Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

M D P
EDICAID  RUG  RICE 

C : 

OMPARISON
A S P
VERAGE  ALES  RICE TO 

A W P
VERAGE  HOLESALE  RICE

Daniel R. Levinson

Inspector General 

June 2005 

OEI-03-05-00200
 Office of Inspector General 

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts management and 
program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs.  The OEI also 
oversees State Medicaid fraud control units, which investigate and prosecute fraud and 
patient abuse in the Medicaid program. 
Office of Investigations 
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers.  The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations.  The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department.  The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops compliance program guidances, renders advisory opinions on OIG sanctions to 
the health care community, and issues fraud alerts and other industry guidance.    E X E C U T I V E   S U M M A R Y  

OBJECTIVE 
To compare average sales price (a statutorily defined price based on 
actual sales transactions) to average wholesale price (the published 
price most States use to set Medicaid reimbursement rates) for 
Medicare-covered drugs. 
BACKGROUND 
Increases in Medicaids prescription drug costs have generated 
considerable attention from the Administration, Congress, and the 
States. Federal regulations require that each States reimbursement for 
Medicaid prescription drugs not exceed the lower of (1) its estimated 
acquisition cost plus a dispensing fee, or (2) the providers usual and 
customary charge to the public for the drug.   
Currently, most States estimate acquisition cost by discounting the 
average wholesale price (AWP) by a certain percentage.  A small 
number of States use wholesale acquisition cost (WAC) plus a 
percentage markup when determining estimated acquisition cost.  The 
AWP is a published price reported in commercial publications.  
Similarly, the WAC is a price reported in commercial publications. 
Prior to the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Public Law 108-173), WAC was not a 
term defined in statute or regulation.  The MMA defined WAC as the 
manufacturers list price for the drug to wholesalers or direct 
purchasers, not including prompt pay or other discounts, rebates, or 
reductions in price, for the most recent month for which information is 
available.   
Previous Office of Inspector General work demonstrated that the AWPs 
States use to establish their Medicaid drug reimbursement rates are 
higher than the prices retail pharmacies pay to purchase drugs.  The 
AWP is not defined in law or regulation, and fails to account for the 
discounts available to various payers.   
Prior to 2005, Medicare also used the AWP as the basis for Part B drug 
reimbursement.  As of January 1, 2005, the MMA changed the basis of 
reimbursement for prescription drugs from AWP to average sales price 
(ASP). 
Unlike AWP and WAC, there is a specific method to calculate ASP 
defined in the MMA and the Social Security Act (the Act). Pursuant to 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  i  E X E C U T I V E   S U M M A R Y  
section 1847A(c) of the Act, as amended by the MMA, the ASP is a 
manufacturers unit sales of a drug to all purchasers in the United 
States in a calendar quarter divided by the total number of units of the 
drug sold by the manufacturer in that same quarter.  The ASP is net of 
any price concessions such as volume, prompt pay, and cash discounts.  
Certain sales are exempt from the calculation of ASP, including sales at 
a nominal charge.  Similar to ASP, average manufacturer price (AMP) is 
defined in the Act and based on actual sales.  Section 1927(k)(1) of the 
Act defines AMP as the average price paid to the manufacturer by 
wholesalers in the United States for drugs distributed to the retail 
pharmacy class of trade, minus customary prompt pay discounts.  
Medicaid uses AMP data reported quarterly by manufacturers to 
determine the rebate amount for a drug.   
The Presidents 2006 Budget proposes to require State Medicaid 
programs to reimburse pharmacies the ASP of a drug.  This proposal 
intends to align pharmacy reimbursement with pharmacy acquisition 
cost and would be consistent with Medicare reimbursement for Part B-
covered drugs as established by the MMA. 
This analysis compares ASP to AWP for 2,077 national drug codes 
where both ASP and AWP data were available for the third quarter of 
2004. We will refer to national drug codes with ASP data as Medicare-
covered drugs.  Medicare-covered drugs may also be covered under the 
Medicaid program.  We analyzed a subset of these national drug codes 
(1,481) to compare AMP to AWP by drug type.  In addition, we 
compared WAC to AWP for 1,898 national drug codes.  
A companion report, Medicaid Drug Price Comparisons:  Average 
Manufacturer Price to Published Prices (OEI-05-05-00240), compares 
AMP to AWP and WAC for Medicaid-reimbursed prescription drugs. 
That analysis includes 24,101 national drug codes. 
FINDING 
Average sales price is substantially lower than average wholesale 
price for drug codes in this review.  For 2,077 national drug codes, the 
median percentage difference between ASP and AWP is 49 percent. 
Even when factoring in the discounted AWP most States use to 
calculate the estimated acquisition cost for Medicaid drugs, ASP is still 
substantially lower. 
The difference between ASP and AWP was greatest for generic drugs. 
For 704 single source brand codes, ASP is 26 percent below AWP at the 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  ii  E X E C U T I V E   S U M M A R Y  
median, and for 216 multisource brand codes, ASP is 30 percent below 
AWP at the median.  For 1,152 generic national drug codes, ASP is    
68 percent less than AWP at the median.  For five drug codes, there was 
no drug type information in the drug compendium. 
To determine if the difference between the analyzed prices were similar 
for Medicare and Medicaid drugs, we compared the results of our 
analysis for Medicare-covered drugs to the analysis for Medicaid-
reimbursed drugs in our companion report. The companion report 
Medicaid Drug Price Comparisons: Average Manufacturer Price to 
Published Prices  (OEI-05-05-00240) examined the differences between 
AMP and AWP for all drugs reimbursed by Medicaid (24,101 national 
drug codes). 
We found that the differences between AWP and other prices analyzed 
are similar for both Medicare and Medicaid drugs.  For the 1,481 codes 
that had AMP and AWP in our review, we found that the difference 
between AMP and AWP for generic drugs is 72 percent at the median; 
correspondingly, the companion report found that the difference 
between AMP and AWP for generic drugs is 70 percent at the median.  
For single source and multisource brand drugs, this report found that 
the differences between AMP and AWP are 22 and 25 percent at the 
median, respectively.  Similarly, the companion report found that the 
differences between AWP and AMP for single source and multisource 
brand drugs are 23 and 28 percent at the median, respectively. 
CONCLUSION 
There is significant interest in changing Medicaid reimbursement for 
prescription drugs by aligning pharmacy reimbursement more closely 
with pharmacy acquisition cost. The changes proposed in the 
Presidents 2006 budget would make Medicaid reimbursement 
consistent with Medicare by basing reimbursement on actual sales 
transactions. This analysis demonstrates that ASP, which is a 
statutorily defined price based on actual sales transactions including 
discounts, was lower than published prices AWP and WAC.   
We believe this inspection will provide useful information to those 
considering the implications of changing Medicaids drug 
reimbursement methodology.  The substantial disparities between 
prices based on actual sales and the published prices currently being 
used indicate that changing the basis of Medicaid reimbursement could 
have a significant impact on Medicaid expenditures.   
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  iii  E X E C U T I V E   S U M M A R Y

AGENCY COMMENTS 
CMS commented that these companion reports make clear that current 
Medicaid payment rules result in overpayments for drugs and 
emphasizes the need for reform.  Similar problems with overpayments 
for Medicare drugs led to passage of the MMA provisions that changed 
the basis of reimbursement for drugs from AWP to ASP.  CMS 
reiterated that the Presidents 2006 budget proposes to solve this 
problem by the use of ASP so Medicaid drug prices will reflect actual 
costs.  CMS stated that Congress should enact legislation to ensure that 
Medicaid payment for drugs is related to actual prices paid by 
pharmacies.  The full text of CMSs comments are provided in   
Appendix A. 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  iv    T A B L E   O F   C O N T E N T S  

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

INTRODUCTION ................................................ 1 

FINDING ......................................................... 8 

Average sales price is substantially lower than average  

  wholesaleprice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

CONCLUSION .................................................. 10 

APPENDIX ...................................................... 11 

Appendix A:  Centers for Medicare & Medicaid Services 

Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

ENDNOTES ..................................................... 14

ACKNOWLEDGMENTS ......................................... 15
   I N T R O D U C T I O N  

OBJECTIVE 
To compare average sales price (a statutorily defined price based on 
actual sales transactions) to average wholesale price (the published 
price most States use to set Medicaid reimbursement rates) for 
Medicare-covered drugs. 
BACKGROUND 
Increases in Medicaids prescription drug costs have generated 
considerable attention from the Administration, Congress, and the 
States. The House Energy and Commerce Subcommittee on Oversight 
and Investigations held a hearing in December 2004 on Medicaid 
Prescription Drug Reimbursement: Why the Government Pays Too 
Much and explored potential reforms.1  Congress has established a 
Medicaid commission to provide recommendations to achieve $10 billion 
in overall Medicaid savings over the next 5 years and to consider longer-
term performance goals and recommendations.2  The National 
Governors Association is also working on proposals to reduce Medicaid 
spending, including spending on prescription drugs.3 
The Office of Inspector General (OIG) and others have found evidence 
that because States lack accurate drug pricing data, Medicaid drug 
reimbursements overestimate pharmacies actual acquisition costs.  OIG 
has also found that Medicaid drug reimbursements exceed the prices 
paid by other Federal programs. OIG has recommended that Medicaid 
should base reimbursement on pricing data that more accurately 
reflects actual acquisition costs.4 
The Administration has expressed interest in adopting a 
reimbursement system for Medicaid that is similar to the Medicare Part 
B drug reform enacted under the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA)      
(Public Law 108-173).  The MMA amended the Social Security Act (the 
Act) to change the method of reimbursement for prescription drugs from 
average wholesale price (AWP) to average sales price (ASP). 
The Presidents 2006 budget proposes restructuring Medicaid pharmacy 
reimbursement to save an estimated $542 million in fiscal year (FY) 
2006 and $15.1 billion over 10 years.5  This budget also proposes to 
require State Medicaid programs to reimburse pharmacies the ASP of a 
drug plus a 6 percent fee for storage, dispensing, and counseling.  
According to the Presidents budget, this reimbursement methodology 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  1  II NN TT RR OO DD UU CC TT II OO NN
aligns pharmacy reimbursement with pharmacy acquisition cost and is 
consistent with Medicare reimbursement for Part B-covered drugs as 
established by the MMA. 
Medicaid Reimbursement for Prescription Drugs 
The Medicaid program, established under Title XIX of the Act, is 
administered by States and financed with 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 provide coverage for prescription drugs under the 
Medicaid program. 
Federal regulations require, with certain exceptions, that State 
Medicaid reimbursements for prescription drugs not exceed the lower of 
(1) its estimated acquisition cost plus a dispensing fee, or (2) the 
providers usual and customary charge to the public for the drug. CMS 
allows each State to define estimated acquisition cost. 
Average wholesale price and wholesale acquisition cost. Currently, most 
States estimate acquisition cost by discounting AWP by a certain 
percentage. A small number of States use wholesale acquisition cost 
(WAC) plus a percentage markup when calculating estimated 
acquisition costs. According to information obtained from CMSs Web 
site, the discount from AWP in the State methodologies ranged from 
5 to 50 percent, and the percentage markup to WAC ranged from 
5 to 12 percent as of March 2005. The median discount for drugs for 
States that use AWP to calculate estimated acquisition cost was AWP 
minus 12 percent. The median percentage markup to WAC for the 
small number of States that use this price to calculate estimated 
acquisition cost was 8.5 percent. 
The AWP is a price published in commercial publications. It is an 
important prescription drug pricing benchmark for payers throughout 
the health care industry. Similarly, the WAC is a price reported in 
commercial publications. Prior to the MMA, WAC was not a term 
defined in statute or regulation. The MMA defined WAC as the 
manufacturers list price for the drug to wholesalers or direct 
purchasers, not including prompt pay or other discounts, rebates, or 
reductions in price, for the most recent month for which information is 
available. 
Previous OIG work demonstrated that the AWPs States use to calculate 
estimated acquisition cost that determine Medicaid drug 
reimbursement rates are higher than the prices retail pharmacies pay 
OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  2  I N T R O D U C T I O N  
to purchase drugs.6  The AWP is not defined in law or regulation, and 
fails to account for the discounts available to various payers, including 
certain Federal agencies, providers, and large purchasers.  It is a price 
derived from manufacturer-reported data for both brand and generic 
drugs. 
According to the Presidents 2006 Budget, the current Medicaid 
reimbursement method has created an incentive for manufacturers to 
artificially raise the AWP to make their products more attractive to 
pharmacies because the profit will be larger with the higher price.  
According to Congressional testimony, States continue to rely on AWP, 
despite its widely recognized deficiencies, because they lack access to 
more accurate pricing information. 
Prior to 2005, Medicare also used AWP as the basis for Part B drug 
reimbursement.  However, numerous reports by OIG and the 
Government Accountability Office, as well as data collected by the 
Department of Justice and Congressional investigations, indicated that 
Medicares reimbursement rate was significantly higher than the prices 
that drug manufacturers, wholesalers, and other similar entities 
actually charge to physicians and suppliers who purchase these drugs. 
Consequently, the MMA changed the basis of reimbursement for 
prescription drugs from AWP to ASP.   
Medicare Drug Reimbursement Methodologies 
Average sales price. In 2005, Medicare began to pay for most drugs using 
an entirely new methodology based on ASP rather than AWP.  Unlike 
AWP and WAC, there is a specific method to calculate ASP set forth in 
the MMA and the Act.  Section 1847A(c) of the Act, as amended by the 
MMA, defines ASP as a manufacturers unit 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 
quarter.  The ASP is net of any price concessions such as volume, 
prompt pay, and cash discounts; free goods contingent on purchase 
requirements; chargebacks; and rebates other than those obtained 
through the Medicaid drug rebate program. Certain sales are exempt 
from the calculation of ASP, including sales at a nominal charge. 
Manufacturers report ASPs to the Centers for Medicare & Medicaid 
Services (CMS) on a quarterly basis by national drug code, which is an 
11-digit identifier that indicates the manufacturer of the drug, the 
product dosage form, and the package size.  Third quarter 2004 ASP 
submissions to CMS from manufacturers served as the basis for first 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  3  III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN
quarter 2005 Medicare allowances for most covered drug codes. As of 
January 1, 2005, Medicares allowance for most covered outpatient drug 
codes is equal to 106 percent of the volume-weighted ASPs for those 
drugs. 
The Medicaid Drug Rebate Program 
Average manufacturer price. Similar to ASP, average manufacturer price 
(AMP) is defined by law and based on actual sales transactions. In 
order for a manufacturers drug to be eligible for Federal Medicaid 
matching funds, section 1927(a)(1) of the Act mandates that drug 
manufacturers enter into rebate agreements with the Secretary and pay 
quarterly rebates to State Medicaid agencies. Under these rebate 
agreements and the law, manufacturers must provide CMS with the 
AMP for each of their national drug codes on a quarterly basis. 
Medicaid calculates drug rebates based on AMP. Section 1927(k)(1) of 
the Act defines AMP to be the average price paid to the manufacturer 
by wholesalers in the United States for drugs distributed to the retail 
pharmacy class of trade minus customary prompt pay discounts. The 
AMP is calculated as a weighted average of prices for all of a 
manufacturers package sizes of a drug sold during a given quarter and 
is reported for the lowest identifiable quantity of the drug (e.g., one 
milligram, one milliliter, one tablet, one capsule). 
Companion Report 
A companion report: Medicaid Drug Price Comparisons: Average 
Manufacturer Price to Published Prices (OEI-05-05-00240), examines 
the differences between AWP, WAC, and AMP for all Medicaid-
reimbursed drug codes (24,101 national drug codes). For comparability, 
we also examined the differences between AMP, WAC, and AWP for 
national drug codes with ASP values. This comparison would determine 
if there were substantial price differences for Medicaid-reimbursed 
drugs and our smaller subset of Medicare-covered drugs. 
METHODOLOGY 
This analysis compares ASP to AWP for 2,077 national drug codes 
where both ASP and AWP data were available for the third quarter of 
2004. We will refer to national drug codes with ASP data as Medicare-
covered drugs. Medicare-covered drugs may also be covered under the 
Medicaid program. We also analyzed a subset of these national drug 
codes (1,481) where both AMP and AWP were available. In addition, we 
analyzed 1,898 codes where both WAC and AWP were available. We 
OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  4  II NN TT RR OO DD UU CC TT II OO NN
analyzed these subsets of codes to determine how the differences 
between the price points for Medicare-covered drugs would compare to 
the differences for Medicaid-reimbursed drugs found in our companion 
report. 
Centers for Medicare & Medicaid Services Data 
We obtained ASP and AMP data for third quarter 2004 from CMS. 
Average sales price data.  We obtained ASPs for 2,113 national drug codes 
that CMS used in its calculation of volume-weighted ASP for Medicare 
reimbursement. When calculating the ASPs, CMS only includes 
national drug codes with ASP submissions that are deemed acceptable. 
We did not examine the national drug codes that CMS opted to exclude 
from its calculation. These ASPs were based on data submitted by 
manufacturers for the third quarter of 2004. 
We did not verify the accuracy of the billing units information contained 
in CMSs ASP data; however, OIG may review this information as part 
of a future study. 
Average manufacturer price data.  For the 2,113 national drug codes that 
had ASP data, we also obtained AMP data from CMS for the third 
quarter of 2004. We determined that 1,500 of these national drug codes 
had usable AMPs. We used a national drug codes AMP when (1) CMS 
used the code in its calculation of volume-weighted ASP, and (2) we 
could successfully identify the amount of drug that the codes AMP 
represented. 
An AMP is reported for the lowest identifiable quantity of the drug 
contained in the national drug code (e.g., one milligram, one milliliter, 
one tablet, one capsule). In contrast, we obtained ASP, AWP, and WAC 
data for the entire amount of the drug contained in the national drug 
code (e.g., for 50 milliliters, for 100 tablets). To ensure that all prices 
were for comparable units, we converted each AMP so that it 
represented the total amount of the drug contained in that code. To 
accomplish this, we multiplied the AMPs for these 1,500 national drug 
codes by the total amount of the drug contained in each code, as 
identified by sources such as the CMS crosswalk file, Red Book, 
manufacturer Web sites, and the Food and Drug Administrations 
national drug code directory. 
OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  5  III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN
Drug Compendium Data 
We obtained AWP and WAC package prices for third quarter 2004 from 
a national drug compendium. This compendiums drug databases 
contain national drug codes, drug names, product description, and 
pricing information, including AWP and WAC. 
Since we obtained monthly data for AWP and WAC, we selected a price 
from 1 month of third quarter 2004 for both price types. To be 
conservative, we selected the minimum quarterly AWP per national 
drug code and maximum quarterly WAC per national drug code for this 
analysis. 
Third quarter 2004 average wholesale price and wholesale acquisition cost. 
We obtained AWP and WAC prices per national drug code for third 
quarter 2004 because the ASP and AMP prices we collected are based on 
manufacturer submissions for the third quarter of 2004. From the 
2,113 national drug codes for which we had ASP data, we found 
2,079 codes with AWP data and 1,899 with WAC data. 
Average Sales Price Comparison 
We created one data set that contained ASP and AWP data for all drugs 
under review. We excluded from our analysis codes that did not have 
information for both ASP and AWP. We also excluded two codes where 
the ASP was zero. As a result of this, there were 2,077 unique national 
drug codes included in our comparison of ASP to AWP. 
We used AWP as our point of comparison because most States calculate 
estimated acquisition cost based on AWP minus some percentage. For 
each of the 2,077 national drug codes, we calculated the percentage 
difference between ASP and AWP. We calculated the median 
percentage difference for these 2,077 codes under review. 
We also calculated the median percentage differences for single source, 
innovator multiple source, and non-innovator multiple source drugs. 
Hereafter, we will refer to single source as single source brand; 
innovator multiple source as multisource brand; and non-innovator 
multiple source as generic. We identified each drug type for these 
categories based on information in the drug compendium. For five 
codes, there was no drug type information in the drug compendium. We 
excluded these five codes from our analysis of drug type. We did not 
verify the data from the compendium. 
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Comparisons of Other Price Points 
We analyzed a subset of codes to determine how the differences between 
the price points for Medicare-covered drugs would compare to the 
differences for Medicaid-reimbursed drugs found in our companion 
report. Out of the 2,077 drug codes we reviewed, we compared AMP to 
AWP for the 1,483 codes where both prices were available. For two of 
these codes, there was no drug type information in the drug 
compendium. We excluded these codes from our analysis of drug type. 
For each of the 1,481 codes in this subset, we calculated the median 
percentage difference between AMP and AWP for each drug type. For 
this analysis of Medicare-covered drugs, we did not use the same drug 
compendium for AWP and WAC data as the companion report. 
Out of the 2,077 drug codes we reviewed, we compared WAC to AWP for 
the 1,898 codes where both prices were available. For each code in this 
subset, we calculated the median percentage difference between WAC 
and AWP for each drug type. 
Limitations 
We intend this inspection to provide information that is useful to those 
who are considering changing the basis of Medicaid reimbursement 
from a published price to a price based on actual sales. However, our 
analysis compares price points and not actual reimbursements. It is a 
theoretical analysis that is useful to estimate the impact of such a 
reimbursement change, but it does not measure the actual impact of 
such a change for two main reasons. First, States do not always 
reimburse at the amount that their estimated acquisition cost formulas 
would predict. Our analysis does not capture the full complexity of 
Medicaid reimbursement, which can include tiered estimated 
acquisition cost formulas as well as other price points (i.e., usual and 
customary charge, Federal upper limits, and State maximum allowable 
costs). Second, we are comparing published prices to ASP. However, if 
the basis of Medicaid reimbursement were changed to ASP, it would 
likely be ASP plus a markup percentage. For example, Medicare Part B 
now reimburses prescription drugs at ASP plus 6 percent. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the President=s Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  7    F I N D I N G  

Average sales price is substantially lower than  The ASP, a statutorily defined price 
based on actual sales transactions 
average wholesale price for drug codes in this 
including discounts, is 
review 
substantially lower than AWP. For 
2,077 national drug codes with ASP and AWP data, ASP is 49 percent 
lower than AWP at the median.   
For the purposes of Medicaid reimbursement, most States estimate 
acquisition cost by discounting AWP by a percentage ranging from 5 to 
50 percent.  The median discount for States that use AWP to calculate 
estimated acquisition cost drugs was 12 percent below AWP.  Even 
when taking into account the discounted AWP most States use to 
calculate estimated acquisition cost, ASP is still substantially lower 
than AWP.   
The ASP for generic drugs was substantially less than AWP when compared 
to single source and multisource brand drugs.   
We analyzed the median percentage differences between ASP and AWP 
by type of drug:  single source brand, multisource brand, and generic. 
For 704 single source brand codes, ASP is 26 percent below AWP at the 
median, and for 216 multisource brand codes, ASP is 30 percent below 
AWP at the median.  The difference between ASP and AWP was 
greatest for generic drugs.  For 1,152 generic national drug codes, ASP 
is 68 percent less than AWP at the median.  For five drug codes, there 
was no drug type information in the drug compendium.  
The differences between AWP and other prices are similar for both 
Medicaid-reimbursed drugs and the smaller subset of Medicare-covered 
drugs we reviewed.       
To determine if the differences between the price points were similar for 
Medicare and Medicaid drugs, we compared the results of our analysis 
for Medicare-covered drugs to the analysis for Medicaid-reimbursed 
drugs in our companion report.  Medicare-covered drugs may also be 
covered under the Medicaid program. 
The companion report Medicaid Drug Price Comparisons: Average 
Manufacturer Price to Published Prices (OEI-05-05-00240) examined 
the differences between AMP and AWP for drugs reimbursed by 
Medicaid (24,101 national drug codes).  The companion reports findings 
for Medicaid-reimbursed drugs were similar to this report's finding for 
the subset of Medicare drugs we reviewed.  It found that the difference 
between AMP and AWP was greatest for generic drugs.   
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  8  F I N D I N G  
For the 1,481 codes that had AMP and AWP in our review, we found 
that the difference between AMP and AWP for generic drugs is   
72 percent at the median; correspondingly, the companion report found 
that the difference between AMP and AWP for generic drugs is   
70 percent at the median.  For single source and multisource brand 
drugs, this report found that the differences between AMP and AWP at 
the median are 22 and 25 percent, respectively.  Similarly, the 
companion report found that the differences between AWP and AMP for 
single source and multisource brand drugs at the median are 23 and      
28 percent, respectively. 
The companion report also found similar differences between WAC and 
AWP. For the 1,898 codes that had AWP and WAC in our review, we 
found WAC is 20 percent lower than AWP for Medicare drugs at the 
median and the companion report found that WAC is 22 percent lower 
than AWP for Medicaid-reimbursed drugs at the median. 
  OEI-03-05-00200  MEDICAID DRUG PRICE COMPARISON:  AVERAGE SALES PRICE TO AVERAGE WHOLESALE PRICE  9  FR IE NC DO IMN MG E N D A T I O N S  
  C O N C L U S I O N  

There is significant interest in changing Medicaid reimbursement for 
prescription drugs by aligning pharmacy reimbursement more closely 
with pharmacy acquisition cost. The changes proposed in the 
Presidents 2006 budget would make Medicaid reimbursement 
consistent with Medicare by basing reimbursement on actual sales 
transactions. This analysis demonstrates that ASP, which is a 
statutorily defined price based on actual sales transactions including 
discounts, was lower than published prices AWP and WAC.    
We believe this inspection will provide useful information to those 
considering the implications of changing Medicaids drug 
reimbursement methodology.  The substantial disparities between 
prices based on actual sales and the published prices currently being 
used indicate that changing the basis of Medicaid reimbursement could 
have a significant impact on Medicaid expenditures. 
AGENCY COMMENTS 
CMS commented that these companion reports make clear that current 
Medicaid payment rules result in overpayments for drugs and 
emphasizes the need for reform.  Similar problems with overpayments 
for Medicare drugs led to passage of the MMA provisions that changed 
the basis of reimbursement for drugs from AWP to ASP.  CMS 
reiterated that the Presidents 2006 budget proposes to solve this 
problem by the use of ASP so Medicaid drug prices will reflect actual 
costs.  CMS stated that Congress should enact legislation to ensure that 
Medicaid payment for drugs is related to actual prices paid by 
pharmacies.  The full text of CMSs comments are provided in   
Appendix A. 
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Centers for Medicare & Medicaid Services Comments 
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 A P P E N D I X ~ A  

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 A P P E N D I X ~ A  

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   E N D N O T E S  

1 Testimony transcript available at: 
http://www.oig.hhs.gov/testimony/docs/2004/reeb120704.pdf. 
2 Federal Register Notice.  Medicaid Program; Establishment of the 
Medicaid Commission and Request for Nominations for Members.  
CMS-2214-N.  
3 Available online at www.nga.org. 
4 Variations in State Medicaid Drug Prices (OEI-05-02-00681); Cost 
Containment of Medicaid HIV/AIDS Drug Expenditures(OEI-05-99-
00611); Medicaid PharmacyAdditional Analyses of the Actual 
Acquisition Cost of Prescription Drug Products (A-06-02-00041). 
5 United States House of Representatives Committee on the Budget. 
Analysis of the Presidents Budget for FY 2006. Available at: 
http://www.house.gov/budget/analysisprez021105.pdf. 
6 Medicaid Pharmacy  Actual Acquisition Cost of Prescription Drug 
Products for Brand Name Drugs (A-06-96-00030); Medicaid  
Pharmacy  Actual Acquisition Cost of Generic Prescription Drug 
Products (A-06-97-00011); Actual Acquisition Cost of Brand Name 
Prescription Drug Products (A-06-00-00023); Medicaid Pharmacy  
Actual Acquisition Cost of Generic Prescription Drug Products    
(A-06-01-00053); Medicaid Pharmacy  Additional Analyses of the 
Actual Acquisition Cost of Prescription Drug Products (A-06-02-00041); 
Medicaids Use of Revised Average Wholesale Prices        
(OEI-03-01-00010); Containment of Medicaid HIV/AIDS Drug 
Expenditures (OEI-05-99-00611). 
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This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and Linda M. Ragone, Deputy Regional Inspector 
General. Other principal Office of Evaluation and Inspections staff who 
contributed include: 
Edward K. Burley, Project Leader 
Linda B. Abbott, Program Specialist 
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