Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
AIDS DRUG ASSISTANCE PROGRAM 
COST CONTAINMENT STRATEGIES 
JUNE GIBBS BROWN 
Inspector General 
SEPTEMBER 2000 
OEI-05-99-00610  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's Region V prepared this report under the direction of William Moran, Regional Inspector 
General and Natalie Coen, Deputy Regional Inspector General.  Principal OEI staff included: 
REGION  HEADQUARTERS 
Ann Maxwell, Project Leader  Elise Stein, Director, Public Health and 
Madeline Carpinelli, Program Analyst  Human Services Staff 
Chip Schonenberger, Intern 
To obtain copies of this report, please call the Chicago Regional Office at 312-353-9867. 
Reports are also available on the World Wide Web at our home page address: 
http://www.hhs.gov/oei  E X E C U T I V E   S U M M A R Y  
PURPOSE 
Compare the prices that State AIDS Drug Assistance Programs are paying for drugs to 
the Federal ceiling prices listed in the Federal Supply Schedule. 
BACKGROUND 
The Ryan White Comprehensive AIDS Resource Emergency (CARE) Act requires that a 
portion of Title II State grants are allocated to establish AIDS Drug Assistance Programs 
(ADAPs).  The ADAPs provide medications to low-income individuals living with 
HIV/AIDS who have limited or no coverage from private insurance or Medicaid.  Overall, 
Federal contributions have risen dramatically from the original appropriation of $52 
million in fiscal year (FY) 1996 to $528 million in the FY 2000 budget. 
The ADAPs are facing fiscal challenges from increasing demand due to growing numbers 
of low-income people living with HIV and the increased cost of drug treatments due to a 
changing standard of care.  The Public Health Service treatment guidelines recommend 
combination antiretroviral therapies that typically range between $10,000 and $12,000 a 
year per client.  In this environment, cost containment has emerged as a key means to 
address the issue of client access. 
One of the principle methods ADAPs have to contain drug costs is the 340B Drug Pricing 
Program.  This program provides drug price ceilings to ADAPs that purchase their drugs 
through a central purchaser as well as certain other federally funded entities.  This 
program also provides a rebate option for ADAPs who do not have a central purchaser. 
The Drug Pricing Program was enacted by Section 602 of the Veterans Health Care Act 
of 1992.  Section 603 of the same law mandated minimum drug discounts for four large 
Federal agencies, known as the Big 4.  Section 603 prices, known as the Federal ceiling 
prices, are available to the specified agencies through the Federal Supply Schedule.  The 
ceiling price calculations stipulated in Section 602 and 603 are not equivalent. 
FINDINGS 
ADAP ceiling prices are, on average, 16 percent higher than the Federal ceiling 
prices 
The ceiling prices limiting drug expenditures for ADAPs are, on average, 16 percent 
higher than the Federal ceiling prices limiting drug costs for the Big 4.  As a result, 
 1 
ADAP Cost Containment Strategies OEI-05-99-00610  ADAPs will pay an average of 29 cents more per pill and 32 dollars more per bottle than 
the Big 4 agencies pay for the same drug. 
ADAPs could have saved nearly $58 million in 1999 if allowed to purchase the 10 
drugs at Federal ceiling prices 
Comparing the actual per drug expenditures of the ADAPs to what they would have paid 
if they had access to Federal ceiling prices results in $57.5 million in Federal savings for 
ADAPs in 1999.  Considering expenditures from all sources of funding, ADAPs could 
have saved $72 million given access to Federal ceiling prices.  The $57.5 million in Federal 
savings could have been used to purchase additional life-saving pharmaceuticals to meet 
the therapeutic needs of several thousand more individuals living with HIV/AIDS. 
When broken out by the type of Drug Pricing Program participation, direct purchase 
States (22 ADAPs) would save $14.4 million given access to Federal ceiling prices, and 
rebate States (22 ADAPs) would save $39 million.  For the five States not participating in 
the Drug Pricing Program, the savings equal $4 million, bringing the total to $57.5 million 
in Federal savings. 
RECOMMENDATIONS 
The Health Resources and Services Administration (HRSA) should seek 
legislation to change the 340B ceiling price calculation to the Federal ceiling 
price calculation 
As indicated in our findings, making this calculation change would result in $57.5  million 
in annual Federal savings for ADAPs.  Also, although it was not in the scope of our study 
to provide a precise estimate regarding the savings available to all 340B Drug Pricing 
Program eligible entities, a 16 percent reduction in the ceiling price for pharmaceuticals 
could save these entities $240 million in Federal funds. 
While this represents significant programmatic savings, 340B drug expenditures in total 
only represent one percent of the domestic pharmaceutical market.  The Big 4 agencies, 
already covered under Section 603, represent just another one and a half percent of the 
market.  Given the limited scope of the proposed changes, it seems likely that any 
pharmaceutical industry loss due to lower Federal prices to 340B eligible entities could be 
regained in additional sales volume.  At the time this study was conducted, 11 ADAPs had 
waiting lists while the demand for combination therapies of two or three drugs continues 
to accelerate.  A potential benefit for the manufacturers is a simplified, uniform Federal 
pricing system to track and report, with price-changing data submissions and 
recalculations required only once a year. 
 2 
ADAP Cost Containment Strategies OEI-05-99-00610  Even though the Big 4 and ADAPs would access the same Federal ceiling prices for 
outpatient covered drugs, we recommend that the programs stay discrete.  The prime 
vendor could negotiate contracts below the 603 ceiling prices for the 340B entities similar 
to the way the VA negotiates multi-year contracts for users of the Federal Supply 
Schedule. 
To allow ADAPs to negotiate the lowest prices possible, HRSA should seek 
legislation to exempt all sales to 340B covered entities from the calculation of 
Non-Federal Average Manufacturers Price 
We recommend that HRSA seek to add exclusionary language to the statutes codifying 
the 340B Drug Pricing Program (42 USC 256B) stating that any price negotiated below 
the 340B statutory ceiling price would be excluded from the calculation of the 
non-Federal Average Manufacturer Price.  Currently, sales at the 340B ceiling price are 
excluded from this calculation, but sales below the ceiling are considered commercial sales 
by the VA and are included.  Defining sales below the ceiling prices as commercial sales 
lowers average commercial prices.  This also lowers the Big 4, Federal ceiling prices since 
they are a percentage of average commercial prices.  The linkage between these two 
pricing schedules creates a disincentive for manufacturers to offer below 340B ceiling 
prices since these have the potential to reduce Federal ceiling prices.  The Prime Vendor 
cannot successfully negotiate prices lower than the 340B ceiling, currently, or lower than 
the Federal ceiling, potentially, until this is changed. 
HRSA should continue to work with rebate and non-participating ADAPs to 
devise ways to grant them access to up-front drug discounts 
Currently, ADAPs that utilize a multiple contract pharmacy model for the purchase and 
distribution of pharmaceuticals are not eligible to access the 340B Drug Pricing Program 
ceiling prices.  The ADAPs using this model would also not be able to take advantage of 
any savings gained by obtaining Federal ceiling prices.  In light of this, we recommend that 
HRSA continue to work with rebate and non-participating ADAPs to devise ways to grant 
them access to direct purchase pricing discounts. 
AGENCY COMMENTS 
The HRSA concurred with the reports findings and recommendations.  They also offered 
suggestions for clarifying the report and making other technical changes.  We appreciate 
their suggestions and, where appropriate, we changed the report to reflect their comments. 
The complete text of HRSA comments can be found in Appendix C.  Further, staff from 
the office of the Assistant Secretary of Planning and Evaluation (ASPE) expressed 
concerns regarding our first recommendation. 
 3 
ADAP Cost Containment Strategies OEI-05-99-00610  The concern raised by ASPE staff has to do with the larger policy implications of our first 
recommendation.  In particular, they are concerned that allowing 340B entities to utilize 
the Section 603 Federal ceiling price might affect the ability of the VA and the Big 4 to 
maintain the low prices they currently obtain.  We understand their concern about the 
negotiations.  In fact, it was our concern with this very issue that lead us to recommend 
that 340B pricing be linked to the statutorily defined Federal ceiling price as opposed to 
the negotiated Federal Supply Schedule (FSS) contract prices the VA and the Big 4 
actually pay for drugs.  The Federal ceiling price acts only as an upper ceiling to the FSS 
prices.  In reality, the VA uses its considerable volume to negotiate prices below the 
Federal ceiling.  Allowing 340B entities to utilize the same ceiling calculation as the VA 
and the Big 4 merely provides them with an equitable starting point.  Discussions with the 
VA confirmed that this is a realistic recommendation in consideration of larger policy 
implications. 
 4 
ADAP Cost Containment Strategies OEI-05-99-00610  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

FINDINGS

ADAP Ceiling Prices Higher Than Federal Ceiling Prices . . . . . . . . . . . . . . . . . . . . . . . 16

Access to Federal Ceiling Prices Would Save ADAPs $57.5 Million . . . . . . . . . . . . . . .  17

Direct Purchase ADAPs Save $14 Million; Rebate ADAPs Save $39 Million . . . . . . .  18

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21

AGENCY COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29

APPENDICES

A: Projected Savings if ADAPs Purchased Drugs at Federal Ceiling Prices  . . . . . . . .  31

B: Names and National Drug Codes of the 10 Drugs Reviewed  . . . . . . . . . . . . . . . . . . 33

C: Agency Comments: HRSA  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34

D:  Related Office of Inspector General Reports . . . . . . . . . . . . . . . . . . . . . . . . . . .  39

ADAP Cost Containment Strategies  5  OEI-05-99-00610  I N T R O D U C T I O N  
PURPOSE 
Compare the prices that State AIDS Drug Assistance Programs are paying for drugs to 
the Federal ceiling prices listed in the Federal Supply Schedule. 
BACKGROUND 
Ryan White CARE Act 
In 1990, Congress passed the Ryan White Comprehensive AIDS Resource Emergency 
(CARE) Act in response to the AIDS epidemic and its impact on individuals, families, 
communities, cities and States.  The Ryan White programs provide health care and 
support services to persons with HIV/AIDS who would otherwise have no access to 
health care.  The Health Resources and Services Administration (HRSA) directs Ryan 
White resources to various local entities through the Acts four titles and Part F. 
Ryan White programs constitute slightly over $1.6 billion of the approximately $8.2 billion 
in Federal HIV/AIDS appropriations for fiscal year (FY) 2000.  The CARE Act is the 
largest source of Federal funding specifically directed to provide primary care for persons 
living with HIV/AIDS.  The Ryan White CARE Act was re-authorized in 1996 through 
September 30, 2000.  It is currently being considered for its second re-authorization. 
AIDS Drug Assistance Programs 
Under Title II of the CARE Act, Ryan White provides formula grants to States to improve 
the quality, availability and organization of health care services to persons with 
HIV/AIDS.  Section 2616(a) requires allocation of a portion of those funds to establish 
AIDS Drug Assistance Programs (ADAPs).  The ADAPs provide medications to low-
income individuals living with HIV/AIDS who have limited or no coverage from private 
insurance or Medicaid.  State ADAPs estimate that they served 64,460 clients in any given 
month of FY 1999 and approximately 108,600 clients in total. 
Federal support for ADAPs has grown significantly.  In the FY 2000 budget, Congress 
earmarked $528 million for ADAP.  This is an increase of 15 percent over the $461 
million for FY 1999.  Overall, Federal contributions have risen dramatically from the 
original appropriation of $52 million in FY 1996.  In 1992, the year the Veterans Health 
Care Act was passed to limit drug costs, only 47 States had adopted a pharmaceutical 
ADAP Cost Containment Strategies  6  OEI-05-99-00610  option.  Prior to 1996, when the ADAP provision was created, grantees elected whether 
or not to have a pharmaceutical option.  Pharmaceutical expenditures for the 47 States 
that chose the option totaled $32 million.  In addition to the Congressionally allocated 
Title II base award, ADAPs often receive contributions from State general revenue funds 
and Ryan White Title I grants to Eligible Metropolitan Areas. 
Title II ADAPs operate within a Federal-State partnership which allows each State 
maximum flexibility to create a system that fits the needs of their HIV/AIDS population. 
State ADAPs decide on the administrative structure, the criteria for program eligibility, the 
drug formulary and the drug purchasing and distribution system.  This has led to wide 
variations between States in the number of patients served, the particular drugs available 
and the prices paid for those drugs. 
ADAP Cost Containment 
The ADAPs are facing fiscal challenges from: 1) increasing demand due to growing 
numbers of low-income people living with HIV and, 2) increasing costs of drug treatments 
due to a changing standard of care.  The Public Health Service (PHS) guidelines 
recommend combination antiretroviral therapies that typically range between $10,000 and 
$12,000 a year per client.  In this environment, cost containment has emerged as a key 
means to address the issue of client access. 
In 1997 appropriations language (H.R. 104-863 to accompany H.R. 3610), Congress 
stated that they expect that all States receiving AIDS drug assistance funding will employ 
cost-savings strategies to maximize assistance to HIV patients.  The HRSA maintains 
similar expectations.  The HRSAs Notice of Grant Awards states: 
If your organization purchases or reimburses for outpatient drugs, 
an assessment must be made to determine whether the 
organizations drug acquisition practices meet Federal requirements 
regarding cost-effectiveness and reasonableness (See 42 CFR Part 
50, Subpart E, and OMB Circulars A-122 and A-87 regarding cost 
principles). If your organization is eligible to be a covered entity 
under Section 340B of the Public Health Service Act and the 
assessment shows that participating in the 340B Drug Pricing 
Program and its Prime Vendor Program is the most economical and 
reasonable manner of purchasing or reimbursing for covered 
outpatient drugs (as defined in section 340B), failure to participate 
may result in a negative audit finding, cost disallowance or grant 
funding offset. 
This concern with cost effective spending is part of a larger public debate on the cost of 
ADAP Cost Containment Strategies  7  OEI-05-99-00610  drug prices.  Many elected officials are calling into question the appropriateness of current 
government acquisition and reimbursement prices.  For example, according to the National 
Conference of State Legislatures, 23 States are considering legislation that strives to limit 
the cost of drugs purchased in their State.  Seven of these legislative proposals take into 
consideration the drug prices on the Federal Supply Schedule (FSS) in establishing their 
price ceilings. 
Drug Discounting Legislation 
In 1990, Congress identified a problem with increasing drug prices and enacted the 
Omnibus Budget Reconciliation Act (OBRA 1990).  This law attempted to limit drug 
costs for the Medicaid program, establishing the Medicaid Drug Rebate Program.  This 
program requires manufacturers to give Medicaid a rebate that is the greater of 15.1 
percent of the Average Manufacturers Price (AMP) or AMP minus the manufacturers 
Best Price (BMP) , whichever is lowest.  The AMP is the average unit price paid by 
wholesalers to manufacturers.  The BMP is the lowest price at which the manufacturer 
sells the drug to any purchaser. 
As originally enacted, the calculation of the BMP included sales to Federal health care 
programs.  As a result, drug manufacturers were reluctant to sell drugs to Federal health 
care programs at the very advantageous prices they had in the past because it could 
increase the rebates they had to pay to Medicaid, which represents a significant portion of 
the US pharmaceutical market.  For this reason, the implementation of OBRA 1990 
resulted in overall price increases for drugs purchased by Federal health care programs as 
well as inflation in the commercial market. 
In order to remove the disincentive for manufacturers to give Federal programs the best 
possible price, the Veterans Health Care Act of 1992 (VHCA) was enacted.  The VHCA 
also attempted to establish price controls to limit the cost of drugs to Federal purchasers 
and certain grantees of Federal agencies.  In particular, Section 601 of VHCA corrected 
the pricing problems created by OBRA 1990 by excluding sales to Federal agencies from 
the calculation of the BMP.  Section 602 of the Act enacted section 340B of the Public 
Health Services Act which provides drug price ceilings to certain grantees of the Public 
Health Service, including ADAPs.  Section 603 of VHCA mandated minimum drug 
discounts for the Department of Veterans Affairs (VA), Department of Defense (DOD), 
Public Health Service, including the Indian Health Service, and later the Coast Guard. 
These agencies are commonly known as the Big 4.  It additionally required that the four 
agencies be offered access to covered drugs and their statutorily discounted prices through 
the Federal Supply Schedule. 
ADAP Cost Containment Strategies  8  OEI-05-99-00610  Section 602: 340B Drug Pricing Program 
Section 602 of VHCA enacted Section 340B of the Public Health Services Act.  This 
statute requires manufacturers, as a condition for the receipt of Medicaid matching funds, 
to sign a pharmaceutical pricing agreement with the Secretary of Health and Human 
Services agreeing to charge a price for covered drugs not to exceed the amount 
determined by statutory formula.  This formula is roughly the AMP decreased by the 
Medicaid unit rebate amount.  The Health Care Financing Administration (HCFA) 
recalculates the ceiling price, using the specified statutory formula, on a quarterly basis for 
the 340B Drug Pricing Program. 
The ADAPs are included in Section 602's list of covered entities, making them eligible 
for 340B pricing discounts.  Although the 340B program discounts are statutorily defined, 
participation remains voluntary.  Those wishing to participate must comply with the 
following statutory requirements to access 340B discounts: 
1.)  Not request a discount for a drug subject to a Medicaid rebate; 
2.)  Not resell or otherwise transfer a discounted drug to a person who is not a patient 
of the entity; 
3.)	 Maintain records of purchases and permit the Secretary and manufacturers to audit 
entity records pertaining to the drugs in question, in accordance with procedures 
established by the Secretary, to assure compliance with the first two requirements; 
4.)	 Repay the manufacturer the amount of 340B discounts received for any violations 
of the first two requirements, if the manufacturer seeks restitution. 
ADAPs Participation in the 340B Drug Pricing Program 
The CARE Act allows States significant flexibility in the design of their ADAP program. 
Generally, States purchasing/distributing systems divide them into two categories: direct 
purchase and rebate States.  However, State ADAPs operate in dynamic environments, so 
the description of each program that follows is a snapshot taken at a fixed point in time. 
A direct purchase State purchases the drugs centrally through a State pharmacy, 
purchasing agent or public agency/hospital.  At the time this study was conducted, twenty-
three ADAPs participated in the 340B direct purchasing option1.  A rebate State contracts 
with a pharmacy network/pharmacy benefits management company for the purchase of 
drugs and then reimburses them.  At the time this study was conducted, twenty-four 
ADAPs received standardized rebates on drugs purchased from pharmacies through the 
340B rebate option.  Five ADAPs obtained voluntary manufacturer rebates to help contain 
drug costs, but elected not to participate in the 340B program. 
1 
As of August 2000, only 22 ADAPs participate in the direct purchase option. 
ADAP Cost Containment Strategies 9  OEI-05-99-00610 The remaining two ADAPs (Washington, DC and Guam) had instituted other purchasing 
mechanisms. 
Section 340B contains no explicit language as to whether the required reduction in price 
should be obtained by a point-of-purchase (direct purchase) or through manufacturer 
rebates.  When initially enacted, section 340B was only an option for the direct purchase 
States with a centralized purchasing agent.  However, many ADAPs were initially 
established to operate under a pharmacy reimbursement model similar to Medicaid, 
without a centralized purchaser.  This structure prevented those States participation in the 
discount program.  The HRSA issued a notice in the Federal Register on June 29, 1998 
recognizing a rebate option for State ADAPs under 340B.  States selecting this option 
would now receive the full statutory Medicaid rebate, lessening the burden on them to 
negotiate with individual manufacturers for voluntary rebates. 
It is generally believed that participation in the 340B direct purchasing option is currently 
the best option for ADAPs to maximize savings on pharmaceutical purchases.  The ceiling 
price for the 340B direct purchasing option is approximately the AMP minus the Medicaid 
unit rebate amount. The ADAPs that utilize the 340B rebate option also obtain the 
Medicaid unit rebate amount from manufacturers, but only after reimbursing retail 
pharmacies at  the average wholesale price (AWP), which tends to be higher than the 
AMP.  Further, several Office of Inspector General (OIG) evaluations have indicated that 
government prices based on AWP are considerably more than prices available to 
commercial purchasers. 
For those ADAPs not participating in the 340B program, one reason often cited is that the 
implementing guidelines that limit an entity to one contract pharmacy are too restrictive, 
limiting client access to needed drugs.  Other ADAPs believe their drug purchasing and 
distribution arrangements provide them with lower costs than can be obtained by the 340B 
program, once all administrative costs are taken into consideration. 
The HRSA published a proposal in the Federal Register on October 22, 1998 that would 
have made participation in the 340B program a grant requirement for eligible entities. 
After receiving negative feedback, HRSA decided that although it will not be a grant 
requirement, it is a program expectation. 
Prime Vendor Provision 
Another 340B provision (340 (a)(8)) mandates the Secretary to establish a Prime Vendor 
Program for covered entities.  The prime vendor would assist covered entities not only in 
accessing the 340B manufacturer drug price reductions, but also in negotiating 
competitive pricing for wholesaler drug distribution.  In September 1999, HRSA 
announced its contract with Bergen Brunswig Drug Company (BBDC) making it the first 
prime vendor for the 340B Drug Pricing Program. 
ADAP Cost Containment Strategies  10  OEI-05-99-00610  As prime vendor, BBDC will negotiate lower prices with about 600 pharmaceutical 
companies based on the large nationwide buying power of the 12,000 entities eligible to 
participate. Under the contract, BBDC will consolidate drug sales and delivery, resulting 
in lower distribution costs, reduced turn around time for delivery of drugs and decreased 
inventory costs. 
The new Prime Vendor Program will offer ADAPs participating in the 340B direct 
purchasing option another cost containment strategy.  Participation is voluntary, but the 
benefits to participants will be greatest if all eligible entities register to be prime vendor 
customers.  Those ADAPs utilizing the rebate option and those not participating in the 
340B Drug Pricing Program are not eligible to participate in the Prime Vendor Program 
for the same reasons they are not eligible for up-front pricing discounts.  Intended as the 
primary vehicle for future drug discounting, HRSA anticipates the Prime Vendor Program 
to provide the best available pricing for its eligible entities. 
Section 603: Federal Ceiling Prices and the Federal Supply Schedule 
As previously stated, Section 603 of VHCA mandated minimum drug discounts for four 
Federal agencies known as the Big 4.  Specifically, the law states that prices to the Big 4 
may not exceed 76 percent of the non-Federal average manufacturer price (non-FAMP). 
These statutorily discounted prices are typically referred to as the Federal ceiling prices. 
The law additionally requires that the four agencies be offered access to covered drugs 
and their Federal ceiling prices through the Federal Supply Schedule. 
The FSS provides a schedule of contracts and prices for covered and non-covered drugs 
that allow agencies to purchase various quantities of pharmaceuticals while still obtaining 
the discounts associated with bulk purchasing.  General Services Administration 
Administrative Order 4800.2E lists who has access to the FSS.  While it includes the 
Public Health Service, it excludes Federal grantees such as ADAPs. 
The VA manages several Federal Supply Schedules dealing with health care commodities 
for the entire Federal Government, including Schedule 65 I B for pharmaceuticals.  In this 
capacity, it negotiates contracts using a non-competitive FSS negotiation procedure.  The 
FSS contracted prices of covered drugs for the Big 4 may not exceed the statutory Federal 
ceiling prices stipulated in Section 603 of VHCA.  To assure that the statue is being 
executed properly, the VA annually recalculates all Federal ceiling prices based on 
manufacturers annual reports of non-FAMP for each covered drug.  However, the 
contract prices for other entities allowed to use the FSS are usually negotiated based on 
most favored customer price disclosures and may exceed the statutory ceiling.  These 
negotiated prices are called the FSS Other Government Agency contract prices.  These 
prices are frequently what non-Big 4 agencies authorized to use the FSS pay for drugs. 
ADAP Cost Containment Strategies  11  OEI-05-99-00610  Of course, if a manufacturer wishes, it may maintain a single price list offering Big 4 or 
better prices to all FSS ordering activities.  Many manufacturers do this to avoid having 
two price lists. 
Non-Federal Average Manufacturer Price 
Section 603 of VHCA created a Big 4 Federal ceiling formula based on the non-FAMP. 
Non-FAMP is defined as the weighted average price of a single form and dosage unit of 
the drug that is paid by wholesalers in the United States to the manufacturer, taking into 
account any cash discounts or similar price reductions during that period, but not taking 
into account (A) any prices paid by the Federal Government, or (B) any prices found by 
the Secretary to be merely nominal in amount.  In other words, non-FAMP is the 
manufacturers weighted average of commercial, non-Federal sales per unit. 
The VA has determined that sales through a wholesaler at the 340B ceiling price should 
be excluded from the calculation of non-FAMP since they are statutorily defined prices. 
However, the VA considers any sales to 340B entities below the ceiling price as 
commercial sales, and includes these sales in the calculation of non-FAMP.  This 
interpretation of non-FAMP by the VA has hindered 340B entities ability to successfully 
negotiate drug prices that are below the ceiling.  Manufacturers do not want to sell at 
below 340B ceiling prices because those sales, unlike sales at the ceiling price which are 
exempt, will be reported as part of the non-FAMP.  The inclusion of extremely low prices 
in the non-FAMP lowers the non-FAMP and subsequently the Federal ceiling prices that 
are calculated from it.  In this way, sales to 340B entities below the ceiling prices 
negatively impacts the price manufacturers must give the Big 4.  This creates a 
disincentive to provide the lowest possible prices to 340B entities. 
Related Work by the Office of Inspector General 
The Office of Inspector General has released two reports regarding ADAP cost 
containment policies in the past few years.  The first report, Audit of State AIDS Drug 
Assistance Programs Use of Drug Price Discounts (A-01-97-01501), focused on 
whether HRSA ensured that ADAPs effectively utilized available discount drug pricing 
programs.  They concluded that participation in the 340B direct purchase option by all 
ADAPs could save the program a considerable amount of money and allow them to 
provide needed drugs to a larger number of individuals living with HIV/AIDS.  The 
second report, Audit of the Utilization of the Public Health Service 340B Drug Pricing 
Program (A-01-98-01500), reviewed whether all eligible PHS funded entities effectively 
utilized the 340B Drug Pricing Program.  They found that 66 percent of the eligible HRSA 
grantees in 1998 did not participate in the program. 
The OIG  has also conducted a variety of studies concerning Medicare payments for 
prescription drugs.  Most notably, Comparing Drug Reimbursement: Medicare and 
ADAP Cost Containment Strategies  12  OEI-05-99-00610  Department of Veterans Affairs (OEI-03-97-00293) compared Medicare drug allowances 
and the prices available to the VA.  This report found that Medicare could save $1 billion 
in 1998 if the allowed amounts for the 34 drugs studied were equal to the prices obtained 
by the VA. 
SCOPE AND METHODOLOGY 
This inspection is a review of the 340B ceiling prices and the prices actually paid by AIDS 
Drug Assistance Programs for 10 commonly prescribed antiretroviral drugs.  Specifically, 
we compared these prices to the Federal ceiling prices listed in the Federal Supply 
Schedule. 
All of the price comparisons made are for the first three quarters of 1999 since this was 
the most current data HRSA and many ADAPs had on specific antiretroviral expenditures 
and rebates at the time data collection was conducted.  All savings estimates based on this 
information have been annualized and only reflect the Federal share of ADAP funding.  In 
FY 1999, Federal funding averaged 80 percent of total ADAP funding.  The remaining 20 
percent comes from the State general revenue funds and other sources. 
Out of the expansive ADAP formularies, we focused on antiretroviral drugs because they 
constitute the most prescribed and effective drug therapies for treating HIV/AIDS. 
According to the ADAP Monitoring Project 1999 Annual Report, antiretroviral 
expenditures comprised 88 percent of overall ADAP spending in June 1998.  We selected 
10 brand name, single source drugs of the possible 16 Food and Drug Administration 
approved antiretroviral drugs. The 10 drugs we reviewed and their National Drug Codes 
are listed in Appendix B. 
We based the comparison of prices on the drug acquisition cost. For the purposes of this 
study, we define drug acquisition cost as the basic cost of the drug to the ADAP. This 
includes all discounts, rebates or any other benefits.  It also includes any additional fees 
charged by wholesalers or other contracted middle-men.  For example, the Texas ADAP 
contracts with a prime vendor to purchase drugs. The prime vendor supplies the ADAP 
with all the drugs on its formulary for 340B ceiling prices plus a one percent distribution 
fee. 
Our definition of acquisition cost does not incorporate the overall program costs of 
delivering pharmaceuticals to eligible clients.  This narrow definition of drug cost was 
necessary to control for the differences in administrative and drug distribution systems 
between the ADAPs and the agencies that access the FSS Federal ceiling prices.  Further, 
specific administrative data was unavailable since ADAPs typically do not break-out 
overhead costs, such as storage and distribution, per drug. 
Unfortunately, this narrow definition of drug cost does not entirely control for the 
ADAP Cost Containment Strategies  13  OEI-05-99-00610  difference between the rebate ADAPs and the Big 4 agencies that access the Federal 
ceiling prices. The Big 4 agencies, like the direct purchase ADAPs, buy needed 
pharmaceuticals directly from a manufacturer or wholesaler.  This is their acquisition cost. 
Rebate States, on the other hand, typically reimburse pharmacies for drugs dispensed to 
ADAP clients at retail drug prices minus a small pharmacy discount.  These higher retail 
prices, to some extent, reflect the pharmacies role in storing and disbursing the drugs on 
behalf of the rebate ADAPs.  In order to account for the hidden storage and distribution 
fees incorporated into these prices, a separate analysis was conducted.  In this analysis, we 
subtracted out an industry average for these costs from rebate ADAPs reimbursement 
expenditures in order to make them more comparable to the Federal ceiling acquisition 
prices. 
To conduct our analysis, we reviewed the ADAP Monthly Report for the first three 
quarters of FY 1999.  This report tracks the unit price, the unit rebate amount, the volume 
prescribed and the dispensing fees for a limited set of pharmaceuticals.  We also reviewed 
the FY 1998 AIDS Pharmaceutical Assistance Annual Administrative Report, the State 
ADAP Profiles, and the ADAP portion of Title II applications for FY 1999. 
We also gathered information regarding pharmaceutical pricing from HCFA and the VA. 
The HCFA supplied us with the 340B ceiling prices and the Medicaid unit rebate amount 
information.  The VA provided us with data on the FSS Federal ceiling and the FSS 
contract prices. 
To gather data on actual State ADAP expenditures, we sent a survey to each of the 52 
operational ADAPs.  Surveys were distributed via facsimile in February 2000 and the 
survey data was collected between February and April 2000. We received 49 surveys back 
for a response rate of 94 percent.  New Hampshire, Wyoming and Maine were unable to 
provide us with the information we requested. 
The survey requested States to record their ADAP expenditures for the first three quarters 
of 1999. For each of the 10 drugs, ADAPs listed the unit price, quantity for a 30 day 
supply, total quantity for the quarter, and dispensing, transaction and administrative fees 
where applicable.  States utilizing the 340B rebate option or States obtaining other 
manufacturer rebates also reported the unit rebate amount, total rebate amount and the 
number of units that received a rebate.  The survey also asked States to describe their 
ADAPs structure for purchasing and distributing drugs in order to get a contextual 
understanding of drug purchasing expenses. 
We conducted extensive follow-up on the survey.  On March 1, 2000, we hosted a 
national teleconference arranged by the National Alliance of State and Territorial AIDS 
Directors for ADAP Directors.  The purpose of the teleconference was to discuss the 
complexities of individual programs and to reach agreement on how to uniformly report 
data.  We spoke individually with State programs where necessary for clarification. 
ADAP Cost Containment Strategies  14  OEI-05-99-00610  We have taken precautions not to disclose any information that would allow the reader to 
trace back to the manufacturers price since this is proprietary information. Towards this 
end, all estimates have been rounded.  We conducted our review in accordance with the 
Quality Standards for Inspections issued by the Presidents Council on Integrity and 
Efficiency. 
ADAP Cost Containment Strategies  15  OEI-05-99-00610  F I N D I N G S  
ADAP ceiling prices are on average 16 percent higher than 
Federal ceiling prices 
The ceiling prices limiting drug expenditures for ADAPs are, on average, 16 percent 
higher than the Federal ceiling prices limiting drug costs for the Big 4.  For the 10 sample 
drugs the ceiling prices available to ADAPs during the first three quarters of 1999 are at 
least 12 percent more than the Federal ceiling prices and range up to 21 percent more.  As 
a result,  ADAPs that take advantage of the ceiling prices offered by the 340B drug 
pricing program will pay anywhere from 9 cents to 70 cents more per pill than the Big 4 
pays for the same drug.  On average, ADAPs will pay 29 cents more per pill and 32 
dollars more per bottle than the Big 4 agencies pay for the same drug. 
The formulas for both 340B and Federal ceiling calculations are stipulated in the Veterans 
Health Care Act of 1992.  The intention of this legislation was to place limits on the prices 
of drugs procured by Federal purchasers.  Yet the ceiling price calculations stipulated for 
each program are different resulting in prices that are consistently higher for entities 
covered under Section 602.  Section 602 of VHCA lays out a statutory calculation for the 
ceiling prices available to ADAPs that is roughly equivalent to AMP, disregarding Federal 
sales,  minus the Medicaid unit rebate amount.  This rebate ranges from 11 to 15 percent. 
The statutory formula laid out in Section 603 stipulates that Big 4 are required to receive a 
minimum 24 percent discount off the non-Federal Average Manufacturer Price which is 
the AMP disregarding Federal sales.  Thus, ADAPs are receiving 11 to 15 percent off a 
non-FAMP equivalent while the Big 4 are guaranteed 24 percent off non-FAMP. 
While Section 602 and 603 ceiling prices determine the highest amount that covered 
entities can pay for pharmaceuticals, there is nothing in the law prohibiting the negotiation 
of prices lower than the stipulated ceiling prices.  In fact, Section 602 (10) reads, Nothing 
in this statute shall prohibit a manufacturer from charging a price for a drug that is lower 
than the maximum price.  However, only 4 of the 22 ADAPs in the direct pricing 
program indicated that they had been able to negotiate below 340B ceiling prices.  The 
VA is typically able to contract below their ceiling price for approximately one-third of the 
covered pharmaceuticals.  Even with this potential, ADAPs are at a disadvantage given 
that they start their negotiations from a higher ceiling, do not individually command 
enough volume to demand large concessions and manufacturers have a disincentive to 
negotiate below ceiling prices with ADAPs since these prices will be included in non-
FAMP. 
ADAP Cost Containment Strategies  16  OEI-05-99-00610  ADAPs could have saved nearly $58 million in 1999 if allowed 
to purchase the 10 drugs at Federal ceiling prices 
Comparing the actual per drug expenditures of the ADAPs to what they would have paid 
if they had access to Federal ceiling prices, results in $57.5 million in Federal savings for 
ADAPs in 1999.  This savings represents 22 percent of the $266 million paid for these 
drugs with Federal funding in 1999.  Considering expenditures from all sources of funding, 
State, local and Federal, ADAPs could have saved $72 million if given access to Federal 
ceiling prices. 
A general estimate of ADAP savings for all drugs can be obtained from analyzing the 
FY 1998 AIDS Pharmaceutical Assistance Annual Administrative Report.  In this annual 
document, ADAPs reported drug expenditures of $538 million on 576 pharmaceuticals. 
The Federal portion of that spending would be approximately $432 million.  If ADAPs 
were able to obtain the 16 percent average amount of savings indicated by our analysis, 
the estimated savings would be $69 million.  Again, we would expect this savings estimate 
to have increased since FY 1998 given that prescription drug costs are the fastest growing 
segment of health care costs.  Since 1993, they have risen at a 12 percent annual rate.  The 
ADAP increases in drug expenditures are consistent with this national trend.  The March 
1999 National ADAP Monitoring Project indicates that national per client ADAP 
expenditures increased by 12 percent between 1997 and 1998.  A 12 percent increase in 
costs would place the estimated FY 1999 savings for all drugs at $77.3 million. 
The majority of savings derives from 3 of the 10 pharmaceuticals 
The ADAPs could have saved $36.8 million, representing over half of the total savings 
estimate, if they were able to purchase just 3 of the 10 drugs at the Federal ceiling prices. 
Purchasing Viracept at Federal ceiling prices would have saved $14 million.  The ADAPs 
could have saved another $13 million by purchasing Combivir at Federal ceiling prices and 
$9.6 million on D4T purchases. The median savings for all 10 drugs is $4 million. 
For Combivir and Viracept, the large potential savings reflect the fact that these are 
expensive, heavily prescribed pharmaceuticals.  Any reduction in cost will have significant 
program savings.  According to the data we received for the first three quarters of 1999, 
approximately 139,000 bottles of Combivir were procured by the ADAPs. This represents 
the third largest volume of any of the 10 drugs.  Viracept had the fourth highest volume at 
136,000 bottles.  Viracept and Combivir are also among the most expensive of the drugs 
we reviewed. 
While D4T was the most heavily prescribed drug of the 10 we analyzed with 175,000 
bottles, it is also the pharmaceutical with the largest difference between the 340B price 
ADAP Cost Containment Strategies  17  OEI-05-99-00610  and the Federal ceiling price.  The 340B ceiling price for D4T is 21 percent higher than the 
FSS Federal ceiling price. 
ADAPs could have served thousands more people living with HIV/AIDS 
The $57.5 million savings could have purchased additional pharmaceuticals to meet the 
pharmaceutical needs and improve the lives of several thousand more individuals living 
with HIV/AIDS.  Using the estimate of $12,000 a year for combination antiretroviral 
therapy, the savings could have purchased an complete regimen for almost 5,000 
additional clients in 1999. 
Focusing solely on the three drugs with the most savings, Viracept, Combivir and D4T, 
also results in a substantial increase in patient access to life-saving therapeutics.  The 
$57.5 million in savings could have purchased an additional 414,000 bottles of D4T at 
Federal ceiling prices.  This translates into a prescription of a bottle per month for 34,500 
patients.  Alternately, the $57.5 million in savings could have purchased 176,000 
additional bottles of Combivir for 14,700 patients annual needs or 166,400 bottles of 
Viracept for 14,000 patients. 
Demand already exists for the greater capacity that these savings would create.  According 
to the Kaiser Family Foundations ADAP Monitoring Report, as of July 1999, there are 11 
ADAPs with waiting lists of eligible clients.  Other ADAPs have capped the amount of 
expenditures per patient or created an enrollment cap in order to deal with the inequity 
between demand and available resources. 
Demand for HIV/AIDS pharmaceuticals continues to increase.  The standard of care for 
persons living with HIV/AIDS is increasingly reliant on drug therapy.  The National 
Institutes of Health/PHS Guidelines for the Use of Antiretroviral Agents in HIV Infected 
Adults and Adolescents calls for the use of combination antiretroviral therapy comprised 
of at least three drugs.  Additionally, the numbers of HIV-infected, low-income, 
traditionally underserved, population are climbing.  This in combination with the fact that 
approximately 75 percent of the HIV population has no private health insurance will 
continue to place increasing demands on the ADAPs to provide more pharmaceuticals. 
Given access to Federal ceiling prices, ADAPs enrolled in the 
direct purchase option would save $14 million.  ADAPs 
utilizing the rebate option would save $39 million 
All State ADAPs showed significant savings when the prices they paid for drugs were 
compared to the Federal ceiling prices.  When broken out by the type of 340B 
participation, direct purchase States (22 ADAPs) would save $14.4 million and rebate 
States (22 ADAPs) would save $39 million.  For the five non-participating States, the 
ADAP Cost Containment Strategies  18  OEI-05-99-00610  savings equals $4 million, bringing the total to $57.5 million in Federal savings.  Appendix 
A contains a break-out of program saving by State ADAP. 
Even though Direct purchase States access the 340B ceiling price, there are significant 
program savings when compared to the Federal ceiling prices 
Even though direct purchase States buy drugs at the best price available to ADAPs, they 
would be paying $14.4 million less if granted access to the Federal ceiling prices.  The 
three direct States that would produce the largest savings are Louisiana, Puerto Rico and 
Texas.  These are three of the largest ADAP programs operating.  The savings in these 
three States would total $7.4 million.  The range of savings for direct purchase States is 
$23,000 in Delaware to $3 million in Texas with median savings of $436,000. 
Comparing rebate States drug expenditures to the Federal ceiling prices results in the most 
program savings for the drug assistance program 
Rebate States would have saved $39 million if granted access to the Federal ceiling prices. 
The three rebate States producing the most savings are California, New Jersey and New 
York, with combined savings of $29 million.  Their savings represent 75 percent of the 
total $39 million in savings from rebate States and could impact the nearly 40,000 clients 
enrolled in those States.  The range of savings for rebate States was $22,000 in Alaska to 
$13.7 million in New York, with median savings of $575,000. 
The excessive amount rebate States pay for drugs is related to the reimbursement model 
they utilize.  Rebate ADAPs reimburse pharmacies at the average wholesale price (AWP), 
or the suggested list price for retailers set by manufacturers, minus a pharmacy discount. 
Our data showed a range of pharmacy discounts of 10 to 16 percent.  The average 
discount obtained was 12.2 percent.  In addition to these pharmacy discounts, rebate 
ADAPs receive the Medicaid unit rebate amount from manufacturers on a quarterly basis. 
Direct purchase ADAPs also use the Medicaid URA to discount the cost of drugs, but it is 
subtracted from the lower AMP, the average manufacturers price, prior to the drug 
purchase. 
For the 10 drugs we examined, we found AWP, the base drug price paid by rebate 
ADAPs, to be 25 percent higher than AMP.  This finding parallels an analysis of 
pharmaceutical pricing by the National Association of Chain Drug Stores.  They found 
that in 1999 only 75.7 percent of the cost of a prescription went to the manufacturer. 
In order to reduce drug expenditures,  rebate and nonparticipating ADAPs have instituted 
various additional cost containment measures.  These efforts include obtaining pharmacy 
or additional manufacturer discounts, voluntary rebates and the subsidy of private 
ADAP Cost Containment Strategies  19  OEI-05-99-00610  insurance premiums or co-payments2.  The $39 million savings projection takes into 
account pharmacy discounts and all manufacturer rebates.  It does not take into account 
savings obtained through the subsidy of private insurance since this cost containment 
measure would still be viable if ADAPs were granted access to Federal ceiling prices. 
Nine States3 supplied us with information regarding savings achieved through the subsidy 
of private insurance.  The savings gained from providing insurance in these nine States 
totaled $4.3 million. 
In order to analyze the impact of hidden distribution fees on our comparison, we 
performed a separate analysis of rebate ADAPs.  This comparison took into consideration 
the fact that the prices rebate ADAPs pay may include storage and distribution costs 
whereas the Federal ceiling prices do not.  Thus, we subtracted a standard distribution fee 
from the drug prices reported to us by the rebate States. 
The National Association of Chain Drug Stores estimates 2.3 percent of the retail price of 
drugs goes to wholesalers for storage and distribution costs. On the other hand, Bergen 
Brunswig believed that recent trends in the commercial pharmaceutical industry have led 
to most wholesalers charging distribution fees of 1 percent or less.  Finally, the VA has a 
negative distribution fee negotiated in exchange for maintaining their business.  Prior to 
the negative fee, the VA was paying .03 percent per bottle in distribution fees.  We 
selected the 2.3 percent estimate to provide rebate ADAPs with the most generous 
allotment for distribution fees.  In this analysis, we found that rebate States would still 
save $35 million if granted access to Federal ceiling prices.  States not participating in the 
340B program would still save $3.4 million. 
2 
Direct purchase ADAPs can also implement a health insurance component within their program. 
3	
Of the nine ADAPs that reported insurance data, 6 were rebate ADAPs, 2 were non-participating ADAPs 
and one was a direct purchase ADAP. 
ADAP Cost Containment Strategies  20  OEI-05-99-00610  R E C O M M E N D A T I O N S  
Two primary concerns regarding the cost effectiveness of ADAP expenditures are drug 
acquisition and drug distribution.  In many ways these two issues are intertwined since the 
method of distribution can determine an acquisition model.  In this inspection, we focused 
primarily on the base acquisition cost of the drugs in order to compare prices across 
government programs.  While we recognize that this is a simplified picture and did take 
steps to estimate distribution expenditures, we strongly feel that lower acquisition costs 
would be advantageous to the program and its ability to provide life-saving drugs to 
low-income individuals living with HIV/AIDS.  Once this option for low cost drugs is 
made available to ADAPs, the more complicated comparison of distribution systems can 
be made and the most economical, efficient and accessible means to distribute HIV/AIDS 
pharmaceuticals can begin to be addressed. 
Fundamentally, any program savings translates into an enhanced ability to serve those in 
need.  Access to Federal ceiling prices would result in overall program savings of $72 
million.  This level of savings could provide a years regimen of combination therapies to 
thousands of additional clients.  In fact, demand already exists for the greater capacity that 
would be created with these savings.  Facing an increasing rate of HIV infection among 
low-income individuals, several ADAPs have been forced to institute program limitations 
in the form of waiting lists, enrollment caps and per client expenditure limits in order to 
deal with the inequity between demand and available resources. 
HRSA should seek legislation to change the 340B ceiling 
price calculation to the Federal ceiling price calculation 
We recommend that HRSA work towards legislatively changing the calculation of the 
340B drug price ceiling in the public health statutes to the statutory formula mandated in 
Section 603 of the Veterans Health Care Act of 1992.  Changing this ceiling calculation 
would create significant Federal savings of $57.5 million for ADAPs.  While our study 
focused on ADAP cost savings, ADAPs are only one of the entities that would be 
impacted by changing the 340B ceiling prices.  However, there is no logical reason to 
carve out ADAPs from the rest of the 340B eligible entities since all of the entities are 
purchasing drugs with Federal dollars.  Further, there is no reason why all federally 
appropriated funds covered by the law should not be spent in the most economical way in 
order to serve additional medically needy clients.  Although it was not in the scope of our 
study to provide a precise estimate regarding the savings available to all 340B Drug 
Pricing Program eligible entities, a 16 percent reduction in the ceiling price could save 
these entities $240 million in Federal funds. 
ADAP Cost Containment Strategies  21  OEI-05-99-00610  Technically, there are three parts to the 603 pricing formula.  The base calculation is AMP 
minus 24 percent.  The second part of the calculation is an annual adjustment using the 
Consumer Price Index for urban consumers.  This is intended to ensure that the ceiling 
prices do not increase more than the rate of inflation.  The third part of the calculation is a 
dual calculation performed starting the second year of a multi-year contract.  This 
calculation compares the inflation adjusted AMP minus 24 percent to the previous years 
FSS contract prices adjusted for inflation.  The lower of the two prices becomes the new 
Federal ceiling price.  We recommend that only the first two aspects of the calculation be 
utilized to create a ceiling price for the 340B entities.  Since the dual calculation entails 
using prices from the previous years FSS contracts, it would create a link between the 
pricing of these two groups.  We are concerned that this linkage could have a detrimental 
effect on the ability of the VA to negotiate the lowest possible prices for the FSS. 
Changing the ceiling calculation would further the legislative intent of VHCA to limit the 
prices of drugs to government purchasers.  Although VHCA successfully established 
ceiling prices to limit costs for a specified group of entities, it failed to produce a single 
discount ceiling for all Federal purchases made by these organizations.  Section 603 covers 
direct Federal purchasers while Section 602 generally covers entities that make 
pharmaceutical purchases with Federal dollars.  Despite the fact that both are expending 
Federal dollars, entities covered by 602 are provided with a smaller discount.  We 
recommend that the current inequity within the law be rectified by standardizing the 
ceiling calculation for all entities covered under Sections 602 and 603 of VHCA.  Section 
603 ceiling prices already cover the Public Health Service and any entity that receives 
funds under the Public Health Service Act. 
Limiting pharmaceutical costs is even more critical today than when VHCA was passed in 
1992.  Medical advances have produced drugs that are often the therapy of choice for 
persons living with HIV/AIDS. These medications have the power to improve quality of 
life by inhibiting the progression of the disease and to prolong life.  The PHS recently 
issued guidelines promoting the use of combination antiretroviral drug therapy for treating 
persons living with HIV as well as AIDS.  As a result of this reliance on drug therapy, 
pharmaceutical purchases have been increasing at a dramatic rate. 
Changing the calculation would be beneficial because the 340B prices would no longer be 
tied to the Medicaid rebate calculation.  Currently, the Section 602 calculation is AMP 
minus the Medicaid URA.  Medicaid is a reimbursement program whereas the 340B Drug 
Pricing Program is intended to provide an up-front discount off the purchase price4 of 
pharmaceuticals.  This difference in structure has lead to technical problems regarding 
4	
A 340B rebate option was designed to specifically accommodate those ADAPs with a reimbursement 
structure. Only ADAPs are eligible to participate in this option. At the time this study was conducted, 23 
ADAPs participated in the rebate option. 
ADAP Cost Containment Strategies  22  OEI-05-99-00610  calculating the ceiling prices.  Medicaid allows changes to the Medicaid URA data to be 
implemented retroactively.  Since the 340B provides an immediate discount at point of 
purchase, many of these retroactive changes are never reflected in the discount they are 
provided.  Adjustments have proven difficult to identify and implement.  On the other 
hand, Section 603 pricing, administered by the VA, is similar to the 340B program in that 
it is an up-front, time of purchase discount program.  Further, the VA has reliable, easily 
validated data that is tracked as pricing changes occur. 
Making this change will impact the manufacturers in several ways.  Primarily, the change 
would allow all 340B covered entities to access outpatient covered drugs at the lower 603 
Federal ceiling prices.  Beyond the 52 ADAPs, there are close to 12,000 eligible 340B 
entities.  However, it has been estimated that only 66 percent of them participate in the 
340B Drug Pricing Program.  In total, pharmaceutical expenditures by 340B entities in 
1999 represented approximately 1 percent of  the domestic pharmaceutical market.  The 
Big 4 agencies, already covered under Section 603, represent just another one and a half 
percent of the market. By means of comparison, Medicaid comprised 10 percent of the 
market.  A potential benefit for the manufacturers is a simplified, uniform Federal pricing 
system to track and report, with price-changing data submissions and recalculations 
required only once a year.  Currently, manufacturers report quarterly data to HCFA and 
face quarterly recalculation of drug prices for the 340B drug pricing program. 
Given the limited scope of the proposed changes, it seems likely that any loss due to lower 
Federal prices to these 12,000 entities could be regained in additional sales volume.  At 
the time this study was conducted, five ADAPs had waiting lists while the demand for 
combination therapies of two or three drugs continues to accelerate.  Further, the 
incremental costs of producing additional drugs is minimal.  Most of the investment 
typically occurs during the research and development phases.  However, in the case of 
these 10 drugs, even these expenses have been mitigated by the Federal subsidy of basic 
research and clinical trial testing.  Given these facts, manufacturers should be able to 
produce more drugs without significantly eroding their profit margin and their ability to 
recoup their initial investments. 
This recommended change could also mean some adaptations for the VA.  The VA 
calculates the Federal ceiling price for the Big 4 annually based on manufacturers reports. 
To maximize efficiency, it would be beneficial if the VA would enter into a data sharing 
agreement with HRSA to annually provide this ceiling price information to them. 
Although both the Big 4 and 340B eligible entities would have access to the same ceiling 
prices for outpatient covered drugs, the programs would stay discrete. The entities 
benefitting from 602 and 603 are very different in ownership and control, creating great 
differences in the administration of the two programs.  Further, HRSAs prime vendor is 
perfectly situated to negotiate contracts at or below the 603 ceiling price for the 340B 
covered entities similar to the way the VA negotiates annual contracts for users of the FSS 
including the Big 4. 
ADAP Cost Containment Strategies  23  OEI-05-99-00610  While the legislative process to accomplish these changes is underway, HRSA should 
encourage the prime vendor to negotiate prices that resemble those the Big 4 currently 
receive.  Maximum impact could be achieved by focusing on the drugs or the State 
ADAPs that we found to have the largest potential for program savings. 
To allow ADAPs to negotiate the lowest prices possible, 
HRSA should seek legislation to exempt all sales to 340B 
covered entities from the calculation of Non-Federal Average 
Manufacturers Price 
To accomplish this, we recommend that HRSA seek to add exclusionary language to the 
statutes codifying the 340B drug pricing program (42 USC 256B) stating that any price 
negotiated by the prime vendor or any 340B eligible entity below the 340B statutory 
ceiling price would be excluded from the calculation of the non-FAMP.  Currently, sales at 
the 340B ceiling price are excluded from the non-FAMP calculation, but sales below the 
ceiling are considered commercial sales by the VA and are included in the calculation. 
The inclusion of sales below the 340B ceiling price in non-FAMP creates disincentives for 
manufacturers to negotiate prices that are lower than ceiling prices for ADAPs. The VA 
considers sales to 340B entities below the 340B ceiling price as commercial sales, and 
therefore, includes them in the calculation of non-FAMP.  Non-FAMP is fed into the VAs 
calculation of the Federal ceiling prices.  The inclusion of extremely low prices, such as 
prices below the 340B ceiling, could lead to lower ceiling prices for the large volume 
purchased by the Big 4.  This potential of racheting down Federal ceiling prices 
discourages manufacturers from offering lower than ceiling prices to 340B entities. 
The inclusion of sales below the 340B ceiling price in non-FAMP does not appear to 
support the intent of VHCA or Congressional mandates.  The VHCA specifically does not 
prohibit manufacturers from offering prices below the ceiling.  Section 340B (10) states 
that there is no prohibition on a larger discount from manufacturers to 340B eligible 
entities.  In light of this, the Congress has encouraged covered entities to aggressively seek 
drug price reductions as a means to expend their resources in the most economical way 
feasible.  Further, Congress excluded Federal sales from the calculation of Best 
Manufacturers Price in Section 601 of VHCA in order to correct a similar pricing 
disincentives faced by government purchasers due to the implementation of the Medicaid 
Rebate Program. 
This non-FAMP issue presents a major barrier to HRSAs Prime Vendor in their ability to 
negotiate the lowest possible prices.  If lower than ceiling price sales to 340B entities 
continue to be included in non-FAMP, the prime vendor cannot successfully negotiate for 
prices lower than the 340B ceiling, currently, or lower than the 603 ceiling potentially. 
ADAP Cost Containment Strategies  24  OEI-05-99-00610  Several manufacturers have made it clear to HRSA that they will not offer deeper 
discounts to 340B eligible entities until the non-FAMP issue is resolved.  The ability to 
offer considerable discounts is pivotal to the success of the Prime Vendor Program since it 
is a voluntary program.  The more entities it can persuade to join the program by offering 
lower than ceiling prices, the larger its bargaining power, and the more price concessions 
it can negotiate on behalf of the ADAPs. 
Excluding below ceiling prices from non-FAMP will also provide consistency in the 
interpretation of ceiling calculations across the Federal Government.  The HCFA excludes 
all 340B sales, ceiling and below, from their calculation of AMP for the Medicaid Rebate 
Program.  The VA, on the other hand, includes any 340B sale below the statutory ceiling 
in its calculation of non-FAMP.  The AMP, as used by HCFA, and non-FAMP should be 
equivalent since each is calculated to represent the average, non-Federal price paid to 
manufacturers by wholesalers. 
Over the years, HRSA has requested that the VA change their reporting procedure so that 
it does not interfere with the 340B Drug Pricing Program.  Specifically, they have asked 
the VA to permit drug manufacturers to exclude all sales to 340B covered entities when 
they report to the VA on their non-FAMP.  This repeated administrative request from 
HRSA has proved ineffective, therefore, we recommend a statutory change excluding all 
340B sales from the calculation of non-FAMP. 
HRSA should continue to work with rebate and non-
participating ADAPs to devise ways to grant them access to 
up-front drug discounts 
Rebate and non-participating ADAPs utilize a reimbursement model for the purchase and 
distribution of pharmaceuticals that prevents them from being eligible for up-front drug 
discounting.  They are ineligible for the direct purchase option of the 340B program and 
they will not be able to take advantage of any savings negotiated by the prime vendor. 
Further, their current structure would prevent them from accessing the Federal ceiling 
prices if that legislative change was enacted. 
There are several ways HRSA could work with rebate States to allow them to access 
direct purchase discounts: 
1) HRSA should continue to provide incentives and technical assistance for States to 
join the direct pricing/Prime Vendor option. 
We recognize that HRSA has in the past and continues to strongly encourage all ADAPs 
to participate in the 340B direct purchase option. On October 22, 1998, HRSA released a 
Federal register notice stating that participation in the 340B program would be a 
ADAP Cost Containment Strategies  25  OEI-05-99-00610  condition of the grant.  While HRSA decided this approach would be too administratively 
burdensome, they did make participation in the 340B program expected.  The Notice of 
Grant Awards now indicates that if participating in the direct purchase or Prime Vendor 
option is determined to be the most economical means to purchase drugs, Failure to 
participate may result in a negative audit finding, cost disallowance or grant funding 
offset. 
The HRSA should work with the remaining rebate and non-participating ADAPs to 
educate them to the significant program savings available through the current up-front 
drug pricing program and the even more dramatic savings potentially available through 
accessing Federal ceiling prices.  A 1999 evaluation found that both non-participating and 
participating entities could benefit from education efforts to help them to better 
understand the program.  Where feasible, HRSA could help ADAPs develop cost-
effective, creative solutions to restructuring their program.  Best practices models could 
be disseminated and used as a starting point to create a system geared to meet the needs of 
each ADAP as well as the eligibility requirements for participation in up-front pricing 
discounts. 
While not suitable for all State ADAPs, one possible way to transform a reimbursement 
system into a system with a single central purchaser, without sacrificing wide distribution, 
would be to engage a mail-order pharmacy.  Mail-order pharmacies typically have a 2 day 
turn-around and can ship to any address in the State.  Further, mail-order pharmacies are 
high-volume operations and can locate where costs are low, keeping administrative 
expenses low.  Illinois recently moved to a mail-order system in order to access 340B 
ceiling prices.  They pay the pharmacy a $15.93 per transaction charge.  This includes all 
labor and administrative cost as well as dispensing fees. 
2) HRSA should revisit the potential of allowing multiple contract pharmacies. 
Despite HRSAs efforts to encourage participation in the direct purchase option, there 
remain serious administrative, fiscal, technical and political barriers to altering some 
States structures to comply with program eligibility rules.  The largest obstacle for most 
rebate and non-participating ADAPs is the program guidance requiring a single State or 
contract pharmacy.  The ADAPs with a reimbursement model make use of vast retail 
pharmacy networks that purchase and distribute pharmaceuticals on their behalf. 
Restructuring this system could mean having to develop internal means to purchase, 
warehouse and distribute drugs.  It could also mean less convenient access for their 
clients. 
In order to achieve maximum participation in drug price savings, HRSA should support 
the submission of proposals for multiple contract pharmacies and review them for 
potential receipt of up-front pricing discounts.  On August 23, 1996, HRSA set forth 
program guidance allowing ADAPs to use contract pharmacy services.  It is this program 
ADAP Cost Containment Strategies  26  OEI-05-99-00610  guidance, not the law, that holds ADAPs to a single contract pharmacy in order to be 
eligible for 340B direct pricing.  However, the guidance also states that HRSA will 
evaluate  the feasibility of permitting covered entities to contract with more than one site 
and contractor. 
In order to support the submission of multiple contract pharmacy proposals, HRSA should 
create a system of review for such proposals.  They should also provide guidance 
regarding the level of drug diversion and client eligibility safeguards needed to reasonably 
consider allowing a multiple contract pharmacy model.  Some of these considerations are 
already outlined in Appendix A, Suggested Contract Provisions, of the Contract Pharmacy 
Services guidance.  This document could be expanded to include more specific monitoring 
and reporting standards for rebate and non-participating ADAPs to adhere to if they were 
seeking up-front pricing discounts. 
The potential for drug diversion in a multiple pharmacy model is a concern.  Despite the 
fact that the 340B statue contains explicit prohibitions against drug diversion and duplicate 
discounting, the Pharmaceutical Research and Manufacturers of America filed a lawsuit in 
1996 to prevent 340B covered entities from contracting with pharmacies.  They claimed 
that companies cannot adequately protect themselves from diversion of low-price drugs 
to non-covered patients.  In response, HRSA indicated that the Department was unaware 
of any documented instances of intentional drug diversion.  They also pointed out that the 
law stipulates that the drug manufacturers and the government have the right to audit 
records of the organizations using the program and that entities are responsible for 
reimbursing manufacturers for any losses due to drug diversion. 
To respond to drug diversion concerns, HRSA could offer specific technical assistance to 
States concentrating on effective ways to safeguard against drug diversion.  This could 
entail providing technical assistance regarding effective drug tracking and reporting 
systems and techniques to strengthen eligibility screening. The HRSA has already 
established an initiative to improve ADAP infrastructure by focusing on the development 
of centrally administered, integrated data systems. A 1998 OIG study of ADAP 
monitoring systems, The Ryan White Evaluation Systems: ADAP (OEI-05-98-00390), 
found that drug assistance programs in the eight States visited have centralized computer 
systems that sufficiently track client enrollment and eligibility as well as monitor pharmacy 
claims information.  Activity reports from these databases are typically reviewed on a 
monthly, sometimes weekly, basis. 
The rebate option was instituted to allow States with a reimbursement structure to access 
standardized savings greater than those they were able to negotiate on their own.  While 
this cost saving measure along with others such as the subsidy of private insurance has 
resulted in program savings, our analysis indicates even greater savings would be achieved 
if the rebate ADAPs could access up-front price discounts similar to those granted the Big 
4.  Even when estimated distribution fees are subtracted from rebate and 
ADAP Cost Containment Strategies  27  OEI-05-99-00610  non-participating States drug expenditures, they would still save $38.4 million at Federal 
ceiling prices.  It is necessary to achieve the aim of the 340B program and adhere to 
Congressional mandates that Federal funds are used in the most cost effective way 
possible that rebate and non-participating States be given every opportunity to access low 
cost drugs. 
ADAP Cost Containment Strategies  28  OEI-05-99-00610  A G E N C Y  C O M M E N T S  
The HRSA concurred with the reports findings and recommendations.  They also offered 
suggestions for clarifying the report and making other technical changes.  We appreciate 
their suggestions and, where appropriate, we changed the report to reflect their comments. 
The complete text of HRSA comments can be found in Appendix C.  Further staff from 
the office of the Assistant Secretary of Planning and Evaluation (ASPE) expressed 
concerns regarding our first recommendation.  We will address their concerns in this 
section. 
In response to our first recommendation,  HRSA indicated that they will actively review 
the need for such a legislative change and make an appropriate recommendation to the 
Department.  They agreed that changing the calculation of the 340B ceiling pricing to the 
Section 603 pricing formula could further stretch Federal dollars to serve additional 
patients whose current needs remain unmet.  Further, they indicated that linking the 340B 
pricing calculation to Section 603, a pricing mechanism intended for up-front discounted 
purchasing, would result in more accurate and timely data for the pricing calculations. 
The HRSA agreed with our second recommendation reiterating the fact that the inclusion 
of sales to 340B covered entities below the current 340B statutory ceiling price into the 
non-Federal Average Manufacturer Price may cause manufacturers to avoid negotiations 
that would provide further discounts to the 340B covered entities. 
Regarding the third recommendation, HRSA pointed out several ongoing activities to 
promote ADAP participation in the 340B direct purchase option, including the 
implementation of the Prime Vendor Program.  We commend their efforts in this area. 
The HRSA cautioned, however, that one potential solution offered, that of transforming 
reimbursement systems into direct purchase systems via mail order pharmacies was not 
necessarily the perfect solution for every State ADAP.  They pointed out that States often 
face unique concerns and constraints that would make a mail order system unworkable. 
We agree with HRSAs assessment. 
One technical concern HRSA expressed was with our calculation of the percentage of 
Federal funding for ADAPs.  We report that Federal funding comprised 80 percent of total 
ADAP funding.  This figure is based on data HRSA supplied to us from the ADAP 
portion of the FY 1999 Title II Grant Applications.  The HRSA used data from the same 
source to arrive at a 74 percent Federal share.  The HRSA percentage is calculated using a 
denominator they have titled Total ADAP Resources which not only includes Federal, 
State and other funding, but a category of cost-savings strategies.  Our denominator 
excludes the category cost-savings strategies since it is our understanding that these are 
ADAP resources, but they do not constitute an ADAP funding source. 
ADAP Cost Containment Strategies  29  OEI-05-99-00610  The concern raised by ASPE staff has to do with the larger policy implications of our first 
recommendation.  In particular, they are concerned that allowing 340B entities to utilize 
the Section 603 Federal ceiling price might affect the ability of the VA and the Big 4 to 
maintain the low prices they currently obtain.  We understand their concern about the 
negotiations.  In fact, it was our concern with this very issue that lead us to recommend 
that 340B pricing be linked to the statutorily defined Federal ceiling price as opposed to 
the negotiated Federal Supply Schedule (FSS) contract prices the VA and the Big 4 
actually pay for drugs.  The Federal ceiling price acts only as an upper ceiling to the FSS 
prices.  In reality, the VA uses its considerable volume to negotiate prices below the 
Federal ceiling.  Allowing 340B entities to utilize the same ceiling calculation as the VA 
and the Big 4 merely provides them with an equitable starting point.  Discussions with the 
VA confirmed that this is a realistic recommendation in consideration of larger policy 
implications. 
ADAP Cost Containment Strategies  30  OEI-05-99-00610  APPENDIX A 
Projected Savings if ADAPs Purchased Drugs at Federal Ceiling Prices 
By State for CY 1999 
States  Federal Savings  State/Other Savings  Total Savings 
Direct Purchase States 
TEXAS  $3,188,827.19  $227,411.05  $3,416,238.24 
LOUISIANA  $2,121,753.07  $0.00  $2,121,753.07 
PUERTO RICO  $2,110,284.76  $445,620.56  $2,555,905.32 
COLORADO  $1,153,847.63  $298,881.17  $1,452,728.81 
ILLINOIS  $837,363.66  $410,718.12  $1,248,081.79 
VIRGINIA  $833,214.59  $78,838.64  $912,053.23 
GEORGIA  $825,576.97  $151,860.11  $977,437.08 
SOUTH CAROLINA  $692,909.46  $63,876.75  $756,786.21 
ALABAMA  $514,536.07  $13,944.96  $528,481.03 
KENTUCKY  $488,075.56  $19,486.20  $507,561.76 
NEVADA  $487,965.83  $190,141.56  $678,107.38 
ARIZONA  $384,879.54  $94,855.93  $479,735.47 
MISSISSIPPI  $234,993.81  $41,703.30  $276,697.11 
NEW MEXICO  $130,204.14  $141,954.05  $272,158.19 
TENNESSEE  $124,160.02  $0.00  $124,160.02 
HAWAII  $109,362.24  $25,360.28  $134,722.51 
IOWA  $99,532.64  $0.00  $99,532.64 
NEBRASKA  $68,254.93  $0.00  $68,254.93 
FLORIDA  $40,509.68  $6,055.50  $46,565.18 
MONTANA  $38,113.22  $0.00  $38,113.22 
DELAWARE*  $23,018.90  $0.00  $23,018.90 
DC**  -$41,153.55  -$3,711.95  -$44,865.50 
Subtotal  $14,466,230.36  $2,206,996.22  $16,673,226.58 
340B Rebate States 
NEW YORK  $13,694,595.49  $1,009,649.49  $14,704,244.98 
CALIFORNIA  $9,544,078.82  $5,797,408.79  $15,341,487.62 
NEW JERSEY  $6,121,303.64  $896,065.96  $7,017,369.60 
MARYLAND  $1,552,366.18  $64,337.19  $1,616,703.37 
WASHINGTON  $1,301,611.64  $530,284.75  $1,831,896.38 
MASSACHUSETTS  $1,084,651.14  $257,847.26  $1,342,498.40 
CONNECTICUT  $962,850.38  $72,194.68  $1,035,045.06 
MISSOURI  $877,743.98  $376,592.56  $1,254,336.54 
OHIO  $869,197.74  $514,594.06  $1,383,791.80 
INDIANA  $620,301.59  $0.00  $620,301.59 
ADAP Cost Containment Strategies  31  OEI-05-99-00610  WISCONSIN  $591,099.36  $147,178.48  $738,277.85 
NORTH CAROLINA  $559,687.70  $770,377.28  $1,330,064.98 
OKLAHOMA  $286,704.96  $110,595.67  $397,300.63 
KANSAS  $252,476.92  $0.00  $252,476.92 
UTAH  $243,022.91  $24,545.63  $267,568.54 
RHODE ISLAND  $228,868.96  $0.00  $228,868.96 
OREGON  $210,505.73  $0.00  $210,505.73 
WEST VIRGINIA  $163,381.51  $12,491.40  $175,872.91 
IDAHO  $75,164.09  $34,023.68  $109,187.77 
VERMONT  $40,994.05  $33,059.72  $74,053.77 
NORTH DAKOTA  $34,450.13  $0.00  $34,450.13 
ALASKA  $21,886.31  $1,622.06  $23,508.38 
Subtotal  $39,336,943.24  $10,652,868.67  $49,989,811.91 
Non-Par ticipating   
States *** 
PENNSYLVANIA  $1,945,523.68  $1,291,223.10  $3,236,746.78 
MICHIGAN  $657,021.25  $0.00  $657,021.25 
MINNESOTA  $586,286.47  $29,309.66  $615,596.14 
ARKANSAS  $515,510.43  $0.00  $515,510.43 
SOUTH DAKOTA  $47,138.80  $0.00  $47,138.80 
Subtotal  $3,751,480.63  $1,320,532.76  $5,072,013.39 
Total Savings****  $57,554,654.23  $14,180,397.65  $71,735,051.88 
Notes: 	 *Delaware is registered as a rebate State with HRSA, but the bulk of its purchases are made through a 
Disproportionate Share Hospital which purchases the drugs directly at the 340B ceiling price. For the 
purposes of this analysis, it was counted as a direct purchase State. 
**The District of Columbias negative savings reflects the fact that they procure their drugs through the 
Department of Defense at Big 4 contract prices. Big 4 contract prices are often lower than Federal ceiling 
prices given the tremendous bargaining power of the Big 4. Washington DC was included in the direct 
purchase category because this category most closely resembles how DC obtains drugs and the prices they 
pay. 
***Non-participating ADAPs often negotiate their own rebates from pharmaceutical manufacturers. 
Michigan and Minnesota receive voluntary rebates from pharmaceutical manufacturers. Pennsylvania 
receives State mandated rebates from pharmaceutical manufacturers. These rebates have been calculated 
into our savings estimates. Arkansas became a direct purchase State in September 1999, at the end of our 
sampled time. 
**** New Hampshire, Wyoming and Maine were unable to provide us with the information we requested. The 
Virgin Islands only became eligible for the 340B Drug Pricing Program in October 1999.  We believe that 
the total savings would be even greater had pricing information from these ADAPs been included. 
ADAP Cost Containment Strategies  32  OEI-05-99-00610  APPENDIX B 
Names and National Drug Codes of the 10 Drugs Reviewed

Pharmaceutical 
 National Drug Code 
Brand Name (Generic Name)
Crixivan (Indinavir)  00006057362 
400 mg, 180 units 
Invirase (Saquinavir)  00004024515 
200mg, 270 units 
Sustiva(Efavirenz)  00056047492 
200mg, 90 units 
Viracept (Nelfinavir)  63010001027 
250mg, 270 units 
Zidovudine (AZT) 
00173010855 
100mg, 100 unit 
Epivir (3TC) 
00173047001 
150mg, 60 units 
Videx (ddl)  00087665201 
100mg, 60 units 
D4T (Zerit) 
00003196701 
40mg, 60 units 
Combivir (AZT/3TC)  00173059500 
150mg/300mg, 60 units 
Fortovase (Saquinavir)  00004024648 
200mg, 180 units 
Note: 	 The original survey requested information on 11 drugs. The 10 drugs listed here and Norvir 
(NDC#00074663322). The National Drug Code for Norvir used on our survey was not issued until June 
1999. It was often not clear in the data received which NDC of Norvir the information corresponded to, 
therefore we did not use any of the data related to this pharmaceutical. 
ADAP Cost Containment Strategies  33  OEI-05-99-00610  APPENDIX C 
Agency Comments

ADAP Cost Containment Strategies  34  OEI-05-99-00610  APPENDIX C 
Agency Comments 
Health Resources and Services Administration (HRSA) Comments to the Office 
of Inspector General (OIG) Draft Report  AIDS Drug Assistance 
Program Cost Containment Strategies OEI-O5-99-00610 
GENERAL COMMENTS 
The draft report is informative and supportive of AIDS Drug Assistance Programs (ADAPs). 
However, to be accurate the Health Resources and Services Administration (HRSA) recommends 
that the report include the information that State ADAPs operate in dynamic environments and 
that the description of each program is a snapshot taken at a fixed point in time. For example, the 
study period for this report included only the first three quarters of 1999. Therefore, to describe 
ADAPs as they existed during the study period, we recommend that 010 change the word 
currently to at the time this study was conducted, everywhere the word currently appears in 
the report. 
OIG RECOMMENDATION 
The Health Resources Services Administration should seek legislation to change the 340B ceiling 
price calculation to the Big 4 ceiling price calculation. 
HRSA COMMENT 
We concur.  We will actively review the need for such a legislative change and make an 
appropriate recommendation to the Department. Implementation of the 340B Drug Pricing 
Program has been tied to the Medicaid program for calculation of the ceiling price. Medicaid is a 
reimbursement program and changes to the data utilized to calculate the Medicaid Unit 
Reimbursement (URA) are allowed to occur retroactively. The 340B price is an immediate, up-
front, at the time of purchase selling price and these changes are often not captured or included in 
the calculation. Adjustments are difficult to identify and implement. The Big 4 Section 603 price 
schedule administered by the Veterans Administration (V.A.) is similar to the 340B drug pricing 
program in being an up-front, at the time of purchase discount program. Changes as they occur 
are tracked by the V.A. and this can be easily communicated to HRSA for the 340B program. The 
Federal dollars, provided to the 340B covered entities through grant funding, may be further 
stretched to serve additional patients and provide additional services with this change in the 
legislation. The impact of this legislative change is not limited to the ADAPs, but would extend to 
all 340B covered entities. The impact is potentially larger and may have a significant impact on 
providing access to both health care services and pharmaceuticals to individuals with current 
unmet needs. 
ADAP Cost Containment Strategies  35  OEI-05-99-00610  APPENDIX C 
Agency Comments

OIG RECOMMENDATION 
To allow ADAPs to negotiate the lowest prices possible, HRSA should seek to statutorily exempt 
all sales to 340B covered entities from the calculation of Non-Federal Average Manufacturers 
Price (nonFAMP). 
HRSA COMMENT 
We concur. The inclusion of sales to 340B covered entities below the current 340B statutory 
ceiling price into the nonFAMP may cause manufacturers to avoid negotiations that would 
provide further discounts to the 340B covered entities. 
OIG RECOMMENDATION 
HRSA should continue to work with rebate and non-participating ADAPs to devise ways to grant 
them access to up-front drug discounts. 1) HRSA should continue to provide incentives and 
technical assistance for States to join the direct pricing/Prime Vendor option, and 2) HRSA 
should revisit the potential of allowing multiple contract pharmacies. 
HRSA COMMENT 
We concur. 
1.	 HRSA has in the past and continues in the present to encourage the ADAPs to participate 
in the 340B direct purchase option. The implementation of the HRSA Prime Vendor is 
anticipated to provide additional savings to those ADAPs participating in both the direct 
discount option and the Prime Vendor as compared to the rebate and non-participating 
ADAPs. The potential additional savings possible if the ceiling price is changed to the 
Big 4 Section 603 ceiling price would be an additional inducement for the ADAP rebate 
option States to implement a direct discount option system. 
HRSA has provided and will continue to provide incentives and technical assistance for 
State ADAPs to participate in the Section 340B direct purchase discount program. 
However, when advising State ADAPs about the Section 340B point of purchase 
discount, HRSA advises State ADAPs to consider the cost-effectiveness of the entire drug 
purchasing, dispensing, and administrative system used by the ADAP. 
ADAP Cost Containment Strategies  36  OEI-05-99-00610  APPENDIX C 
Agency Comments 
2.	 A Mail Order Pharmacy has been an option for the ADAPs since the establishment of 
the 340B Contract Pharmacy Service Provider guidelines. HRSA will continue to explore 
options that may facilitate ADAPs in utilizing either a Mail Order Pharmacy or multiple 
contract pharmacy service providers. 
The report suggests that one way to easily transform a reimbursement system into a 
system with a single central purchase, without sacrificing wide distribution, would be to 
engage mail-order pharmacy service. It is important to note that a system that works well 
for one State ADAP may not be suitable for another State to incorporate. 
A mail-order pharmacy may not necessarily be a perfect solution for every State ADAP 
for the following reasons: 
1) A number of ADAPs provide treatments for acute opportunistic infections and pain 
medication that require immediate and convenient client access. 
2) Many of the reimbursement State ADAPs utilize the same structure as other 
governmental programs providing access to medications within the State (i.e., Medicaid) 
and often both Medicaid and ADAP utilize the same local pharmacy network. 
3) Clients often move back and forth between Medicaid and ADAP. It is essential that 
these two programs coordinate and function well together. 
4) ADAP clients living in public housing projects and high crime inner-city neighborhoods, 
as well as homeless or those living in temporary housing, would also prove difficult to 
serve through a mail-order system due to potential shipping loss and theft. 
These potential problems would also impact client adherence, another major concern that could 
impact a clients overall health, as well as result in additional health care costs (e.g., viral 
resistance, risk from opportunistic infections, increased emergency room utilization, increased 
hospitalization, and increased mortality). 
TECHNICAL COMMENTS 
Page 8: Under ADAPs Participation in the 340B Drug Pricing Program, please insert a new 
second sentence that says: State ADAPs operate in dynamic environments, so the description of 
each program that follows is a snapshot taken at a fixed point in time. 
ADAP Cost Containment Strategies  37  OEI-05-99-00610  APPENDIX C 
Agency Comments 
Under the heading, ADAPs Participation in the 340B Drug Pricing Program, line 5, that reads 
Currently, twenty-three ADAPs participate in the 340B, add under the direct discount 
program and change twenty-three to twenty-two. 
Line 7 states Twenty-two ADAPs receive standardized rebates, add under the 340B rebate 
option and change twenty-two to twenty-four. 
Page 12: In the second paragraph under Scope and Methodology, the report describes funding 
sources to ADAPs and states that Federal funding typically comprises 80 percent of total ADAP 
funding. While that may be correct for the States responding to the survey, please add a new 
sentence at the end of the paragraph: Overall, though, as reported in the FY 1999 Title II grant 
applications, State ADAPs estimated 74 percent of funds was from Federal sources, (specifically 
64 percent was received from the Federal ADAP earmark, 7 percent from Title II base 
contribution, 3 percent from Title I contributions, 18 percent from State contributions, 1 percent 
from other contributions, and 7 percent from other cost-saving strategies). 
Page 17: Under the heading, ADAPs could have served thousands more people living with 
HIV/AIDS, paragraph 4. change the 3rd sentence to read, The National Institutes of 
Health/PHS Guidelines for the Use of Antiretroviral Agents in HIV Infected Adults and 
Adolescents calls for the use of combination Antiretroviral therapy comprised of at least three 
drugs. Delete sentence 4 because the guidelines no longer encourage starting persons infected 
with HIV on aggressive drug therapy earlier in the development of the disease. 
Page 25: Delete paragraph 4 that starts with the sentence, The ADAPs concerned about the 
drawbacks of a mail-order system could create a mixed system. This recommendation would 
require States to develop parallel systems that would be administratively burdensome and not 
necessarily cost effective. 
Appendix A: Include Arkansas and the Virgin Islands in the first chart that lists States that 
participate in the 340B direct purchase option. Delete Delaware and D.C. as using this option. 
Delaware participates in the rebate option and D.C. purchases medications under the Federal 
Supply Schedule. 
Include Delaware and Wyoming in the second chart that lists the States that participate in the 
340B rebate option. 
Include the following information in the 3rd chart that lists the States that do not participate in the 
340B purchasing option: Michigan and Minnesota receive voluntary rebates from pharmaceutical 
manufacturers and Pennsylvania receives State mandated rebates from pharmaceutical 
manufacturers. 
ADAP Cost Containment Strategies  38  OEI-05-99-00610  APPENDIX D 
Related Office of Inspector General Reports 
The Ryan White Evaluation Systems: AIDS Drug Assistance Programs (OEI-05-98-00390) 
The Ryan White Evaluation Systems: Title II Grants to the States (OEI-05-98-00393) 
Audit of the Utilization of the Public Health Service 340B Drug Pricing Program 
(A-01-98-01500) 
Audit of State AIDS Drug Assistance Programs Use of Drug Price Discounts (A-01-97-01501) 
Comparing Drug Reimbursement: Medicare and Department of Veterans Affairs 
(OEI-03-97-00293) 
ADAP Cost Containment Strategies  39  OEI-05-99-00610