Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

MEDICAID DRUG PRICE 


COMPARISON: 


AVERAGE SALES PRICE TO 


AVERAGE WHOLESALE PRICE


Daniel R. Levinson


Inspector General 


June 2005 


OEI-03-05-00200

Office of Inspector General 
 http://oig.hhs.gov 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 

as amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components: 

Office of Audit Services 

The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors 

in carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the department. 

Office of Evaluation and Inspections 

The OIG's Office of Evaluation and Inspections (OEI) conducts management and 

program evaluations (called inspections) that focus on issues of concern to the 

department, the Congress, and the public. The findings and recommendations contained 

in the inspections reports generate rapid, accurate, and up-to-date information on the 

efficiency, vulnerability, and effectiveness of departmental programs. The OEI also 

oversees State Medicaid fraud control units, which investigate and prosecute fraud and 

patient abuse in the Medicaid program. 

Office of Investigations 

The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 

and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 

convictions, administrative sanctions, or civil monetary penalties. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support in OIG's internal operations. The OCIG imposes program exclusions and 

civil monetary penalties on health care providers and litigates those actions within the 

department. The OCIG also represents OIG in the global settlement of cases arising 

under the Civil False Claims Act, develops and monitors corporate integrity agreements, 

develops compliance program guidances, renders advisory opinions on OIG sanctions to 

the health care community, and issues fraud alerts and other industry guidance. 
Δ EXECUTIVE SUMMAR Y 

OBJECTIVE 

To compare average sales price (a statutorily defined price based on 

actual sales transactions) to average wholesale price (the published 

price most States use to set Medicaid reimbursement rates) for 

Medicare-covered drugs. 

BACKGROUND 

Increases in Medicaid’s prescription drug costs have generated 

considerable attention from the Administration, Congress, and the 

States. Federal regulations require that each State’s reimbursement for 

Medicaid prescription drugs not exceed the lower of (1) its estimated 

acquisition cost plus a dispensing fee, or (2) the provider’s usual and 

customary charge to the public for the drug. 

Currently, most States estimate acquisition cost by discounting the 

average wholesale price (AWP) by a certain percentage. A small 

number of States use wholesale acquisition cost (WAC) plus a 

percentage markup when determining estimated acquisition cost. The 

AWP is a published price reported in commercial publications. 

Similarly, the WAC is a price reported in commercial publications. 

Prior to the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Public Law 108-173), WAC was not a 

term defined in statute or regulation. The MMA defined WAC as the 

manufacturer’s list price for the drug to wholesalers or direct 

purchasers, not including prompt pay or other discounts, rebates, or 

reductions in price, for the most recent month for which information is 

available. 

Previous Office of Inspector General work demonstrated that the AWPs 

States use to establish their Medicaid drug reimbursement rates are 

higher than the prices retail pharmacies pay to purchase drugs. The 

AWP is not defined in law or regulation, and fails to account for the 

discounts available to various payers. 

Prior to 2005, Medicare also used the AWP as the basis for Part B drug 

reimbursement. As of January 1, 2005, the MMA changed the basis of 

reimbursement for prescription drugs from AWP to average sales price 

(ASP). 

Unlike AWP and WAC, there is a specific method to calculate ASP 

defined in the MMA and the Social Security Act (the Act). Pursuant to 

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EXE CUTIVE S U MMAR Y 

section 1847A(c) of the Act, as amended by the MMA, the ASP is a 

manufacturer’s unit sales of a drug to all purchasers in the United 

States in a calendar quarter divided by the total number of units of the 

drug sold by the manufacturer in that same quarter. The ASP is net of 

any price concessions such as volume, prompt pay, and cash discounts. 

Certain sales are exempt from the calculation of ASP, including sales at 

a nominal charge. Similar to ASP, average manufacturer price (AMP) is 

defined in the Act and based on actual sales. Section 1927(k)(1) of the 

Act defines AMP as the average price paid to the manufacturer by 

wholesalers in the United States for drugs distributed to the retail 

pharmacy class of trade, minus customary prompt pay discounts. 

Medicaid uses AMP data reported quarterly by manufacturers to 

determine the rebate amount for a drug. 

The President’s 2006 Budget proposes to require State Medicaid 

programs to reimburse pharmacies the ASP of a drug. This proposal 

intends to align pharmacy reimbursement with pharmacy acquisition 

cost and would be consistent with Medicare reimbursement for Part Bcovered drugs as established by the MMA. 

This analysis compares ASP to AWP for 2,077 national drug codes 

where both ASP and AWP data were available for the third quarter of 

2004. We will refer to national drug codes with ASP data as Medicarecovered drugs. Medicare-covered drugs may also be covered under the 

Medicaid program. We analyzed a subset of these national drug codes 

(1,481) to compare AMP to AWP by drug type. In addition, we 

compared WAC to AWP for 1,898 national drug codes. 

A companion report, “Medicaid Drug Price Comparisons: Average 

Manufacturer Price to Published Prices” (OEI-05-05-00240), compares 

AMP to AWP and WAC for Medicaid-reimbursed prescription drugs. 

That analysis includes 24,101 national drug codes. 

FINDING 

Average sales price is substantially lower than average wholesale 

price for drug codes in this review. For 2,077 national drug codes, the 

median percentage difference between ASP and AWP is 49 percent. 

Even when factoring in the discounted AWP most States use to 

calculate the estimated acquisition cost for Medicaid drugs, ASP is still 

substantially lower. 

The difference between ASP and AWP was greatest for generic drugs. 

For 704 single source brand codes, ASP is 26 percent below AWP at the 

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EXE CUTIVE S U MMAR Y 

median, and for 216 multisource brand codes, ASP is 30 percent below 

AWP at the median. For 1,152 generic national drug codes, ASP is 

68 percent less than AWP at the median. For five drug codes, there was 

no drug type information in the drug compendium. 

To determine if the difference between the analyzed prices were similar 

for Medicare and Medicaid drugs, we compared the results of our 

analysis for Medicare-covered drugs to the analysis for Medicaidreimbursed drugs in our companion report. The companion report 

“Medicaid Drug Price Comparisons: Average Manufacturer Price to 

Published Prices” (OEI-05-05-00240) examined the differences between 

AMP and AWP for all drugs reimbursed by Medicaid (24,101 national 

drug codes). 

We found that the differences between AWP and other prices analyzed 

are similar for both Medicare and Medicaid drugs. For the 1,481 codes 

that had AMP and AWP in our review, we found that the difference 

between AMP and AWP for generic drugs is 72 percent at the median; 

correspondingly, the companion report found that the difference 

between AMP and AWP for generic drugs is 70 percent at the median. 

For single source and multisource brand drugs, this report found that 

the differences between AMP and AWP are 22 and 25 percent at the 

median, respectively. Similarly, the companion report found that the 

differences between AWP and AMP for single source and multisource 

brand drugs are 23 and 28 percent at the median, respectively. 

CONCLUSION 

There is significant interest in changing Medicaid reimbursement for 

prescription drugs by aligning pharmacy reimbursement more closely 

with pharmacy acquisition cost. The changes proposed in the 

President’s 2006 budget would make Medicaid reimbursement 

consistent with Medicare by basing reimbursement on actual sales 

transactions. This analysis demonstrates that ASP, which is a 

statutorily defined price based on actual sales transactions including 

discounts, was lower than published prices AWP and WAC. 

We believe this inspection will provide useful information to those 

considering the implications of changing Medicaid’s drug 

reimbursement methodology. The substantial disparities between 

prices based on actual sales and the published prices currently being 

used indicate that changing the basis of Medicaid reimbursement could 

have a significant impact on Medicaid expenditures. 

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EXE CUTIVE S U MMAR Y

AGENCY COMMENTS 

CMS commented that these companion reports make clear that current 

Medicaid payment rules result in overpayments for drugs and 

emphasizes the need for reform. Similar problems with overpayments 

for Medicare drugs led to passage of the MMA provisions that changed 

the basis of reimbursement for drugs from AWP to ASP. CMS 

reiterated that the President’s 2006 budget proposes to solve this 

problem by the use of ASP so Medicaid drug prices will reflect actual 

costs. CMS stated that Congress should enact legislation to ensure that 

Medicaid payment for drugs is related to actual prices paid by 

pharmacies. The full text of CMS’s comments are provided in 

Appendix A. 

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Δ T ABLE OF CONTENTS 

EXECUTI VE SUMMARY ......................................... i

INTRODUCTI ON ................................................ 1 

FINDI NG ......................................................... 8 

Average sales price is substantially lower than average 

 wholesale price ......................................... 8

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

APPENDI X ...................................................... 11 

Appendix A: Centers for Medicare & Medicaid Services’ 

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

ENDNOTE S ..................................................... 14

ACKN O W LEDGMENTS ......................................... 15
Δ INTRODU C TION 

OBJECTIVE 

To compare average sales price (a statutorily defined price based on 

actual sales transactions) to average wholesale price (the published 

price most States use to set Medicaid reimbursement rates) for 

Medicare-covered drugs. 

BACKGROUND 

Increases in Medicaid’s prescription drug costs have generated 

considerable attention from the Administration, Congress, and the 

States. The House Energy and Commerce Subcommittee on Oversight 

and Investigations held a hearing in December 2004 on “Medicaid 

Prescription Drug Reimbursement: Why the Government Pays Too 

Much” and explored potential reforms.1 Congress has established a 

Medicaid commission to provide recommendations to achieve $10 billion 

in overall Medicaid savings over the next 5 years and to consider longerterm performance goals and recommendations.2 The National 

Governors Association is also working on proposals to reduce Medicaid 

spending, including spending on prescription drugs.3 

The Office of Inspector General (OIG) and others have found evidence 

that because States lack accurate drug pricing data, Medicaid drug 

reimbursements overestimate pharmacies’ actual acquisition costs. OIG 

has also found that Medicaid drug reimbursements exceed the prices 

paid by other Federal programs. OIG has recommended that Medicaid 

should base reimbursement on pricing data that more accurately 

reflects actual acquisition costs.4 

The Administration has expressed interest in adopting a 

reimbursement system for Medicaid that is similar to the Medicare Part 

B drug reform enacted under the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA) 

(Public Law 108-173). The MMA amended the Social Security Act (the 

Act) to change the method of reimbursement for prescription drugs from 

average wholesale price (AWP) to average sales price (ASP). 

The President’s 2006 budget proposes restructuring Medicaid pharmacy 

reimbursement to save an estimated $542 million in fiscal year (FY) 

2006 and $15.1 billion over 10 years.5 This budget also proposes to 

require State Medicaid programs to reimburse pharmacies the ASP of a 

drug plus a 6 percent fee for storage, dispensing, and counseling. 

According to the President’s budget, this reimbursement methodology 

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INTROD UCT ION

aligns pharmacy reimbursement with pharmacy acquisition cost and is 

consistent with Medicare reimbursement for Part B-covered drugs as 

established by the MMA. 

Medicaid Reimbursement for Prescription Drugs 

The Medicaid program, established under Title XIX of the Act, is 

administered by States and financed with State and Federal funds. 

Medicaid pays for medical and health-related assistance for certain 

vulnerable and needy individuals and families. All 50 States and the 

District of Columbia provide coverage for prescription drugs under the 

Medicaid program. 

Federal regulations require, with certain exceptions, that State 

Medicaid reimbursements for prescription drugs not exceed the lower of 

(1) its estimated acquisition cost plus a dispensing fee, or (2) the 

provider’s usual and customary charge to the public for the drug. CMS 

allows each State to define estimated acquisition cost. 

Average wholesale price and wholesale acquisition cost. Currently, most 

States estimate acquisition cost by discounting AWP by a certain 

percentage. A small number of States use wholesale acquisition cost 

(WAC) plus a percentage markup when calculating estimated 

acquisition costs. According to information obtained from CMS’s Web 

site, the discount from AWP in the State methodologies ranged from 

5 to 50 percent, and the percentage markup to WAC ranged from 

5 to 12 percent as of March 2005. The median discount for drugs for 

States that use AWP to calculate estimated acquisition cost was AWP 

minus 12 percent. The median percentage markup to WAC for the 

small number of States that use this price to calculate estimated 

acquisition cost was 8.5 percent. 

The AWP is a price published in commercial publications. It is an 

important prescription drug pricing benchmark for payers throughout 

the health care industry. Similarly, the WAC is a price reported in 

commercial publications. Prior to the MMA, WAC was not a term 

defined in statute or regulation. The MMA defined WAC as the 

manufacturer’s list price for the drug to wholesalers or direct 

purchasers, not including prompt pay or other discounts, rebates, or 

reductions in price, for the most recent month for which information is 

available. 

Previous OIG work demonstrated that the AWPs States use to calculate 

estimated acquisition cost that determine Medicaid drug 

reimbursement rates are higher than the prices retail pharmacies pay 

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INTROD UCT ION 

to purchase drugs.6 The AWP is not defined in law or regulation, and 

fails to account for the discounts available to various payers, including 

certain Federal agencies, providers, and large purchasers. It is a price 

derived from manufacturer-reported data for both brand and generic 

drugs. 

According to the President’s 2006 Budget, the current Medicaid 

reimbursement method has created an incentive for manufacturers to 

artificially raise the AWP to make their products more attractive to 

pharmacies because the profit will be larger with the higher price. 

According to Congressional testimony, States continue to rely on AWP, 

despite its widely recognized deficiencies, because they lack access to 

more accurate pricing information. 

Prior to 2005, Medicare also used AWP as the basis for Part B drug 

reimbursement. However, numerous reports by OIG and the 

Government Accountability Office, as well as data collected by the 

Department of Justice and Congressional investigations, indicated that 

Medicare’s reimbursement rate was significantly higher than the prices 

that drug manufacturers, wholesalers, and other similar entities 

actually charge to physicians and suppliers who purchase these drugs. 

Consequently, the MMA changed the basis of reimbursement for 

prescription drugs from AWP to ASP. 

Medicare Drug Reimbursement Methodologies 

Average sales price. In 2005, Medicare began to pay for most drugs using 

an entirely new methodology based on ASP rather than AWP. Unlike 

AWP and WAC, there is a specific method to calculate ASP set forth in 

the MMA and the Act. Section 1847A(c) of the Act, as amended by the 

MMA, defines ASP as a manufacturer’s unit sales of a drug to all 

purchasers in the United States in a calendar quarter divided by the 

total number of drug units sold by the manufacturer in that same 

quarter. The ASP is net of any price concessions such as volume, 

prompt pay, and cash discounts; free goods contingent on purchase 

requirements; chargebacks; and rebates other than those obtained 

through the Medicaid drug rebate program. Certain sales are exempt 

from the calculation of ASP, including sales at a nominal charge. 

Manufacturers report ASPs to the Centers for Medicare & Medicaid 

Services (CMS) on a quarterly basis by national drug code, which is an 

11-digit identifier that indicates the manufacturer of the drug, the 

product dosage form, and the package size. Third quarter 2004 ASP 

submissions to CMS from manufacturers served as the basis for first 

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INTROD UCT ION

quarter 2005 Medicare allowances for most covered drug codes. As of 

January 1, 2005, Medicare’s allowance for most covered outpatient drug 

codes is equal to 106 percent of the volume-weighted ASPs for those 

drugs. 

The Medicaid Drug Rebate Program 

Average manufacturer price. Similar to ASP, average manufacturer price 

(AMP) is defined by law and based on actual sales transactions. In 

order for a manufacturer’s drug to be eligible for Federal Medicaid 

matching funds, section 1927(a)(1) of the Act mandates that drug 

manufacturers enter into rebate agreements with the Secretary and pay 

quarterly rebates to State Medicaid agencies. Under these rebate 

agreements and the law, manufacturers must provide CMS with the 

AMP for each of their national drug codes on a quarterly basis. 

Medicaid calculates drug rebates based on AMP. Section 1927(k)(1) of 

the Act defines AMP to be the average price paid to the manufacturer 

by wholesalers in the United States for drugs distributed to the retail 

pharmacy class of trade minus customary prompt pay discounts. The 

AMP is calculated as a weighted average of prices for all of a 

manufacturer’s package sizes of a drug sold during a given quarter and 

is reported for the lowest identifiable quantity of the drug (e.g., one 

milligram, one milliliter, one tablet, one capsule). 

Companion Report 

A companion report: “Medicaid Drug Price Comparisons: Average 

Manufacturer Price to Published Prices” (OEI-05-05-00240), examines 

the differences between AWP, WAC, and AMP for all Medicaidreimbursed drug codes (24,101 national drug codes). For comparability, 

we also examined the differences between AMP, WAC, and AWP for 

national drug codes with ASP values. This comparison would determine 

if there were substantial price differences for Medicaid-reimbursed 

drugs and our smaller subset of Medicare-covered drugs. 

METHODOLOGY 

This analysis compares ASP to AWP for 2,077 national drug codes 

where both ASP and AWP data were available for the third quarter of 

2004. We will refer to national drug codes with ASP data as Medicarecovered drugs. Medicare-covered drugs may also be covered under the 

Medicaid program. We also analyzed a subset of these national drug 

codes (1,481) where both AMP and AWP were available. In addition, we 

analyzed 1,898 codes where both WAC and AWP were available. We 

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INTROD UCT ION

analyzed these subsets of codes to determine how the differences 

between the price points for Medicare-covered drugs would compare to 

the differences for Medicaid-reimbursed drugs found in our companion 

report. 

Centers for Medicare & Medicaid Services Data 

We obtained ASP and AMP data for third quarter 2004 from CMS. 

Average sales price data. We obtained ASPs for 2,113 national drug codes 

that CMS used in its calculation of volume-weighted ASP for Medicare 

reimbursement. When calculating the ASPs, CMS only includes 

national drug codes with ASP submissions that are deemed acceptable. 

We did not examine the national drug codes that CMS opted to exclude 

from its calculation. These ASPs were based on data submitted by 

manufacturers for the third quarter of 2004. 

We did not verify the accuracy of the billing units information contained 

in CMS’s ASP data; however, OIG may review this information as part 

of a future study. 

Average manufacturer price data. For the 2,113 national drug codes that 

had ASP data, we also obtained AMP data from CMS for the third 

quarter of 2004. We determined that 1,500 of these national drug codes 

had usable AMPs. We used a national drug code’s AMP when (1) CMS 

used the code in its calculation of volume-weighted ASP, and (2) we 

could successfully identify the amount of drug that the code’s AMP 

represented. 

An AMP is reported for the lowest identifiable quantity of the drug 

contained in the national drug code (e.g., one milligram, one milliliter, 

one tablet, one capsule). In contrast, we obtained ASP, AWP, and WAC 

data for the entire amount of the drug contained in the national drug 

code (e.g., for 50 milliliters, for 100 tablets). To ensure that all prices 

were for comparable units, we converted each AMP so that it 

represented the total amount of the drug contained in that code. To 

accomplish this, we multiplied the AMPs for these 1,500 national drug 

codes by the total amount of the drug contained in each code, as 

identified by sources such as the CMS crosswalk file, “Red Book,” 

manufacturer Web sites, and the Food and Drug Administration’s 

national drug code directory. 

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INTROD UCT ION

Drug Compendium Data 

We obtained AWP and WAC package prices for third quarter 2004 from 

a national drug compendium. This compendium’s drug databases 

contain national drug codes, drug names, product description, and 

pricing information, including AWP and WAC. 

Since we obtained monthly data for AWP and WAC, we selected a price 

from 1 month of third quarter 2004 for both price types. To be 

conservative, we selected the minimum quarterly AWP per national 

drug code and maximum quarterly WAC per national drug code for this 

analysis. 

Third quarter 2004 average wholesale price and wholesale acquisition cost. 

We obtained AWP and WAC prices per national drug code for third 

quarter 2004 because the ASP and AMP prices we collected are based on 

manufacturer submissions for the third quarter of 2004. From the 

2,113 national drug codes for which we had ASP data, we found 

2,079 codes with AWP data and 1,899 with WAC data. 

Average Sales Price Comparison 

We created one data set that contained ASP and AWP data for all drugs 

under review. We excluded from our analysis codes that did not have 

information for both ASP and AWP. We also excluded two codes where 

the ASP was zero. As a result of this, there were 2,077 unique national 

drug codes included in our comparison of ASP to AWP. 

We used AWP as our point of comparison because most States calculate 

estimated acquisition cost based on AWP minus some percentage. For 

each of the 2,077 national drug codes, we calculated the percentage 

difference between ASP and AWP. We calculated the median 

percentage difference for these 2,077 codes under review. 

We also calculated the median percentage differences for single source, 

innovator multiple source, and non-innovator multiple source drugs. 

Hereafter, we will refer to single source as single source brand; 

innovator multiple source as multisource brand; and non-innovator 

multiple source as generic. We identified each drug type for these 

categories based on information in the drug compendium. For five 

codes, there was no drug type information in the drug compendium. We 

excluded these five codes from our analysis of drug type. We did not 

verify the data from the compendium. 

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INTROD UCT ION

Comparisons of Other Price Points 

We analyzed a subset of codes to determine how the differences between 

the price points for Medicare-covered drugs would compare to the 

differences for Medicaid-reimbursed drugs found in our companion 

report. Out of the 2,077 drug codes we reviewed, we compared AMP to 

AWP for the 1,483 codes where both prices were available. For two of 

these codes, there was no drug type information in the drug 

compendium. We excluded these codes from our analysis of drug type. 

For each of the 1,481 codes in this subset, we calculated the median 

percentage difference between AMP and AWP for each drug type. For 

this analysis of Medicare-covered drugs, we did not use the same drug 

compendium for AWP and WAC data as the companion report. 

Out of the 2,077 drug codes we reviewed, we compared WAC to AWP for 

the 1,898 codes where both prices were available. For each code in this 

subset, we calculated the median percentage difference between WAC 

and AWP for each drug type. 

Limitations 

We intend this inspection to provide information that is useful to those 

who are considering changing the basis of Medicaid reimbursement 

from a published price to a price based on actual sales. However, our 

analysis compares price points and not actual reimbursements. It is a 

theoretical analysis that is useful to estimate the impact of such a 

reimbursement change, but it does not measure the actual impact of 

such a change for two main reasons. First, States do not always 

reimburse at the amount that their estimated acquisition cost formulas 

would predict. Our analysis does not capture the full complexity of 

Medicaid reimbursement, which can include tiered estimated 

acquisition cost formulas as well as other price points (i.e., usual and 

customary charge, Federal upper limits, and State maximum allowable 

costs). Second, we are comparing published prices to ASP. However, if 

the basis of Medicaid reimbursement were changed to ASP, it would 

likely be ASP plus a markup percentage. For example, Medicare Part B 

now reimburses prescription drugs at ASP plus 6 percent. 

Standards 

This study was conducted in accordance with the “Quality Standards for 

Inspections” issued by the President=s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

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Δ FINDING 

Average sales price is substantially lower than 

average wholesale price for drug codes in this 

review 

The ASP, a statutorily defined price 

based on actual sales transactions 

including discounts, is 

substantially lower than AWP. For 

2,077 national drug codes with ASP and AWP data, ASP is 49 percent 

lower than AWP at the median. 

For the purposes of Medicaid reimbursement, most States estimate 

acquisition cost by discounting AWP by a percentage ranging from 5 to 

50 percent. The median discount for States that use AWP to calculate 

estimated acquisition cost drugs was 12 percent below AWP. Even 

when taking into account the discounted AWP most States use to 

calculate estimated acquisition cost, ASP is still substantially lower 

than AWP. 

The ASP for generic drugs was substantially less than AWP when compared 

to single source and multisource brand drugs. 

We analyzed the median percentage differences between ASP and AWP 

by type of drug: single source brand, multisource brand, and generic. 

For 704 single source brand codes, ASP is 26 percent below AWP at the 

median, and for 216 multisource brand codes, ASP is 30 percent below 

AWP at the median. The difference between ASP and AWP was 

greatest for generic drugs. For 1,152 generic national drug codes, ASP 

is 68 percent less than AWP at the median. For five drug codes, there 

was no drug type information in the drug compendium. 

The differences between AWP and other prices are similar for both 

Medicaid-reimbursed drugs and the smaller subset of Medicare-covered 

drugs we reviewed. 

To determine if the differences between the price points were similar for 

Medicare and Medicaid drugs, we compared the results of our analysis 

for Medicare-covered drugs to the analysis for Medicaid-reimbursed 

drugs in our companion report. Medicare-covered drugs may also be 

covered under the Medicaid program. 

The companion report “Medicaid Drug Price Comparisons: Average 

Manufacturer Price to Published Prices” (OEI-05-05-00240) examined 

the differences between AMP and AWP for drugs reimbursed by 

Medicaid (24,101 national drug codes). The companion report’s findings 

for Medicaid-reimbursed drugs were similar to this report's finding for 

the subset of Medicare drugs we reviewed. It found that the difference 

between AMP and AWP was greatest for generic drugs. 

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F I NDING 

For the 1,481 codes that had AMP and AWP in our review, we found 

that the difference between AMP and AWP for generic drugs is 

72 percent at the median; correspondingly, the companion report found 

that the difference between AMP and AWP for generic drugs is 

70 percent at the median. For single source and multisource brand 

drugs, this report found that the differences between AMP and AWP at 

the median are 22 and 25 percent, respectively. Similarly, the 

companion report found that the differences between AWP and AMP for 

single source and multisource brand drugs at the median are 23 and 

28 percent, respectively. 

The companion report also found similar differences between WAC and 

AWP. For the 1,898 codes that had AWP and WAC in our review, we 

found WAC is 20 percent lower than AWP for Medicare drugs at the 

median and the companion report found that WAC is 22 percent lower 

than AWP for Medicaid-reimbursed drugs at the median. 

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ΔFR IE NDING C O MMENDA T I O N S 

 CONCLUSION 

There is significant interest in changing Medicaid reimbursement for 

prescription drugs by aligning pharmacy reimbursement more closely 

with pharmacy acquisition cost. The changes proposed in the 

President’s 2006 budget would make Medicaid reimbursement 

consistent with Medicare by basing reimbursement on actual sales 

transactions. This analysis demonstrates that ASP, which is a 

statutorily defined price based on actual sales transactions including 

discounts, was lower than published prices AWP and WAC. 

We believe this inspection will provide useful information to those 

considering the implications of changing Medicaid’s drug 

reimbursement methodology. The substantial disparities between 

prices based on actual sales and the published prices currently being 

used indicate that changing the basis of Medicaid reimbursement could 

have a significant impact on Medicaid expenditures. 

AGENCY COMMENTS 

CMS commented that these companion reports make clear that current 

Medicaid payment rules result in overpayments for drugs and 

emphasizes the need for reform. Similar problems with overpayments 

for Medicare drugs led to passage of the MMA provisions that changed 

the basis of reimbursement for drugs from AWP to ASP. CMS 

reiterated that the President’s 2006 budget proposes to solve this 

problem by the use of ASP so Medicaid drug prices will reflect actual 

costs. CMS stated that Congress should enact legislation to ensure that 

Medicaid payment for drugs is related to actual prices paid by 

pharmacies. The full text of CMS’s comments are provided in 

Appendix A. 

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Δ APPENDIX ~ A 

Centers for Medicare & Medicaid Services’ Comments 

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APP E N D I X ~A 

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APP E N D I X ~A 

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Δ ENDNOTE S 

1 Testimony transcript available at: 

http://www.oig.hhs.gov/testimony/docs/2004/reeb120704.pdf. 

2 Federal Register Notice. Medicaid Program; Establishment of the 

Medicaid Commission and Request for Nominations for Members. 

CMS-2214-N. 

3 Available online at www.nga.org. 

4 “Variations in State Medicaid Drug Prices” (OEI-05-02-00681); “Cost 

Containment of Medicaid HIV/AIDS Drug Expenditures”(OEI-05-99-

00611); “Medicaid Pharmacy—Additional Analyses of the Actual 

Acquisition Cost of Prescription Drug Products” (A-06-02-00041). 

5 United States House of Representatives Committee on the Budget. 

“Analysis of the President’s Budget for FY 2006.” Available at: 

http://www.house.gov/budget/analysisprez021105.pdf. 

6 “Medicaid Pharmacy – Actual Acquisition Cost of Prescription Drug 

Products for Brand Name Drugs” (A-06-96-00030); “Medicaid 

Pharmacy – Actual Acquisition Cost of Generic Prescription Drug 

Products” (A-06-97-00011); “Actual Acquisition Cost of Brand Name 

Prescription Drug Products” (A-06-00-00023); “Medicaid Pharmacy – 

Actual Acquisition Cost of Generic Prescription Drug Products” 

(A-06-01-00053); “Medicaid Pharmacy – Additional Analyses of the 

Actual Acquisition Cost of Prescription Drug Products” (A-06-02-00041); 

“Medicaid’s Use of Revised Average Wholesale Prices” 

(OEI-03-01-00010); “Containment of Medicaid HIV/AIDS Drug 

Expenditures” (OEI-05-99-00611). 

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1

2

3

4

5

6

Δ ACKNOWLEDGMENTS 

This report was prepared under the direction of Robert A. Vito, Regional 

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office, and Linda M. Ragone, Deputy Regional Inspector 

General. Other principal Office of Evaluation and Inspections staff who 

contributed include: 

Edward K. Burley, Project Leader 

Linda B. Abbott, Program Specialist 

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