PRESCRIPTION 

DRUGS

Comparison of DOD, 

Medicaid, and 

Medicare Part D 

Retail Reimbursement 

Prices

Report to the Ranking Member, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate

June 2014

GAO-14-578

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-578, a report to the 

Ranking Member, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

June 2014

PRESCRIPTION DRUGS

Comparison of DOD, Medicaid, and Medicare Part D 

Retail Reimbursement Prices

Why GAO Did This Study

In 2011, federal spending for 

prescription drugs by DOD, Medicaid, 

and Medicare Part D totaled 

$71.2 billion—representing about

85 percent of all federal prescription 

drug expenditures—for about 

114.4 million beneficiaries. Each 

program reimbursed retail pharmacies 

for outpatient prescriptions filled at 

these pharmacies by their 

beneficiaries. 

GAO was asked to compare prices 

paid for prescription drugs across 

federal programs. This report 

compares retail reimbursement prices 

paid by DOD, Medicaid, and Medicare 

Part D for a sample of prescription 

drugs and describes factors affecting 

these prices. Using agency data for the 

third quarter of 2010 (the most recent 

data available at the time of GAO’s 

analysis), GAO selected a sample of 

50 high-utilization and 50 highexpenditure drugs; after accounting for 

overlap between the two groups, the 

final sample contained 78 drugs. GAO 

calculated average gross unit prices 

paid to pharmacies by each program 

by adding total program-paid and 

beneficiary-paid amounts and dividing 

by total utilization for each drug, the 

entire sample, and the subsets of 

brand-name and generic drugs. GAO

calculated net unit prices paid by each 

program by subtracting all agencyreported beneficiary-paid amounts, 

rebates, refunds, and other price 

concessions from the gross unit prices. 

GAO also interviewed DOD, Medicaid, 

and Medicare Part D officials and 

reviewed literature describing factors 

affecting drug prices.

What GAO Found

GAO found that Medicaid paid the lowest average net prices across a sample of 

78 high-utilization and high-expenditure brand-name and generic drugs when 

compared to prices paid by the Department of Defense (DOD) and Medicare 

Part D. Specifically, Medicaid’s average net price for the entire sample was 

$0.62 per unit, while Medicare Part D paid an estimated 32 percent more 

($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, 

Medicaid paid the lowest net price for the subset of brand-name drugs in the 

sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 

69 percent more. Medicaid also paid the lowest net price for the subset of 

generic drugs, while Medicare Part D paid 4 percent more and DOD paid 

50 percent more. 

Comparison of Average Net Unit Prices for the Sample Drugs, Third Quarter of 2010

a

GAO used only federally mandated rebates when calculating Medicaid net prices. If state 

supplemental rebates had been applied, actual net prices paid by Medicaid would have been lower 

than the prices shown in the figure. GAO found that the state supplemental rebates, in aggregate, 

were equivalent to 4 percent of Medicaid expenditures for all drugs in the target quarter.

b

The Medicare Part D net prices are estimates because CMS allows Medicare Part D plan sponsors 

to use a variety of methods to allocate post-purchase price adjustments to the drug level and thus 

GAO could not definitively assign rebates to specific drugs.

GAO found that multiple factors affected the net prices paid by each program. 

Specifically, a key factor for the entire sample and the brand-name subset was 

the amount of any post-purchase price adjustments, which are the refunds, 

rebates, or price concessions received by each program from drug 

manufacturers after drugs have been dispensed to program beneficiaries. These 

price adjustments ranged from about 15 percent of the gross price for Medicare 

Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across 

the entire sample. The gross prices each program negotiated with pharmacies 

and the magnitude of beneficiary-paid amounts also contributed to differences in 

net prices paid by the three programs, but to a lesser degree.

GAO provided a copy of the draft report to DOD and the Department of Health 

and Human Services (HHS) for comment. DOD stated that it had no comments. 

HHS provided a technical comment, which was incorporated.

View GAO-14-578. For more information, 

contact John Dicken at (202) 512-7114 or 

dickenj@gao.gov.
Page i GAO-14-578 Comparison of Retail Reimbursement Prices

Letter 1 

Background 5

Medicaid Paid Lower Net Prices Than DOD and Medicare Part D, 

Largely Due to Differences in Post-Purchase Price Adjustments 9

Agency Comments 16

Appendix I Scope and Methodology 17

Appendix II GAO Contact and Staff Acknowledgments 28

Tables

Table 1: Percentage of Total Drug Utilization and Expenditures 

Included in the Retail Reimbursement Sample, Third 

Calendar Quarter of 2010 20

Table 2: Retail Reimbursement Drug Sample, Third Calendar 

Quarter of 2010 21

Figures

Figure 1: Comparison of Average Net Unit Prices for the Sample 

Drugs, Third Quarter of 2010 10

Figure 2: Comparison of Average Gross Unit Prices, BeneficiaryPaid Amounts, Post-Purchase Price Adjustments, and 

Average Net Unit Prices for the Sample Drugs, Third 

Calendar Quarter of 2010 12

Contents
Page ii GAO-14-578 Comparison of Retail Reimbursement Prices

Abbreviations

AMP average manufacturer price

CMS Centers for Medicare & Medicaid Services

DIR direct and indirect remuneration

DOD Department of Defense

FCP federal ceiling price

HCPCS Healthcare Common Procedure Coding System

HCTZ hydrochlorothiazide

HHS Department of Health and Human Services

MAX Medicaid Analytic eXtract

MSIS Medicaid Statistical Information System

NDC national drug code

PACE Program of All-Inclusive Care for the Elderly

PDE Medicare Part D Prescription Drug Event

PDTS Pharmacy Data Transaction Service

POS point-of-sale

URA unit rebate amount

VA Department of Veterans Affairs

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-14-578 Comparison of Retail Reimbursement Prices

441 G St. N.W.

Washington, DC 20548

June 30, 2014

The Honorable Tom Coburn, M.D.

Ranking Member

Committee on Homeland Security and Governmental Affairs

United States Senate

Dear Dr. Coburn:

The Department of Defense (DOD), Medicaid, and Medicare Part D drug 

programs all incur substantial costs each year paying for prescription 

drugs for their beneficiaries.1 In 2011, federal spending for prescription 

drugs in these programs was a combined $71.2 billion—representing 

about 85 percent of all federal prescription drug expenditures—for 

approximately 114.4 million beneficiaries.2

 

1

DOD provides prescription drug coverage to active duty and retired military personnel, 

their dependents, and others. Medicaid is the joint federal-state financed health care 

program for certain low income individuals. Medicare Part D is an optional outpatient 

prescription drug benefit offered by Medicare—the federally financed health insurance 

program for persons aged 65 and over, individuals under age 65 with certain disabilities, 

and individuals with end-stage renal disease.

2

Total federal prescription drug expenditures for 2011 were obtained from the National 

Health Expenditures data for 2012 and include federal spending for DOD, Medicaid, 

Medicare, the Children’s Health Insurance Program, Indian Health Services, and 

Maternal/Child Health. See Centers for Medicare & Medicaid Services, Office of the 

Actuary, National Health Statistics Group, NHE Web Tables, accessed Apr. 2, 2014, 

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/Downloads/NHE2012.zip. At the time we began our 

analysis, 2011 was the most recent year for which net expenditure data were available for 

Medicaid and Medicare Part D. DOD’s share of the total spending does not include 

spending for inpatient drugs in non-DOD facilities. Medicaid’s share of the total is the 

federal portion of Medicaid’s expenditures for prescription drugs net of rebates.
 

Page 2 GAO-14-578 Comparison of Retail Reimbursement Prices

DOD, Medicaid, and Medicare Part D each reimburse retail pharmacies 

for outpatient prescriptions that beneficiaries fill at these pharmacies.3

Given the significant level of federal spending on prescription drugs, you 

requested that we compare prices paid for these drugs across federal 

programs. In this report, we compare prices paid by DOD, Medicaid, and 

Medicare Part D for a sample of prescription drugs dispensed by retail 

pharmacies to program beneficiaries, and we describe factors 

contributing to differences in these prices. Our April 2013 report 

compares direct purchase prices paid by DOD and the Department of 

Veterans Affairs (VA) for a sample of prescription drugs dispensed to 

beneficiaries through the agencies’ own facilities and mail order 

pharmacies.

Prices for prescription drugs purchased in retail pharmacies generally 

include markups by one or more intermediaries (such as wholesalers and 

distributors) as well as storage, overhead, and dispensing costs.

4

To compare prices paid by DOD, Medicaid, and Medicare Part D for 

prescription drugs beneficiaries obtained at retail pharmacies, we 

selected a sample of drugs and then calculated gross and net unit prices 

paid by the programs we reviewed. To select the sample, we obtained 

prescription drug claims data from DOD and the Centers for Medicare & 

Medicaid Services (CMS) for the third calendar quarter of 2010.5

 

3

For purposes of this report, “retail pharmacies” are pharmacies that have store-based 

retail locations that dispense medications to the public, including chain and independent 

pharmacies; outpatient pharmacies operated by hospitals, supermarkets or mass 

merchants such as Wal-Mart; and mail order pharmacies used by Medicare Part D plans. 

DOD’s mail order pharmacy and military treatment facility pharmacies are excluded from 

this report because DOD buys drugs for those pharmacies directly from manufacturers. 

For more information about DOD’s direct purchase of prescription drugs, see GAO, 

Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices, 

We then 

GAO-13-358

(Washington, D.C.: Apr. 19, 2013).

4

GAO-13-358. In some cases, VA beneficiaries can obtain drugs on a fee-for-service 

basis through non-VA facilities. These make up a very small proportion of VA drug 

expenditures (less than 1 percent in fiscal year 2010). Therefore we did not include VA in 

this report comparing prices paid to retail pharmacies.

5

We chose the third calendar quarter of 2010 as the target quarter for our analysis 

because more recent Medicaid data were not available at the time that we began our 

analysis.

CMS, an agency within the Department of Health and Human Services (HHS), oversees 

the Medicare and Medicaid programs at the federal level.
 

Page 3 GAO-14-578 Comparison of Retail Reimbursement Prices

selected drugs based on high utilization or high expenditures using DOD 

and Medicare Part D data.6

We then calculated the following program prices for the individual drugs in 

the sample, the entire sample, and each subset of brand-name drugs and 

generic drugs:

The sample we selected included the top 50 

brand-name and top 50 generic drugs based on combined utilization 

ranks and combined expenditure ranks for DOD and Medicare Part D. 

After accounting for overlap between the high utilization and high 

expenditure drugs, the final sample contained 78 drugs—33 brand-name 

and 45 generic—and accounted for at least 25 percent of utilization and 

25 percent of expenditures for both DOD and Medicare Part D retail 

prescriptions filled by beneficiaries in the third calendar quarter of 2010.

• gross unit prices paid to retail pharmacies (representing total 

program-paid plus beneficiary-paid amounts),7

• net unit prices (representing program-paid amounts minus offsetting 

rebates, refunds, and other price concessions, which we refer to in 

this report collectively as post-purchase price adjustments).

and

To determine gross unit prices we used DOD Pharmacy Data Transaction 

Service (PDTS) data on prescription drugs dispensed to DOD 

beneficiaries by non-DOD retail pharmacies, the Medicaid Analytic 

eXtract (MAX) prescription drug data file, and Medicare Part D 

 

6

Cleaned and validated Medicaid data for 2010 were not available at the time that we 

selected our sample. However, such data became available later and we were able to use 

these data to determine Medicaid gross and net unit prices.

7

For DOD, program payments are made directly by DOD. For Medicaid, program 

payments are made by each state’s Medicaid program; the federal government 

subsequently provides matching funds to the states to cover a portion of these costs. For 

Medicare Part D, program payments include payments made by the plan sponsor and 

payments made by Medicare. Because the Medicaid data we used did not include 

beneficiary-paid amounts, we were only able to determine program-paid amounts for 

Medicaid. Therefore the Medicaid gross prices we report are somewhat lower than the 

actual gross prices would have been had beneficiary-paid amounts been included. 

However, beneficiary-paid amounts for Medicaid are generally nominal and it is likely that 

they would be smaller than the corresponding amounts for DOD and Medicare Part D.
 

Page 4 GAO-14-578 Comparison of Retail Reimbursement Prices

Prescription Drug Event (PDE) claims data.8 For all three programs, we 

excluded claims with third-party payments, physician-administered 

outpatient drugs, and items that are not traditionally considered drugs 

such as bandages and syringes.9 To determine post-purchase price 

adjustments for calculating net unit prices, we used PDTS data from 

DOD; unit rebate amount (URA) and CMS-64 data from Medicaid; and 

the 2010 Direct and Indirect Remuneration (DIR) Detailed Report from 

Medicare.10

To describe factors contributing to differences in net prices paid by the 

three programs, we examined differences between the gross and net unit 

prices paid by each program. We also interviewed DOD, Medicaid, and 

Medicare Part D officials and reviewed literature describing factors that 

affect drug prices. The results of our analyses are limited to the 78 highutilization and high-expenditure drugs in our sample for the third calendar 

quarter of 2010 and are not necessarily applicable across all drugs or any 

other time periods.

We reviewed agency data for reasonableness and consistency, including 

screening for outlier prices and examining possible reasons for 

inconsistencies between the data sources. We also reviewed 

documentation and talked to agency officials about steps they take to 

ensure data reliability. We determined that the data were sufficiently 

reliable for our purposes. We conducted this performance audit from May 

 

8

PDTS is a centralized electronic database system that DOD uses to maintain prescription 

drug information from various points of service for its beneficiaries worldwide. Medicaid 

MAX files are derived from the Medicaid Statistical Information System (MSIS)—the 

reporting system where states provide Medicaid data on utilization and claims to CMS. We 

used the MAX Prescription Drug file. The Medicare Part D PDE data contain pharmacy 

claims for all prescription drugs dispensed to Medicare Part D beneficiaries.

9

For Medicaid, we also excluded (1) Arizona and Delaware because claims for those 

states did not include third-party payments, (2) claims for beneficiaries who were also 

eligible for Medicare because retail prescription drugs for those beneficiaries are covered 

by Medicare Part D, and (3) claims paid under a capitated managed care plan or similar 

approaches. For Medicare Part D, we excluded claims from plans that restrict enrollment, 

such as employer plans, Program of All-Inclusive Care for the Elderly (PACE) plans, and 

demonstration plans.

10Manufacturers are statutorily required to provide rebates (on the basis of URA data) to 

state Medicaid agencies for covered drugs (see 42 U.S.C. § 1396r-8). States may also 

negotiate supplemental rebates directly with manufacturers for drugs dispensed to 

Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a 

standardized quarterly expenditure report that states submit to CMS.
 

Page 5 GAO-14-578 Comparison of Retail Reimbursement Prices

2013 through June 2014 in accordance with generally accepted 

government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide 

a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit objectives.

See appendix I for additional details on our scope and methodology, 

including the list of drugs in our sample.

DOD, Medicaid, and Medicare Part D use different methods to pay for 

prescription drugs dispensed in retail pharmacies based on program 

design differences and statutory requirements. Specifically, DOD 

reimburses retail pharmacies directly for drugs dispensed to its 

beneficiaries, state Medicaid programs reimburse pharmacies and then 

receive federal matching funds for a portion of these expenditures, and 

Medicare Part D pays pharmacies indirectly through plan sponsors. 

Under the Medicare Part D program, beneficiaries may choose from 

competing prescription drug plans offered by plan sponsors (primarily 

private health insurers), and those plan sponsors are responsible for 

paying pharmacies. In addition, DOD and Medicaid are statutorily entitled 

to certain refunds or rebates from drug manufacturers for drugs 

dispensed to their beneficiaries, while Medicare Part D plan sponsors 

negotiate with manufacturers for rebates and other price concessions.

In fiscal year 2011, DOD provided prescription drug coverage to about 

9.7 million beneficiaries through retail pharmacies, its military treatment 

facilities, and its mail order pharmacy.11

 

11Generally, eligible beneficiaries include active duty personnel and their dependents, 

medically eligible National Guard and Reserve service members and their dependents, 

and retirees and their dependents and survivors.

Active duty service members 

(including activated National Guard and Reserve members) are not 

charged for covered prescriptions. For all other beneficiaries, the 

beneficiary-paid amount (i.e., the amount they pay to the pharmacy when 

filling a prescription) varies based on the type of medication and where 

the prescription is filled.

Background

DOD
 

Page 6 GAO-14-578 Comparison of Retail Reimbursement Prices

For certain drugs dispensed to beneficiaries at retail pharmacies after 

January 28, 2008, DOD is statutorily entitled to pay the federal ceiling 

price (FCP), which also pertains to its directly-purchased drugs.12 In 

practice, DOD obtains these prices through post-purchase refunds paid 

by the manufacturers of certain drugs—primarily brand-name drugs.13 In 

fiscal year 2011, DOD’s prescription drug spending totaled about 

$7.48 billion, according to DOD officials, representing about 8.9 percent 

of federal spending for prescription drugs.14

In fiscal year 2011, Medicaid provided prescription drug coverage to 

about 71.5 million low income beneficiaries. Prescription drug coverage is 

an optional benefit under federal Medicaid law that all states and the 

District of Columbia provide. States establish and administer their own 

Medicaid programs within broad federal guidelines. Thus, Medicaid 

programs vary from state to state. Most states require a nominal 

beneficiary copayment for prescription drugs.

State Medicaid programs reimburse retail pharmacies for drugs 

dispensed to Medicaid beneficiaries and then report these payments to 

CMS. The federal government provides matching funds to state programs 

to cover a portion of these costs. Federal law requires manufacturers to 

pay rebates to state Medicaid agencies for drugs dispensed to Medicaid 

beneficiaries.15

 

12See 10 U.S.C. § 1074g(f) (added by National Defense Authorization Act for Fiscal Year 

2008, Pub. L. No. 110-181, § 703(a), 122 Stat. 3, 188). This ensures that prescriptions for 

covered drugs dispensed to DOD beneficiaries on or after January 28, 2008, and paid for 

by DOD are subject to the pricing standards under 38 U.S.C. § 8126.

These statutorily mandated rebates are calculated based 

13Drugs covered under this provision are innovator single-source and multiple-source 

drugs marketed under an original New Drug Application from the Food and Drug 

Administration, as well as biological products. 38 U.S.C. § 8126(h)(2). DOD officials told 

us that some transactions for covered drugs, such as claims for which DOD is the second 

payer, do not generate a refund.

14Spending is net of beneficiary copayments and post-purchase refunds and includes 

drugs dispensed at DOD inpatient and clinic facilities as well as all outpatient prescriptions 

filled through DOD’s military treatment facilities, its mail order pharmacy, and non-DOD 

retail pharmacies. Of the $7.48 billion, about $3.98 billion (53.2 percent) was for 

prescription drugs that beneficiaries obtained at non-DOD retail pharmacies (i.e., paid by 

DOD via retail reimbursement).

15See 42 U.S.C. § 1396r-8. States may also negotiate supplemental rebates with 

manufacturers for Medicaid drugs.

Medicaid
 

Page 7 GAO-14-578 Comparison of Retail Reimbursement Prices

on two prices manufacturers must report to CMS—the average 

manufacturer price (AMP) and the “best price.”16

• For brand-name drugs: the rebate equals the greater of 23.1 percent 

of the AMP or the difference between the AMP and the best price. If 

the AMP rises faster than inflation as measured by the change in the 

consumer price index, the manufacturer is required to provide an 

additional rebate to the state Medicaid program. The rebate is capped 

at 100 percent of AMP.17

• For generic drugs: the rebate equals 13 percent of AMP. Best price 

is not a factor and there are no additional rebates or caps.

In addition, most state Medicaid programs negotiate additional rebates—

known as state supplemental rebates—from drug manufacturers. In fiscal 

year 2011, total federal and state Medicaid net spending on prescription 

drugs was $13.7 billion.18 The federal share was $8.6 billion, accounting 

for about 10.3 percent of federal drug expenditures.

In 2011, about 33.2 million Medicare beneficiaries were enrolled in the 

Medicare Part D program.19

 

16The AMP is the average price paid to the manufacturer by or for retail community 

pharmacies including independent or chain pharmacies and excluding, among others, 

mail-order and nursing home pharmacies. The best price is the lowest price available from 

the manufacturer to any purchaser, with some exceptions (for example, direct government 

purchasers such as VA and DOD are excluded).

Medicare beneficiaries can obtain coverage 

for outpatient prescription drugs by choosing from multiple competing 

plans offered by plan sponsors—primarily private health insurers—that 

contract with CMS to offer the prescription drug benefit. The plan 

sponsors are responsible for reimbursing retail pharmacies for drugs 

dispensed to Medicare Part D beneficiaries. Drug plans may differ in the 

premiums charged to CMS and beneficiaries; beneficiary deductibles and 

17For blood clotting factors and drugs approved exclusively for pediatric use, the 

calculation is identical to the brand-name drug calculation but uses 17.1 percent of AMP. 

The same additional rebate and cap apply.

18Total spending is the combined federal and state spending net of drug rebates that 

manufacturers paid to state Medicaid programs, which amounted to $16.1 billion.

19This represents about 68 percent of the 49 million individuals enrolled in Medicare in 

2011. 

Medicare Part D
 

Page 8 GAO-14-578 Comparison of Retail Reimbursement Prices

copayments (i.e., beneficiary-paid amounts); the drugs covered; 

pharmacies available to beneficiaries for filling prescriptions; and the drug 

prices, rebates, and other price concessions negotiated with 

manufacturers and pharmacies.

Although Medicare Part D plans can design their own formularies, CMS 

generally requires that each formulary include at least two drugs within 

each therapeutic class and has also designated six categories of clinical 

concern for which plans must cover all or substantially all of the drugs.20

As we previously reported, plan sponsors have indicated that these 

formulary requirements limit their ability to negotiate lower prices for some 

drugs.21 Medicare Part D beneficiaries fill prescriptions at retail or mail 

order pharmacies affiliated with their plans; these pharmacies then submit 

claims to the plan sponsors for reimbursement. Plan sponsors often 

negotiate point-of-sale and post-purchase rebates and other price 

concessions with manufacturers and pharmacies; these must be reported 

to CMS each year at the national drug code (NDC) level in the DIR 

reports.22 In 2011, federal spending on Medicare Part D totaled 

approximately $55.2 billion, accounting for about 65.9 percent of total 

federal drug expenditures.

 

20See 42 C.F.R. § 423.120(b)(2) (2013). A formulary is a list of medications, grouped by 

therapeutic class, that a health care system’s providers are encouraged to use when 

prescribing medications. A therapeutic class describes a group of drugs that are similar in 

chemical structure, pharmacological effect, or clinical use. Part D sponsor formularies 

must include all or substantially all drugs in the following six classes of clinical concern as 

identified by CMS: immunosuppressant (for prophylaxis of organ transplant rejection), 

antidepressant, antipsychotic, anticonvulsant, antiretroviral, and antineoplastic. Examples 

of other therapeutic classes include analgesics, blood glucose regulators, cardiovascular 

agents, dermatological agents, respiratory tract agents, and sedatives.

21See GAO, Medicare Part D: Spending, Beneficiary Cost-Sharing, and Cost-Containment 

Efforts for High-Cost Drugs Eligible for a Specialty Tier, GAO-10-242 (Washington, D.C.: 

Jan. 29, 2010), 21.

22NDCs are three-segment numbers that are the universal product identifiers for drugs. A 

drug can have multiple NDCs associated with it depending on the manufacturer, strength, 

dosage form, and package size.
 

Page 9 GAO-14-578 Comparison of Retail Reimbursement Prices

Medicaid paid a lower average net unit price—that is, the price after 

subtracting any beneficiary-paid amounts and post-purchase price 

adjustments—than DOD and Medicare Part D across the entire sample of 

78 prescription drugs and the subsets of brand-name and generic drugs. 

Specifically, Medicaid’s average net price for the entire sample was 

$0.62 per unit, while Medicare Part D paid an estimated 32 percent more 

($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit).23

 

23The actual net prices paid by Medicaid would have been even lower than the prices we 

report if we had been able to apply the state supplemental rebates. However, 

because state Medicaid programs report the amount of any supplemental rebates in 

aggregate on a quarterly basis, it is impossible to precisely apply these supplemental 

rebates to the calculation of net prices at the NDC or drug level. Therefore, we chose to 

use only statutorily mandated (i.e., URA-based) rebates when calculating net prices. We 

found that Medicaid state supplemental rebates totaled about $201 million for the 34

states included in the 2010 MAX data we used for the third calendar quarter of 2010, or 

about 4.0 percent of total Medicaid expenditures for all drugs reimbursed by those states 

in that quarter.

(See 

fig. 1.) Similarly, Medicaid’s average net price for the subset of brandname drugs in our sample was $1.57 per unit, the lowest among the three 

programs, while DOD paid 34 percent more ($2.11 per unit), and 

Medicare Part D paid an estimated 69 percent more ($2.65 per unit). 

Medicaid also paid the lowest net price for the subset of generic drugs in 

our sample ($0.28 per unit), while Medicare Part D paid 4 percent more 

($0.29 per unit) and DOD paid 50 percent more ($0.42 per unit).

The Medicare Part D net prices we calculated are estimates that could vary depending on 

how plan sponsors choose to allocate DIR to the NDC level. That is, CMS requires plan 

sponsors that do not receive or record their DIR at the NDC level to use a reasonable 

allocation methodology to allocate their DIR to the NDC level for reporting purposes. For 

example, plan sponsors may allocate their DIR based on actual drug utilization, the plan’s 

total drug expenditures, the plan’s brand-name drug expenditures, the plan’s total drug 

expenditures for drugs in the preferred brand-name tier, or any other method approved by 

CMS. Different allocation choices by the plan sponsors would produce different calculated 

net prices for Medicare Part D.

Medicaid Paid Lower 

Net Prices Than DOD 

and Medicare Part D, 

Largely Due to 

Differences in PostPurchase Price 

Adjustments
 

Page 10 GAO-14-578 Comparison of Retail Reimbursement Prices

Figure 1: Comparison of Average Net Unit Prices for the Sample Drugs, Third 

Quarter of 2010

Note: Our sample included 33 brand-name and 45 generic drugs that had high utilization or high 

expenditures for DOD and Medicare Part D in our target quarter.

a

We used only federally mandated rebates when calculating Medicaid net prices. If we had been able 

to apply state supplemental rebates, actual net prices paid by Medicaid would have been lower than 

the prices shown in the figure. We found that the state supplemental rebates, in aggregate for the 34 

states in our analysis, were equivalent to 4 percent of Medicaid expenditures for all drugs in the target 

quarter.

b

The Medicare Part D net prices we report are estimates because CMS allows Medicare Part D plan 

sponsors to use a variety of methods to allocate post-purchase price adjustments to the NDC level.

When we examined the net prices that each program paid for the 

individual drugs in the sample after subtracting all reported beneficiarypaid amounts and post-purchase price adjustments, we found that 

Medicaid paid the lowest prices for 25 brand-name and 3 generic drugs, 

while DOD paid the lowest net price for 5 brand-name and 22 generic 

drugs, and Medicare Part D paid the lowest estimated net price for 3 

brand-name and 20 generic drugs.
 

Page 11 GAO-14-578 Comparison of Retail Reimbursement Prices

We found that multiple factors affected the net prices paid by each 

program, including the amount of post-purchase price adjustments each 

program received, the gross prices paid to pharmacies, the beneficiarypaid amounts, and market dynamics. Of these, a key factor for the entire 

sample and for the brand-name subset was the amount of manufacturer 

post-purchase price adjustments received. (See fig. 2.) On average 

across the entire sample, these price adjustments ranged from about 15 

percent of the gross price for Medicare Part D to about 31 percent for 

DOD, and nearly 53 percent for Medicaid. For the brand-name subset of 

the sample, these rebates ranged from about 19 percent of the gross 

price for Medicare Part D to nearly 39 percent for DOD and 62 percent for 

Medicaid.
 

Page 12 GAO-14-578 Comparison of Retail Reimbursement Prices

Figure 2: Comparison of Average Gross Unit Prices, Beneficiary-Paid Amounts, Post-Purchase Price Adjustments, and

Average Net Unit Prices for the Sample Drugs, Third Calendar Quarter of 2010

Notes: Our sample included 33 brand-name and 45 generic drugs that had high utilization or high 

expenditures for DOD and Medicare Part D in our target quarter. The top of each stacked bar 

represents the average gross unit price paid to retail pharmacies by each program and its 

beneficiaries. Post-purchase price adjustments include DOD’s manufacturer refunds, Medicaid’s 

federally mandated rebates, and Medicare Part D rebates and other price concessions. 

a

Because the Medicaid Analytic eXtract (MAX) data do not include beneficiary-paid amounts, we were 

only able to determine program-paid amounts for Medicaid. Therefore the Medicaid gross prices we 

report are somewhat lower than the actual gross prices would have been had beneficiary-paid 

amounts been included. In addition, we used only federally mandated rebates when calculating 

Medicaid net prices. If we had been able to apply state supplemental rebates, the rebates received by 

Medicaid would have been larger and net prices paid by Medicaid would have been lower than the 

amounts shown in the figure. We found that the state supplemental rebates, in aggregate for the 34 

states in our analysis, were equivalent to 4 percent of Medicaid expenditures for all drugs in the target 

quarter.

b

The Medicare Part D post-purchase price adjustments and net price amounts we report are 

estimates because CMS allows plan sponsors to use a variety of methods to allocate post-purchase 

price adjustments to the NDC level.
 

Page 13 GAO-14-578 Comparison of Retail Reimbursement Prices

The statutory framework allowing each program to obtain post-purchase 

price adjustments contributes to the wide range of percentages observed. 

Medicaid’s federally mandated rebates apply to virtually all drugs, while 

DOD’s refunds only apply to certain drugs (i.e., primarily brand-name 

drugs). Furthermore, we found that even when DOD received a refund for 

a given drug, DOD’s per-unit refund amount was less than Medicaid’s 

per-unit rebate for most of the drugs in our sample even though we 

applied only the federally mandated (i.e., URA-based) rebates for the 

calculation of Medicaid net prices. If we had been able to accurately apply 

the Medicaid state supplemental rebates, the per-unit Medicaid rebate 

amounts would be even larger (i.e., a greater percentage of the gross unit 

price) than we report. Finally, we found that Medicare Part D obtained the 

lowest per-unit price adjustments among the three programs. In contrast 

to the statutory authority allowing DOD and Medicaid to collect specific 

refunds and rebates, Medicare Part D plan sponsors rely on independent 

negotiations to obtain price concessions from drug manufacturers. As we 

have previously reported, plan sponsors have noted limitations on their 

ability to negotiate price concessions for some drugs due to formulary 

requirements set by CMS, lack of competitors for some drugs, or low 

utilization for some drugs that limit incentives for manufacturers to provide 

price concessions.24

The gross unit prices paid to retail pharmacies by each program and the 

magnitude of beneficiary-paid amounts also contributed to the differences 

in net prices, although to a lesser degree than post-purchase price 

adjustments. As shown in figure 2, each of the three programs paid the 

lowest gross unit price to pharmacies for one of the groups of sample 

drugs: Medicare Part D for the sample as a whole, DOD for the subset of 

brand-name drugs, and Medicaid for the subset of generic drugs. These 

different gross unit prices act as a “starting point” for determining net 

prices paid by the programs—a lower gross price negotiated between the 

program and the pharmacy makes it easier for the program to achieve a 

lower net unit price after accounting for beneficiary-paid amounts and 

post-purchase price adjustments.

Beneficiary-paid amounts also affected the net prices paid by each 

program; larger beneficiary payments contributed to lower net prices paid 

by the agency. The average beneficiary-paid amounts varied across the 

 

24See GAO-10-242. 
 

Page 14 GAO-14-578 Comparison of Retail Reimbursement Prices

three programs; for example, on average for all 78 drugs in our sample, 

beneficiaries paid nearly 19 percent—or $0.23—of Medicare Part D’s 

gross price per unit, while DOD beneficiaries paid about 7 percent—or 

$0.12—of DOD’s average gross price per unit.25

Market dynamics—such as manufacturer responses to offset discounts, 

the number of competitors for a given drug, and varying utilization of 

specific drugs by different programs—can also affect the net prices paid 

by these and other drug programs and thus the amount of savings the 

programs might be able to achieve. For example, the DOD, Medicaid, and 

Medicare Part D drug programs theoretically could have achieved savings 

had they been able to pay the lowest price for each of the drugs in our 

sample through having access to the post-purchase price adjustments 

available to the program with the lowest net price for each drug. However, 

market dynamics, such as manufacturer responses, likely would offset at 

least some of the savings. Previous reports by GAO and the 

Congressional Budget Office have noted that making rebates or other 

discounts available to federal programs could provide savings for the 

newly eligible programs but could result in higher prices for other 

programs—including those already eligible for the discounts—as drug 

manufacturers respond by raising their prices to offset the change.

Beneficiary-paid 

amounts also varied depending on the category of drugs examined. For 

the subset of brand-name drugs in our sample, beneficiary-paid amounts 

ranged from 6 percent of the gross price for DOD to 17 percent for 

Medicare Part D, while for the subset of generic drugs these amounts 

ranged from 14 percent of the gross price for DOD to 21 percent for 

Medicare Part D.

26

The magnitude of these potential offsetting price increases could depend 

on a number of factors. For example, if a large federal program with many 

beneficiaries became eligible for the discounts, manufacturers might 

 

25While we only had data on beneficiary-paid amounts for two of the programs (i.e., DOD 

and Medicare Part D), beneficiary-paid amounts for Medicaid are generally nominal and it 

is likely that they would be smaller than corresponding amounts for DOD and Medicare 

Part D.

26See Congressional Budget Office, The Effect of the March Health Legislation on 

Prescription Drug Prices (Washington, D.C.: Nov. 4, 2010); GAO, Prescription 

Drugs: Expanding Access to Federal Prices Could Cause Other Price Changes, 

GAO/HEHS-00-118 (Washington, D.C.: Aug. 7, 2000); and GAO, Federal Drug Prices: 

Effects of Opening the Pharmaceutical Schedule Are Uncertain, GAO/T-HEHS-97-171

(Washington, D.C.: July 10, 1997).
 

Page 15 GAO-14-578 Comparison of Retail Reimbursement Prices

choose to raise prices by a greater amount than they would if a smaller 

program with fewer beneficiaries became eligible. Manufacturers might 

choose to raise prices more for drugs with fewer competitors than for 

drugs with many competitors. Furthermore, because federal prices are 

generally based on prices paid by nonfederal purchasers such as private 

health insurers, manufacturers would have to raise prices to those 

purchasers in order to raise the federal prices. The magnitude of these 

potential effects would vary by drug and would depend on a number of 

factors, including the relationship between the specific federal price 

extended to newly eligible programs and the price paid by nonfederal 

purchasers.

Other factors that may affect the magnitude of savings, if any, which 

could be achieved by DOD, Medicaid, and Medicare Part D include 

differences between the programs with regard to:

• programs’ formulary practices—for example, in exchange for price 

concessions, a program may offer a reduced copayment or preferred 

placement of a manufacturer’s drug in the formulary to encourage 

beneficiaries to choose that drug rather than a similar alternative. In 

addition, programs may differ in their ability to exclude certain drugs 

from their formularies, which can limit their ability to negotiate; for 

example, DOD officials told us that they must cover all drugs within a 

class. 

• number of beneficiaries enrolled—that is, a program or plan with 

more beneficiaries can generally negotiate lower gross prices with 

pharmacies and more rebates from manufacturers through offering 

greater anticipated utilization of drugs than a program with fewer 

beneficiaries.

• utilization practices based on differences in beneficiary 

populations—for example, Medicare Part D’s predominantly elderly 

population is likely to use a different mix of drugs than a program such 

as Medicaid, which serves a younger population, and these utilization 

differences can affect each program’s ability to obtain discounts on 

certain drugs based on volume.

• copayment structure—for example, one program may achieve lower 

net prices on certain drugs by charging beneficiaries a higher 

copayment for the drug.

• type of pharmacy—for example, the Medicare Part D net prices we 

are reporting include data from prescriptions filled at mail order 

pharmacies used by the plans, which typically charge the plans less 

overhead than retail store-based pharmacies, while DOD prices are 
 

Page 16 GAO-14-578 Comparison of Retail Reimbursement Prices

limited to prescriptions filled at store-based pharmacies; if the mail 

order prescriptions were excluded, the average Medicare Part D 

prices would likely be higher than those we report.27

We provided a copy of the draft report to DOD and the Department of 

Health and Human Services (HHS) for comment. DOD stated that it had 

no comments. HHS provided a technical comment, which was 

incorporated.

We will send copies of this report to relevant congressional committees 

and other interested members. The report also will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions regarding this report, please 

contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff members who made key 

contributions to this report are listed in appendix II.

Sincerely yours,

John E. Dicken

Director, Health Care

 

27Drugs dispensed through DOD’s mail order pharmacy are paid through direct purchase 

by DOD rather than through retail reimbursement. For further details on DOD’s prices for 

direct purchase drugs, see GAO-13-358. 

Agency Comments
Appendix I: Scope and Methodology

Page 17 GAO-14-578 Comparison of Retail Reimbursement Prices

In this appendix we describe our data sources, the selection of the drug 

sample, and calculations of gross and net unit prices paid by the 

Department of Defense (DOD), Medicaid, and Medicare Part D for 

prescription drugs dispensed to their beneficiaries at retail pharmacies.

We obtained prescription drug claims data from DOD and the Centers for 

Medicare & Medicaid Services (CMS) for the third calendar quarter of 

2010.1 Specifically, we obtained Pharmacy Data Transaction Service 

(PDTS) data from DOD covering prescription drugs dispensed to its 

beneficiaries by non-DOD retail pharmacies and we obtained Medicaid 

Analytic eXtract (MAX) data and Medicare Part D Prescription Drug Event 

(PDE) claims data from CMS.2 For each data source, we excluded claims 

with third-party payments; we also excluded physician-administered 

outpatient prescription drugs and items that are not traditionally 

considered drugs such as bandages, syringes, needles, diabetes test 

strips, and saline.3

 

1

We chose the third calendar quarter of 2010 as the target quarter for our analysis 

because more recent Medicaid data were not available at the time that we began our 

analysis.

For Medicaid, we excluded Arizona and Delaware 

because claims from those states did not include third-party payment 

data. We included only fee-for-service Medicaid claims because claims 

paid under a capitated managed care plan or similar methods would not 

CMS, an agency within the Department of Health and Human Services, oversees the 

Medicare and Medicaid programs at the federal level.

2

PDTS is a centralized electronic database system that DOD uses to maintain prescription 

drug information from various points of service for its beneficiaries worldwide. Medicaid 

MAX files are derived from the Medicaid Statistical Information System (MSIS)—the 

reporting system where states provide Medicaid data on utilization and claims to CMS. We 

used the MAX Prescription Drug file. Because MAX data reflect final adjustments and 

corrections, they were the most accurate Medicaid data available for our analysis. The 

2010 MAX data available at the time of our analysis contained data for 36 states; missing 

states were the District of Columbia, Idaho, Kansas, Maine, Massachusetts, Mississippi, 

Missouri, Nebraska, Nevada, New Jersey, North Dakota, Ohio, Texas, Utah, and 

Wisconsin. The Medicare Part D PDE data contain pharmacy claims for all prescription 

drugs dispensed to Medicare Part D beneficiaries. 

3

Because Medicare Part B primarily covers physician-administered outpatient drugs, we 

used Part B data to identify and exclude these drugs from our sample. However, Medicare 

Part B uses Healthcare Common Procedure Coding System (HCPCS) codes to identify 

drugs while DOD and Medicare Part D use national drug codes (NDC). Therefore, we 

used the July 2010 NDC-HCPCS Crosswalk Files for Medicare Part B to identify 

physician-administered drugs in the DOD and Part D data so we could exclude them.

Appendix I: Scope and Methodology

Data Sources
Appendix I: Scope and Methodology

Page 18 GAO-14-578 Comparison of Retail Reimbursement Prices

provide an accurate picture of drug prices actually paid.4 We also 

excluded Medicaid claims for beneficiaries who were also eligible for 

Medicare because retail prescription drugs for those beneficiaries are 

covered by Medicare Part D. We excluded Medicare Part D claims from 

plans that restrict enrollment, such as employer plans, Program of AllInclusive Care for the Elderly (PACE) plans, and demonstration plans. We 

used Red Book data from Truven Health Analytics to determine the 

brand-name or generic status of each drug.5

We reviewed agency data for reasonableness and consistency, including 

screening for outlier prices and examining possible reasons for 

inconsistencies between the data sources. We also reviewed 

documentation and talked to agency officials about steps they take to 

ensure data reliability. We determined that the data were sufficiently 

reliable for our purposes.

We determined utilization using units of each (for drugs measured in 

discrete units such as tablets, capsules, vials, or kits), milliliters (for drugs 

measured in liquid volume), and grams (for drugs measured by weight). 

When calculating expenditures, we used the sum of the programs’ 

payments for each drug plus any reported beneficiary-paid amounts 

(e.g., deductibles and copayments). Cleaned and validated Medicaid data 

for 2010 were not available at the time that we selected our sample. 

Therefore, we used only DOD and Medicare Part D data to select our 

sample. However, such data became available later and we were able to 

use these data to determine Medicaid gross and net unit prices. To select 

the highest utilization and highest expenditure drugs for the sample, 

we aggregated the utilization and expenditure data at the drug level 

(i.e., drug name, strength, and dosage form) separately for DOD and 

Medicare Part D. For example, all national drug codes (NDC) 

 

4

Under a capitated managed care plan, providers receive a fixed rate per enrollee for all 

services covered under the plan. Therefore drug claims paid under such a plan would not 

provide an accurate picture of drug prices.

5

Red Book is a drug pricing compendium with information about prices and other 

characteristics of drug products, published by Truven Health Analytics.

A brand-name drug is a drug marketed under a proprietary, trademark-protected name. 

After any patent and market exclusivity for the brand-name drug expires, other drug

companies may develop a generic equivalent—a similar drug that has the same active 

ingredient, strength, dosage form, route of administration, and intended use.

Selection of the Drug 

Sample
Appendix I: Scope and Methodology

Page 19 GAO-14-578 Comparison of Retail Reimbursement Prices

corresponding to 10 mg tablets of Lipitor reimbursed by DOD on behalf of 

its beneficiaries were aggregated and the associated utilization and 

expenditures were summed and compared to other brand-name drugs, 

while NDCs corresponding to 10 mg tablets of atorvastatin (the generic 

equivalent of Lipitor) reimbursed by DOD were aggregated separately 

and compared to other generic drugs.6

Because we encountered difficulty in identifying and removing outliers 

from the Medicare Part D PDE data due to issues with the reliability of the 

“Quantity Dispensed” field, we narrowed the drugs considered for 

inclusion in the sample by first using DOD utilization and expenditure data 

to rank the top 150 brand-name and top 150 generic drugs in each 

category (high utilization and high expenditure). We were then able to 

clean the data by identifying and removing outliers from the much smaller 

subset of PDE claims corresponding to these drugs. We ranked the 

brand-name and generic drugs based on utilization and expenditures for 

Medicare Part D. We then combined the DOD and Medicare Part D 

rankings to determine the top brand-name and generic drugs that were 

reimbursed by both agencies.

The drug sample was selected to include the top 50 brand-name and top 

50 generic drugs; 25 of the brand-name drugs and 25 of the generic 

drugs were selected on the basis of the combined DOD and Medicare 

Part D utilization ranks, and the other 25 brand-name and 25 generic 

drugs were selected on the basis of the combined DOD and Medicare 

Part D expenditure ranks. After accounting for drugs that were in both the 

high-expenditure group and the high-utilization group, the final sample 

contained 33 brand-name drugs and 45 generic drugs and accounted for 

at least 25 percent of utilization and 25 percent of expenditures for both 

DOD and Medicare Part D retail prescriptions filled by beneficiaries in the 

 

6

NDCs are three-segment numbers that are the universal product identifiers for drugs for 

human use. The Food and Drug Administration assigns the first segment of the NDC, 

which identifies the labeler (i.e., the firm that manufactures, repackages, or distributes a 

drug). The labeler assigns the second and third segments. The second segment identifies 

a specific strength, dosage form, and formulation (e.g., 20 mg capsules) and the third 

segment identifies package size and type (e.g., 100 capsules in a bottle). A drug can have 

multiple NDCs associated with it. For example, a drug made by one manufacturer, in one 

strength or dosage form, but in three package sizes, would have three NDCs where the 

first and second segments are identical and the third segment differs for each package 

size.
Appendix I: Scope and Methodology

Page 20 GAO-14-578 Comparison of Retail Reimbursement Prices

third calendar quarter of 2010 (see table 1). (See table 2 for a list of the 

drugs in the sample.)

Table 1: Percentage of Total Drug Utilization and Expenditures Included in the 

Retail Reimbursement Sample, Third Calendar Quarter of 2010

Program

Percentage of total 

drug utilization 

included in the sample

Percentage of total 

drug expenditures 

included in the sample

Department of Defense (DOD) 26 percent 32 percent

Medicare Part D 25 percent 27 percent

Source: GAO analysis of DOD and Medicare Part D data. | GAO-14-578

Note: Cleaned and validated Medicaid data for 2010 were not available at the time that we selected 

our sample. Therefore, we used only DOD and Medicare Part D data to select our sample. However, 

such data became available later and we were able to use these data to determine Medicaid gross 

and net unit prices.
Appendix I: Scope and Methodology

Page 21 GAO-14-578 Comparison of Retail Reimbursement Prices

Table 2: Retail Reimbursement Drug Sample, Third Calendar Quarter of 2010

Drug utilization rankinga Drug expenditure ranking

Drug name, strength, and dosage form

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

utilization ranks

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

expenditure ranks

33 Brand-name drugs

Actos (30 mg tablet) 27 12 17

Actos (45 mg tablet) 43 19 23

Advair Diskus 250 50 (0.25 mg/

actuation-0.05 mg/actuation, disk) 7 3 4 8 5 6 

Aricept (10 mg tablet) 21 9 12 4 3 3 

Carafate (1 gm/10 ml suspension) 5 8 5 

Celebrex (200 mg capsule) 8 23 13 6 22 13

Copaxone (20 mg/1 ml kit) 15 10 11

Crestor (10 mg tablet) 18 20 18 16 17 15

Cymbalta (60 mg capsule, delayed 

release) 15 22 16 9 14 10

Generlac (10 gm/15 ml solution) 14 6 10

Januvia (100 mg tablet) 17 24 19

Klor Con 10 (10 meq tablet, 

extended release) 32 16 20

Klor Con M20 (20 meq tablet, 

extended release) 36 19 22

Lantus (100 units/1ml solution) 34 6 18

Lantus Solostar (100 units/1 ml 

solution) 36 29 25

Lexapro (10 mg tablet) 13 24 16 19 33 20

Lexapro (20 mg tablet) 23 28 21

Lidoderm (5% patch, extended 

release) 28 32 23 14 13 12

Lipitor (10 mg tablet) 12 12 11 13 15 13

Lipitor (20 mg tablet) 9 10 9 5 8 6 

Lipitor (40 mg tablet) 17 17 15 10 11 9 

Lovaza (1 gm capsule, liquid filled) 4 14 8 

Namenda (10 mg tablet) 10 4 6 12 7 8 

Nexium (40 mg capsule, delayed 

release) 1 2 1 1 2 1 

Oxycontin (80 mg tablet, extended 

release) 42 16 22

Plavix (75 mg tablet) 3 1 2 2 1 1 
Appendix I: Scope and Methodology

Page 22 GAO-14-578 Comparison of Retail Reimbursement Prices

Drug utilization rankinga Drug expenditure ranking

Drug name, strength, and dosage form

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

utilization ranks

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

expenditure ranks

Singulair (10 mg tablet) 6 11 7 3 9 5 

Spiriva (18 mcg capsule) 20 13 14 7 4 4 

Tracleer (125 mg tablet) 22 31 21

Tricor (145 mg tablet) 31 29 23 35 28 24

Voltaren Gel (1% gel/jelly) 2 7 3 

Welchol (625 mg tablet) 22 40 25

Zetia (10 mg tablet) 19 21 19 18 18 16

45 Generic drugsb

Alendronate sodium (70 mg tablet) 49 15 25

Amlodipine besylate (5 mg tablet) 18 11 13 15 12 8 

Amlodipine besylate (10 mg tablet) 34 15 23 25 14 17

Amlodipine besylate benazepril HCL 

(5 mg-20 mg capsule) 41 23 25

APAP hydrocodone bitartrate 

(325 mg-10 mg tablet) 12 20 14 24 34 22

APAP hydrocodone bitartrate 

(500 mg-5 mg tablet) 2 9 5 

APAP hydrocodone bitartrate 

(500 mg-10 mg tablet) 26 26 25

APAP oxycodone (325 mg-5 mg 

tablet) 16 32 22

APAP oxycodone (325 mg-10 mg 

tablet) 22 39 23

APAP propoxyphene napsylate 

(650 mg-100 mg tablet) 10 24 15

Atenolol (50 mg tablet) 28 19 21

Chlorhexidine gluconate 

(0.12% liquid) 1 21 11

Fentanyl (100 mcg/1 hr patch, 

extended release) 26 11 16

Fexofenadine HCL (180 mg tablet) 14 16 13

Finasteride (5 mg tablet) 52 10 24

Fluticasone propionate 

(0.05 mg/actuation, spray) 2 6 3 

Furosemide (20 mg tablet) 24 16 19

Furosemide (40 mg tablet) 14 6 9 

Gabapentin (300 mg capsule) 6 7 6 
Appendix I: Scope and Methodology

Page 23 GAO-14-578 Comparison of Retail Reimbursement Prices

Drug utilization rankinga Drug expenditure ranking

Drug name, strength, and dosage form

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

utilization ranks

DOD 

rank

Medicare 

Part D rank

Rank after 

combining DOD and 

Medicare Part D 

expenditure ranks

Hydrochlorothiazide (HCTZ) 

(25 mg tablet) 11 10 10

Lactulose (10 gm/15 ml solution) 7 2 4 

Lansoprazole (30 mg capsule, 

delayed release) 11 17 10

Lisinopril (10 mg tablet) 17 17 15

Lisinopril (20 mg tablet) 15 13 12

Losartan potassium (50 mg tablet) 19 20 17

Losartan potassium (100 mg tablet) 18 9 8 

Losartan potassium/HCTZ (100 mg25 mg tablet) 28 29 21

Metformin HCL (500 mg tablet) 5 3 2 

Metformin HCL (1000 mg tablet) 32 18 24

Metoprolol succinate (25 mg tablet, 

extended release) 23 13 15

Metoprolol succinate (50 mg tablet, 

extended release) 12 7 6 

Metoprolol succinate (100 mg tablet, 

extended release) 20 8 10

Metoprolol tartrate (25 mg tablet) 21 14 17

Metoprolol tartrate (50 mg tablet) 25 12 18

Omeprazole (20 mg capsule, 

delayed release) 4 1 1 16 1 5 

Pantoprazole sodium (40 mg tablet, 

enteric coated) 1 3 1 

Simvastatin (20 mg tablet) 8 8 8 5 5 4 

Simvastatin (40 mg tablet) 9 4 6 4 2 2 

Simvastatin (80 mg tablet) 32 32 25

Tamsulosin HCL(0.4 mg capsule) 17 4 7 

Tramadol HCL(50 mg tablet) 3 5 2 

Valacyclovir HCL (1 gm tablet) 3 52 20

Venlafaxine HCL (75 mg capsule, 

extended release) 6 24 13

Venlafaxine HCL (150 mg capsule, 

extended release) 9 19 10

Zolpidem tartrate (10 mg tablet) 13 29 20 10 40 19

Source: GAO analysis of DOD and Medicare Part D data. | GAO-14-578
Appendix I: Scope and Methodology

Page 24 GAO-14-578 Comparison of Retail Reimbursement Prices

Notes: We excluded physician-administered outpatient drugs, over-the-counter drugs, and certain 

items such as bandages, syringes, needles, diabetes test strips, and saline. We determined drug 

utilization and expenditures by aggregating data for all national drug codes (NDC) corresponding to 

the same drug name, strength, and dosage form. Cleaned and validated Medicaid data for 2010 were 

not available at the time that we selected our sample. Therefore, we used only DOD and Medicare 

Part D data to select our sample. However, such data became available later and we were able to 

use these data to determine Medicaid gross and net unit prices.

a

We determined utilization using units of each (for drugs measured in discrete units such as tablets, 

capsules, vials, or kits), milliliters (for drugs measured in liquid volume), and grams (for drugs 

measured by weight). The use of these standards may cause certain drugs (e.g., liquids) to have a 

higher utilization rank than they would if a different method had been used.

b

Three generic drugs tied for the rank of 25 after combining DOD and Medicare Part D expenditure 

ranks. Therefore, we present data in the “Drug expenditure ranking” columns for 27 generic drugs.

After selecting the sample, we calculated gross unit prices paid to 

pharmacies by DOD, Medicaid, Medicare Part D, and their beneficiaries 

for all individual drugs.7 We calculated gross unit prices by first adding the 

program-paid and beneficiary-paid amounts for each drug, then dividing 

these expenditures by total utilization. For Medicaid, we were unable to 

include beneficiary-paid amounts because CMS does not collect these 

data. Therefore the Medicaid gross prices we report are somewhat lower 

than the actual gross prices would have been had beneficiary-paid 

amounts been included. However, beneficiary-paid amounts for Medicaid 

are generally nominal and it is likely that they would be smaller than 

corresponding amounts for DOD and Medicare Part D. We also 

calculated gross unit prices for the entire sample, the subset of brandname drugs, and the subset of generic drugs by dividing the total 

expenditures for all relevant drugs by the total utilization for those drugs.

All three programs (DOD, Medicaid, and Medicare Part D) obtain refunds, 

rebates, or other price concessions from drug manufacturers for at least 

some drugs dispensed to their beneficiaries by retail pharmacies. In order 

to more accurately calculate reimbursement prices paid to pharmacies by 

each program, we accounted for these post-purchase price adjustments

by calculating program-paid net unit prices. To calculate these prices for 

DOD, we obtained post-purchase refund data from DOD for prescription 

 

7

For DOD, program payments are made directly by DOD. For Medicaid, program 

payments are made by each state’s Medicaid program; the federal government 

subsequently provides matching funds to the states to cover a portion of these costs. For 

Medicare Part D, program payments include payments made by the plan sponsor and 

payments made by Medicare. Because the Medicaid MAX data do not include beneficiarypaid amounts, we were only able to determine program-paid amounts for Medicaid.

Calculation of Gross Unit 

Prices

Calculation of ProgramPaid Net Unit Prices
Appendix I: Scope and Methodology

Page 25 GAO-14-578 Comparison of Retail Reimbursement Prices

drugs dispensed to its beneficiaries at non-DOD retail pharmacies.8

To calculate program-paid net unit prices for Medicaid, we obtained from 

CMS the Medicaid statutory rebate data (the unit rebate amount, or URA) 

and Form CMS-64 data on aggregate Medicaid state supplemental 

rebates for our target quarter.

These refunds were subtracted from the NDC-level gross unit prices to 

determine net unit prices paid by DOD for each NDC. We then 

aggregated these net NDC-level prices as appropriate to determine 

average net unit prices for each individual drug in our sample, for the 

entire sample, for the subset of brand-name drugs, and for the subset of 

generic drugs.

9 Medicaid URA data were obtained at the 

NDC level. However, because state Medicaid programs report the 

amount of any supplemental rebates in aggregate on a quarterly basis, it 

is impossible to precisely apply these supplemental rebates to the 

calculation of net prices at the NDC or drug level. Therefore, we 

estimated Medicaid’s net prices using only the statutorily mandated 

rebates.10

 

8

For certain drugs dispensed to beneficiaries under its retail pharmacy program, DOD is 

entitled to pay the federal ceiling price (FCP) which also pertains to its directly-purchased 

drugs. See 10 U.S.C. § 1074g(f) (added by National Defense Authorization Act for Fiscal 

Year 2008, Pub. L. No. 110-181, § 703(a), 122 Stat. 3, 188). This ensures that 

prescriptions for covered drugs dispensed to DOD beneficiaries on or after January 28, 

2008, and paid for by DOD are subject to the pricing standards under 38 U.S.C. § 8126 

(h)(2). Drugs covered under this provision are innovator single source and multiple source 

drugs marketed under an original New Drug Application from the Food and Drug 

Administration as well as biological products. In practice, DOD obtains these prices 

through post-purchase refunds paid by drug manufacturers. The refund amounts are 

calculated as the difference between the non-federal average manufacturer price (nonFAMP) and the FCP. DOD officials told us that some transactions for covered drugs, such 

as claims for which DOD is the second payer, do not generate a refund.

To do this, we subtracted the NDC-level URA from the gross 

unit price for each NDC to calculate a net unit price, then aggregated the 

results for the appropriate NDCs to determine average net unit prices for 

9

Manufacturers are required to provide rebates (which are calculated on the basis of URA 

data) to state Medicaid agencies for covered drugs. See 42 U.S.C. § 1396r-8. States may 

also negotiate supplemental rebates directly with manufacturers for drugs dispensed to 

Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a 

standardized quarterly expenditure report that states submit to CMS documenting 

payments and rebates or offsets in various medical categories, including prescription 

drugs, to obtain federal matching funds to which states are entitled.

10Medicaid state supplemental rebates, in aggregate across all drugs for the 34 states in 

our analysis, totaled nearly $201 million in the third calendar quarter of 2010, or about 4.0 

percent of total Medicaid expenditures in that quarter.
Appendix I: Scope and Methodology

Page 26 GAO-14-578 Comparison of Retail Reimbursement Prices

each individual drug in our sample, for the entire sample, for the subset of 

brand-name drugs, and for the subset of generic drugs.

For Medicare Part D, plan sponsors may negotiate rebates and other 

price concessions from manufacturers for drugs dispensed to their 

beneficiaries. Beginning in 2010, the annual total of all such price 

concessions at the NDC level must be reported to CMS on the annual 

Medicare Part D Direct and Indirect Remuneration (DIR) Detailed 

Report.11 However, because plan sponsors have several options for 

allocating DIR to the NDC level, calculation of the net drug price using the 

NDC-level DIR data provides only an estimate of the net prices paid by 

plan sponsors.12 We also evaluated the impact of point-of-sale (POS) 

rebates as reported in the PDE data to our calculation of net prices for 

Medicare Part D and determined that POS rebates were insignificant in 

comparison to DIR amounts; we therefore ignored POS rebates in our 

calculation of net prices.13

To estimate program-paid net prices for Medicare Part D, we obtained the 

2010 DIR Detailed Report from CMS. To calculate the total DIR for each 

 

11The annual Medicare Part D DIR Detailed Report includes discounts, chargebacks or 

rebates, cash discounts, free goods contingent on a purchase agreement, up-front 

payments, coupons, goods in kind, free or reduced price services, grants, and other price 

concessions or similar benefits from any source, including manufacturers, pharmacies, 

enrollees, or any other person, that decrease costs incurred by the Part D plan sponsor for 

the drug.

12Plan sponsors might not receive or record their DIR at the NDC level; however, CMS 

requires that plan sponsors in this situation use a reasonable allocation methodology to 

allocate DIR to the NDC level for DIR reporting purposes. For example, plan sponsors 

may allocate DIR based on actual drug utilization, the plan’s total drug expenditures, the 

plan’s brand-name drug expenditures, the plan’s total drug expenditures for drugs in the 

preferred brand-name tier, or any other method approved by CMS. Therefore, the 

Medicare Part D net prices we calculated are estimates that could vary if plan sponsors 

made different allocation choices from the options approved by CMS.

13POS rebates have already been subtracted in determining gross drug prices as reported 

in the PDE data. However, these POS rebates are also included in the DIR totals reported 

in the DIR Detailed Report. Therefore, if the total DIR amount is subtracted from the gross 

drug price in order to calculate the net price, POS rebates will be subtracted twice. 

However, in reviewing available POS data, we concluded that these POS rebates were 

insignificant and could be ignored for purposes of our analysis. Specifically, we found that 

only two Part D plans (out of 3,982 plans included in our analysis) reported POS rebates 

to CMS in the PDE data for 2010. In total, these two plans reported about $639,000 in 

POS rebates in 2010; this represents less than 0.01 percent of the $8.7 billion in DIR 

reported for that year.
Appendix I: Scope and Methodology

Page 27 GAO-14-578 Comparison of Retail Reimbursement Prices

NDC, we added the “rebate” and “all_other_dir” variables. Because the 

DIR report includes annual—rather than quarterly—data on price 

concessions, we estimated the proportion of Medicare Part D price 

concessions applicable to our sample by determining the proportion of 

2010 expenditures that occurred in the third calendar quarter for each 

NDC in our sample. We multiplied this result by the total amount of price 

concessions reported in the 2010 DIR Detailed Report for a given NDC to 

estimate the proportion of each NDC’s DIR (in dollars) to apply to our 

analysis. We divided this result by the NDC-level utilization and 

subtracted the resulting per-unit price concession amount from the 

Medicare Part D gross unit price for that NDC. We then aggregated the 

results for the appropriate NDCs to determine average net unit prices for 

the entire sample, the subset of brand-name drugs, and the subset of 

generic drugs.

We interviewed DOD and CMS officials and reviewed literature describing 

factors that affect drug prices. The results of our analyses are limited to 

the 78 high-utilization and high-expenditure drugs in our sample for the 

third calendar quarter of 2010 and are not necessarily applicable across 

all drugs or any other time periods.
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 28 GAO-14-578 Comparison of Retail Reimbursement Prices

John E. Dicken, (202) 512-7114 or dickenj@gao.gov

In addition to the contact named above, key contributors to this report 

were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard; 

Laurie Pachter; and Carmen Rivera-Lowitt.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(291122)
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