U.S. Department of Health and Human Services 
Office of Inspector General 
 
Medicare Part B 
Drug Payments: 
Impact of Price 
Substitutions 
Based on 2017 
Average Sales 
Prices 
 
OEI-03-19-00260 
Suzanne Murrin 
August 2019 
Deputy Inspector General 
 
for Evaluation and Inspections 
oig.hhs.gov  Report in Brief  U.S. Department of Health and Human Services 
August 2019 
Office  of Inspector General 
OEI-03-19-00260 
 
 
Medicare Part B Drug Payments:  Impact of 
Why OIG Did This Review 
Price Substitutions Based on 2017 Average 
When Congress established average 
sales price (ASP) as the basis for 
Sales Prices 
Medicare Part B drug reimbursement, 
it also provided a mechanism for 
What OIG Found 
monitoring market prices and limiting 
  The Centers for Medicare & Medicaid Services (CMS) lowered Part B 
potentially excessive payment 
reimbursement for 14 drugs on the basis of 2017 data. 
amounts.  The Social Security Act 
  CMSs price-substitution policy saved Medicare and its beneficiaries  mandates that OIG compare ASPs 
$7 million over 1 year.   with average manufacturer prices 
  Medicare and its beneficiaries could have saved up to an additional  (AMPs).  If OIG finds that the ASP for 
$2.9 million over 1 year if CMS implemented a more expansive  a drug exceeds the AMP by a certain 
percentage (currently 5 percent), the 
price-substitution policy that, for example, allowed substitution for 
Act directs the Secretary of Health and 
drugs that exceeded the 5-percent threshold in a single quarter. 
Human Services to substitute the 
Exhibit: Results of the Medicare Part B Price-Substitution Policy  ASP-based payment amount with 
a lower calculated rate.  Through 
regulation, CMS outlined that it would 
make this substitution only if the ASP 
for a drug exceeds the AMP by 
5 percent in the 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 ASPs 
from 2017.  This report also offers 
Source:  OIG analysis of ASP and AMP data from 2017.  a recommendation for achieving 
additional savings. 
What OIG Recommends 
How OIG Did This Review 
Because of the potential for savings to Medicare beneficiaries and to the 
To determine the effects of the 
program, the Office of Inspector General (OIG) recommends that CMS 
price-substitution policy, we calculated 
expand the price-substitution policy.  CMS did not concur with the  the difference between ASP-based 
recommendation, instead stating that as additional data become available  payment and AMP-based payment for 
and as it continues to gain experience with the price-substitution policy, it will  each drug with a price substitution.  
consider further changes as necessary.  OIG recognizes that CMS, in setting  We then applied this difference to the 
policy for payment substitution, needs to achieve an important balance  Medicare utilization for each of these 
drugs.  To account for a 3-quarter lag 
between safeguarding access to drugs and ensuring that Medicare and its 
between the reporting of pricing data 
beneficiaries do not overpay for drugs.  To provide greater flexibility and 
and the application of price 
achieve this continued balance, any future expansion of the 
substitutions, we used drug utilization 
payment-substitution policy could contain a provision that would prevent 
data for the fourth quarter of 2017 
a price substitution when there are indications that the substitution amount is 
through the third quarter of 2018 to 
below provider acquisition costs.  calculate the savings based on 2017 
ASP data. 
Full report can be found at http://oig.hhs.gov/oei/reports/oei-03-19-00260.asp   
TABLE OF CONTENTS 
BACKGROUND  1 
Methodology  3 
   
FINDINGS   
CMSs price-substitution policy saved Medicare and its beneficiaries $7 million over 1 year  5 
Expanding the price-substitution criteria could have generated up to $2.9 million in additional  6 
savings for Medicare and its beneficiaries 
   
CONCLUSION AND RECOMMENDATION   
Expand the price-substitution policy  7 
Agency Comments and OIG Response  8 
   
APPENDICES   
A: Detailed Methodology  9 
      B: Agency Comments  10 
   
ACKNOWLEDGMENTS  12 
 
   
BACKGROUND 
Objectives 
1.  To quantify the Medicare savings based on 2017 average sales 
prices that resulted from price substitutions for certain 
Part B-covered drugs.   
2.  To estimate the financial impact of expanding the Centers for 
Medicare & Medicaid Services (CMS) criteria for price substitution.  
When Congress established the average sales price (ASP) as the basis for 
Drug Pricing Terms  Medicare Part B drug reimbursement, it also provided a mechanism for 
monitoring market prices and adjusting ASP-based payments in certain 
Manufacturers Average Sales 
Price (ASP)  situations.  Specifically, the Social Security Act (the Act) mandates that the 
Office of Inspector General (OIG) compare ASPs with average manufacturer 
In general, the manufacturers ASP 
for a unit of drug that is sold is  prices (AMPs).1  If OIG finds that the ASP for a drug exceeds the AMP by 
defined as the manufacturers sales  a certain percentage (currently 5 percent), the Act directs the Secretary of 
of a drug to all purchasers in the 
Health and Human Services (after being notified by OIG) to substitute the 
United States in a calendar quarter 
payment amount with the lesser of the widely available market price (if any) 
divided by the total number of units 
or 103 percent of the AMP.2, 3  
of the drug sold by the manufacturer 
in that same quarter. 
Payments for Prescription Drugs Under Medicare Part B  
Average Manufacturer Price 
(AMP)  Medicare Part B covers a limited number of outpatient prescription drugs.  
These drugs are usually administered in a physicians office or other 
In general, AMP is defined as the 
average price paid to the  outpatient setting and include, for example, drugs used to treat cancer.  
manufacturer for the drug in the  To obtain reimbursement for Part B drugs, health care providers submit 
United States by (1) wholesalers for 
claims to Medicare contractors using Healthcare Common Procedure 
drugs distributed to retail 
Coding System (HCPCS) codes.  (Hereinafter in this report, we refer to 
community pharmacies and (2) retail 
community pharmacies that  HCPCS codes as drugs.4)  
purchase drugs directly from the 
CMS calculates the payment amount for these drugs using information 
manufacturer. 
provided by manufacturers.  Certain manufacturers must provide CMS with 
National Drug Code (NDC) 
the ASP and volume of sales for each of their National Drug Codes (NDCs) 
An NDC is a code that identifies  quarterly.5, 6  CMS then calculates an ASP-based payment amount for the 
a drugs manufacturer, product, and 
drug, which includes all of the NDCs associated with the drug.7  Under the 
package size.   
ASP pricing methodology, the Medicare reimbursement for most 
Healthcare Common Procedure 
Coding System (HCPCS) Code 
 
A HCPCS code is a standardized  1 Section 1847A(d)(2)(B) of the Social Security Act (the Act). 
billing code that is used primarily to  2 Section 1847A(d)(3) of the Act. 
3 Pursuant to  1847A(d)(3)(B)(ii) of the Act, the threshold percentage has been maintained at 5 percent. 
identify products, supplies, and other 
4 A HCPCS code for a drug represents the drug name and a specific amount of the drug but does not 
services.  A HCPCS code specifies the 
specify the manufacturer or package size. 
name and the amount of the drug 
5 Section 1927(b)(3) of the Act. 
and may represent one or more  6 An NDC is a drug code that identifies a specific manufacturer, product, and package size. 
NDCs.  7 Section 1847A(c) of the Act.  Certain types of sales are exempted from ASP, and ASP is net of any price 
concessions (with limited exceptions). 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2017 Average Sales Prices  1 
OEI-03-19-00260   
Part B drugs is equal to 106 percent of the volume weighted ASP for the 
drug.8  However, under sequestration legislation, Medicares portion of the 
payment amount for most drugs is reduced by 2 percent.9    
Quarterly reimbursement amounts are not based on current-quarter data 
because there is a 2-quarter lag between the sales period for which ASPs 
are reported and the effective date of the reimbursement amounts.  For 
example, manufacturers ASPs from the first quarter of 2018 were used to 
establish reimbursement amounts for the third quarter of 2018. 
Manufacturer Reporting of AMPs 
In addition to providing quarterly ASPs, certain manufacturers must provide 
CMS with the AMP for each of their NDCs quarterly.10  The AMP is generally 
calculated as a weighted average of prices for all of a manufacturers 
package sizes of a drug and is reported for the lowest identifiable quantity 
of the drug, e.g., 1 milliliter, one tablet, one capsule. 
AMP-Based Price Substitutions 
Through regulation, CMS established the criteria under which it would 
implement a price substitution for a drug.  CMS may substitute 103 percent 
of the AMP for the ASP-based reimbursement amount when OIG identifies 
a drug that exceeds the 5-percent threshold in the 2 previous quarters or 
3 of the previous 4 quarters.11  CMS implemented the AMP substitution 
policy in April 2013.  Because CMS believes that comparisons based on 
partial AMP data may not adequately reflect market trends, the agency will 
consider lowering reimbursement amounts only when corresponding AMP 
data are available for each of the NDCs used to determine the published 
reimbursement amount for a drug.12  To prevent the price-substitution 
policy from inadvertently raising Medicare reimbursement amounts, CMS 
does not substitute prices when the substituted amount is greater than the 
ASP-based payment amount calculated for the quarter in which the price 
substitution takes effect.13  CMS also does not substitute prices when the 
Food and Drug Administration (FDA) has identified a drug as being in short 
supply.14  Price substitutions take effect in the quarter after OIG shares the 
 
8 Section 1847A(b)(1) of the Act.  Medicare beneficiaries are responsible for 20 percent of this amount in 
the form of coinsurance. 
9 Part B claims dated on or after April 1, 2013, incur a reduction in payment in accordance with the 
Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012 (see CMS Medicare FFS 
Provider e-News, Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) Program 
Sequestration, March 8, 2013).  Under this mandatory payment reduction, Medicares portion of the 
payment rate for most Part B drugs is reduced by 2 percent.  This reduction does not apply to the 
coinsurance portion of the Medicare allowed amount for Part B drugs. 
10 Section 1927(b)(3) of the Act. 
11 42 CFR  414.904(d)(3). 
12 Ibid. 
13 Ibid. 
14 Ibid. 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2017 Average Sales Prices  2 
OEI-03-19-00260   
results of its most recent pricing comparison and remain in effect for one 
quarter.15 
Because of the 2-quarter lag between the ASP reporting period and the 
effective date of reimbursement amounts, and the additional quarter that is 
necessary for OIG to complete its pricing comparison, there is a 3-quarter 
lag between the ASP reporting period and the effective date of the price 
substitutions.  As shown in Exhibit 1, price substitutions that took effect in 
the fourth quarter of 2017 were based on comparisons of ASPs and AMPs 
from the first quarter of 2017. 
Exhibit 1: Timeline for AMP-Based Price Substitutions in 2017 
First    Manufacturers collect ASPs and AMPs from the first quarter of 2017 for their drugs sold during that quarter 
 
Quarter  
2017 
Manufacturers send ASPs and AMPs from the first quarter of 2017 to CMS by April 30, 2017 
  Second   CMS sends first-quarter 2017 ASP and AMP data to OIG by end of June 2017 
Quarter  
2017 
  OIG identifies the drugs that meet the price-substitution criteria and provides them to CMS by August 15, 2017 
Third   CMS publishes Part B drug reimbursement rates for the fourth quarter of 2017, including price substitution for 
 
Quarter   drugs thatbased on data from the first quarter of 2017met the criteria  
2017 
 CMS uses AMP-based reimbursements for Part B drugs that met criteria based on data from the first quarter of 
Fourth 
  2017 
Quarter  
2017 
OIG Monitoring of ASPs and AMPs 
To comply with its statutory mandate, OIG has provided CMS with pricing 
comparisons since the January 2005 implementation of the ASP 
reimbursement methodology for Part B drugs.  OIG issued six annual 
reports for the years prior to CMSs April 2013 implementation of the AMP 
price-substitution policy.  These reports estimated that Medicare and its 
beneficiaries would have saved $35 million based on data from 2009 
through 2012 if CMS implemented the AMP price substitutions.  OIGs 
2013 annual report was the first to calculate annual savings that were 
a direct result of CMSs price-substitution policy.  
Methodology  To determine the effects of the price-substitution policy, we calculated the 
difference between ASP-based payment and AMP-based payment for each 
drug with a price substitution.  We then applied this difference to the 
Medicare utilization for each of these drugs.  To account for a 3-quarter lag 
between the reporting of pricing data and the application of price 
substitutions, we used drug utilization data for the fourth quarter of 2017 
 
15 42 CFR  414.904(d)(3). 
Medicare Part B Drug Payments:  Impact of Price Substitutions Based on 2017 Average Sales Prices  3 
OEI-03-19-00260   
through the third quarter of 2018 to calculate the savings based on 
2017 ASP data.  Appendix A provides a more detailed methodology. 
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  We conducted this study in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General on 
Integrity and Efficiency. 
   
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FINDINGS 
CMSs  CMS initiated price substitutions for 14 drugs based on 2017 data.  Price 
substitutions for these drugs saved Medicare and its beneficiaries 
price-substitution 
$7 million over the 1-year period between the fourth quarter of 2017 and 
policy saved 
the third quarter of 2018, as shown in Exhibit 2.  Since CMS instituted its 
Medicare and its  price-substitution policy in 2013, Medicare and its beneficiaries have saved 
$62.5 million, including the $7 million amount in 2017.   
beneficiaries 
$7 million over   
1 year   
 
Exhibit 2: Price substitutions saved Medicare and its beneficiaries $7 million 
    Quarter(s) in Which Price   
Substitutions Occurred 
Drug  Description  Fourth  First  Second  Third  Savings 
Quarter  Quarter  Quarter  Quarter 
2017  2018  2018  2018 
J0592  Buprenorphine hydrochloride          $195 
J0670  Mepivacaine HCl injection          $1,315 
J1580  Garamycin gentamicin injection          $8,322 
Tetanus immune globulin 
J1670  $15,740 
injection         
J2400  Chloroprocaine HCl injection          $2,896 
J2501  Paricalcitol          $1,107 
J2720  Protamine sulfate injection          $335 
J3315  Triptorelin pamoate          $1,867,572 
J3486  Ziprasidone mesylate          $13 
J7520  Sirolimus oral          $5,110,869 
J9100  Cytarabine HCl injection          $374 
J9200  Floxuridine injection          $316 
Q0166  Granisetron HCl oral          $351 
Q0167  Dronabinol oral          $5,923 
          Total  $7,015,328 
Source:  OIG analysis of A SP and AMP data from 2017 
   
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Expanding the  CMS has maintained a cautious approach to price substitutions.  However, 
this cautious approach may restrict the Governments ability to limit 
price-substitution 
potentially excessive payment amounts based on ASPs.  If CMS had 
criteria could have 
expanded its price-substitution criteria to include certain other Part B drugs 
generated up to  in 2017, Medicare and its beneficiaries could have saved up to an additional 
$2.9 million in  $2.9 million over 1 year. 
additional savings  Millions could be saved by expanding the substitution criteria to include 
drugs that exceeded the 5-percent threshold in a single quarter.  
for Medicare and its 
Eighteen drugs with complete AMP data exceeded this threshold in at least 
beneficiaries   
1 quarter of 2017 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.  If 
the 18 drugs had been eligible for price reductions on the basis of data from 
a single quarter only, Medicare and its beneficiaries could have saved up to 
an additional $2.9 million between the fourth quarter of 2017 and the 
third quarter of 2018.16  Since 2013, Medicare and its beneficiaries could 
have saved up to an additional $29.1 million (including the $2.9 million for 
2017) if CMS had expanded its criteria to include drugs that exceeded the 
5-percent threshold in a single quarter.   
Previously, CMS has expressed concern that price substitutions based on 
results from a single quarter may represent an aberrant quarter of pricing 
rather than a market trend.17  However, according to 2016 and 2017 data, 
10 of these 18 drugs exceeded the 5-percent threshold more than once over 
the 2-year period.18  These 10 drugs accounted for $2.4 million of the 
$2.9 million in additional savings.  Over the 2-year period, 7 of the 
10 exceeded the threshold in 2 of the 8 quarters, and the other 3 drugs 
exceeded the threshold three or more times in the 8 quarters.  
 
   
 
16 These 18 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.  One of these drugs did not have any allowed 
Part B utilization during the reviewed period; therefore, the estimated savings for this drug were $0.  We 
excluded one additional injectable drug from this analysis because the oral form of this drug was 
identified by FDA as being in short supply. 
17 76 Fed. Reg. 73026, 73288 (Nov. 28, 2011). 
18 This analysis is based on pricing comparison results for the 2-year period between the first quarter of 
2016 and the last quarter of 2017. 
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CONCLUSION AND RECOMMENDATION 
Under the current price-substitution policy, 14 drugs were subject to 
reimbursement reductions on the basis of data from 2017, saving Medicare 
and its beneficiaries $7 million between the fourth quarter of 2017 and the 
third quarter of 2018.  Since the inception of price substitution, Medicare 
and its beneficiaries have saved $62.5 million.  Price substitution continues 
to be an important mechanism for CMS to employ in ensuring reasonable 
payments for Medicare Part B drugs.   
CMS could achieve even greater savings for Medicare and its beneficiaries 
by expanding its criteria for AMP-based price substitutions.  OIG has 
previously recommended that CMS expand the price-substitution criteria.  
Since 2013, Medicare and its beneficiaries could have saved up to an 
additional $29.1 million if CMS had expanded its criteria.  CMS stated that it 
did not concur with expanding the price-substitution policy and expressed 
concern that expanding price-substitution criteria may impede physician 
and beneficiary access to drugs.  OIG agrees that access to prescription 
drugs should always be considered when contemplating pricing policies, 
and OIG supports current safeguards to prevent substitutions for drugs that 
FDA has identified as being in short supply.  However, OIG continues to 
believe that CMS can achieve a better balance between safeguarding access 
to drugs and ensuring that Medicare and its beneficiaries do not overpay 
for drugs.  To provide greater flexibility and achieve this continued balance, 
any future expansion of the payment-substitution policy could contain 
a provision that would prevent a price substitution when there are 
indications that the substitution amount would be below provider 
acquisition costs. 
To more effectively limit excessive payment amounts based on ASPs and to 
generate greater savings for Medicare and its beneficiaries, we continue to 
recommend that CMS expand its price-substitution criteria to include at 
least some additional drugs.  A more expansive policy might include drugs 
with complete AMP data that exceed the 5-percent threshold in a single 
quarter.  However, CMS also could consider a more modest expansion of 
the policy that better captures drugs that repeatedly exceed the threshold.   
   
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AGENCY COMMENTS AND OIG RESPONSE 
CMS did not concur with our recommendation, instead stating that as 
additional data becomes available and as it continues to gain experience 
with the price-substitution policy, it will consider further changes as 
necessary.  CMS believes the current policy safeguardswhich identify 
drugs that exceed the 5-percent threshold for 2 consecutive quarters or 
3 of 4 quartersidentify drugs that consistently exceed the threshold. 
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 2017 data shows 
that if the policy had been expanded to include the 18 drugs that exceeded 
the 5-percent threshold in a single quarter, beneficiaries and the program 
could have saved up to an additional $2.9 million.  The majority of the 
18 drugs we identified for these potential savings exceeded the threshold 
multiple times over a 2-year period.  Expanding the policy to capture drugs 
that exceed the threshold in a single quarter could increase the savings to 
beneficiaries and the program and still ensure access to drugs.  
To help ensure that CMS has sufficient information for its consideration 
regarding the price-substitution policy, OIG will continue to provide CMS 
with the results from our quarterly pricing comparisons, along with annual 
reports on the impact of the price-substitution policy.  
For the full text of CMSs comments, see Appendix B. 
 
   
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APPENDIX A: Detailed Methodology 
We obtained NDC-level ASP data and AMP data for Part B drugs from CMS  
for 2017.  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 2017 through the third quarter of 2018.  In 
addition, we obtained the drugs that had price substitutions based on data 
from 2017.   
For each quarter of 2017, we calculated the volume-weighted AMP 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.19  We then subtracted the AMP-based reimbursement amount 
from the ASP-based reimbursement amount for the quarter in which the 
price substitution occurred20 and multiplied the difference by the Part B 
utilization for each drug in the respective quarter that the price substitution 
occurred.   
   
 
19 One of these drugs associated with a potential price substitution did not have a payment amount 
based on ASP during the quarter the substitution would have taken place.  However, we used the 
same method to calculate potential savings, i.e., we calculated the difference between the proposed 
substituted amount and the actual payment amount and multiplied that difference by the Part B 
utilization. 
20 AMP-based price substitutions based on data from the first through fourth quarters of 2017 were 
applied in the fourth quarter of 2017 through the third quarter of 2018, respectively. 
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APPENDIX B: Agency Comments 
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ACKNOWLEDGMENTS 
Conswelia McCourt served as the team leader for this study.  Office of 
Evaluation and Inspections staff who provided support include 
Althea Hosein, Christine Moritz, and Michael Novello.  
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 2017 Average Sales Prices  12 
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