44 of 51) would prefer that CMS develop a single national benchmark 
to set Medicaid reimbursement rates.  Twenty-four States specified that 
they want a benchmark based on pharmacy acquisition costs. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  ii     
E X E C U T I V E   S U M M A R Y  
According to CMS staff, the agency has not yet provided uniform 
guidance about options for Medicaid reimbursement after AWPs are no 
longer available from First DataBank, but is taking steps to address this 
issue and plans to provide guidance to States.  CMS stated that although 
the agency does not mandate that a specific formula or methodology be 
used for reimbursement, it plans to conduct a nationwide survey to collect 
retail community pharmacy prices for drugs (including acquisition costs) 
and intends to discuss the results and other options for States in future 
guidance and/or in proposed rulemaking. 
RECOMMENDATION 
First DataBank will stop publishing AWPs no later than          
September 26, 2011, forcing many States to reevaluate how they will 
pay for prescription drugs.  It will also present States with the 
opportunity to move to new reimbursement methodologies that could 
better reflect pharmacy acquisition costs.  However, many States are 
not fully prepared to implement new reimbursement methodologies at 
this time.  As a result, these States will need to develop, obtain CMS 
approval for, and implement new reimbursement methodologies in an 
extremely limited timeframe.  In addition, a number of States will 
either begin or continue to base reimbursement on WAC, a 
manufacturer-reported benchmark that, like AWP, is not based on 
actual sales transactions.   
States overwhelmingly would prefer that CMS, to address the 
uncertainty surrounding drug reimbursement decisions, develop a 
national benchmark to set reimbursement.  A national benchmark that 
reflects actual pharmacy acquisition costs would eliminate States 
reliance on the inflated published prices that cause Medicaid and its 
beneficiaries to pay too much for certain drugs.  Therefore, we 
recommend that CMS:  
Develop a national benchmark that accurately estimates acquisition 
cost and encourage States to consider it when determining 
Medicaid reimbursement for prescription drugs. 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with our recommendation.  CMS stated that it is 
contracting with a vendor to develop a survey of retail prices and 
acquisition cost information.  CMS expects to develop an estimate of 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  iii     
E X E C U T I V E   S U M M A R Y  
average acquisition cost using the data from this survey.  CMS also 
stated that it intends to include external stakeholders in this process to 
ensure that there is transparency in the average acquisition cost 
determination and that the methodology is implemented appropriately.  
We did not make any changes to the report based on CMSs comments.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  iv   
  
 T A B L E   O F   C O N T E N T S  
 
EX ECUT I VE  SUM M ARY  .....................................i 
 
 
 
 
I NT RO DU CT I O N  ............................................ 1 
 
 
F I NDI NG S  .................................................  11 
Twenty States had not developed any definitive plans for   
prescription drug reimbursement after First DataBank stops 
publishing AWPs .......................................  11 
   
Fifteen States have relatively well-developed plans to move          
away from AWP-based reimbursement ..................... 11 
  
  Ten States will continue using AWP to set reimbursement, at      
         least in the short term ................................... 13 
 
Forty-four States would like CMS to develop a national        
benchmark to set Medicaid reimbursement for  
prescription drugs ......................................  13 
 
 
RECO M M END AT I O N  .......................................  15 
Agency Comments and Office of Inspector General Response ....  16 
 
APP EN DI X  ................................................ 17 
A:  Agency Comments ................................... 17 
 
 
ACKNO WL E DG M E N T S .....................................  19 
         
 I N T R O D U C T I O N  
OBJECTIVES 
1.  To determine how States will set reimbursement for Medicaid 
prescription drugs after First DataBank stops publishing average 
wholesale prices (AWP) in September 2011. 
2.  To determine the role that States would prefer the Centers for 
Medicare & Medicaid Services (CMS) to play in developing Medicaid 
reimbursement methodologies for prescription drugs. 
BACKGROUND 
Numerous reports by the Office of Inspector General (OIG) have found 
that the fundamentally flawed nature of AWP-based reimbursement 
has caused Medicaid to pay too much for certain drugs.  OIG has 
recommended that CMS work with States and Congress to base 
payments on a figure that more accurately reflects pharmacy 
acquisition cost.1 
However, as of the first quarter of 2011, 45 States still used AWP as a 
primary benchmark when setting Medicaid reimbursement amounts;   
37 of these States obtained AWP data from the publishing company 
First DataBank.  Following the filing of a lawsuit, First DataBank 
decided to stop publishing AWPs no later than September 26, 2011.2  
This has forced many States to reevaluate how they will pay for 
prescription drugs after that date and presents States with the 
opportunity to move to new reimbursement methodologies that better 
reflect pharmacy acquisition costs.   
 
 
 
1 For example, see Comparison of Medicaid Federal Upper Limit Amounts to Average 
Manufacturer Prices (OEI-03-05-00110), June 2005; Variation in State Medicaid Drug 
Prices (OEI-05-02-00681), September 2004; Cost Containment of Medicaid HIV/AIDS Drug 
Expenditures (OEI-05-99-00611), July 2001; or Medicaid Pharmacy  Additional Analyses 
of the Actual Acquisition Cost of Prescription Drug Products (A-06-02-00041),         
September 2002.    
2 First DataBank, Drug Pricing Policy.  Accessed at http://www.firstdatabank.com on 
November 22, 2010.  First DataBank will continue to publish other pricing data, such as 
wholesale acquisition cost (WAC). 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  1 
     
I N T R O D U C T I O N  
Medicaid Reimbursement for Prescription Drugs 
The Medicaid program, established under Title XIX of the Social 
Security Act (the Act), is administered by States and financed using 
State and Federal funds.  Medicaid pays for medical and health-related 
assistance for certain vulnerable and needy individuals and families.  
All 50 States and the District of Columbia (hereinafter referred to as 
States) provide coverage for prescription drugs under Medicaid.  In 
2009, Medicaid expenditures for prescription drugs totaled $26 billion.3  
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are reimbursed by State Medicaid agencies.  Federal 
regulations require, with certain exceptions, that State Medicaid 
reimbursement for a covered outpatient drug not exceed (in the 
aggregate) the lower of (1) the estimated acquisition cost plus a 
dispensing fee or (2) the providers usual and customary charge to the 
public for the drug.4  Estimated acquisition cost refers to the States 
best estimate of the price generally and currently paid by providers for 
the drug.5  CMS allows States flexibility in determining the estimated 
acquisition cost.  Estimating pharmacy acquisition cost has historically 
presented a challenge for States because they lack access to pricing data 
that are based on actual drug sales.     
AWP and WAC.  States typically estimate the acquisition cost for a drug 
based on published prices, such as AWP and WAC.6  Most States have 
historically used the pricing compendium published by First DataBank 
to obtain AWP and WAC data.  First DataBank relies on manufacturers 
(or other third parties) to report or otherwise make available the values 
for AWP and WAC.7, 8   
 
 
3 This was the most recent year for which complete expenditure data were available. 
4 42 CFR  447.512. 
5 42 CFR  447.502. 
6 For certain generic drugs, States may also set reimbursement through the Federal 
upper limit and/or the State maximum allowable cost programs. 
7 Although most brand-name drugs have a WAC, many generic drugs do not.  
8 The term manufacturers refers to manufacturers, repackagers, private labelers, and 
other suppliers.  First DataBank, Drug Pricing Policy.  Accessed at 
http://www.firstdatabank.com on November 22, 2010.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  2 
     
I N T R O D U C T I O N  
Neither AWP nor WAC is based necessarily on actual sales 
transactions.  AWP is not defined in law or regulation and fails to 
account for prompt pay or other discounts, rebates, and reductions.9  
Section 1847A(c)(6)(B) of the Act defines WAC as the manufacturers list 
price for the drug to wholesalers or direct purchasers, not including 
prompt pay or other discounts, rebates, or reductions, for the most 
recent month for which information is available.   
Based on information from CMSs Web site, at the end of 2010 all but a 
few States either used AWPs discounted by a certain percentage           
(5 to 50 percent) to determine estimated acquisition costs for most 
covered drugs or used AWP in combination with other available pricing 
data (e.g., WAC).10  
Dispensing fees.  In addition to reimbursing pharmacies for the cost of 
the drug, States are required to determine a reasonable dispensing 
fee.11  This fee represents the charge for the professional services 
provided by the pharmacist when dispensing a prescription (including 
overhead expenses and profit).12  In the fourth quarter of 2010, State 
dispensing fees paid to pharmacies ranged from $1.00 to $14.01 per 
prescription.13  
AWP Lawsuit Involving First DataBank and McKesson 
Typically, a drug manufacturer sells a drug to a wholesaler, which then 
sells it to a pharmacy.14  The price wholesalers charge pharmacies for 
the drug is generally based on WAC.  As previously mentioned, WAC is 
the undiscounted list price that manufacturers report to publishing 
companies, such as First DataBank, which use these data to produce 
 
 
9 First DataBank, Drug Pricing Policy.  Accessed at http://www.firstdatabank.com on 
November 22, 2010. 
10 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2010.  Accessed at http://www.cms.gov on February 22, 2011. 
11 42 CFR  447.512. 
12 Health Resources and Services Administration, Pharmacy Affairs & 340B Drug 
Pricing Program.  Accessed at http://www.hrsa.gov on April 26, 2011.   
13 CMS, Medicaid Prescription Reimbursement Information by State  Quarter Ending 
December 2010.  Accessed at http://www.cms.gov on February 22, 2011.  This range 
excludes fees for IV therapy and compounded prescriptions.  
14 Prescription Access Litigation (PAL), Current Lawsuits:  First DataBank McKesson 
Medi-Span.  Accessed at http://www.prescriptionaccess.org on October 26, 2010. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  3 
     
I N T R O D U C T I O N  
pricing compendia.  Pharmacies are reimbursed for most drugs covered 
under Medicaid based on the States estimated acquisition cost formula 
(e.g., based on AWP), plus the dispensing fee.15  Pharmacies can profit 
from the difference between what they pay to the wholesaler for the 
drug and what Medicaid reimburses for the drug (commonly referred to 
as the spread).16     
In June 2005 and February 2006, members of PAL17 filed a lawsuit 
alleging that First DataBank and a wholesaler, McKesson, engaged in a 
scheme to increase the spread of certain prescription drugs by    
reporting higher AWPs.18  This case was eventually settled, and First 
DataBank announced it would discontinue publishing AWPs no later 
than September 26, 2011.19 
Other Pricing Options for States  
Since the announcement of First DataBanks settlement, many 
stakeholders (e.g., purchasers, pharmacies, providers) have speculated 
about the various other pricing benchmarks that could be used as the 
basis for Medicaid reimbursement.  These include, but are not limited 
to, WAC, average acquisition cost (AAC), average manufacturer price 
(AMP), and average sales price (ASP).  There is little industry 
consensus as to which, if any, of these benchmarks will be used by 
States.  Some stakeholders believe that an AWP replacement may not 
even be necessary, at least not in the short term,20 as States will have 
 
 
15 42 CFR  447.512. 
16 PAL, Current Lawsuits:  First DataBank McKesson Medi-Span.  Accessed at 
http://www.prescriptionaccess.org on October 26, 2010. 
17 According to its Web site, PAL is a national coalition of more than 130 organizations 
whose stated purpose is to challenge illegal drug pricing tactics and to work to make 
prescription drug prices more affordable for consumers through class action litigation and 
public education.  Accessed at http://www.prescriptionaccess.org on November 9, 2010.   
18 PAL, Current Lawsuits:  First DataBank McKesson Medi-Span.  Accessed at 
http://www.prescriptionaccess.org on October 26, 2010. 
19 First DataBank, Drug Pricing Policy.  Accessed at http://www.firstdatabank.com on 
November 22, 2010. 
20 Journal of Managed Care Pharmacy, What Is the Price Benchmark to Replace Average 
Wholesale Price (AWP)?  Accessed at www.amcp.org on October 22, 2010.  Atlantic 
Information Services, Inc., Health Business Daily, Competing Stakeholders Disagree Over 
the Future of AWP Drug Pricing Benchmark and Possible Replacements.  Accessed at 
www.aishealth.com on October 26, 2010.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  4 
     
I N T R O D U C T I O N  
access to AWPs in pricing compendia published by other companies, 
such as Medi-Span.   
WAC.  Although First DataBank will cease publication of AWPs, it will 
continue to publish other pricing information, such as WACs (pricing 
compendia published by other companies will also include WACs).  In a 
June 2010 white paper, the American Medicaid Pharmacy 
Administrators Association and the National Association of State 
Medicaid Directors (AMPAANASMD) recommended that States use 
WAC along with a well-designed maximum allowable cost program21 as 
an interim alternative for AWP until a better option is developed.22  
According to AMPAANASMD, WAC should be only a temporary 
solution because it is practically impossible to audit, does not account 
for discounts and therefore does not reflect actual prices, and could be 
subject to inflation.   
AAC.  Two States (Alabama and Oregon) recently switched from an 
AWP-based reimbursement method to an AAC-based method.  The first 
State to do so, Alabama, received CMS approval to implement a new 
methodology that uses AAC as the reimbursement benchmark for 
brand-name and generic drugs effective September 22, 2010.23  To 
determine AAC, Alabama (through a contractor) requests that randomly 
selected pharmacies submit 1 months worth of invoices semiannually.  
The State reviews these invoices and other applicable information to 
calculate AAC.  CMS also approved Alabamas request to increase the 
dispensing fee from $5.40 to $10.64 per prescription.  Alabamas Web 
site states that its AAC plan will establish a transparent, timely, and 
accurate pharmacy reimbursement system.   
Effective January 1, 2011, CMS approved Oregons State Plan 
Amendment to replace AWP with AAC in setting payment for Medicaid 
 
 
21 States may develop maximum allowable cost programs to establish maximum 
reimbursement amounts for equivalent groups of multiple-source generic drugs.  
22 AMPAANASMD, Post AWP Pharmacy Pricing and Reimbursement.  Accessed at 
http://hsd.aphsa.org on October 26, 2010.   
23 Alabama Medicaid Agency, AAC Program Implementation.  Accessed at 
http://www.medicaid.state.al.us on October 25, 2010.  In cases in which no AAC is available, 
reimbursement will be based on WAC plus 9.2 percent.    
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  5 
     
I N T R O D U C T I O N  
prescription drugs. 24  Similar to Alabamas new methodology, Oregon 
(through a contractor) will establish AAC by conducting rolling surveys 
of enrolled pharmacies to verify the actual invoice amount paid for a 
drug.  Oregon is using a tiered per-prescription dispensing fee instead of 
a flat rate.  
AMP.  Section 1927(k)(1) of the Act, as amended by section 2503 of the 
Patient Protection and Affordable Care Act (ACA), P.L. 111-148, defines 
AMP as the average price paid to a manufacturer by wholesalers for 
drugs distributed to retail community pharmacies and by retail 
community pharmacies that purchase drugs directly from the 
manufacturer, with certain exclusions.   
Manufacturers that enter into a Medicaid rebate agreement must report 
AMPs to CMS monthly and quarterly.25  AMPs provided monthly are 
used to establish Federal upper limit amounts,26 and AMPs provided 
quarterly are used primarily to calculate the rebate amounts owed to 
States under the Medicaid drug rebate program.27 
The Deficit Reduction Act of 2005 (DRA), P.L. 109-171, required CMS to 
make AMP data available to all State Medicaid agencies.28  This would 
have enabled States to use monthly AMP data when setting Medicaid 
reimbursement rates for prescription drugs.  However, section 2503 of 
the ACA modified this requirement in a way that limits the AMP 
information available to States for reimbursement or other purposes.29      
ASP.  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 drug units sold by the manufacturer in that same 
 
 
24 Oregon Medicaid Agency, State Plan Amendment, Transmittal # 10-13.  Accessed at 
http://www.oregon.gov on January 19, 2011. 
25 Section 1927(b)(3) of the Act. 
26 Section 2503(a)(1)(B) of ACA. 
27 Section 1927(c)(1)(A) of the Act.  
28 Section 6001 of the DRA required that CMS provide States with AMP data.  Although 
the DRA did not require States to use AMP data in determining reimbursement, the 
dissemination of AMP data would have provided States with a new source for establishing 
estimated acquisition cost. 
29 The ACA requires CMS to publish weighted AMPs for certain multiple-source drugs, 
instead of publishing AMPs for all drugs. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  6 
     
I N T R O D U C T I O N  
quarter, net of any discounts.30  Certain sales are exempt from the 
calculation of ASP, including sales at a nominal charge.  Manufacturers 
report ASP data to CMS quarterly, with submissions due 30 days after 
the close of the quarter.31         
As of January 2005, CMS replaced AWP with ASP as the basis for 
determining reimbursement for most drugs covered under Medicare 
Part B.32  Manufacturers report ASPs to CMS only for certain drugs 
covered under Part B, which represent a limited subset of prescription 
drugs covered under Medicaid.  The Medicare Part B payment amounts 
for these drugs are generally 106 percent of ASP.33  
Previous OIG Work on AWP 
OIG has produced a significant amount of work demonstrating that the 
AWPs States use to estimate acquisition costs often overstate the prices 
retail pharmacies pay to purchase drugs.  This has resulted in inflated 
reimbursement rates and has led to excessive Medicaid expenditures for 
prescription drugs.34  Prior OIG reports concluded that the reliance on 
manufacturer-reported AWPs as a basis for drug reimbursement is 
fundamentally flawed and that AWPs exceed other pricing points.35  
OIG has also repeatedly recommended that CMS work with Congress to 
set Medicaid drug reimbursement amounts that more closely 
approximate pharmacy acquisition costs.36  CMS concurred with these 
recommendations and stated that OIGs reports make clear that current 
 
 
30 Section 1847A(c) of the Act, as added by the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), P.L. 108-173. 
31 Section 1927(b)(3) of the Act. 
32 Sections 303(b) and 305(a) of the MMA. 
33 Section 1847A(b)(1) of the Act. 
34 For example, see Medicaids Use of Revised Average Wholesale Prices                     
(OEI-03-01-00010), September 2001. 
35 For example, see Medicaid Drug Price Comparisons:  Average Manufacturer Price to 
Published Prices (OEI-05-05-00240), June 2005; Medicaid Drug Price Comparison:  Average 
Sales Price to Average Wholesale Price (OEI-03-05-00200), June 2005; or Medicaids Use of 
Revised Average Wholesale Prices (OEI-03-01-00010), September 2001. 
36 For example, see Comparison of Medicaid Federal Upper Limit Amounts to Average 
Manufacturer Prices (OEI-03-05-00110), June 2005; Variation in State Medicaid Drug 
Prices (OEI-05-02-00681), September 2004; Cost Containment of Medicaid HIV/AIDS Drug 
Expenditures (OEI-05-99-00611), July 2001; or Medicaid Pharmacy  Additional Analyses 
of the Actual Acquisition Cost of Prescription Drug Products (A-06-02-00041),        
September 2002.    
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  7 
     
II NN TT RR OO DD UU CC TT II OO NN   
Medicaid payment rules result in overpayments for drugs and 
emphasize the need for reform.  Although systemwide reforms were 
explored in 2004 and 2005 through congressional hearings37 and 
proposed in the Presidents 2006 budget, many States continue to use 
AWP as their primary method for setting reimbursement.  
Ongoing Work Involving AWP 
OIG is conducting an audit that will collect pharmacy invoice data for 
selected drugs.  The purpose of the audit is to determine pharmacies 
actual acquisition costs and then to compare them to other benchmarks, 
such as AWPs, WACs, and AMPs.  The audit will provide pricing data 
that can help States assess the various benchmarks that could be used 
when establishing Medicaid reimbursement methodologies for 
prescription drugs.  
METHODOLOGY 
Data Collection 
In January 2011, we emailed online surveys to pharmacy program 
administrators at the 51 State Medicaid agencies and received complete 
responses from all.38  We also interviewed CMS staff in February 2011.   
Medicaid reimbursement survey.  In the survey, we asked States to 
describe their reimbursement methodologies for Medicaid prescription 
drugs in the first quarter of 2011.  We also asked States to report the 
sources of the data used to determine reimbursement during that 
quarter (e.g., First DataBank).   
To assess the effect of First DataBanks ceasing publication of AWPs, we 
first asked States that use AWP as the basis for reimbursement 
whether they intended to continue using it.  If States intended to 
continue using AWP, we asked what publishing company they would 
obtain these data from and whether they intend to use AWP in the long 
term.  If the States did not intend to continue using AWP, we asked that 
they describe the changes they had made or anticipate making to their 
 
 
37 For example, see Medicaid Prescription Drug Reimbursement:  Why the Government 
Pays Too Much, House Committee on Energy and Commerce, Subcommittee on Oversight 
and Investigations, 108th Congress (2004). 
38 This includes the 50 States and the District of Columbia. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  8 
     
I N T R O D U C T I O N  
reimbursement methodologies.  These States were asked to provide the 
benchmark they intend to use to estimate acquisition cost, the actions 
necessary for implementation, and the expected date of implementation.   
We also asked all States to describe the role they would prefer CMS to 
play in developing Medicaid reimbursement methodologies and whether 
States would prefer that CMS develop a single national benchmark.   
Interview with CMS.  We asked staff from CMSs Center for Medicaid, 
Childrens Health Insurance Programs and Survey & Certification 
(CMCS)39 whether the agency has provided guidance to all States in 
regard to First DataBanks ceasing publication of AWPs.  If so, we asked 
that they provide us with copies of this guidance and the date it was 
released.  In addition, we asked whether individual States had contacted 
CMS with concerns about this topic.  We asked whether CMS intends to 
provide guidance to all States about AWP issues and Medicaid 
reimbursement and, if so, to describe it. 
Data Analysis 
States reimbursement methodologies.  We reviewed States responses to 
the surveys and determined that 45 States had AWP-based 
reimbursement methodologies in the first quarter of 2011 (either alone 
or in combination with other pricing points, such as WAC)  and 37 of 
these States obtained AWP information from First DataBank in that 
quarter.  Of the six States that did not use AWP as a basis for 
reimbursement, four usually used WAC (Rhode Island, Massachusetts, 
North Carolina, and Ohio) and two had recently switched from AWP to 
AAC (Alabama and Oregon). 
For the 45 States that reported using AWP-based reimbursement 
methodologies in the first quarter of 2011, we analyzed descriptions 
about any changes to their methodologies in relation to First DataBank 
and AWP.  We determined the number of States that (1) were unsure 
about their plans to replace AWP, (2) intended to replace AWP with 
other benchmarks, or (3) intended to continue using AWP.  We further 
analyzed the effect First DataBanks ceasing publication of AWPs may 
 
 
39 CMCS performs many functions such as assisting States with improving the quality of 
their Medicaid operations, and identifying and proposing modifications to Medicaid 
program measures, regulations, laws, and policies.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  9 
     
II NN TT RR OO DD UU CC TT II OO NN   
have on reimbursement methodologies by calculating the number of 
States within each of the three groups that had obtained AWPs from 
First DataBank in the first quarter of 2011.  
If a State was unsure about its plans to continue using AWP, we 
reviewed its responses to other survey questions to gain a better 
perspective of how the State would likely proceed.  For example, we 
reviewed answers about whether a new source for AWP had been 
considered and whether the State had begun to develop plans for a new 
methodology.  
If the State did not intend to continue using AWP, we reviewed State 
responses to determine the benchmark that would be used to replace 
AWP, the reasons for selecting the new benchmark, and when the new 
methodology might be implemented. 
For States that intend to continue using an AWP-based reimbursement 
methodology, we determined whether they had selected a publishing 
company to use in obtaining AWP, and if so, which source was selected.  
We also determined whether the States intend to use AWP in the long 
term. 
CMSs role in AWP issues.  We reviewed responses from CMS staff to 
determine whether the agency has provided guidance (or intends to 
provide guidance) to all States in regard to AWP issues.  We also 
determined whether individual States had contacted CMS with 
questions about the future of Medicaid reimbursement after AWPs are 
no longer available from First DataBank.  In conjunction with the CMS 
interview, we reviewed States responses about the role they would like 
CMS to play in regard to this topic.  We calculated the number of States 
that would prefer CMS to develop one national benchmark to set 
Medicaid reimbursement.  
Limitations 
Our findings are based on self-reported survey responses of State 
Medicaid agencies.  We did not verify their accuracy.  Responses were 
current as of February 2011; therefore, how States intend to pay for 
prescription drugs may have changed after that 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. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  10 
     
 F I N D I N G S  
Twenty of the forty-five 
Twenty States had not developed any definitive 
States that used AWP to set 
plans for prescription drug reimbursement 
reimbursement for Medicaid 
after First DataBank stops publishing AWPs  
prescription drugs in the 
first quarter of 2011 had not 
made any definitive plans regarding reimbursement for Medicaid 
prescription drugs after September 2011.  These 20 States were among 
the 37 that obtained AWPs from First DataBank in the first quarter of 
2011.  As a result, in an extremely short timespan, all 20 States will 
need to either contract with a new publishing company to obtain AWP 
data or implement new reimbursement methodologies that do not rely 
on AWPs. 
Eight of the twenty States were unsure about nearly every aspect of 
their post-September 2011 reimbursement plans.  These eight States 
had not decided whether they will continue to use AWP (from another 
source) or instead select another benchmark.  The remaining 12 States 
were able to provide some detail about their reimbursement plans.  Six 
States intend to discontinue using AWP but had not yet taken any steps 
to select a new benchmark, three States intend to continue using AWP 
but had not selected the publishing source for AWP data,40 and three 
States are considering plans to either use AWP from another source or 
replace AWP with WAC. 
      
In total, 15 of the 45 States 
Fifteen States have relatively well-developed 
that used AWP in determining 
plans to move away from AWP-based 
reimbursement for Medicaid 
reimbursement  
prescription drugs in the first 
quarter of 2011 have relatively well-developed plans to implement new 
methodologies that replace AWP with another benchmark.41  Thirteen of 
these fifteen States were among the 37 that used AWP data from First 
DataBank in the first quarter of 2011.  In addition, two States that had 
 
 
40 One of these States noted that it is using AWP as a contingency plan until it can 
incorporate CMS-published prices, such as AMP or actual acquisition cost. 
41 We considered a State to have a relatively well-developed plan if it could provide 
details about how drugs would be reimbursed after First DataBank stops publishing AWPs 
(e.g., the benchmark that would be used to replace AWP). 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  11 
     
F I N D I N G S  
obtained AWP from a source other than First DataBank in the first 
quarter of 2011 still intend to replace AWP.  
Three of the fifteen States plan to replace AWP with acquisition cost 
Three States are developing new reimbursement methodologies that use 
acquisition cost obtained through pharmacy surveys.42, 43  Two of these 
States had used First DataBank and the third State had used         
Medi-Span to obtain AWPs in the first quarter of 2011. Of the States 
using First DataBank, one has collected the pharmacy data needed to 
calculate AAC and hopes to use these data in calculating Medicaid 
reimbursement in the third quarter of 2011; the other State has 
proposed legislative changes and intends to complete a pharmacy 
acquisition cost survey.  The State that obtained AWP from Medi-Span 
has drafted a preliminary reimbursement plan to use AAC.   
Twelve of the fifteen States plan to replace AWP with WAC 
Twelve States intend to use WAC to determine Medicaid 
reimbursement amounts after AWPs are no longer available from First 
DataBank.44  The factors these States considered when selecting WAC 
as the new benchmark included its budget neutrality and availability.  
All but one of these States had obtained AWPs from First DataBank in 
the first quarter of 2011.   
Three of the 12 States already included WAC as a reimbursement 
option (in addition to AWP) prior to the first quarter of 2011.45  These 
three States intend to eliminate the AWP option from their 
methodologies once First DataBank stops AWP publication and instead 
use WAC exclusively.  Among the remaining nine States, three did not 
have a set date for implementing the new WAC-based methodologies 
 
 
42 In addition to these three States, Alabama and Oregon implemented reimbursement 
methodologies that replaced AWP with AAC in September 2010 and January 2011, 
respectively.  
43 Based on online reports, one of these States no longer intends to implement an      
AAC-based reimbursement method.  Accessed at http://www.drugchannels.net on           
April 13, 2011. 
44 This is in addition to the four States (Rhode Island, Massachusetts, North Carolina, 
and Ohio) that did not have AWP-based reimbursement methodologies in the first quarter 
of 2011 and were using WAC exclusively. 
45 Two of the States had added the WAC option in December 2010; the remaining State 
has included WAC and AWP in its reimbursement plan since 2003. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  12 
     
F I N D I N G S  
and six provided tentative dates that ranged from July 2011 to late 
2011.   
Ten of the forty-five States that 
Ten States will continue using AWP to set 
used AWP to set reimbursement 
reimbursement, at least in the short term  
for Medicaid prescription drugs in 
the first quarter of 2011 plan to continue using the benchmark after 
September 2011.  Among these 10 States, 4 had obtained AWPs from 
First DataBank in the first quarter of 2011 and now plan to obtain AWP 
data from another source (Medi-Span and/or Micromedex).  The other 
six States were already getting the data from one of these other sources.   
However, only 1 of the 10 States was certain it would use AWP to 
calculate reimbursement in the long term.46  The remaining nine States 
were either unsure whether they would use AWP as a long-term method 
(six States) or reported that they would use AWP as an interim plan 
until a new benchmark was selected (three States).   
Most States (44 of 51) wanted 
Forty-four States would like CMS to develop a 
CMS to develop a single 
national benchmark to set Medicaid 
national benchmark to set 
reimbursement for prescription drugs  
Medicaid reimbursement rates.  
Almost half of States (24) specified that they wanted a benchmark based 
on pharmacy acquisition costs (the majority of the remaining States did 
not specify a preferred benchmark).  One State mentioned that CMS 
would have less of a challenge obtaining access to acquisition cost data 
than would individual States.  In addition, if CMS obtained acquisition 
cost data, that would relieve States of the need for and expense of 
conducting an acquisition cost survey on their own.  Certain States also 
mentioned that the acquisition cost benchmark should be updated 
frequently and consider regional (urban or rural) differences and 
pharmacy-type differences (e.g., chain, independent, specialty).   
Among the seven States that did not want CMS to develop a national 
benchmark, the majority (four) had plans to continue using AWP (two 
had obtained AWPs from First DataBank and two from Medi-Span in 
the first quarter of 2011).  Of the remaining States, one had already 
 
 
46 We did not provide States with a definition for what constitutes a long-term plan.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  13 
     
F I N D I N G S  
switched from AWP to an AAC-based reimbursement method, one 
intended to switch to a WAC-based reimbursement method, and one did 
not have definitive reimbursement plans after First DataBank stops 
publishing AWPs.  
CMS is taking steps to address the AWP issue and plans to provide 
guidance in the future 
Our interview with CMS staff in February 2011 indicated that the 
agency had not yet provided uniform guidance to all States about 
options for Medicaid reimbursement after AWPs are no longer available 
from First DataBank.  However, CMS intends to provide guidance about 
this topic in the future.  CMS stated that although the agency does not 
mandate that a specific formula or methodology be used for 
reimbursement, it plans to conduct a nationwide survey to collect retail 
community pharmacy prices for drugs47 (including acquisition costs) and 
intends to discuss the results and other options for States in future 
guidance and/or proposed rulemaking.  In addition, when individual 
States contacted CMS about whether it plans to provide a new reference 
price that reflects pharmacy acquisition costs, CMS responded that it 
will make the data derived from this survey publicly available.48  When 
complete, these data would provide States with an additional 
benchmark option that reflects actual cost.   
 
 
 
 
 
 
 
 
 
 
 
47 As described in section 6001(e) of the DRA. 
48 CMS, Statement of Work, Survey of Retail Prices; Payment and Utilization Rates; and 
Performance Rankings.  Accessed at http://www.fbo.gov on February 22, 2011. 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  14 
     
F I NR DE ICN OG MS M  E N D A T I O N  
 
To ensure that Medicaid pays appropriately for prescription drugs, any 
reimbursement methodology must be based on benchmarks that are 
accurate and reliable estimates of pharmacy acquisition costs.  As of the 
first quarter of 2011, the majority of States used AWP data obtained 
from First DataBank as the primary benchmark.  Several OIG reports 
have shown that the inflated nature of AWPs causes Medicaid to pay too 
much for certain drugs, and as a result, we recommended that CMS 
work with States and Congress to base payments on a benchmark that 
more accurately reflects pharmacy acquisition costs.  Regardless, many 
States continue to use AWPs to set drug reimbursement amounts.  
First DataBank will stop publishing AWPs no later than           
September 26, 2011.  This has forced many States to reevaluate how 
they will pay for prescription drugs after that date and presents States 
with the opportunity to move to new reimbursement methodologies that 
would better reflect pharmacy acquisition costs.  However, many States 
are not fully prepared to implement new reimbursement methodologies 
at this time.  As a result, they will need to develop, obtain CMS 
approval for, and implement new reimbursement methodologies in an 
extremely limited timeframe.  In addition, a number of States will 
either begin or continue to base reimbursement on WAC, a 
manufacturer-reported benchmark that, like AWP, is not based on 
actual sales transactions.   
States overwhelmingly would prefer that CMS, to address the 
uncertainty surrounding drug reimbursement decisions, develop a 
national benchmark to set reimbursement.  A national benchmark that 
reflects actual pharmacy acquisition costs would eliminate States 
reliance on the inflated published prices that cause Medicaid and its 
beneficiaries to pay too much for certain drugs.  A CMS-developed 
national benchmark may also be more efficient and cost-effective than 
having 51 State Medicaid agencies individually collecting acquisition 
cost data from pharmacies.  Therefore, we recommend that CMS:  
Develop a national benchmark that accurately estimates acquisition cost 
and encourage States to consider it when determining Medicaid 
reimbursement for prescription drugs 
A CMS contractor plans to administer a survey to collect monthly 
pharmacy pricing data, including acquisition costs.  Using the data 
gathered in this survey, CMS should develop a national benchmark that 
reflects pharmacy acquisition costs (by the fourth quarter of 2011, if 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  15 
     
R E C O M M E N D A T I O N  
possible), giving States an additional option to use in setting Medicaid 
reimbursement for prescription drugs.  Among other things, this 
benchmark should account for differences in the types and the 
geographical locations of pharmacies.  After the national benchmark is 
provided to States, CMS should update it frequently to reflect price 
changes in the market.  In addition, with the implementation of any 
new methodology based on this benchmark, CMS should ask States to 
review their dispensing fees to ensure that payment levels for 
pharmacies are fair and appropriate. 
Although we recognize that CMS currently does not mandate the 
method States use to set reimbursement rates, we believe CMS should 
encourage all States to adopt the national benchmark.  According to our 
survey, States are looking to CMS for guidance in setting a benchmark 
and would welcome one based on actual pharmacy acquisition costs.  
This benchmark would have the potential to streamline Medicaid 
reimbursement systems; provide a transparent basis for payment; and, 
if applied appropriately, significantly reduce Medicaid payment 
amounts for prescription drugs.   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with our recommendation.  CMS stated that it is 
contracting with a vendor to develop a survey of retail prices and 
acquisition cost information.  CMS expects the survey will provide the 
ingredient costs of all covered outpatient drugs purchased by retail 
community pharmacies, including independent community pharmacies, 
chain pharmacies, and specialty pharmacies.  CMS expects to use these 
data to develop an estimate of AAC.  CMS also stated that it intends to 
include external stakeholders in this process to ensure that there is 
transparency with the AAC determination and that the methodology is 
implemented appropriately.   
We did not make any changes to the report based on CMSs comments.  
For the full text of CMSs comments, see Appendix A.  
   
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  16 
  x 
A  P  PEN  D  A 

Agency Comments 
/S.$""VIr:~.~ 
~ 
(  DEPARTMENT OF HEALTH & HUMAN SERVICES  Centers for Medicare & Medicaid Services 
,S~ 
Administrator 
Washington, DC 20201 
JUN  0 8 lOl1
DATE: 
TO: 	 Daniel R, Levinson 

Inspector General 

FROM: 	 Donald M. Berwick, M.D_ 

Administrator 

SUBJECT: 	 Office ofInspector General (OIG) Draft Report: "Replacing Average Wholesale 
Price: Medicaid Drug Payment Policy," (OEl-03-11-00060) 
Thank you for the opportunity to review and comment on the OIG Draft Report entitled 
"Replacing Average Wholesale Price: Medicaid Drug Payment Policy" (OEI-0311-00060). 
The 010 surveyed aliSO States and the District of Columbia to determine how States will set 
reimbursement for Medicaid prescription drugs after First DataBank stops publishing average 
wholesale prices (AWP) in September.2011, and to determine the role that States would prefer 
the Centers for Medicare & Medicaid Services (CMS) to play in developing Medicaid 
reimbursement methodologies for prescription drugs. 
The OIG fOllnd that of the 45 States with an AWP-based reimbursement methodology in the tirst 
quarter of20II, 20 States had not developed any definitive plans for prescription drug 
reimbursement after First DataBank stops publishing AWPs. The OIG also reported that IS 
States have relatively well-developed plans to move away from AWP-based reimbursement. 
Finally, the OIG reported that there were 10 States that stated they would continue using A WP to 
set reimbursement aftet First DataBank ceases to publish these rates. Fo.ur of the 10 States were 
receiving AWP from First DataBank, and have now made plans to obtain AWP data from 
another sOllrce (Medi-Span and/or Micromedex). 
In addition, the OIG leamed that 44 States would like CMS to develop a national benchmark to 
use in setting Medicaid reimbursement for prescription drugs. 
OIG Recommendatiqn 
CMS should develop a national benchmark that accutately estimates acquisition cost and 
encourage States to consider it when determining Medicaid reimbursement for prescription 
drugs. 
OEI031100060  REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  17     
A P P E N D I X   ~   A    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  18 
     
 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.   
Stephanie Yeager served as the team leader for this study.  Central 
office staff who contributed include Kevin Manley.  
OEI-03-11-00060    REPLACING AWP:  MEDICAID DRUG PAYMENT POLICY  19 
   
  
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 & 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 pro mote economy and efficiency throughout HHS. 
Office of Evaluatio n 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 prac tical recommendations for improving program operations.  
Office of Investiga tions 
 
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 in ternal 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 moni tors 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.