Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JULY 2001 

OEI-05-99-00611 

Cost Containment of Medicaid HIV/AIDS 

Drug Expenditures 
OFFICE OF INSPECTOR GENERAL 

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

as amended by Public Law 100-504, 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 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 Chicago regional office prepared this report under the direction of William Moran, 

Regional Inspector General and Natalie Coen, Deputy Inspector General. Principal OEI 

staff included: 

REGION 

Ann Maxwell, Project Leader

Madeline Carpinelli, Analyst

Services

Erin Bliss, Intern

HEADQUARTERS 

Elise Stein, Director, Public Health and 

Human 

Stuart Wright, Director, Medicare and 

Medicaid 

To obtain copies of this report, please call the Chicago Regional Office at (312) 353-4124. 

Reports are also available on the World Wide Web at our home page address: 

http://www.hhs.gov/oig/oei 
EXECUTIVE SUMMARY 

PURPOSE 

To compare the amount that Medicaid reimburses for HIV/AIDS drugs to the prices paid 

by other government purchasers. 

BACKGROUND 

Title XIX of the Social Security Act established Medicaid as a jointly-funded, 

Federal-State health insurance program to provide medical services to low-income 

persons. It is estimated that Medicaid’s net spending on prescription drugs, the most 

frequently used benefit in the Medicaid program, totaled $16.4 billion in fiscal year (FY) 

2000. The Centers for Medicare and Medicaid Services (CMS), formerly known as the 

Health Care Financing Administration, spent $617 million on antiretrovirals in FY 1999. 

Medicaid provides prescription drug benefits for 42 to 46 percent of the 335,000 persons 

living with HIV/AIDS who receive regular care. 

As the largest source of public coverage for prescription drugs, Medicaid strives to be a 

prudent purchaser of pharmaceuticals. It does this by limiting drug reimbursement to 

pharmacies and by receiving quarterly rebates from drug manufacturers. 

Other Federal programs also seek to limit pharmaceutical costs. To assess how Medicaid 

is functioning as a Federal purchaser of HIV/AIDS drugs, we compared Medicaid’s net 

unit costs (reimbursement price minus rebates) for antiretrovirals in FY 2000 to other 

Federal purchasers. In particular, we compare Medicaid’s net prices to: 1) Federal 

ceiling prices, 2) Federal supply schedule prices, 3) 340B Drug Pricing Program ceiling 

prices, and 4) the net costs paid under the 340B Drug Pricing Program rebate option 

available to AIDS Drug Assistance Programs. 

FINDINGS 

Medicaid pays up to 33 percent more than other Federal Government drug 

discount programs for HIV/AIDS drugs 

Comparing the prices paid for antiretrovirals, we found that the 10 Medicaid agencies in 

our sample pay 33 percent more than the Federal ceiling price, 10 percent more than the 

Federal supply schedule and 15 percent more than the 340B Drug Discount Program 

ceiling prices. Medicaid’s net costs also averaged 5 percent more than AIDS Drug 

Assistance Programs participating in the rebate option for most antiretrovirals. 

Medicaid HIV/AIDS Drug Cost Containment i OEI-05-99-00611 
Differences in Federal drug pricing formulas are partially responsible for cost 

discrepancies 

The difference in HIV/AIDS antiretroviral drug costs across Federal programs is partially 

explained by the fact that each of the Federal purchasers we reviewed adheres to a 

different federally mandated formula. The intention of each of these approaches is to 

place limits on the prices of drugs procured by Federal purchasers. Yet, the outcomes of 

the various approaches differ and result in consistently higher antiretroviral drug prices 

for the Medicaid program. 

State reimbursement formulas affect the magnitude of the gap between Medicaid 

and other government drug purchasers 

State Medicaid agencies’ flexibility in setting reimbursement rates has resulted in 

different prices for the same antiretroviral drugs among State Medicaid agencies. 

Massachusetts reports the lowest unit expenditures on pharmacy acquisition costs. If the 

other nine States in our sample utilized Massachusetts’ formula, they could have saved an 

annualized $24.5 million dollars. Georgia reports the highest unit expenditures on 

pharmacy acquisition costs. 

Medicaid could have saved $102 million if the 10 States surveyed purchased the 

16 antiretrovirals at Federal ceiling prices 

Comparing the actual per drug expenditures of Medicaid to what they would have paid if 

they had access to Federal ceiling prices results in a joint Federal/State savings of $102 

million in FY 2000 ($54 million Federal share) for the 10 States in our review. This 

represents 25 percent of the total spent on antiretrovirals in these States. If all Medicaid 

programs were able to obtain Federal ceiling prices, we estimate the program could have 

saved $140 million ($73 million Federal share). 

RECOMMENDATIONS 

The rules guiding Medicaid reimbursement and rebates are intended to allow the program 

to participate in the pharmaceutical market as prudent buyers. Our findings demonstrate 

that Medicaid is paying more for antiretroviral drugs than other Federal purchasers. We 

offer several options regarding Medicaid drug reimbursement and rebates as potential 

means to lower Medicaid expenditures on antiretroviral drugs. 

For the 16 HIV/AIDS drugs examined, Centers for Medicare and Medicaid Services 

should review the current reimbursement methodology and work with States to 

find a method that more accurately estimates pharmacy acquisition cost 

In order to maximize scarce Federal and State dollars, it is essential to improve the 

accuracy of States’ estimated pharmacy acquisition cost. We offer the following three 

suggestions for improving reimbursement methodology: 

Medicaid HIV/AIDS Drug Cost Containment ii OEI-05-99-00611 
< Option 1: Develop safeguards to protect Medicaid from average wholesale 

price (AWP) manipulations, or 

< Option 2: Create national estimated acquisition cost for the States based 

upon the average manufacturers price, or 

< Option 3: Share average manufacturer price data with States so that they can 

accurately set Medicaid reimbursement amounts. 

Whichever method CMS adopts to improve estimated acquisition cost, a re-examination 

of the dispensing fee should also be conducted to ensure that pharmacists can cover their 

costs. 

The Centers for Medicare and Medicaid Services should initiate a review of 

Medicaid rebates for the 16 HIV/AIDS drugs examined 

Though an improved reimbursement methodology would generate program savings, it 

would not completely close the gap between Medicaid and other government drug 

purchasers. This would require a more substantial rebate from drug manufacturers. We 

offer the following two suggestions to CMS for further research: 

< Option 1: Increase the rebate percentage of average manufacturer price, or 

< Option 2: Base the rebates on average wholesale price rather than average 

manufacturer price. 

While our findings and recommendations pertain only to antiretroviral drugs, numerous 

other Inspector General reports have concluded that Medicaid pays more than other 

Federal and private purchasers for a wide variety of drugs. As part of a larger effort to 

examine the problems plaguing Medicaid drug reimbursement and rebate policies, our 

recommendations build off the recommendations made in those previous reports. Future 

work in this area may, in turn, find that the recommendations presented in this report for 

antiretroviral drugs may have broader applicability. 

AGENCY COMMENTS 

The CMS provided comments on the draft report in which they agreed with the overall 

intent of our recommendations, but expressed reservations with many of the specific 

suggestions we offered for achieving them. Primarily, CMS felt that they did not have 

the statutory authority to make the suggested changes. Since reducing Medicaid prices 

for HIV/AIDS medications is so crucial to ensuring access to these drugs, we encourage 

CMS to seek any legislation necessary to accomplish the task. However, we continue to 

believe that most of the options delineated in the report can be undertaken without 

amending current law. The complete text of CMS’s comments can be found in Appendix 

E. Additional discussion can be found on page 26. 

Medicaid HIV/AIDS Drug Cost Containment iii OEI-05-99-00611 
TABLE OF CONTENTS 

PAGE

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

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

FINDINGS

Medicaid Pays 33 Percent More than other Federal Programs for HIV/AIDS Medications .. 11

Differences in Drug Pricing Formulas Partially Responsible for Cost Discrepancies ....... 12

Reimbursement Formulas Affect Magnitude of the Gap ............................... 14

Medicaid Could Have Saved $102 Million ......................................... 16

RECOMMENDATIONS ..................................................... 18

AGENCY COMMENTS ..................................................... 26

APPENDICES

A: Glossary of Terms .......................................................... 29

B: List of Antiretroviral Drugs .................................................. 30

C: Sampled States’ Formula for Estimating Acquisition Cost .......................... 31

D: Sampled States’ Dispensing Fees .............................................. 32

E: Agency Comments ......................................................... 33

F: Related Office of Inspector General Report Summaries ............................ 37

G: Related Office of Inspector General Reports ..................................... 40

H: End Notes ................................................................ 41

Medicaid HIV/AIDS Drug Cost Containment iv OEI-05-99-00611 
INTRODUCTION 

PURPOSE 

To compare the amount that Medicaid reimburses for HIV/AIDS drugs to the prices paid 

by other government purchasers. 

BACKGROUND 

Medicaid 

Medicaid is the largest program providing medical services to America’s poorest people 

and represents our nation’s primary health care safety net for low-income women, 

children and disabled persons. Title XIX of the Social Security Act established Medicaid 

as a jointly-funded, Federal-State health insurance program. The Federal Government 

contributes a matching percentage of State Medicaid outlays, ranging from 50 percent to 

83 percent of health care costs, depending on the State’s relative per capita income. 

The Centers for Medicare and Medicaid Services (CMS), formerly known as the Health 

Care Financing Administration (HCFA), administers Medicaid at the Federal level. The 

CMS estimates expenditures for the program totaled $201 billion in fiscal year (FY) 

2000, $114 billion in Federal and $87 billion in State funds. This funding covered 

approximately 41 million individuals. 

Medicaid and HIV 

Of the total $201 billion Medicaid spent in FY 2000, $4.1 billion went for HIV/AIDS 

care.1 The States’ portion of expenditures for Medicaid HIV/AIDS patients was $1.9 

billion. Federal Medicaid HIV/AIDS spending was $2.2 billion. 

There are an estimated 800,000 to 900,000 Americans living with HIV/AIDS, 300,000 of 

whom are estimated to be living with AIDS. Fifty-five percent of all adults and 90 

percent of children with AIDS are enrolled in Medicaid. 

Most persons with HIV/AIDS who qualify for Medicaid coverage do so by meeting one 

of two eligibility requirements. First, many individuals with HIV/AIDS become disabled 

as a result of their illness. This disability, combined with limited income, makes them 

eligible for Social Security Income, and consequently, eligible for Medicaid. Second, 

people with HIV may meet categorical and financial tests unrelated to their disease. 

Despite Medicaid’s critical role in providing care for both HIV and AIDS patients, 

eligibility for the largest population of HIV infected persons, childless adults that have 

not yet been disabled by AIDS, is limited. 

Medicaid HIV/AIDS Drug Cost Containment 1 OEI-05-99-00611 
Medicaid eligibility may be broadening for persons infected with HIV. Since 1997, CMS 

has granted States the ability to submit a 1115 waiver proposal to test Medicaid 

eligibility expansion. In February 2000, Maine received approval to extend Medicaid 

benefits to non-disabled persons living with HIV. In January 2001, Massachusetts also 

received waiver approval to enable people with HIV to qualify for comprehensive health 

coverage under Medicaid. In 1999, Section 204 of the Ticket to Work and Work 

Incentives Improvement Act established the Demonstration to Maintain Independence 

and Employment grant program. This program authorizes States to provide Medicaid 

benefits and services to workers who have physical or mental impairments that, without 

medical assistance, will result in disability. Thus far, Mississippi has been granted $27.5 

million to provide Medicaid coverage to 500 persons living with HIV/AIDS. Finally, 

Congress is considering national legislation to provide States with an option to extend 

Medicaid coverage to low-income non-disabled individuals with HIV/AIDS without the 

need to apply for an 1115 waiver. 

Medicaid and Prescription Drug Coverage 

Medicaid is the largest source of public coverage for prescription drugs. It is estimated

that Medicaid’s net spending on prescription drugs, the most frequently used benefit in

the Medicaid program, totaled $16.4 billion in FY 2000. Medicaid provides prescription

drug benefits for 42 to 46 percent of the 335,000 persons living with HIV/AIDS who

receive regular care. In FY 1999, Medicaid spent $617 million for antiretrovirals.

Medicaid’s prescription drug program faces increasing demand and rising pharmaceutical

costs. The rate of HIV infection is accelerating among low-income persons, especially

women. In the last decade the proportion of AIDS cases reported among women has

tripled.2 Demand for services has also increased due to Medicaid eligibility expansion. 

Further, pharmaceutical costs have been increasing approximately 16 to 21 percent

annually compared to the 4 to 7 percent annual increases in overall Medicaid spending.3

As a result of increasing demand and increasing costs, containment of prescription drug

expenditures has become an important issue at both the State and Federal level.

Currently, Medicaid seeks to control pharmaceutical expenses in several ways. One way

is to limit drug coverage through such measures as prescriptions limits and restrictions on

specific drugs based upon drug formularies.4 However, Medicaid’s ability to use

formularies is limited. In particular, CMS issued a letter in June 1996 to State Medicaid

directors requiring States to cover all Food and Drug Administration approved protease

inhibitors, a prominent drug class used in the treatment of HIV/AIDS. States can also

institute beneficiary co-payments, but these cannot exceed the maximum of $3. 

Medicaid also strives to limit the cost of drugs. Toward this end, State agencies limit the

amount they reimburse pharmacies for prescription drugs. They also receives rebates

from manufacturers for dispensed drugs.

Medicaid HIV/AIDS Drug Cost Containment 2 OEI-05-99-00611 
Medicaid Drug Reimbursement to Pharmacies 

Under Section 1902(a)(30)(A) of the Social Security Act, CMS has the authority to set 

upper payment limits for services available under the Medicaid program. On July 31, 

1987, CMS published the final rule (52 FR 28648) that limits Medicaid drug 

reimbursements to pharmacies. The guidelines for payment were issued to ensure that 

the Federal Government act as a prudent buyer of drugs. 

The reimbursement methods set forth differ for generic and brand name drugs. All of the 

drugs in our study are brand name because there are no generic antiretrovirals available at 

this time. For brand name drugs, Medicaid reimbursement is the lower of either the 

pharmacist’s usual and customary charge to the general public or the estimated 

acquisition cost (EAC) plus a reasonable dispensing fee. 

Estimated Acquisition Cost 

The estimated acquisition cost is the State agency’s best estimate of the price generally 

paid by pharmacies for a drug.5 The CMS’s final rule does not specify any particular 

method for calculating EAC. As a result, States have developed their own methods for 

estimating acquisition cost. States typically use one of two methods. The “cost plus” 

method calculates the provider’s cost based upon the wholesaler acquisition cost (WAC) 

plus a markup percent. The WAC is the list price established by manufactures for sales 

to wholesalers. The “list less” method relies upon the average wholesale price (AWP) 

less a discount percentage. The AWP is the manufacturer’s suggested list price for a 

wholesaler to charge a pharmacy for a drug. Both the AWP and WAC are listed and 

updated by First Databank, a national drug pricing compendium, in the national drug 

product and pricing information publication the Blue Book. 

The majority of State Medicaid agencies use the list less method. However, various 

investigations into AWP demonstrated that AWP was overstated by as much as 10 to 20 

percent. In response, CMS clarified that the State determination of estimated acquisition 

cost using AWP must include a significant discount to be considered an acceptable 

estimate. In 1997, the Office of Inspector General (OIG) report, “Medicaid Pharmacy -

Actual Acquisition Costs of Prescription Drug Products for Brand Name Drugs” (A-06-

96-00030) found that the actual acquisition costs for brand name drugs were still on 

average 18 percent lower than AWP. The average State discount in 1999 was 10.4 

percent off of AWP.6 

Recent investigations conducted by the Department of Justice, the Office of Inspector 

General and Medicaid Fraud Control Units are further calling into question AWP’s 

validity. They have found that even with the “significant discount” off of average 

wholesale price, prices paid by Medicaid are still inflated. As a result, efforts are being 

made to ensure accurate drug pricing data are used in setting Medicaid reimbursement 

rates. First Databank has agreed to change the way it reports prices for 48 

pharmaceuticals based on figures that fraud investigators have determined to be closer to 

Medicaid HIV/AIDS Drug Cost Containment 3 OEI-05-99-00611 
what medical providers actually pay. None of the 48 pharmaceuticals with revised prices 

are antiretrovirals used for treating HIV/AIDS. 

Dispensing Fees 

State agencies are required to determine reasonable dispensing fees, or, if dispensing fees 

are not paid separately, to impute an amount equivalent to a reasonable dispensing fee. 

This fee represents the charge for the professional services provided by a pharmacist 

when dispensing a prescription. Prior to 1987, States were required to survey dispensing 

fee costs and update those fees in a periodic manner. The requirement was eliminated 

with the expectation that States would continue to work to establish a reasonable 

dispensing fee level and document these in their State plan. 

Manufacturer Rebates: The Medicaid Drug Rebate Program 

In addition to limiting reimbursement, the Medicaid program controls costs by obtaining 

rebates from drug manufacturers. The Omnibus Budget Reconciliation Act of 1990 

created the Medicaid Drug Rebate Program. This Federal statute mandates that drug 

manufacturers provide rebates to State Medicaid agencies. For their drugs to be eligible 

for Medicaid reimbursement, manufacturers must enter into rebate agreements with the 

Secretary of the Department of Health and Human Services and pay quarterly rebates to 

the State Medicaid agencies. 

Rebates are calculated separately for generic drugs and brand name drugs. The rebate for 

brand name drugs is the greater of 15.1 percent of the average manufacturer price (AMP) 

per unit or the difference between the AMP and the manufacturer’s “Best Price.” The 

average manufacturer price is the average unit price paid to the manufacturer for the drug 

by wholesalers. The Best Price is defined as the lowest price available from the 

manufacturer to any wholesaler, retailer, provider, health maintenance organization, 

nonprofit entity, or government entity, excluding any prices charged to certain 

government agencies and the Federal Supply Schedule, State pharmaceutical assistance 

programs, and any single award contract prices.7 In an effort to restrain drug price 

inflation, the rebate calculation includes an additional rebate on any drug whose price 

increases at a rate faster than the Consumer Price Index-Urban. 

Other Federal Drug Purchasing Systems 

Department of Veterans Affairs 

The Veterans Health Care Act (VHCA) of 1992, Section 603, states that prices to the 

Department of Veterans Affairs (VA), Department of Defense, the Coast Guard and the 

Public Health Service, known as the Big 4, may not exceed 76 percent of the non-Federal 

average manufacturer price (non-FAMP). The non-FAMP is the manufacturers weighted 

average of commercial, non-Federal sales per unit. These statutorily discounted prices 

Medicaid HIV/AIDS Drug Cost Containment 4 OEI-05-99-00611 
are typically referred to as the Federal ceiling prices. The law additionally requires that 

the Big 4 access these Federal ceiling prices through the Federal supply schedule (FSS). 

In addition to calculating the Federal ceiling price, the VA manages several Federal 

supply schedules dealing with health care commodities for the entire Federal 

Government, including Schedule 65 I B for pharmaceuticals. The FSS provides a 

schedule of contracts and prices for a broad range of drugs that allow agencies to 

purchase various quantities of pharmaceuticals while still obtaining the discount 

associated with bulk purchasing. Using competitive procedures, contracts are awarded to 

companies to provide drugs at “the most favored customer price.” 

340B Covered Entities 

Section 602 of VHCA enacted Section 340B of the Public Health Services Act. This sets 

statutory ceiling prices for pharmaceuticals purchased by certain covered entities. The 

entities eligible for 340B Drug Discount Program direct purchase option purchase drugs 

directly from the manufacturers through a centralized mechanism. The ceiling price 

formula is roughly the average manufacturer’s price decreased by the Medicaid unit 

rebate amount (URA). 

Among those eligible for the 340B Drug Discount Program are the AIDS Drug 

Assistance Programs (ADAP), established by the Ryan White Comprehensive AIDS 

Resource Emergency Act of 1990. The ADAPs provide medications to low-income 

individuals living with HIV/AIDS who have limited or no coverage from private 

insurance or Medicaid. 

The 340B ceiling price is available to 23 State ADAPs who acquire pharmaceuticals 

through a centralized purchaser. Another 24 State ADAPs take advantage of a rebate 

option that allows them to access Medicaid unit rebates on a quarterly basis. Like 

Medicaid, these ADAPs do not purchase their own drugs but rather reimburse retail 

pharmacies for prescriptions filled. 

Pharmaceutical Industry Overview 

The pharmaceutical industry is extremely complex, including a myriad of arrangements 

that differ by drug, company and purchaser. Chart 1 provides an extremely basic view of 

these interactions. It is only meant to explicate the fundamental dynamics among the 

various entities involved in Medicaid drug purchasing and distribution. It does not, by 

any means, capture the full complexity of the system. The following paragraphs explain 

the chart from top to bottom. 

Manufacturers typically do not distribute their products, but rather rely on wholesalers to 

warehouse and distribute their drugs. For brand name drugs, manufacturers set the 

wholesale acquisition price as a list price for wholesalers to purchase drugs from 

manufacturers. Manufacturers also set the average wholesale price as a suggested list 

Medicaid HIV/AIDS Drug Cost Containment 5 OEI-05-99-00611 
price for wholesalers to charge drug suppliers. Both the WAC and the AWP operate as 

suggested list prices and are typically not what is paid. Buyers negotiate lower prices 

through the inclusion of discounts, rebates or free goods. 

Wholesalers purchase large quantities of drugs from manufacturers and distribute them to 

drug suppliers, including retail pharmacies, pharmacy benefit managers, hospitals and 

physicians. Almost 80 percent of all prescription drugs are purchased through 

wholesalers. The interaction between these components and the Medicaid program has 

been diagramed in Chart 1 below. We have also included a glossary of terms in 

Appendix A. 

Medicaid HIV/AIDS Drug Cost Containment 6 OEI-05-99-00611 
Chart 1: Pharmaceutical Industry 

Manufacturers 

Manufacturers distribute their products primarily through drug wholesalers but also sell 

directly to pharmacies, hospitals and other bulk purchasers. 

Manufacturers establish wholesale acquisition cost and average wholesale price. 

Reimbursement: Estimated Acquisition Cost 

(EAC) - (WAC plus a percentage or AWP 

minus a percentage) - plus dispensing fee 

Manufacturer Rebates: 

15.1% of AMP or AMP-Best Price 

List Price: Wholesale Acquisition Cost (WAC) 

Actual Selling Price: Average Manufacturers 

Price (AMP) 

Wholesalers 

Wholesalers act as the middlemen that distribute 

pharmaceuticals from manufacturers to pharmacies. 

List Price: Average Wholesale Price (AWP) 

Actual Selling Price: Actual Acquisition Cost 

(AAC) 

Retail Pharmacies 

Pharmacies dispense prescriptions to consumers and provide 

professional pharmacist services. 

Medicaid Agencies 

Cover the pharmaceutical costs for eligible low-income women, children and disabled. 

Medicaid HIV/AIDS Drug Cost Containment 7 OEI-05-99-00611 
Related Work by the Office of Inspector General 

The Office of Inspector General has issued a significant body of work related to all 

aspects of Medicaid drug pricing including reimbursement, rebates and the accuracy of 

AWP. In 1997, the OIG released a series of reports specific to 10 States estimating the 

difference between AWP and the prices at which pharmacies purchase brand name and 

generic drugs. The results from the 10 States are summarized in two reports: “Medicaid 

Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products” (A-06-97-

00011) and “Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products 

for Brand Name Drugs” (A-06-97-00030). These reports found that pharmacies pay an 

average of 42.5 percent less than AWP for generic drugs and 18.3 percent less for brand 

name drugs. The OIG recommended that CMS work to ensure that the States reimburse 

the ingredient portion of Medicaid in a manner more consistent with the findings of the 

report. It was also recommended that CMS study any of the other factors, such as 

dispensing fees, which they believe could significantly impact pharmacy reimbursement. 

Other related reports include “Need to Establish Connection Between the Calculation of 

Medicaid Drug Rebates and Reimbursement for Medicaid Drugs” (A-06-97-00052). 

This report examines the disparity inherent in the fact that Medicaid drug rebates are 

calculated using the AMP while the Medicaid program reimburses pharmacies based on 

AWP. The Inspector General recommended a legislative change to base rebates on the 

AWP. In “Medicaid Drug Rebates: The Health Care Financing Administration1 Needs to 

Provide Additional Guidance to Drug Manufacturers to Better Implement the Program” 

(A-06-91-00092), the OIG found manufacturers’ calculations of AMP to be inconsistent. 

The OIG recommended that CMS should survey manufacturers to identify the various 

calculation methods used to determine AMP and develop a more specific policy for 

manufacturers. 

Another related OIG report looks at the prices paid for 10 antiretrovirals by the AIDS 

Drug Assistance Program (ADAP). This report, “AIDS Drug Assistance Program Cost 

Containment Strategies” (OEI-05-99-00610), found that ADAP ceiling prices are, on 

average, 16 percent higher than the Federal ceiling prices and that ADAPs could have 

saved $58 million in 1999 if they were able to access the Federal ceiling prices. 

SCOPE AND METHODOLOGY 

This inspection compares the net prices (reimbursement price minus rebates) that 10 

State Medicaid agencies paid for all 16 HIV/AIDS antiretroviral drugs to the prices paid 

by other government purchasers. Specifically, the prices paid by the State Medicaid 

agencies were compared to the Federal ceiling prices, the Federal supply schedule 

contract prices, and the prices available to 340B eligible entities. 

1 In June 2001, the Health Care Financing Administration (HCFA) was renamed the Centers for 

Medicare and Medicaid Services (CMS). 

Medicaid HIV/AIDS Drug Cost Containment 8 OEI-05-99-00611 
The 10 States selected accounted for 73 percent of Medicaid’s total fee-for-service 

spending on antiretrovirals in FY 1999. They also accounted for nearly 70 percent of all 

AIDS cases in the United States (excluding Puerto Rico).8 The States are: California, 

Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, New York, 

Pennsylvania and Texas. 

We selected the most commonly prescribed package size for each of the 16 Food and 

Drug Administration approved antiretroviral drugs. A list of these selected drugs can be 

found in Appendix B. Antiretrovirals constitute one of the most prescribed and effective 

drug therapies for treating HIV/AIDS and are covered by all Medicaid agencies. 

We focused on the pharmaceutical prices paid by the fee-for-service component of 

Medicaid. We did not consider drug prices negotiated by Medicaid managed care 

organizations. Most States carve out HIV/AIDS prescription drug payments from their 

managed care contracts and pay for these drugs separately under their standard drug 

benefit policy. Furthermore, managed care organizations negotiate their own drug 

discounts with manufacturers and are not covered by Federal laws that seek to contain 

Medicaid drug costs. 

For the purpose of this study, we focused on drug acquisition costs. For Medicaid, we 

defined these as the net costs to Medicaid for antiretroviral drugs. This is calculated by 

subtracting the manufacturer’s rebates paid to Medicaid from the reimbursement rates 

paid by Medicaid to the pharmacies. We selected acquisition cost, choosing to disregard 

administrative overhead, drug distribution and storage expenses, in order to control for 

different administrative and drug distribution systems. Comparisons incorporating this 

data would amount to a comparison of alternate systems and are not the focus of this 

study. 

To conduct our analysis, we gathered information regarding pharmaceutical pricing from 

CMS and the VA. The CMS supplied us with the average manufacturer’s price, the Best 

Price, the Medicaid unit rebate amount, 340B ceiling prices as well as total expenditures 

on antiretrovirals. The VA provided us with data on the Federal ceiling prices and the 

FSS contract prices. 

To gather data on actual State Medicaid agencies’ expenditures, we sent a survey to each 

of the 10 States in our sample in September 2000. The survey requested States to record 

drug reimbursements, rebates and dispensing fees for the first two quarters of Federal FY 

2000. The survey also asked States brief questions concerning the reimbursement 

formula, dispensing fee charges, and any additional rebates. Finally, the States were 

requested to provide the total amount spent on the 16 drugs in FY 1999. 

The surveys were followed up with telephone interviews with each State’s Medicaid 

Director or Pharmacy Division Director. The purpose of the interviews was to gain a 

general understanding of program operations and to explore any efforts surrounding 

Medicaid HIV/AIDS Drug Cost Containment 9 OEI-05-99-00611 
HIV/AIDS treatment or drug cost containment strategies. The interviews were conducted 

between September and November of 2000. 

We have taken precaution not to disclose any proprietary drug prices. Towards this end, 

most estimates are averages and all estimates have been rounded. All savings estimates 

based on this information have been annualized. We conducted our review in accordance 

with the Quality Standards for Inspections issued by the President’s Council on Integrity 

and Efficiency. 

Medicaid HIV/AIDS Drug Cost Containment 10 OEI-05-99-00611 
FINDINGS 

Medicaid pays up to 33 percent more than other Federal

Government drug discount programs for HIV/AIDS drugs 

Comparing the prices for antiretrovirals, we found that the Medicaid agencies we

sampled pay up to 33 percent more than other Federal Government programs that

purchase antiretrovirals. On average, Medicaid pays:

< 33 percent more than the Federal ceiling price,9

< 10 percent more than the Federal supply schedule contract prices, and,

< 15 percent more than the 340B Drug Discount Program ceiling prices.

On average, Medicaid will pay 61 cents more per pill than the Big 4 agencies covered by

the Federal ceiling prices. This difference ranges from 7 cents more per pill for

Rescriptor and $1.10 more per pill for D4T. For D4T, this difference translates into $66

more per prescription.

While Medicaid’s average net price is higher than the Federal Supply Schedule average

price when all 16 drugs are considered, for 7 drugs, Medicaid pays less than the FSS

price. Medicaid averages 11 cents less per pill for theses 7 drugs. However, where

Medicaid is paying more than the FSS, they are averaging 50 cents more per pill. For

example, Medicaid pays 46 percent more for D4T than agencies accessing the FSS and

44 percent more for Videx.

These comparisons indicate that the Medicaid program is not as successful as other

Federal purchasers in securing low-cost pharmaceuticals for its recipients. One possible

explanation for the discrepancy is the fact that the various programs purchase their drugs

at different points in the economic chain of pharmaceutical manufacturers, wholesalers

and pharmacies. The VA, on behalf of the Big 4 and the rest of the agencies accessing

the FSS, as well as the 340B Drug Discount Program (direct purchase option) purchase

directly from manufacturers or wholesalers. The Medicaid program does not purchase

drugs directly. Rather, participating pharmacies bill Medicaid an allowed amount for

filled prescriptions. 

Given that Medicaid’s price purchases the additional services of a pharmacist, it is not

surprising that Medicaid’s reimbursement rate is higher than other program’s purchase

prices. The National Association of Chain Drug Stores found that in 1999, 22 percent of

the cost of a prescription went to the pharmacy and another 2.3 percent went to the

wholesaler. However, the prices used in the above comparisons were not Medicaid’s 

reimbursement prices, but rather its net prices. Medicaid’s net price is their

reimbursement price minus manufacturer rebates. The rebates are intended to give

Medicaid HIV/AIDS Drug Cost Containment 11 OEI-05-99-00611 
Medicaid the benefit of price discounts offered by the manufacturers to their largest 

customers. Even calculating in these rebates, Medicaid is paying the highest prices for 

antiretrovirals of any Federal purchaser. 

Medicaid pays 5 percent more for antiretrovirals than AIDS Drug Assistance 

Programs with identical drug distribution structure 

While the above comparisons may only approximately gauge Medicaid’s drug 

purchasing performance due to differences among the programs, one would expect 

Medicaid to pay the same amount for the same drugs when compared to a government 

program of similar structure. In order to assess this, we compared the prices Medicaid 

pays for antiretrovirals to those paid by AIDS Drug Assistance Programs utilizing the 

rebate option of the 340B Drug Discount Program. 

The Medicaid program and the rebate ADAPs share identical drug purchasing and 

distribution structures. Like Medicaid, rebate ADAPs reimburse pharmacies for the 

purchase and distribution of drugs. Like Medicaid, rebate ADAPs receive the Medicaid 

unit rebate from manufacturers on a quarterly basis. Despite their identical structures, 

Medicaid paid, on average, 5 percent more than the drug assistance programs for 10 

antiretrovirals in 1999. Medicaid reimburses 6 percent more for Combivir, Videx and 

Retrovir. Since both programs receive the same statutorily defined rebates, the 

discrepancy indicates that Medicaid’s reimbursement rate for the sampled States is higher 

than the average reimbursement rate for the rebate ADAPs. 

Differences in Federal drug pricing formulas are partially

responsible for cost discrepancies 

Each Federal drug purchaser adheres to a different federally mandated formula to contain 

drug costs. The Big 4 and the 340B programs, because they have the ability to purchase 

directly from a manufacturer or wholesaler, are able to realize their savings up-front 

through federally defined ceiling prices. Medicaid, on the other hand, attempts to contain 

costs by recouping rebates from manufacturers after paying discounted retail prices for 

pharmaceuticals. The intent of each approach is to place limits on the prices of drugs 

procured by Federal purchasers. Yet the outcomes of the various approaches differ and 

result in consistently higher prices for the Medicaid program. Table A outlines the 

formulas governing drug prices for the Federal programs of interest. 

Medicaid HIV/AIDS Drug Cost Containment 12 OEI-05-99-00611 
Table A. Federal Drug Discount Formulas 

Drug Purchasing Program Drug Purchasing Formula 

Statutory Authority 10 

Medicaid Reconciliation Act 1990 

Reimbursement Cost 

Base Containment 

Measure 

Omnibus Budget Wholesaler 15.1% of 

prices Manufacturer 

prices 

Federal Ceiling Price Manufacturer 24% of of 1992 (Section 603) 

prices Manufacturer 

prices 

Veterans Health Care Act 

Federal Supply Schedule ‘most favored negotiations Administrative Services 

customer price’ with Act of 1949 

annual Federal Property and 

manufacturers 

340B Drug Discount Program Manufacturer Veterans Health Care Act 

(direct purchase) prices 15.1% of of 1992 (Section 602) 

Manufacturer 

prices 

340B Drug Discount Program Wholesaler 

(rebate option) prices 15.1% of 63 CFR 35239 

Manufacturer 

prices 

As shown in Table A, there are several considerations when comparing Federal drug 

pricing formulas. One is the price estimate used as the base reimbursement amount, a 

second involves the calculation of those base estimates, and a third is the level of the 

mandated discounts. 

Medicaid and rebate ADAPs reimburse based on a wholesale list price. This is a 

recommended list price for the sale of drugs from wholesalers to retailers. On the other 

hand, the Federal ceiling price and the 340B ceiling price are sales calculated using 

manufacturer prices. As a result, Medicaid is at a disadvantage because its 

reimbursement formula is based on the wholesale list price, which is always higher than 

the manufacturer sales price. It is higher since it represents a price farther down the 

chain of buyers and sellers. It is also higher because wholesale list price is only a list 

price that is almost always higher than the actual purchase price, whereas manufacturer 

sales prices are based on actual transaction prices. 

Medicaid HIV/AIDS Drug Cost Containment 13 OEI-05-99-00611 
Second, even when measures for the various programs are based on manufacturers’ 

prices, there are different interpretations of what that base includes. The VA bases its 

reimbursement and cost containment on the non-federal average manufacturer price (nonFAMP). Non-FAMP is the average price of a drug that is paid by wholesalers in the 

United States to the manufacturer, except for any prices paid by the Federal 

Government.11 The CMS bases cost containment on average manufacturer price, which 

is the average price paid to the manufacturer for the drug by wholesalers for drugs 

distributed to the retail pharmacy class of trade.12 Although conceptually similar, these 

definitions are not identical, and CMS and the VA may calculate them slightly 

differently. Both AMP and non-FAMP specifically exclude sales to federal purchasers, 

but how they may vary is unclear. Furthermore, the VA updates their non-FAMP 

calculation annually whereas CMS updates the AMP calculation quarterly. 

Third, the level of discounting in the programs’ cost containment measure also differs. 

Medicaid and rebate ADAPs receive the Medicaid unit rebate amount from 

manufacturers. This is roughly 15.1 percent of AMP. They receive these rebates 

quarterly only after reimbursing retail pharmacies at prices based on average wholesale 

price. The 340B Drug Discount Program also uses the Medicaid unit rebate amount to 

discount the cost of drugs, but there is a key difference between program formulas. The 

340B direct purchase program subtracts the unit rebate amount (URA) from the drug 

price prior to the drug purchase. The Federal ceiling price provides an even steeper 

discount by subtracting 24 percent off of manufacturer prices rather than the 15.1 percent 

represented by the Medicaid unit rebate amount. Thus, Medicaid faces disadvantages in 

both paying a higher reimbursement base and receiving a lower cost containment 

discount when compared to Federal ceiling prices. 

State reimbursement formulas affect the magnitude of the

gap between Medicaid and other government drug

purchasers 

State Medicaid agencies have flexibility in setting their reimbursement rates. This has 

resulted in different prices for the same drugs among State Medicaid agencies. 

Massachusetts’ net unit prices are 24 percent higher than the Federal ceiling prices for 

these 16 drugs. Maryland’s approach yields net prices that are 33 percent higher than the 

Federal ceiling price. Georgia bears the highest net costs, which are 55 percent higher 

than the Federal ceiling price. Given the fact that Medicaid manufacturer rebates are 

nationally set by CMS, the only explanation for the difference among States is their 

reimbursement methodology. 

As previously stated, Medicaid reimbursement of pharmacies includes two components, 

the estimated acquisition cost and the dispensing fee. The State Medicaid Manual 

defines estimated acquisition cost as “the agency’s best estimate of the price generally 

and currently paid by providers.”13 Currently, CMS grants States maximum flexibility in 

determining estimated acquisition cost. Seven of the 10 States calculate this estimate 

Medicaid HIV/AIDS Drug Cost Containment 14 OEI-05-99-00611 
based solely upon average wholesale price. Two States consider both average wholesale 

price and wholesaler acquisition cost and reimburse at the lower calculation. One State 

bases calculations solely upon WAC. Appendix C contains a list of the States’ 

reimbursement formulas. 

Massachusetts reports the lowest unit pharmacy acquisition costs 

The other nine States reimburse pharmacies at an average unit price that is 2 to 16 

percent higher than Massachusetts’ cost for these 16 drugs. If the other nine States in our 

sample utilized Massachusetts’ formula, they could have saved an annualized $24.5 

million. Of this total, over $12.7 million represent the Federal share of program savings. 

These savings would narrow the disparity between State Medicaid net costs and Federal 

ceiling prices by 24 percent. The gap would close even further for the Federal supply 

schedule (58 percent) and 340B covered entities (44 percent). 

Massachusetts is the only State in our sample that consistently calculates pharmacy 

reimbursement based upon wholesaler acquisition cost. The WAC represents the price at 

which wholesalers purchase the drug from the manufacturer. Massachusetts reimburses 

at WAC plus 10 percent. The other six States (not in our sample) that use WAC for 

constructing pharmacy costs also average a 10 percent mark-up. 

Georgia reports the highest unit pharmacy acquisition costs 

Georgia reimburses pharmacies at an average unit price that is 9 to 16 percent higher than 

the reimbursement of the other nine States. If Georgia utilized a reimbursement 

calculation equal to the average calculation of the other nine States, it could have saved 

over $1.5 million in annual net costs. This represents a savings of 10 percent of 

Georgia’s total net costs, of which the Federal Government pays a 60 percent share. 

Georgia reports using AWP minus 10 percent as its formula and obtaining its pricing 

information from First Databank. Four other States in our sample also report the 

consistent use of the AWP minus 10 percent formula and the receipt of data from First 

Databank. The average drug cost for Georgia is over 9 percent higher than these other 

four States. 

Eight of ten States pay modest dispensing fees 

While the estimated acquisition cost calculation is intended to reimburse the pharmacies’ 

costs to purchase the drug, the dispensing fee is meant to compensate pharmacies for the 

costs of dispensing the drug. 

Most States pay pharmacists a flat dispensing fee for brand name drugs. These flat fees 

range from $3.0014 to $4.23. The average flat dispensing fee is $3.89. Some States 

employ a “tiered” dispensing fee that varies across drugs. For two of these tiered-fee 

Medicaid HIV/AIDS Drug Cost Containment 15 OEI-05-99-00611 
States, the maximum dispensing fees average $4.35. See Appendix D for a list of 

dispensing fees by State. 

Illinois and Texas are the only States in our sample with significantly higher dispensing 

fees. Illinois pays a fee equal to 10.4 percent of the drug cost, up to a maximum fee of 

$15.40. For 15 of the antiretrovirals, the calculated fee reached the Illinois cap, and the 

average fee for all 16 drugs was $15.10. The Texas fee system pays $5.27 plus 2 percent 

of the drug cost. This calculation produced an average fee of $10.85 for Texas for the 16 

drugs in our study. 

Medicaid could have saved $102 million if the 10 States 

surveyed purchased 16 antiretroviral drugs at Federal ceiling

prices 

The 10 States we reviewed would have saved a total of $51 million or 25 percent15 of 

their net cost for the first two quarters of FY 2000 if their drug prices equaled the Federal 

ceiling prices. This amounts to program savings of $102 million annually. The Federal 

share of this savings is approximately $54 million annually. 

While this savings estimate is limited to only 10 of the 52 Medicaid programs, the 10 

States are those with the largest percentage of HIV/AIDS cases. These States also 

represent the bulk of Medicaid expenditures on antiretrovirals. We estimate that they 

represent 73 percent of the total Medicaid spent in FY 1999 for the 16 antiretrovirals. If 

we assume this same percentage for FY 2000, we can estimate that if all Medicaid 

programs’ net prices were equal to the Federal ceiling prices, the program could have 

saved $140.5 million, saving the Federal Government $73.8 million. 

The States that would save the most if Medicaid net costs were equivalent to other 

Federal drug prices are New York, Florida and California. This is due to the extremely 

large volume of drugs they purchase. These three States purchased 73 percent of all of 

the units purchased by our sample States. The States that would maximize per unit 

savings are Georgia, Texas and Illinois. On average, Georgia could save over a dollar 

per pill if their net prices were equal to the Federal ceiling prices. They could save 75 

cents per pill if their net prices were equal to those listed on the Federal supply schedule. 

Medicaid could have saved over $55 million, representing over half of the total savings 

estimate, if their net prices for just 3 of the 16 drugs were equal to the Federal ceiling 

prices. If the net price of Combivir was equivalent to the Federal ceiling prices, the 

program would have saved $26 million. Medicaid could have saved another $18 million 

if D4T net prices were equivalent to the Federal ceiling prices and almost $12 million on 

Epivir. The median savings for all 16 drugs is $4 million. 

Medicaid HIV/AIDS Drug Cost Containment 16 OEI-05-99-00611 
These savings could be applied to the expanding need for antiretroviral therapy 

All States have opted to include prescription drug benefits in their programs, so Medicaid 

covers antiretroviral therapy for all eligible persons with HIV/AIDS. Medicaid faces 

increasing demand for antiretrovirals because the population of Medicaid eligible persons 

with HIV/AIDS is growing. Program savings can be translated into the ability to provide 

life-saving antiretrovirals to additional persons for the same cost. The $102 million 

savings could purchase additional antiretrovirals to meet the impending 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 purchase a complete regimen for over 8,500 HIV-infected persons. 

Focusing solely on the three drugs with the most savings, Epivir, Combivir and D4T, also 

results in a substantial increase in purchasing power for these life-saving therapeutics. 

The $102 million in savings could purchase an additional 728,000 bottles of D4T at 

Federal ceiling prices. This translates into a prescription of a bottle per month for 60,000 

patients. Alternately, the $102 million in savings could purchase 712,000 additional 

bottles of Epivir for 59,000 patients’ annual needs or 315,000 bottles of Combivir for 

26,300 patients. 

This purchasing ability is particularly important for the Medicaid program in light of 

three trends. First, some States are considering extending Medicaid eligibility to lowincome HIV-positive individuals before they become categorically eligible through 

disability. The CMS has already approved waivers for Maine and Massachusetts to 

conduct such demonstration programs, and other States have pending applications. 

States that apply for such demonstration waivers must prove budget neutrality, and 

decreased drug costs can help the States to extend prescription drug eligibility and still 

meet this requirement. 

Second, the rate of HIV infection is accelerating among low-income persons, especially 

women. In the last decade the proportion of AIDS cases reported among women has 

tripled16. This trend suggests that more HIV-positive persons will become categorically 

eligible for Medicaid. Providing antiretroviral therapy to more persons without 

increasing total expenditures would ease the impending strain on Medicaid budgets. 

Third, some States have already experienced budget strains and shortfalls related to 

Medicaid drug costs, and these pressures can have serious consequences for the provision 

of optional services. For example, the Medicaid Director of Indiana has proposed 

restricting Medicaid drug coverage and eliminating certain other optional services to 

avert budget shortfalls over the next 2 years.17 Cost savings for antiretrovirals represents 

one means to alleviate strained budgets and to preclude the need to restrict coverage of 

these lifesaving drugs. 

Medicaid HIV/AIDS Drug Cost Containment 17 OEI-05-99-00611 
RECOMMENDATIONS 

Maximizing the ability to purchase life-saving antiretroviral drugs may be the only 

fiscally viable solution to meeting the challenges of increasing demand and access. 

Demand for HIV/AIDS pharmaceuticals continues to increase as the standard of care for 

persons living with HIV/AIDS grows increasingly reliant on drug therapy. The National 

Institutes of Health/Public Health Service Guidelines for the Use of Antiretroviral Agents 

in HIV Infected Adults and Adolescents calls for the use of combination therapy 

comprised of at least three drugs. Additionally, the numbers of HIV-infected people are 

climbing among the low-income, traditionally under-served, population. This, in 

combination with the fact that approximately 68 percent of the HIV/AIDS population in 

care has no private health insurance18 will continue to place increasing demands on 

Medicaid to provide more pharmaceuticals. Beyond this increase in demand, State and 

Federal legislatures continue to consider expanding Medicaid coverage to a broader 

range of HIV-infected persons. 

The rules guiding Medicaid reimbursement and rebates are intended to allow the program 

to participate in the pharmaceutical market as prudent buyers. Our findings demonstrate 

that Medicaid is paying more for antiretroviral drugs than other Federal purchasers. 

Because of this discrepancy and the potential program savings, the CMS should revisit 

the rules governing Medicaid reimbursement and rebates for antiretrovirals. 

Unfortunately, the extreme complexity of the pharmaceutical market complicates the 

resolution of these issues. The drug industry is multi-layered, with a variety of 

manufacturing, distribution and retail sales arrangements that not only differ by 

geographic location, but also by product. Thus, it is extremely difficult to determine how 

and to what degree changes will affect market participants. Recognizing the potential for 

unexpected impacts, we offer several options within each recommendation for CMS to 

examine as means to improve reimbursement and rebate methodology for antiretroviral 

drugs. Our recommendations suggest starting points for additional research and 

discussion on how these changes could impact quality and access to care. Such 

comprehensive examinations represent the first step to actuating the long term goals that 

involve regulatory or legislative changes. 

Medicaid HIV/AIDS Drug Cost Containment 18 OEI-05-99-00611 
For the 16 HIV/AIDS drugs examined, Centers for Medicare

and Medicaid Services should review the current 

reimbursement methodology and work with States to find a

method that more accurately estimates pharmacy acquisition 

cost 

The CMS has the ability to address deficiencies in the Medicaid reimbursement system. 

Under Section 1902(a)(30)(A) of the Social Security Act, CMS has the authority to set 

upper payment limits for services available under the Medicaid program. Regulations 

42 CFR 447.331 through 447.334 limit the aggregate amounts State Medicaid agencies 

may claim for pharmaceuticals. To be granted Federal matching funds to pay for 

pharmaceuticals, State agencies are required to submit claims to CMS for approval. In 

order to maximize scarce State and Federal dollars it is essential that CMS use its 

authority to help improve the accuracy of States' estimated pharmacy acquisition cost. 

Options for Improving Estimated Acquisition Cost 

Medicaid’s current reimbursement system predominantly relies upon average wholesale 

price to estimate acquisition cost. The CMS can improve the EAC calculation either by 

making changes to AWP within the existing system or by changing the basis of the 

calculation. If CMS prefers to continue using AWP, then we suggest the following 

improvement option: 

<	 Option 1: Develop safeguards to protect Medicaid from average wholesale 

price manipulations 

The CMS has demonstrated an awareness of problems with AWP validity, and we 

encourage CMS to intensify its efforts to address this issue. In 1997 and 1998, 

CMS supported legislative proposals that would have required Medicare 

reimbursement to be based upon actual acquisition cost rather than average 

wholesale price. Also in 1998, in comments to an OIG report, “Need to Establish 

Connection Between the Calculation of Medicaid Drug Rebates and 

Reimbursement for Medicaid Drugs” (A-06-97-00052), CMS indicated that they 

were planning to examine the calculation of AWP. They stated that this review 

would include issues such as, “how AWP is defined; how to safeguard against 

manipulation of AWPs to maximize reimbursement or minimize rebates; how to 

verify the accuracy of AWPs; the need for an indexing factor; and differences in 

AWPs for brand name versus generic drugs.”19 The CMS has not yet undertaken 

this examination, but we suggest that they follow through with their planned 

study. Such an examination would provide a solid foundation of knowledge for 

building safeguards to protect Medicaid from AWP manipulations. 

Medicaid HIV/AIDS Drug Cost Containment 19 OEI-05-99-00611 
More recently, CMS has expressed the intent to work with State Medicaid 

programs to implement a revised AWP methodology that the Department of 

Justice has established with First Databank regarding a limited set of drugs. One 

approach to revising the AWP methodology would be for CMS to require EAC 

calculations using AWP to be based on market surveys in order to qualify for 

Federal financial participation. Providing clear guidelines for acceptable 

calculations will assist States in maintaining Medicaid’s responsiveness to the 

pharmaceutical marketplace. 

Furthermore, we suggest that CMS reinforce these guidelines by requiring a more 

frequent reporting of payment assurances by States. To access Federal matching 

funds, States must make “findings and assurances” that their drug reimbursements 

have not exceeded the maximum aggregate limits that CMS has established.20 

Payment assurances for brand name drugs compare the prices paid by State 

agencies to State calculations of estimated acquisition cost. The CMS set this 

reporting period for every 3 years to limit the burden on States to make these 

calculations. At the time of the regulation, however, CMS did not anticipate that 

States would use the EAC reimbursement method as consistently as they have. 

Submitting pricing assurances may be less arduous than anticipated because 

States already make estimated acquisition cost calculations. Increasing the 

frequency of these reports may increase accountability of State reimbursements 

without imposing an undue burden. 

If CMS prefers to create a new basis for estimating acquisition cost, then we 

suggest that CMS use average manufacturer price for the EAC calculation. The 

CMS can either set national EAC levels or allow States to set their own levels. If 

CMS’s main concern is protection of AMP confidentiality, then we recommend 

Option 2. If CMS is more concerned with State flexibility, then we recommend 

Option 3. 

Option 2: Create national estimated acquisition costs for States based upon 

average manufacturer price 

An alternative to creating a market-based average wholesale price may be to 

discontinue the reliance upon this figure. The use of AWP for estimating 

acquisition costs emerged as a matter of convenience because AWP data was 

readily accessible. Initially, it did not seem problematic to rely on manufacturer’s 

pricing information without audit controls. Because manufacturers do not bill the 

program for their drugs, there appeared to be little to no incentive to inflate prices. 

However, over the years the financial link between manufacturers and Medicaid 

billers has become evident. Manufacturers can inflate AWP and generate 

financial incentives for providers to favor their products. Now that these issues 

have been identified, the negative repercussions of relying on AWP outweigh the 

convenience. 

Medicaid HIV/AIDS Drug Cost Containment 20 OEI-05-99-00611 
An alternate reimbursement option involves CMS determining its own estimated 

acquisition cost for States based upon average manufacturer price. Unlike AWP, 

which is a suggested list price, AMP is a calculation that reflects actual 

transactions between drug manufacturers and commercial purchasers. 

Manufacturers submit AMP information to CMS quarterly, which CMS uses to 

calculate Medicaid’s unit rebate amounts. The average manufacturer price data is 

subject to Federal oversight and audits, which ensure its accuracy. 

A reimbursement formula based on AMP instead of AWP would also serve to 

connect rebates and reimbursement. Currently, reimbursement is based on AWP 

and rebates are based on AMP, creating a disconnection between the two 

calculations. This disconnection has introduced incentives for manufacturers to 

inflate average wholesale price to generate profit for providers. If both rebates 

and reimbursement were based on AMP, however, the incentive to inflate 

reimbursement amounts would be removed as any increase to AMP would also 

cause an increase in the rebates paid by the manufacturer. 

The confidentiality of AMP is statutorily protected, so States cannot currently 

obtain this information and use it to create their own estimated acquisition cost. 

The CMS, however, could determine its own methodology for estimating 

acquisition cost based upon AMP plus some mark-up percentage to compensate 

wholesalers and pharmacies. Under the condition that CMS does not reveal its 

EAC formula, AMP would remain confidential. The CMS could then report EAC 

data to States along with the unit rebate information it already reports on a 

quarterly basis. 

While this option may limit State flexibility to determine their own payment 

systems, it would allow the States and the Federal Government to access 

significant program savings. In order to maintain some level of flexibility, CMS 

could implement this suggestion using aggregate reimbursement limits for States. 

This would require that total State spending on drugs did not exceed a maximum 

set by CMS, without imposing a strict ceiling on each prescription drug price. 

This approach would afford States and physicians some flexibility on a case by 

case basis while also providing the Federal Government with the needed 

oversight and control over expenditures. 

< Option 3: Share average manufacturer price data with States so that they 

can accurately set Medicaid reimbursement rates 

The rebate program requires drug manufacturers to report average manufacturer 

price and Best Price data to the Secretary in order to have their drugs reimbursed 

by Medicaid. Both AMP and Best Price are confidential. The confidentiality 

provision mandates that AMP and Best Price information provided by the 

manufacturer “will not be disclosed by the Secretary or State Medicaid agency in 

Medicaid HIV/AIDS Drug Cost Containment 21 OEI-05-99-00611 
a form which reveals the Manufacturer, or prices charged by the Manufacturer” 

except as necessary to carry out the Medicaid rebate program.21 

Currently, CMS interprets the confidentiality clause very narrowly. This 

interpretation prevents CMS from sharing average manufacturer price data with 

State Medicaid agencies. The CMS reports only the unit rebate amounts to States, 

from which States cannot deduce AMP because of the complex unit rebate 

methodology. It would seem plausible, however, to interpret the confidentiality 

provision more broadly as a safeguard to prevent manufacturers from gaining 

access to the pricing information of their competitors. The legislation specifically 

prohibits the State Medicaid agencies from disclosing average manufacturer price 

and Best Price, which implies a legislative assumption that State Medicaid 

agencies would have access to that information. In September 1995, CMS 

addressed this issue in response to comments received on the proposed rule 

regarding Medicaid payment for outpatient drugs. The CMS asserted that they 

would not to disclose AMP to the States but maintained that the statute 

contemplates the disclosure of manufacturer pricing data to the States and that they 

believed Congress intended that States have access to sufficient pricing 

information to implement the Medicaid drug rebate program.22 

Furthermore, the statute also indicates that State Medicaid agencies have a legal 

obligation to protect manufacturers’ confidentiality interests. The CMS could 

initiate this reimbursement option by working with the States to devise a means of 

protecting the confidentiality of average manufacturer price. For example, the 

State Medicaid agencies could conduct in-house calculations of reimbursement for 

antiretrovirals using AMP plus a markup percentage that would be kept 

confidential. Because this methodology would only affect 16 drugs, performing 

and protecting this calculation should not present a formidable burden. Once CMS 

and the States have agreed upon protection measures, then CMS could provide 

AMP data to the States on a quarterly basis. 

By sharing AMP information with the State Medicaid agencies, CMS could 

provide States with the means to fulfill the intent of the Medicaid reimbursement 

to reflect actual acquisition costs. Improving the accuracy of State estimates 

would also generate program savings. Furthermore, States would maintain 

flexibility in determining their reimbursement formulas and enjoy more valid 

information upon which to base those determinations. 

Examining the Current Medicaid Dispensing Fees 

Regardless of which option CMS chooses to improve pharmacy reimbursement 

methodology, any change should include a separate consideration of appropriate 

dispensing fees to ensure that pharmacists can cover their professional costs. Otherwise, 

pharmacies may begin to refuse Medicaid patients, limiting access for beneficiaries. 

Medicaid HIV/AIDS Drug Cost Containment 22 OEI-05-99-00611 
In the past, CMS has expressed concern about fair pharmacy compensation for serving 

Medicaid clients and has stated that one means to ensure access was to permit pharmacies 

to profit from sales to Medicaid clients. Though the final rule of 1987 deleted a 

procedural requirement for States’ determination of reasonable dispensing fees, CMS 

expressed the expectation that the States would continue their customary activities to 

establish this fee. These activities included: 1) audits and surveys of pharmacy 

operational costs; 2) compilation of data regarding professional salaries and fees; and 3) 

analysis of compiled data regarding pharmacy overhead costs, profits, etc. We 

recommend that CMS consider reinstating the requirement that States determine a 

reasonable dispensing fee using one of the methods described or another appropriate 

method for estimating pharmacy dispensing costs. 

The Centers for Medicare and Medicaid Services should 

initiate a review of Medicaid rebates for the 16 HIV/AIDS drugs

examined 

Though an improved reimbursement methodology would generate program savings, it 

would not completely close the gap between Medicaid and other government drug 

purchasers. Medicaid reimbursement cannot be lowered so far as to eliminate all 

pharmacy profit without risking pharmacies' willingness to serve this population. This 

access concern limits the extent to which decreased reimbursement can achieve savings. 

However, the Medicaid rebate program could significantly increase the unit rebate amount 

and still allow the manufacturers to profit from participation. Drug manufacturers receive 

approximately 76 percent of the cost of a prescription. After deducting taxes, research, 

marketing and other operational costs from this gross share, manufacturers retain a net 

profit that averages over 18 percent. 

Initiating a review of the rebate formula to address the purchasing disadvantage that 

Medicaid faces in comparison to other Federal purchasers would be consistent with the 

legislative history of the program. The Omnibus Budget Reconciliation Act of 1990 

created the Medicaid drug rebate program and set forth a formula based upon average 

manufacturer price and Best Price. This formula produced an unintended consequence 

that disadvantaged certain Federal drug purchasers, including the VA. The Veterans 

Health Care Act of 1992 amended the rebate program to correct that disadvantage. 

Congress changed the rebate formula to exclude certain government purchasers from the 

Best Price calculation in order to secure better drug prices for those programs. The 

VHCA of 1992 also increased the rebate percentage from 12.5 percent to 15.7 percent off 

of AMP in the last quarter of 1992 and then incrementally lowered it to 15.1 percent. 

We propose that CMS examine how another legislative amendment could ameliorate 

Medicaid’s purchasing disadvantage to generate program savings for the 16 drugs 

examined. We offer two suggestions for further research, which are linked to the 

Medicaid HIV/AIDS Drug Cost Containment 23 OEI-05-99-00611 
reimbursement option that CMS pursues. If CMS chooses to base reimbursement 

calculations upon average manufacturer price, as outlined by either Option 2 or Option 3 

of the previous recommendation, then we suggest the following: 

< Option 1: Increase the rebate percentage of average manufacturer price 

Ensuring that Medicaid's net costs more closely resemble the costs of other Federal 

purchasers requires an increase in the Medicaid unit rebate. The current Medicaid 

rebate is statutorily based upon a 15.1 percent discount off of AMP.23 One of the 

reasons that the Federal ceiling price is much lower than the Medicaid net price is 

because the Federal ceiling price statutorily receives a 24 percent discount off of 

average manufacturer price. Regardless of improvements to the reimbursement 

formula, the Medicaid net price would still exceed the Federal ceiling price 

because the Federal ceiling price receives a greater discount off of average 

manufacturer price. Increasing the percentage off of AMP used for the rebate 

calculation would allow Medicaid to access greater program savings. 

On the other hand, if CMS continues to base reimbursement on average wholesale price, as 

outlined by Option 1 of the reimbursement recommendations, then we suggest the following: 

<	 Option 2: Base rebates on average wholesale price rather than average 

manufacturer price 

Another potential means to achieve these savings involves changing the basis of 

the Medicaid rebate calculation from average manufacturer price (AMP) to 

average wholesale price (AWP). In May 1998, the OIG issued "Need to Establish 

Connection between the Calculation of Medicaid Drug Rebates and 

Reimbursement for Medicaid Drugs" (A-06-97-00052). This report recommended 

a legislative change requiring that Medicaid rebates be based upon AWP. Despite 

concurring with the administrative benefits, CMS disagreed that such a proposal 

was feasible. We suggest that CMS re-evaluate this recommendation to determine 

whether it would achieve program savings. 

As discussed, the current disconnection between reimbursement based on AWP 

and rebates based on AMP creates an incentive for manufacturers to use average 

wholesale price inflation as a profit-based incentive for providers to choose their 

drug. Using average wholesale price for rebate calculations would minimize 

manufacturers' incentives to inflate AWP because their rebate obligations would 

increase as AWP increased. Furthermore, the rebate program guarantees an 

additional rebate when drugs prices increase at a faster rate than inflation, as 

measured by the consumer price index. This mechanism also discourages artificial 

price inflation. If Medicaid reimbursement methodology continues to use average 

wholesale price, then this change could both improve the accuracy of 

reimbursement and increase the unit rebates. 

Medicaid HIV/AIDS Drug Cost Containment 24 OEI-05-99-00611 
One concern, however, that CMS should consider involves this susceptibility of 

AWP to manipulation. Average wholesale price listings are not currently indexed 

to actual transactions, so conceivably, manufacturers could artificially lower AWP 

in the same way that they can artificially inflate it. A lower AWP could reduce 

Medicaid reimbursement expenditures, but it would also reduce unit rebate 

amounts. These circumstances complicate the forecasting of net program savings 

through this option. 

Implications for Broader Medicaid Drug Benefit 

While our findings and recommendations pertain only to antiretroviral drugs, numerous 

other Inpector General reports have concluded that Medicaid pays more than other Federal 

and private purchasers for a wide variety of drugs. In 1997, the IG estimated that the 

actual acquisition cost for brand name drugs averaged 18.3 percent below AWP. The 

difference between actual acquisition cost and generic drugs averaged 42.5 percent. For a 

complete list of the findings and recommendations of these reports, please consult 

Appendix F. 

As part of a larger effort to examine the problems plaguing Medicaid drug reimbursement 

and rebate policies, our recommendations build off the recommendations made in 

previous OIG reports. Future work in this area may, in turn, find that the 

recommendations presented in this report for antiretrovirals drugs may have broader 

applicability. 

Medicaid HIV/AIDS Drug Cost Containment 25 OEI-05-99-00611 
AGENCY COMMENTS 

The CMS provided comments on the draft report in which they agreed with the overall 

intent of our recommendations but expressed reservations with many of the specific 

suggestions we offered for achieving them. The complete text of CMS’s comments can be 

found in Appendix E. Primarily, CMS felt that they did not have the statutory authority to 

make the suggested changes. Since reducing prices for HIV/AIDS medications is so 

crucial to ensuring access to these drugs, we encourage CMS to seek any legislation 

necessary to accomplish the task. However, we continue to believe that most of the 

options delineated in the report can be undertaken without amending current law. Below 

we review CMS’s concerns and offer some specific suggestions on how our recommended 

options could be operationalized under current law. 

In response to the first option related to Medicaid reimbursement, CMS stated that there 

are already safeguards in place to protect AWP from price manipulation. The CMS points 

out that the law gives States the authority to establish their own payment methodologies 

for prescription drugs. Consequently, CMS believes that States retain the responsibility 

for implementing any necessary safeguards, with CMS “encourag[ing] states to be 

proactive in monitoring the pharmaceutical marketplace.” Finally, CMS stated that their 

guidance to the States regarding the calculation of estimated acquisition cost was clear and 

that further guidance would constitute Federal price controls. 

While it is true that some safeguards protecting Medicaid from AWP inflation are in 

place, considerable evidence points to the fact that AWP is still very vulnerable to price 

manipulations. Appendix F lists several other OIG reports that, like this report, document 

on-going problems with AWP calculations resulting in higher prices to the Medicaid 

program. Federal and State prosecutors are currently investigating numerous drug 

companies regarding alleged inflation of AWP for Medicaid-covered drugs. In January 

2001, the Bayer Corporation agreed to pay $14 million to settle charges of alleged AWP 

inflation and other alleged wrongdoing. Even CMS has demonstrated an awareness of the 

problems with AWP validity through support of legislative proposals to replace AWP with 

actual acquisition cost and through correspondence with the House Commerce Committee. 

The persistence of these problems indicates that this issue has not yet been sufficiently 

addressed. 

The OIG agrees that CMS should not impose price controls, and our recommendations do 

not suggest price controls. Rather, our options to safeguard AWP suggest that CMS 

provide more specificity in the guidelines that it already imposes. While we agree with 

CMS that States retain responsibility for defining their EAC methodology, CMS also 

retains the responsibility of oversight for that methodology through the State plan 

approval process. The CMS has demonstrated the authority to provide boundaries of 

acceptability of EAC calculations. In the State Medicaid Manual, CMS already requires 

that States must include a “significant discount” off of AWP in order for a State’s 

Medicaid HIV/AIDS Drug Cost Containment 26 OEI-05-99-00611 
reimbursement methodology to be accepted. Given the preponderance of evidence that 

demonstrates AWP still overstates prices, we believe that CMS should further clarify the 

requirements of an acceptable use of AWP by specifying that the AWP should be derived 

in a way that reflects actual market transactions. 

The CMS disagreed with our second option related to Medicaid reimbursement, to create a 

national EAC for the States based on the AMP, and our third option, to share AMP data 

with States to set Medicaid reimbursement rates. In both cases, they cited the statutorily 

protected confidentiality of AMP. The CMS did agree to examine the current dispensing 

fee as part of their state plan amendment review process and will do so whenever a State 

proposes a fee change. 

We continue to believe that the creation of a national estimated acquisition cost based on 

AMP is workable on a drug-by-drug basis without disclosing AMP information. This 

recommendation applies to only 16 very specific drugs, namely, antiretrovirals to treat 

HIV/AIDS. We believe that the CMS could develop an estimated acquisition cost for the 

States for these 16 drugs based upon AMP plus a markup percentage. The CMS could 

share the calculated EAC for these 16 drugs without revealing the formula from which the 

EAC was derived much the way they currently share unit rebate amounts with States 

without revealing AMP. 

Our interpretation of the confidentiality provision for AMP leads us to believe that CMS 

could legally share AMP with the State Medicaid programs. The confidentiality provision 

mandates that AMP information provided by the manufacturer “will not be disclosed by 

the Secretary or State Medicaid agency in a form which reveals the Manufacturer or prices 

charged by the Manufacturer.”24 The specific inclusion of the State Medicaid agencies in 

that mandate implies a legislative assumption that those agencies would have access to 

AMP information. In September 1995, CMS addressed this issue and expressed an 

interpretation of this provision more similar to our own. In the Federal Register (60 FR 

48442), CMS stated that although they would not disclose AMP to the States at that time, 

they maintained that the statute contemplates the disclosure of this manufacturer pricing 

data to the States.25 

Our second recommendation called for CMS to initiate a review of Medicaid rebates for 

the 16 HIV/AIDS drugs examined in this study. The CMS agreed with the first option of 

increasing the rebate percentage of AMP and plans to include this recommendation when 

they consider legislative changes for the Medicaid program. 

The CMS disagreed with our second option, basing the rebates on AWP rather than AMP, 

citing comments to an OIG report from 1998, “Need to Establish Connection Between the 

Calculation of Medicaid Drug Rebates and Reimbursement for Medicaid Drugs” 

(A-06-97-00052). In these comments, CMS stated that a legislative change was not 

feasible at the time the report was issued and expressed concern with AWP validity. We 

share this concern, and our recommendation advised CMS to consider the susceptibility of 

AWP to manipulation if they chose this option. 

Medicaid HIV/AIDS Drug Cost Containment 27 OEI-05-99-00611 
In the 1998 CMS comments, CMS stated that they were planning to examine the 

calculation of AWP, including issues such as, “how AWP is defined; how to safeguard 

against manipulation of AWPs to maximize reimbursement or minimize rebates; how to 

verify the accuracy of AWPs; the need for an indexing factor; and differences in AWPs 

for brand name versus generic drugs.”26 We support such an examination. We agree that 

these issues warrant CMS’s attention, and these concerns strengthen our belief that the 

CMS should provide greater guidance to the States regarding acceptable use of AWP. 

We hope that this additional discussion of our recommendations is helpful to CMS. We 

encourage them to reconsider the feasibility of each option to accomplish the ultimate goal 

of assuring that Medicaid pays reasonable prices for the 16 antiretroviral drugs we 

reviewed. Reducing prices for these life-saving antiretrovirals is an essential step in 

helping the Medicaid program meet the demands of expanded eligibility for people living 

with HIV. 

Medicaid HIV/AIDS Drug Cost Containment 28 OEI-05-99-00611 
APPENDIX A 

Glossary of Terms 

Estimated Acquisition Cost (EAC) — State Medicaid agency’s best estimate of the price 

generally and currently paid by pharmacies for a drug.2 This figure is meant to represent 

pharmacies’ actual acquisition cost (AAC). 

Average Wholesale Price (AWP) — The published manufacturer’s suggested list price for a 

wholesaler to charge a pharmacy for a drug.3 

Wholesale Acquisition Cost (WAC) — the price paid by the wholesaler for drugs purchased 

from the manufacturer. Publicly listed WAC amounts may not reflect all available discounts.4 

Actual Acquisition Cost (AAC) — The net cost at which the pharmacy acquires a drug.5 

Average Manufacturer Price (AMP) — The average price paid by wholesalers to the 

manufacturer for drugs distributed to the retail pharmacy class of trade.6 

Best Price (BP) — The lowest price available for a drug from the manufacturer to any purchaser 

with the exception of Federal agencies and State pharmaceutical assistance programs. 7 

2 State Medicaid Manual, Part 6, Section 6305.1 

3 Prescription Drug Trends -- A Chartbook. The Henry J. Kaiser Family Foundation, July 2000. 

4 Ibid. 

5 Ibid. 

6 42 USC Sec. 1396r-8(k)(1) 

7 42 USC Sec. 1396r-8(c)(1)(C) 

Medicaid HIV/AIDS Drug Cost Containment 29 OEI-05-99-00611 
APPENDIX B 

List of Antiretroviral Pharmaceuticals

Pharmaceutical Manufacturer Activity 

Class Chemical / Mechanistic Class 

Crixivan (Indinavir) Merck Antiviral Protease Inhibitor 

Invirase (Saquinavir) Hoffmann-La Roche Antiviral Protease Inhibitor 

Sustiva (Efavirenz) DuPont Antiviral Non-Nucleoside 

Reverse Transcriptase Inhibitor 

Norvir (Ritonavir) Abbott Laboratories Antiviral Protease Inhibitor 

Viracept (Nelfinavir) Agouron 

Pharmaceuticals Antiviral Protease Inhibitor 

Retrovir (AZT) 

(Zidovudine) Glaxo Wellcome Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Epivir (3TC) Glaxo Wellcome Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Videx (ddl) Bristol Myers-Squibb Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

D4T (Zerit) Bristol Myers-Squibb Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Combivir (AZT/3TC) Glaxo Wellcome Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Fortovase (Saquinavir) Hoffmann-La Roche Antiviral Protease Inhibitor 

Hivid 

(Zalcitabine, ddC) Hoffmann-La Roche Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Viramune (Nevirapine) Boehringer Ingelheim 

Pharmaceuticals, Inc/ Antiviral Non-Nucleoside Reverse Transcriptase Inhibitor 

Rescriptor (Delavirdine) Pharmacia & Upjohn Antiviral Non-Nucleoside 

Reverse Transcriptase Inhibitor 

Ziagen (abacavir) Glaxo Wellcome Antiviral Nucleoside 

Reverse Transcriptase Inhibitor 

Agenerase (amprenavir) Glaxo Wellcome Antiviral Protease Inhibitor 

Medicaid HIV/AIDS Drug Cost Containment 30 OEI-05-99-00611 
APPENDIX C 

Sampled States’ Formulas for Estimating Acquisition Cost

State EAC Calculation 

California AWP - 5% or Direct Price8 

Florida AWP - 13.25% 

Georgia AWP - 10% 

Illinois AWP - 10% 

Maryland lower of: AWP-10%, WAC+10%, 

Direct+10%9 

Massachusetts WAC + 10% 

New Jersey AWP - 10% 

New York AWP - 10% 

Pennsylvania AWP - 10% 

Texas lower of : AWP - 15.5% or WAC + 

12% 

8 California has negotiated agreements with certain drug manufacturers to purchase drugs directly 

from the manufacturer. These agreements cover four of the drugs in our study, namely, Crixivan, 

Norvir, D4T and Rescriptor. Including these discounts, California Medicaid administrators 

estimate their average reimbursement formula is AWP- 12 percent. 

9 Direct Price is the price at which the manufacturer sells directly to the pharmacy. 

Medicaid HIV/AIDS Drug Cost Containment 31 OEI-05-99-00611 
APPENDIX D 

Sampled States’ Dispensing Fees

State Dispensing Fee to Pharmacies 

California $3.80 

Florida $4.23 

Georgia $4.33-$4.63 

Illinois 10.4% of drug cost up to $15.40 

maximum10 

Maryland $4.21 

Massachusetts $2.50 + $0.50 beneficiary co-pay 

New Jersey $3.73-$4.07 

New York $3.50 

Pennsylvania $4.00 

Texas $5.27 + 2% of drug cost 

10 For prescriptions that cost less than $37.50, Illinois pays a flat fee of $3.45. All of the drugs in 

our study cost more than $37.50 per prescription. 

Medicaid HIV/AIDS Drug Cost Containment 32 OEI-05-99-00611 
APPENDIX E 

Agency Comments

Medicaid HIV/AIDS Drug Cost Containment 33 OEI-05-99-00611 
Medicaid HIV/AIDS Drug Cost Containment 34 OEI-05-99-00611 
Medicaid HIV/AIDS Drug Cost Containment 35 OEI-05-99-00611 
Medicaid HIV/AIDS Drug Cost Containment 36 OEI-05-99-00611 
APPENDIX F 

Related Office of Inspector General Report Summaries

Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and 

Reimbursement for Medicaid Drugs (A-06-97-00052) 

Findings Recommendations 

Manufacturers use inconsistent methods to calculate 

AMP. Using AWP in place of AMP could have 

resulted in 1.15 billion more in drug rebates for 100 

brand name drugs in each CY of 1994 through 1996. 

Submit a legislative proposal requiring rebates to be 

based upon AWP. 

There is no direct financial connection between the 

calculation of drug rebates and reimbursements to 

pharmacies 

Establish safeguards to ensure that manufacturers do 

not raise AWP if a proposal is enacted. 

Requiring drug manufacturers to pay rebates based on 

AWP would reduce the administrative burden at 

HCFA and manufacturers. 

Study other viable alternatives to the current program 

of using AMP to calculate the Medicaid rebates such 

as the establishment of a flat percentage of 

manufacturers gross sales. 

Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products 

(A-06-97-00011) 

Findings Recommendations 

Pharmacies pay an average of 42.5 percent less than 

AWP for generic drugs sold to Medicaid beneficiaries. 

HCFA should work to ensure that States reimburse 

the ingredient portion of Medicaid drugs in a manner 

11 

more consistent with the findings of this report 

If reimbursement had been based on the estimates of 

this report, Medicaid could have saved $145.5 million 

for CY 1994 and 1995 for 200 drugs. 

HCFA should study any of the other factors, such as 

dispensing fees, which they believe could significantly 

impact pharmacy reimbursement. 

11 HCFA is the acronym for the Health Care Financing Administration. In June 2001, the Health Care 

Financing Administration was renamed the Centers for Medicare and Medicaid Services (CMS). 

Medicaid HIV/AIDS Drug Cost Containment 37 OEI-05-99-00611 
Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand 

Name Drugs (A-06-97-00030) 

Findings Recommendations 

The actual acquisition cost for brand name drugs is 

estimated to be a national average of 18.3 percent 

below AWP. 

HCFA should work to ensure that States reimburse the 

ingredient portion of Medicaid drugs in a manner more 

consistent with the findings of this report 

If reimbursement had been based on the estimates of 

this report, Medicaid could have saved $225 million 

for 100 drugs in CY 1994. 

HCFA should study any of the other factors, such as 

dispensing fees, which they believe could significantly 

impact pharmacy reimbursement 

Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid 

Prescription Drug Program of CA, D.C., DE, FL, MD, MO, MT, NE, NJ, NC, VA 

(A-06-95-00062 through A-06-95-00072) 

(This nationwide audit resulted in 11 separate, State-specific reports. ) 

Findings Recommendations 

The estimates of the extent that AWP The State Agencies should consider the results of their audit in 

exceeded pharmacy purchase invoice prices determining any future changes to pharmacy reimbursement. 

for brand name drugs and generic drugs were: 

State Brand Name Generic 

CA 17.5% 41.4% 

DC 17.3% 43.8% 

DE 19.3% 37% 

FL 20.2% 41.5% 

MD 18.7% 41.9% 

MO 18.5% 42.5% 

MT 16.2% 48.5% 

NC 16.9% 45.2% 

NE 18.7% 44.9% 

NJ 19.8% 42.5% 

VA 17.2% 45.1% 

Medicaid HIV/AIDS Drug Cost Containment 38 OEI-05-99-00611 
Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide 

Additional Guidance to Drug Manufacturers to Better Implement the Program 

(A-06-91-00092) 

Findings Recommendations 

Manufacturers’ calculations of AMP are inconsistent. HCFA should survey manufacturers to identify the 

variations in determining AMP and develop a more 

specific policy for manufacturers. 

There are significant differences among 

manufacturers’ policies on the OIG’s right of access to 

company records. 

Establish requirements which provide for unrestricted 

access by Federal oversight agencies to manufacturer’s 

records pertaining the rebate program 

There are significant differences among manufacturers 

in the length of time records relating to drug rebates 

are retained. 

Establish requirements which direct drug 

manufacturers to retain rebate records for a period of 2 

years. 

Medicaid HIV/AIDS Drug Cost Containment 39 OEI-05-99-00611 
APPENDIX G 

Related Office of Inspector General Reports 

Excessive Medicare Payments for Prescription Drugs (OEI-03-97-00290) 

Medicare Reimbursement of Albuterol (OEI-03-00-00311) 

Medicare Reimbursement of End Stage Renal Disease Drugs (OEI-03-00-00020) 

Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and

Reimbursement for Medicaid Drugs (A-06-97-00052)

Medicaid Pharmacy: Actual Acquisition Cost of Generic Prescription Drug Products (A-06-97-

00011)

Medicaid Managed Care and HIV/AIDS (OEI-05-97-00210)

Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand Name

Drugs (A-06-96-00030)

Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid Prescription

Drug Program of _______

California Department of Health Services (A-06-95-00062)

Montana Dept. Of Public Health and Human Services (A-06-95-00068)

Florida Agency for Health Care Administration (A-06-95-00065)

North Carolina Department of Human Resources (A-06-95-00071)

Delaware Department of Health and Social Services (A-06-95-00063)

Virginia Department of Medical Assistance (A-06-95-00072)

New Jersey Department of Human Services (A-06-95-00070)

Nebraska Department of Social Services (A-06-95-00069)

Missouri Department of Social Services (A-06-95-00067)

District of Columbia Department of Human Services (A-06-95-00064)

Maryland Department of Health and Mental Hygiene (A-06-95-00066)

Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide Additional

Guidance to Drug Manufacturers to Better Implement the Program (A-06-91-00092)

Medicaid Drug Rebates: Inaccurate Reporting of Medicaid Drug Data by Pharmacies (A-06-91-

00056)

Medicaid Drug Rebates: Improvements Needed in the Health Care Financing Administration’s

Procedures to implement the Medicaid Drug Rebate Program (A-06-91-00102) 

Medicaid HIV/AIDS Drug Cost Containment 40 OEI-05-99-00611 
APPENDIX H 

End Notes

1. Federal HIV/AIDS Spending: A Budget Chartbook. Fiscal Year 2000. The Henry J. Kaiser Family 

Foundation. 

2. National Center for HIV, STD and TB Prevention, Division of HIV/AIDS Prevention, Centers for Disease 

Control and Prevention, “HIV/AIDS Among US Women: Minority and Young Women at Continuing 

Risk.” 

3. Owens, J., Chief, Medicaid Program Integrity, State of Florida, “New Approaches to Combat Fraud and 

Abuse in the Medicaid Prescribed Drug Program.” Presented at Medicaid Drug Rebate Program 

Conference, Salt Lake City, September 2000. 

4. 42 USC 1396r-8(d) regulates and defines the states’ rights to restrict drugs or to impose preauthorization 

requirements. 

5. 42 CFR 447.301 

6. National Pharmaceutical Council, "Pharmaceutical Benefits Under State Medical Assistance Programs" 

1999, p. 4-57. 

7. Section 1927(c)(1)(C) of the Social Security Act defines “best price” as the lowest price available from the 

manufacturer to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or 

governmental entity within the United States, excluding: (1) any prices charged to the Indian Health 

Service, the Department of Veteran Affairs, the Department of Defense, the Public Health Service (PHS), 

and PHS-covered entities; (2) any prices charged under the Federal Supply Schedule; (3) any prices used 

under state pharmaceutical assistance program prices; and (4) any depot and single award contract prices. 

8. Centers for Disease Control and Prevention’s HIV/AIDS Surveillance Report 

9. Federal Ceiling prices limit the pharmaceutical prices paid by the Department of Veterans’ Affairs, 

Department of Defense, Public Health Service and the Coast Guard. 

The full complexity of these formulas are not represented. Only the basic elements have been included in 

order to more vividly portray the fundamental differences between the various formulas. For instance, the 

Medicaid rebate is actually the greater of 15.1 percent of AMP or AMP minus the manufacturer’s “Best 

Price”. 

11. Veteran’s Health Care Act of 1992, Title VI, Sec. 603(h)(5) 

12. [SSA 1927] 42 USC Sec. 1396r-8(k)K1) 

13. State Medicaid Manual, Part 6, Section 6305.1 

Medicaid HIV/AIDS Drug Cost Containment 41 OEI-05-99-00611 

10 
14. Massachusetts Medicaid agency pays a dispensing fee of $2.50 but beneficiaries pay a $.50 copayment. 

Thus, the pharmacy receives $3.00 per prescription. 

15. The 25 percent is based upon a total expenditure calculation that we made using data provided by each 

State for expenditures on each drug in our sample. Our survey also asked States to estimate their total 

spending on antiretrovirals, and this survey question yielded a lower total expenditure estimate. The $51 

million savings represents 28 precent of this lower estimated expenditure total. 

16. National Center for HIV, STD and TB Prevention, Division of HIV/AIDS Prevention, Centers for Disease 

Control and Prevention, “HIV/AIDS Among US Women: Minority and Young Women at Continuing 

Risk.” 

17. Indianapolis Star. “Director Proposes Cuts in Medicaid” by Kevin Corcoran. January 24, 2001. 

18. This is an estimate based on people with HIV/AIDS who are in regular care. Most of these people rely on 

public sector insurance programs -- estimates range from 68 percent to 83 percent. Bozzette, S.A., et al., 

“The Care of HIV-infected Adults in the United States”, New England Journal of Medicine, Vol. 339, No. 

26, 1998. 

19. “Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and Reimbursement for 

Medicaid Drugs” (A-06-97-00052), Attachment 2. 

20. 42 CFR 447.333 

21. 42 USC 1396r-8(b)(3)(D) 

22. 60 FR 48442 

23. The full complexity of the formula is not represented here, but it is explained fully in the Background. The 

rebate formula also accounts for “Best Price” and an inflation indexing methodology. 

24. 42 USC 1396r-8(b)(3)(D) 

25. 60 FR 48442 

26. “Need to Establish Connection Between the Calculation of Medicaid Drug Rebates and Reimbursement for 

Medicaid Drugs” (A-06-97-00052), Attachment 2. 

Medicaid HIV/AIDS Drug Cost Containment 42 OEI-05-99-00611