CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

JUNE 2005

Prices for

Brand-Name

Drugs Under

Selected Federal

Programs

CBO

© Royalty-free/Corbis

The Congress of the United States O Congressional Budget Office

CBO

Prices for Brand-Name Drugs

Under Selected Federal Programs

June 2005

A

PAPER

Preface

Federal and state governments are large purchasers of pharmaceuticals, accounting for 

over 20 percent of total U.S. expenditures for outpatient prescription drugs in 2003. Across 

government programs, drug prices can vary considerably. The prices that federal and state 

governments pay for drugs are determined by a combination of statutory rebates or discounts, 

supplemented by negotiations with drug manufacturers.

This Congressional Budget Office (CBO) paper, prepared at the request of the Senate Majority Leader, describes the processes by which drug prices paid to manufacturers (and, in some 

cases, to wholesale distributors) are determined and the relative average prices that result 

under many federal programs. In keeping with CBO’s mandate to provide objective, nonpartisan analysis, this paper makes no recommendations.

Julie Somers of CBO’s Microeconomic Studies Division and Anna Cook of CBO’s Health 

and Human Resources Division prepared the paper under the supervision of Roger Hitchner, 

David Moore, Bruce Vavrichek, and James Baumgardner. (Roger Hitchner has since left 

CBO.) Colin Baker analyzed rebates under the Medicaid program. James Bell and Susan 

Labovich assisted with data analysis. Tom Bradley served as CBO’s internal reviewer. Information and data were provided by the Department of Veterans Affairs, the Department of 

Defense, and the Centers for Medicare & Medicaid Services. Julia Christensen, Philip Ellis, 

Tim Gronniger, Arlene Holen, Robert Murphy, Sam Papenfuss, Allison Percy, Eric Rollins, 

Frank Russek, and Shinobu Suzuki, all of CBO, provided thoughtful comments on drafts, as 

did Joseph Antos of the American Enterprise Institute for Public Policy Research and John R. 

Nowak, RPh, of the Department of Veterans Affairs’ Pharmacy Benefits Management Strategic Healthcare Group. (The assistance of external reviewers implies no responsibility for the 

final product, which rests solely with CBO.) 

Christine Bogusz edited the paper, and Janey Cohen proofread it. Maureen Costantino 

designed the cover and Figure 2 and prepared the paper for publication. Lenny Skutnik 

printed copies of the paper, and Annette Kalicki and Simone Thomas produced the electronic 

version for CBO’s Web site (www.cbo.gov). 

Douglas Holtz-Eakin

Director

June 2005

Summary and Introduction 1

Direct Federal Purchasers 5

Federal Supply Schedule for Pharmaceuticals

Program 6

The “Big Four” Federal Ceiling Price Program 8

Department of Veterans Affairs 9

Department of Defense 9

Medicaid Rebate Program 10

The Public Health Service’s 340B Drug Pricing Program 12

Conclusion 12

Appendix A: Data Used in This Analysis 13

Appendix B: Methodology of This Analysis 15

CONTENTS
vi PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

Table

1. Description and Estimates of Prices Paid to Manufacturers, Relative to

List Price, for Brand-Name Drugs Under Selected Federal

Programs, 2003 4

Figures

1. Estimated Prices Paid to Manufacturers, Relative to List Price, for

Brand-Name Drugs Under Selected Federal Programs, 2003 3

2. How Prices Paid to Manufacturers for Brand-Name Drugs Are

Determined Under Selected Federal Programs 7

Box

1. An Analysis of Drug Pricing, Not Drug Spending 2
Prices for Brand-Name Drugs

Under Selected Federal Programs

Summary and Introduction

Purchases of pharmaceuticals by federal and state governments accounted for over 20 percent of total U.S. expenditures for outpatient prescription drugs in 2003.1

 Because the prices that federal and state governments pay 

for drugs are determined by a variety of statutory rebates 

or discounts, supplemented by negotiations with drug 

manufacturers, drug prices can differ considerably across 

government programs.

This Congressional Budget Office (CBO) paper describes 

the processes by which prices paid to manufacturers (and, 

in some cases, to wholesale distributors) are determined 

and the relative average prices that result under the following federal programs:

B The Federal Supply Schedule (FSS) for pharmaceuticals, which is available to all direct federal purchasers;2

B The federal ceiling price (FCP) program, which is 

available to the Department of Veterans Affairs (VA), 

the Department of Defense (DoD), the Public Health 

Service (PHS), and the Coast Guard;

B The Department of Veterans Affairs’ pharmaceutical 

prime vendor program;

B The Department of Defense’s TRICARE pharmaceutical program;

B The Medicaid rebate program; and

B The Public Health Service’s 340B drug pricing program.

The Medicare program, currently in transition with the 

implementation of changes required under the Medicare 

Prescription Drug, Improvement, and Modernization Act 

of 2003 (MMA), is not included in the discussion.3

CBO estimated the average price paid to manufacturers 

(and, in some cases, to wholesale distributors) under 

those federal programs in 2003 for a sample of topselling brand-name prescription drugs relative to the list 

price (in this paper, the average wholesale price, or AWP), 

based on the quantities of those drugs sold in the United 

States. The sample includes 130 drugs that accounted for 

about 50 percent of U.S. sales through retail pharmacies 

and about 70 percent of U.S. sales of brand-name drugs 

through retail pharmacies in 2003.4

 The analysis is restricted to single-source drugs (brand-name drugs still 

under patent protection) for which purchasers do not 

have access to generic alternatives.

1. Centers for Medicare & Medicaid Services, Office of the Actuary, 

National Health Statistics Group, “Table 3: National Health 

Expenditures, by Source of Funds and Type of Expenditure: 

Selected Calendar Years 1998-2003,” available at www.cms.

hhs.gov/statistics/nhe/historical/t3.asp.

2. This paper uses the term “direct federal purchasers” to refer to federal agencies that buy drugs from wholesale distributors or from 

manufacturers and that provide their own dispensing services.

3. The Federal Employees Health Benefits (FEHB) program also is 

not included in the discussion. For an analysis of discounts negotiated by pharmacy benefit managers on behalf of FEHB plans, see 

General Accounting Office, Pharmacy Benefit Managers: FEHBP 

Plans Satisfied with Savings and Services, but Retail Pharmacies 

Have Concerns, GAO/HEHS-97-47 (February 1997).

4. Based on 2003 data from IMS Health’s National Sales Perspectives. In this paper, a brand-name drug is defined by its trade 

name (for example, Lipitor), and a brand-name drug product is 

defined by its trade name, strength, and dosage form (for example, 

Lipitor 10 mg tablet). The analysis includes about 330 different 

brand-name drug products. See Appendix A for a description of 

the drug price data sets CBO used and Appendix B for an explanation of the price index methodology used to compare average 

program prices relative to list price.
2 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

The prices paid to manufacturers for brand-name drugs 

are only one of several factors that determine total drug 

spending. The cost of dispensing the drug to the patient, 

the savings generated from the use of generic drugs, and 

other important factors that also affect total drug spending are summarized in Box 1. Those factors, although important, have not been included in this analysis.

The prices paid to manufacturers vary substantially across 

government programs (see Figure 1). CBO estimates that 

the average prices for single-source brand-name prescription drugs for the third quarter of calendar year 2003 

range from 53 percent of the list price in the case of the 

Federal Supply Schedule to 41 percent of the list price in 

the case of DoD.5

The relationships among the prices reported in this paper 

are likely to hold only under current regulations and market conditions. Future changes in pricing regulations 

would be likely to change the relationships among those 

prices. That is because the price charged to any one purchaser for a particular drug represents strategic decisions 

on the part of the manufacturer, and that price would be 

likely to change if it was extended to other purchasers 

through regulation. For example, when prices from the 

Federal Supply Schedule for pharmaceuticals program 

were included in the calculation of Medicaid’s best prices 

(used to calculate Medicaid rebates), FSS prices rose. 

Moreover, the relationships do not apply to every drug. 

Box 1.

An Analysis of Drug Pricing, Not Drug Spending

Drug pricing, as examined in this paper, differs from 

drug spending in several ways. First, the prices paid 

to manufacturers for single-source brand-name prescription drugs under selected federal programs do 

not reflect the final cost of dispensing the drug to the 

patient. In the Medicaid program, for example, the 

Medicaid net manufacturer price, or the net price 

that manufacturers receive for Medicaid sales—the 

average manufacturer price (AMP) minus the Medicaid rebate—averages about 51 percent of the average wholesale price (AWP). For further details, see 

Table 1 and Figure 1 in the main text. However, the 

net final price to Medicaid—that is, the payments to 

pharmacies minus rebates from manufacturers—averages about 64 percent of the AWP. The difference 

between those two prices (13 percentage points) is 

the amount retained by pharmacies and wholesale 

distributors, who may use it to cover the costs involved in operating a pharmacy or warehouse, including distribution and dispensing costs, as well as 

payments to owners or stockholders.1,2

Second, the sample of brand-name drugs examined 

in this paper is based on national consumption patterns and does not necessarily reflect purchases made 

under federal programs.3

 This approach does not 

capture important cost containment strategies used 

by federal purchasers. For example, through the use 

of drug formularies, certain purchasers, such as the 

Department of Veterans Affairs and the Department 

of Defense, attempt to steer utilization toward those 

brand-name drugs for which they get better prices. 

Most federal programs also encourage the use of generic drugs, when available. 

Other factors that affect drug spending over time 

and that are not included in this analysis are changes 

in program participation and utilization rates and 

the introduction of new drugs on the market.

1. For an analysis of the difference between the total amount 

that state Medicaid agencies paid to pharmacies and the 

amount that pharmacies and wholesalers paid to purchase 

the drugs from manufacturers, see Congressional Budget 

Office, Medicaid’s Reimbursements to Pharmacies for Prescription Drugs (December 2004).

2. Direct federal purchasers usually dispense drugs within their 

own facilities, the cost of which is not reflected in this

analysis. 

3. The sample is restricted to top-selling brand-name drugs for 

which no generic substitutes are available, weighted by the 

total number of tablets and capsules sold in the United 

States (see Appendix B for further details). 

5. Results for other quarters in calendar year 2003 are similar.
PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 3

Figure 1.

Estimated Prices Paid to Manufacturers, Relative to List Price, for Brand-Name 

Drugs Under Selected Federal Programs, 2003

(Percent)

Source: Congressional Budget Office.

Notes: In this analysis, the list price is the average wholesale price.

The first three bars in the figure are manufacturer-reported private-sector prices.

The study sample includes 130 single-source brand-name prescription drugs that accounted for about 50 percent of U.S. sales through 

retail pharmacies and about 70 percent of U.S. sales of brand-name drugs through retail pharmacies in 2003. The estimates of average 

price are based on the quantities of those drugs sold in the United States and, with the exception of the federal ceiling price (FCP), are 

for the third quarter of 2003. (The FCP is calculated annually, so the estimate of average price is for calendar year 2003.) Results for 

other quarters in 2003 are similar. Prices exclude dispensing costs (see Box 1). 

The “Big Four” are the four largest federal purchasers of pharmaceuticals: the Department of Veterans Affairs (VA), the Department of 

Defense (DoD), the Public Health Service, and the Coast Guard.

For instance, although the FSS price is lower relative to 

the AWP than the best price, on average, the FSS price is 

higher than the best price for about one-fifth of the drugs 

examined in this analysis.

The AWP is a publicly available, suggested list price for 

sales of a drug by a wholesaler to a pharmacy or other 

provider; it is reported in publications such as Thomson 

Micromedex’s Red Book and First DataBank’s Blue Book. 

However, the AWP is not the actual price that wholesalers 

charge but is more like a sticker price in the automobile 

industry. 

The AWP was chosen as the main price reference for this 

paper because it is frequently used to set payment rates in 

pharmaceutical transactions. For example, state Medicaid 

agencies, pharmacy benefit managers, and other thirdparty payers frequently use the AWP to set payment rates 

to retail pharmacies for providing single-source brandname drugs to their beneficiaries. In addition, studies 

have reported savings from the Medicare drug discount 

DoD's Military Treatment Facility Average Price

VA Average Price

Price Available to the "Big Four"

Federal Ceiling Price

340B Ceiling Price

Medicaid Net Manufacturer Price

Federal Supply Schedule Price

Best Price

Nonfederal Average Manufacturer Price

Average Manufacturer Price

0 10 20 30 40 50 60 70 80 90 100
4 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

Table 1.

Description and Estimates of Prices Paid to Manufacturers, Relative to

List Price, for Brand-Name Drugs Under Selected Federal Programs, 2003

Continued

Average Price

as a Percentage

Price Description of Price and Associated Federal Program of List Price

Average Wholesale Price (AWP) The AWP is a publicly available, suggested list price for sales of a drug by a wholesaler to a 

pharmacy or other provider. It is not the actual price that wholesalers charge but serves 

more like a sticker price in the automobile industry. It was chosen as the reference price for 

this analysis because it is commonly used in pharmaceutical transactions. 

100

Average Manufacturer Price (AMP) The AMP is used to calculate the rebates that manufacturers are required to give to federal 

and state governments for sales to Medicaid beneficiaries. The AMP is the average price paid 

to a manufacturer for drugs distributed through retail and mail-order pharmacies. The AMP 

does not include rebates paid by the manufacturer to third-party payers. Both the AMP and 

the nonfederal average manufacturer price exclude sales to direct federal purchasers.

79

Nonfederal Average Manufacturer 

Price (Non-FAMP)

The non-FAMP is used to calculate the maximum price that manufacturers can charge the "Big 

Four"---the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public 

Health Service (PHS), and the Coast Guard---for brand-name drugs. The non-FAMP is the 

average price paid to the manufacturer by wholesalers (or others who purchase directly from 

the manufacturer) for drugs distributed to nonfederal purchasers, taking into account any 

cash discounts or similar price reductions given to those purchasers but not taking into 

account any prices paid by the federal government. The non-FAMP does not reflect rebates 

paid by the manufacturer to third-party payers. 

79

Best Price The best price is used to calculate the rebates that manufacturers are required to give to 

federal and state governments for sales to Medicaid beneficiaries. The best price is the 

lowest price paid by any private-sector purchaser for the drug product, and it includes 

discounts, rebates, chargebacks, and other pricing adjustments.

63

Federal Supply Schedule (FSS) Price All direct federal purchasers of pharmaceuticals can purchase drugs at prices listed in the 

Federal Supply Schedule for pharmaceuticals (FSS prices). The VA negotiates FSS prices with 

manufacturers on the basis of the prices that manufacturers charge their most-favored 

commercial customers under comparable terms and conditions. Furthermore, during a 

multiyear contract period, those FSS prices may not increase faster than inflation. 

53

Medicaid Net Manufacturer Price The Omnibus Budget Reconciliation Act of 1990 requires manufacturers to pay a rebate to the 

Medicaid program. For brand-name drugs, the basic rebate is equal to the greater of 15.1 

percent of the AMP or the difference between the AMP and the best price. There is an 

additional rebate if the AMP rises faster than inflation. The Medicaid net manufacturer price is 

the AMP minus all rebates.

51

340B Ceiling Price Section 340B of the Public Health Service Act of 1992 extends the Medicaid drug rebate 

program to PHS-funded clinics and disproportionate share hospitals. Eligible entities are free 

to negotiate steeper discounts than the Medicaid rebate amount. Not all eligible entities choose 

to participate in the program, however. 

51
PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 5

Table 1.

Continued

Source: Congressional Budget Office.

Notes: In this analysis, the list price is the average wholesale price.

The study sample includes 130 single-source brand-name prescription drugs that accounted for about 50 percent of U.S. sales through 

retail pharmacies and about 70 percent of U.S. sales of brand-name drugs through retail pharmacies in 2003. The estimates of average 

price are based on the quantities of those drugs sold in the United States and, with the exception of the FCP, are for the third quarter 

of 2003. (The FCP is calculated annually, so the estimate of average price is for calendar year 2003.) Results for other quarters in 2003 

are similar. Prices exclude dispensing costs (see Box 1 on page 2).

card program (which began June 1, 2004) in terms of 

percentage discounts off of the AWP.6

 Finally, pharmacies 

often use the AWP as a basis for pricing prescriptions to 

cash-paying customers. Therefore, the prices that manufacturers and wholesale distributors charge for brandname prescription drugs under federal programs are expressed in Table 1 and described in the text below as a 

percentage of the AWP.

Direct Federal Purchasers

The federal government seeks to obtain prices that are 

equal to or lower than the lowest prices paid for drugs in 

the private marketplace. Depending on the program, the 

government has various measures of “lowest price.” In 

general, manufacturers are required to report to the fedAverage Price

as a Percentage

Price Description of Price and Associated Federal Program of List Price

Federal Ceiling Price (FCP) The FCP is the maximum price that manufacturers can charge the Big Four for brand-name 

drugs. It is calculated annually. In the first year of an FSS contract, the FCP equals 76 

percent of the previous fiscal year's non-FAMP minus an additional discount if the non-FAMP 

rises faster than inflation. In subsequent years of a multiyear contract, the FCP also cannot 

exceed the previous year's FSS price, increased by inflation. 

50

Price Available to the Big Four Under the federal ceiling price program, the Big Four purchase brand-name drugs at a price 

that cannot exceed the FCP. About two-thirds of the brand-name drug products on the FSS 

have one FSS price (which cannot exceed the FCP). The remaining one-third of the brandname drug products have both an FSS price, offered to all non-Big Four purchasers, and an 

FSS Big 4 price, offered to the Big Four. The price available to the Big Four is the FSS Big 4 

price when it exists and is the FSS price offered to all federal purchasers otherwise.

49

VA Average Price The VA average price for a drug may be lower than the price available to the Big Four 

because VA negotiates further price reductions using its preferred formulary. The VA average 

price takes into account all the various pricing schedules and contracts under which VA 

purchases drugs, and it includes discounts from the prime vendor that averaged about 3 

percent of the contract price in 2003, or about 1.4 percent of the AWP.

42

DoD's Military Treatment Facility 

(MTF) Average Price

The DoD military treatment facility average price for a drug may be lower than the price 

available to the Big Four because DoD negotiates further price reductions using its preferred 

formularies. The MTF average price takes into account all the various pricing schedules and 

contracts under which DoD purchases drugs. 

41

6. The AWP also had been used in the Medicare program to calculate payment rates for drug products administered in a physician’s 

office (under Medicare Part B), but the MMA began basing payment for drugs covered under Part B on average sales price (ASP) 

on January 1, 2005. ASP as defined for the Medicare Part B program is the manufacturer’s average price to all nonfederal purchasers in the United States. It includes all volume discounts, promptpay discounts, cash discounts, free goods that are contingent on 

any purchase requirement, chargebacks, and rebates (other than 

rebates under the Medicaid drug rebate program).
6 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

eral government their average price and their lowest price 

charged to all nonfederal customers or to some subset of 

nonfederal customers (see Figure 2). The Medicaid rebate 

program’s average manufacturer price (AMP) and the federal ceiling price program’s nonfederal average manufacturer price (non-FAMP) are manufacturer-reported average prices; the Medicaid rebate program’s best price and 

the Federal Supply Schedule program’s most-favored 

commercial (MFC) customer price are manufacturerreported lowest prices. The exact definition of the average 

price and the lowest price varies somewhat depending on 

the program. (Those distinctions will be described in 

more detail below.) The programs may then require that 

manufacturers offer their lowest price or deduct some 

statutory discount or rebate from the average price, as 

shown in Figure 2.

In some instances, the price with statutory discounts or 

rebates serves as a starting point for additional negotiations between federal purchasers or their representatives 

and pharmaceutical manufacturers. Drug manufacturers 

are willing to negotiate with government purchasers for a 

variety of reasons related to the extent to which price concessions are expected to increase sales volume, the ability 

of federal purchasers to consolidate purchasing and reduce manufacturers’ transaction costs, and the influence 

of the federal programs on other purchasers in the

market.

Federal Supply Schedule for Pharmaceuticals

Program

FSS Price Relative to the AWP: 53 Percent

For federal purchasers, the Federal Supply Schedule for 

pharmaceuticals program is intended to obtain or beat 

the lowest prices negotiated for brand-name drugs between manufacturers and their most-favored commercial 

customers under comparable terms and conditions. The 

Department of Veterans Affairs negotiates FSS contracts 

with drug manufacturers to establish prices available to all 

direct federal purchasers of pharmaceuticals (including 

VA, DoD, the Public Health Service, the Bureau of Prisons, other federal agencies and institutions, the District 

of Columbia, U.S. territorial governments, and many Indian Tribal governments). Those prices are commonly referred to as FSS prices. The FSS price lists are publicly 

available.

Under the Veterans Health Care Act of 1992, drug manufacturers must list their brand-name drugs on the FSS to 

receive payment for the purchase of drugs by federal 

agencies and under the Medicaid program.7 Those FSS 

prices for brand-name drugs must be no greater than the 

prices manufacturers charge their most-favored commercial customers under comparable terms and conditions.8

Furthermore, during a multiyear contract period, those 

FSS prices may not increase faster than inflation (as measured by the consumer price index for all urban consumers, or CPI-U).9,10

In fiscal year 2003, sales under FSS contracts totaled 

about $4.5 billion for brand-name drugs and about $0.3 

billion for generic drugs.11 For single-source brand-name 

prescription drugs, CBO estimates that the FSS is about 

53 percent of the AWP, on average.12 That amount is 

about 10 percentage points less than the Medicaid rebate 

program’s best price, which is defined as the lowest price 

paid by any private-sector purchaser. One reason that VA 

may be able to obtain such low FSS prices is that manufacturers may elect to extend federal ceiling prices to all 

federal purchasers. Also, whereas FSS prices have an inflation-adjustment mechanism, best prices do not. 

7. Public Law 102-585, 38 U.S.C. 8126(a)(4).

8. 48 C.F.R. 538.270.

9. 38 U.S.C. 8126(d). In some cases, the FSS contract price can differ from the price in the FSS price list, for reasons such as temporary price reductions. In those cases, this provision applies to the 

FSS contract price. For simplicity, the discussion that follows does 

not distinguish between the FSS price and the FSS contract price.

10. During a multiyear contract period, an FSS price may decrease if 

prices charged to the most-favored commercial customers on 

which the contract award was predicated decrease. (See 48 C.F.R. 

552.238-75.)

11. E-mail from the VA’s National Acquisition Center, April 8, 2005. 

12. The Government Accountability Office (formerly the General 

Accounting Office) found FSS prices to be about 42 percent to 50 

percent of the AWP. See General Accounting Office, VA and DoD 

Health Care: Factors Contributing to Reduced Pharmacy Costs and 

Continuing Challenges, GAO-02-969T (July 22, 2002), Table 1, p. 

5.

A different study found FSS prices to be about 52 percent of the 

AWP for a sample of 172 commonly used brand-name and 

generic drug products in the fourth quarter of 2000. See Public 

Health Institute, Pharmaceuticals & Indigent Care Program, 

Pharmaceutical Discounts Under Federal Law: State Program 

Opportunities (Oakland, Calif.: PHI, May 2001), Table 3, footnote 6, p. 9; and phone call with Dr. Steven Schondelmeyer of the 

PRIME Institute at the University of Minnesota on October 5, 

2004.
PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 7

Figure 2.

How Prices Paid to Manufacturers for Brand-Name Drugs Are Determined Under 

Selected Federal Programs

\

Source: Congressional Budget Office.

Notes: Pricing provisions depicted are for prices paid to manufacturers for brand-name prescription drugs and do not include distribution and dispensing costs 

(see Box 1 on page 2).

AMP = average manufacturer price; non-FAMP = nonfederal average manufacturer price; FCP = federal ceiling price; MFC = most-favored commercial customer price; FSS = Federal Supply Schedule price; DoD = Department of Defense; VA = Department of Veterans Affairs.

a. The Medicaid net manufacturer price is also available to 340B-eligible entities.

b. The Medicaid net manufacturer price includes an additional rebate when the AMP rises faster than inflation.

c. States have faced legal challenges from manufacturers for pursuing additional price reductions.

d. The FCP includes an additional discount when the non-FAMP rises faster than inflation.

e. In the second and subsequent years of a multiyear contract, the FCP also cannot exceed the previous year’s FSS price, increased by inflation.

f. During a multiyear contract period, FSS prices may not increase faster than inflation.

g. The “Big Four” are the four largest federal purchasers of pharmaceuticals: the Department of Veterans Affairs, the Department of Defense, the Public 

Health Service (including the Indian Health Service), and the Coast Guard.

h. In general, a formulary is a list of drugs selected by a panel of physicians and pharmacists on the basis of an evaluation of their therapeutic merits, safety, 

and cost relative to other drugs in the same therapeutic class.

Medicaid Direct Federal Purchasers

Average

Lowest

Manufacturer-Reported

Private-Sector Prices

Types of Discounts

Prices with

Statutory Discounts

Types of Discounts

AMP Non-FAMP

Best Price

Prices with

Statutory Discounts

Basic Rebate =

Maximum of

15.1 Percent of AMP

or

AMP Minus Best Price

FSS = Negotiated Price

Based on the MFC,

Available to All

Federal Purchasersf

MFC

FCP = 76 Percent of

Non-FAMP Minus

Additional Discountd, e

Medicaid Net

Manufacturer Pricea =

AMP Minus Basic Rebate

Minus Additional Rebateb

Price Available to the

“Big Four”g =

Minimum of

FCP or FSS

Further Negotiations

Some states currently

pursue additional price

reductions by using

prior-authorization

programs.c

DoD and VA obtain

further price reductions

using their preferred

formularies.h
8 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

Furthermore, VA may be able to lower FSS prices 

through negotiations with manufacturers.

The “Big Four” Federal Ceiling Price Program

Under the Veterans Health Care Act of 1992, the Congress also established a separate brand-name drug discount program for the four largest—the Big Four—federal purchasers of pharmaceuticals: VA, DoD, PHS 

(including the Indian Health Service), and the Coast 

Guard.13 The Big Four account for more than 95 percent 

of purchases made under FSS contracts. The law sets a 

cap on the prices that manufacturers can charge the four 

agencies based on a measure of average manufacturer 

prices and inflation. The price to the Big Four for a 

brand-name drug is the lower of the FSS price or the cap 

(see Figure 2).

Nonfederal Average Manufacturer Price Relative to the 

AWP: 79 Percent

The nonfederal average manufacturer price is the average 

price paid to a manufacturer by wholesalers (or by others 

who purchase directly from the manufacturer) for drugs 

distributed to nonfederal purchasers. It is the measure of 

the average manufacturer price used to set the cap. It 

takes into account any cash discounts or similar price reductions but excludes any prices paid by the federal government or any prices found by the Secretary of the VA to 

be merely “nominal” in amount. (For example, manufacturers sometimes establish such nominal prices for drugs 

provided to charities or other not-for-profit entities.) In 

practice, the only cash discounts or similar price reductions taken into account are those given to the wholesale 

distributor (or to others who purchase directly from the 

manufacturer). The non-FAMP does not reflect rebates 

paid by the manufacturer to third-party payers (insurance 

companies or pharmacy benefit management companies, 

for example).14 Non-FAMPs are reported to the VA Secretary. Non-FAMP data are not publicly available. For 

single-source brand-name prescription drugs, CBO estimates that the non-FAMP for the third quarter of calendar year 2003 is about 79 percent of the AWP, on average. 

Federal Ceiling Price Relative to the AWP: 50 Percent

To receive payment for the purchase of drugs by federal 

agencies and under the Medicaid program, federal law requires manufacturers to provide brand-name drugs to the 

four agencies at a price not to exceed the federal ceiling 

price. In the first year of an FSS contract, the FCP equals 

76 percent of the previous fiscal year’s non-FAMP minus 

an additional discount if the non-FAMP in the previous 

one-year period increased faster than inflation (as measured by the CPI-U).15 In the second and subsequent 

years of a multiyear contract, the FCP also cannot exceed 

the previous year’s FSS price, increased by inflation (as 

measured by the CPI-U).16

For single-source brand-name prescription drugs, CBO 

estimates that the non-FAMP for fiscal year 2002 is about 

73 percent of the 2003 AWP, on average. Based on that 

estimate, the 2003 FCP cannot exceed 55 percent of the 

2003 AWP, on average.17 The two additional inflationadjustment mechanisms lower the FCP by another 5 percentage points, resulting in an FCP for single-source, 

brand-name prescription drugs of about 50 percent of the 

2003 AWP, on average.

Price Available to the Big Four Relative to the AWP: 

49 Percent

The price to the Big Four for a brand-name drug is the 

lower of the FSS price or the FCP. Drug manufacturers 

can choose to offer all federal purchasers a single FSS 

price that is less than or equal to the FCP, or they can establish a dual pricing structure. Under that structure, the 

FSS price (based on the most-favored commercial customer price) is offered to non-Big Four federal purchasers 

and a second, or “dual,” price is offered to the Big Four. 

13. 38 U.S.C. 8126.

14. Based on phone conversations with VA staff members, September 

2004.

15. The additional discount for the 2003 FCP equals the non-FAMP 

for the third quarter of calendar year 2002 minus the non-FAMP 

for the third quarter of calendar year 2001, inflated by the percentage increase in the CPI-U between September 2001 and September 2002. See 38 U.S.C. 8126(c).

16. The 2003 FCP equals the lower of (a) 76 percent multiplied by 

the non-FAMP for fiscal year 2002 minus any additional discount 

or (b) the FSS price as of September 30, 2002, inflated by the percentage increase in the CPI-U between September 2001 and September 2002. That is, in subsequent years of a multiyear contract, 

the FCP may be defined by the FSS price. See 38 U.S.C. 8126(d).

17. The calculation of 55 percent of the 2003 AWP is equal to the 

non-FAMP for fiscal year 2002 multiplied by 76 percent (73 percent of the 2003 AWP multiplied by 76 percent).
PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 9

The price offered to only the Big Four—which is less 

than or equal to the FCP—is sometimes referred to as the 

FSS Big 4 price to distinguish it from the FSS price, 

which is available to all federal purchasers. FSS Big 4 

price data are publicly available. 

About one-third of the brand-name drug products listed 

on the FSS have FSS Big 4 prices, and the other twothirds have a single FSS price (available to all federal purchasers) that must be less than or equal to the FCP. Some 

drugs may have a single FSS price because the FSS price is 

less than the FCP. Furthermore, because non-Big Four 

purchases account for such a small share of total purchases from the FSS (less than 5 percent), some manufacturers may choose to extend the FCP for certain drugs to 

all federal purchasers rather than incur the cost of maintaining two price lists. As mentioned above, that may be 

one reason why VA obtains FSS prices that are about 10 

percentage points less, relative to the AWP, than the Medicaid rebate program’s best price.

For single-source brand-name prescription drugs, CBO 

estimates that the price available to the Big Four is about 

49 percent of the AWP, on average. (That estimate includes drugs that have an FSS Big 4 price and drugs that 

have a single FSS price offered to all federal purchasers.) 

Department of Veterans Affairs 

VA Average Price Relative to the AWP: 42 Percent

For VA’s own purchases, it has been able to obtain lower 

prices from manufacturers, for example, by entering into 

competitively bid national contracts in which manufacturers’ products are placed on VA’s national formulary—a 

list of approved drugs to be used throughout VA’s health 

care system.18 From a manufacturer’s point of view, the 

discount offered to VA may be offset by the increase in 

volume captured at the expense of other manufacturers 

who produce drugs that are therapeutic substitutes (that 

is, the drugs are used to treat the same condition). Furthermore, according to VA’s Office of Academic Affiliations, more than 76,000 medical and associated health 

students, residents, and fellows receive some or all of their 

clinical training at VA facilities each year.19 Therefore, 

manufacturers have an additional incentive to ensure that 

their drugs are used in VA facilities if they expect that 

prescribing practices learned during training will carry 

over to post-training practice.

VA also receives a discount for prompt payment from its 

prime vendor. That vendor provides distribution services 

to VA and to a few other authorized agencies and handles 

about 95 percent of VA’s pharmaceutical purchases. In 

2003, VA's discount from its prime vendor averaged 

about 3 percent of the contract price, or about 1.4 percent of the AWP.

In fiscal year 2003, VA’s drug purchases totaled about 

$3.4 billion, up from about $2.5 billion two years earlier.20 CBO obtained expenditure and quantity data for 

VA purchases made through its prime vendor to estimate 

the average price, taking into account all the various pricing schedules and contracts under which VA purchases 

drugs. For single-source brand-name prescription drugs, 

CBO estimates that VA’s average price is about 42 percent 

of the AWP.

Department of Defense

DoD’s Military Treatment Facility Average Price Relative 

to the AWP: 41 Percent

TRICARE is DoD’s managed health care program for 

active-duty service members and their families, military 

retirees and their families, and other beneficiaries. Under 

DoD’s TRICARE Pharmacy Program, beneficiaries may 

fill prescriptions at military treatment facilities (MTFs); 

through the TRICARE Mail Order Pharmacy (TMOP); 

at TRICARE network retail pharmacies; or at nonnetwork retail pharmacies. DoD pays federal prices (for 

example, FSS prices or FSS Big 4 prices) for drugs purchased by TRICARE beneficiaries at MTFs and through 

TMOP. In 2003, DoD did not have access to federal 

prices for drugs purchased by TRICARE beneficiaries at

18. In general, a formulary is a list of drugs selected by a panel of physicians and pharmacists on the basis of an evaluation of their therapeutic merits, safety, and cost relative to other drugs in the same 

therapeutic class.

19. See the Web site for VA’s Office of Academic Affiliations, available 

at www.va.gov/oaa/OAA_Mission.asp.

20. For 2003 spending, see Department of Veterans Affairs, FY 2005 

Budget Submission (February 2004), vol. 2, p. 2C-11. For 2001 

spending, see Department of Veterans Affairs, FY 2003 Budget 

Submission (February 2002), vol. 2, p. 2-141.
10 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

network or non-network retail pharmacies.21 However, 

DoD has indicated that it intends to apply federal prices 

to purchases made at network retail pharmacies after September 30, 2004.22

Unlike the network and non-network retail pharmacies, 

MTFs and TMOP fill prescriptions according to drug 

formularies.23 MTFs and TMOP may select one or a few 

drugs from a class with therapeutic substitutes for inclusion on formularies. Thus, for selected drugs, they are 

able to offer manufacturers increased market share in return for further price concessions and thus obtain prices 

lower than those available to the Big Four. 

DoD’s drug purchases totaled about $4 billion in fiscal 

year 2003, up from a little over $2 billion in 2001.24

Spending at military treatment facilities accounted for 

about 40 percent of that 2003 total, retail pharmacies accounted for about 50 percent, and mail order accounted 

for the remaining 10 percent.25

CBO obtained expenditure and quantity data for DoD’s 

MTF purchases to estimate the average price, taking into 

account all the various pricing schedules and contracts 

under which DoD purchases drugs. For single-source 

brand-name prescription drugs, CBO estimates that the 

average price at military treatment facilities is about 41 

percent of the AWP (like the VA’s average price, the MTF 

average price includes distribution costs but not dispensing costs). 

Medicaid Rebate Program

Unlike direct federal purchasers, the Medicaid program 

for outpatient drugs works through the retail pharmacy 

distribution channel. Medicaid beneficiaries fill their prescriptions at their local retail pharmacies, sometimes paying a copayment that is limited to $3 per prescription.26

The state pays pharmacies for filling those prescriptions 

on the basis of the state’s formula for estimating pharmacy acquisition costs plus a flat dispensing fee of, generally, $3 to $5 per prescription.27 In a subsequent transaction, the manufacturer issues a rebate to the state 

Medicaid program.28 Medicaid’s expenditures for prescription drugs, net of those rebates, represent about 15 

percent of the U.S. market for outpatient prescription 

drugs.29 However, that share is expected to decline in 

2006 when responsibility for paying for drugs for dual eligibles (Medicaid beneficiaries who are enrolled in both 

Medicaid and Medicare) will shift from the Medicaid 

program to the Medicare prescription drug benefit program. The dual eligibles currently account for about half 

of Medicaid drug spending.

AMP Relative to the AWP: 79 Percent

The Omnibus Budget Reconciliation Act of 1990 

amended the Social Security Act to require manufacturers 

to give back to the Medicaid program a portion of their 

revenues from drug sales to Medicaid beneficiaries.30

(The federal government provides about 57 percent of 

the funding for the Medicaid program through matching 

funds.)31 The rebate is based on the AMP, which is the 

average price paid to a manufacturer by wholesalers for 

21. TRICARE network retail pharmacies are participating pharmacies 

that provide drugs to TRICARE beneficiaries at an agreed-upon 

payment rate. 

22. See Letter from Steven Thomas, Acting Executive Director, VA 

National Acquisition Center, to Manufacturers of Covered Drugs, 

October 14, 2004, available at www1.va.gov/oamm/nac/fsss/files/

20041014DearManufacturer.pdf.

23. DoD is in the process of implementing a uniform formulary that 

will apply to the network and non-network retail pharmacies as 

well as MTFs and TMOP. See www.tricare.osd.mil/pharmacy/

unif_form.cfm. 

24. The increase in DoD’s pharmaceutical spending is due to several 

factors, including expansion of drug benefits under the TRICARE 

Senior Pharmacy program (which began in 2001), increases in the 

use of retail pharmacies, and growth in drug prices.

25. Data provided by DoD on April 6, 2005.

26. In certain cases, states have received waivers to charge higher 

copayments.

27. National Pharmaceutical Council, Pharmaceutical Benefits Under 

State Medical Assistance Programs (Reston, Va.: National Pharmaceutical Council, 2003), p. 4-41.

28. In 2002, Medicaid rebates totaled $5.9 billion. See Medicaid 

expenditure data compiled by CMS on the basis of accounting 

statements (Form CMS-64) submitted by the states, available at 

www.cms.hhs.gov/medicaid/mbes/ofs-64.asp. 

29. Medicaid’s expenditures (federal and state) for outpatient prescription drugs, net of rebates, totaled $23.4 billion out of the $162 

billion in total U.S. expenditures for outpatient prescription drugs 

in 2002. See www.cms.hhs.gov/medicaid/mbes/ofs-64.asp and 

www.cms.hhs.gov/statistics/nhe/historical/t2.asp.

30. 42 U.S.C. 1396r-8.

31. See www.cms.hhs.gov/medicaid/mbes/ofs-64.asp. 
PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS 11

drugs distributed to retail and mail-order pharmacies. 

Whereas the non-FAMP is the average price paid to a 

manufacturer across both retail and nonretail channels of 

distribution, the AMP is the average price paid to a manufacturer across only retail channels of distribution (including mail order). Both the AMP and the non-FAMP 

exclude sales to direct federal purchasers. The AMP data 

are not publicly available. For single-source, brand-name 

prescription drugs, CBO estimates that the AMP is about 

79 percent of the AWP.32 Thus, for the sample of drugs 

examined in this analysis, the estimate of the AMP is the 

same as the estimate of the non-FAMP, even though their 

definitions differ slightly.

Best Price Relative to the AWP: 63 Percent

Medicaid's basic rebate for brand-name drugs is equal to 

the greater of 15.1 percent of the AMP or the difference 

between the AMP and the best price (the lowest price 

paid by any private-sector purchaser for the drug product).33 The best price reflects discounts, rebates, chargebacks, and other pricing adjustments. Best-price data are 

not publicly available. (Generic drugs are reimbursed under a different formula, and their manufacturers pay a flat 

rebate of 11 percent of the AMP.) For single-source 

brand-name prescription drugs, CBO estimates that the 

best price is about 63 percent of the AWP, on average.

Medicaid Net Manufacturer Price Relative to the AWP:

51 Percent

Manufacturers must extend an additional rebate to Medicaid if the AMP rises faster than inflation (as measured 

by the CPI-U).34 For single-source brand-name prescription drugs, CBO estimates that the basic rebate is about 

22 percent of the AMP, on average, and the additional rebate averages about 13 percent of the AMP.35 Expressed 

as a percentage of the AWP, the two rebates combined 

equal about 28 percent. Therefore, the net price that 

manufacturers receive for Medicaid sales (the AMP minus the Medicaid rebate) averages about 51 percent of the 

AWP, which is 12 percentage points below the best 

price.36

Some states also negotiate supplemental rebates from 

manufacturers. For example, manufacturers may agree to 

pay an additional amount if states agree not to require 

prior authorization before dispensing their drugs. However, states have faced legal challenges from manufacturers for pursuing additional price reductions, and states’ 

negotiating leverage may decline in 2006 when, as mentioned above, responsibility for paying for drugs for dual 

eligibles will shift from Medicaid to Medicare. At the 

same time, the change in Medicaid’s market share could 

also affect manufacturers’ negotiations with private-sector 

purchasers and the resulting best-price levels.

The Medicaid net manufacturer price is the portion of 

Medicaid spending going to manufacturers. Medicaid’s 

payments to pharmacies for brand-name drugs in 2002 

were, on average, about 16.3 percent above the AMP 

(weighted by Medicaid’s payments to pharmacies) or, using the estimate of the AMP relative to the AWP, about 

92 percent of the AWP.37 The Medicaid program then receives about 28 percent of the AWP back from manufacturers as rebates, resulting in a net final price to Medicaid 

of about 64 percent of the AWP. That estimate is not included in Table 1 because, unlike the other estimates in 

the table, the Medicaid net final price includes dispensing 

costs. The Medicaid net final price (64 percent of the 

AWP), which includes distribution and dispensing costs, 

32. This estimate is similar to results presented in an earlier CBO 

study. According to that study, the AMP was about 80 percent of 

the AWP for 224 top-selling Medicaid brand-name drug products 

in 1993. See Congressional Budget Office, How the Medicaid 

Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical 

Industry (January 1996).

33. The Government Accountability Office stated in a recent report 

that it “found considerable variation in the methods that manufacturers used to determine best price and AMP.” See Government 

Accountability Office, Medicaid Drug Rebate Program: Inadequate 

Oversight Raises Concerns About Rebates Paid to States, GAO-05-

102 (February 2005), p. 15.

34. The additional rebate for a quarter is calculated by taking the difference between the drug’s average price in that quarter (as measured by the AMP) and the drug’s inflation-adjusted market 

introduction price, or base price. (The base price is the AMP in 

the first quarter in which the drug was marketed or the last quarter of 1990 for older drugs.)

35. The basic rebate is equal to 15.1 percent of the AMP for a little 

over half of the drugs examined in this analysis (for those drugs, 

15.1 percent of the AMP is greater than the difference between 

the AMP and the best price).

36. The calculation of 51 percent of the average wholesale price is 

equal to the average manufacturer price minus the Medicaid 

rebate (79 percent of the AWP minus 28 percent of the AWP).

37. Congressional Budget Office, Medicaid’s Reimbursements to Pharmacies for Prescription Drugs (December 2004).
12 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

is only slightly higher than the best price (63 percent of 

the AWP), which excludes those costs. 

The Public Health Service’s 340B Drug 

Pricing Program

340B Ceiling Prices Relative to the AWP: 51 Percent

Section 340B of the Public Health Service Act, enacted as 

part of the Veterans Health Care Act of 1992, extends the 

prices available through the Medicaid drug rebate program to PHS-funded clinics and disproportionate share 

hospitals.38 The 340B discount is calculated using the 

Medicaid rebate formula and is deducted from the manufacturer’s selling price rather than paid as a rebate. Eligible entities may negotiate steeper discounts than the 

Medicaid rebate amount. 

Participating entities spent an estimated $3.4 billion for 

outpatient drugs in calendar year 2003.39 However, not 

all eligible entities participate in the program. Some may 

choose not to participate because of a lack of familiarity 

with the program or because they may be receiving low 

prices already. By law, the 340B ceiling price—the maximum price that manufacturers can charge participating 

entities—equals the Medicaid net manufacturer price, 

which, based on the drugs included in this analysis, 

equals 51 percent of the AWP, on average.

Conclusion 

The prices paid to manufacturers for brand-name prescription drugs vary across federal programs, in part

because of differences in the statutory rebates or discounts that apply to those programs. In addition, some 

federal purchasers negotiate with manufacturers for additional price reductions using, for example, preferred 

formularies.

However, the statutory rebates or discounts have a similar 

underlying structure even if their specific calculations differ. By law, both Medicaid and the direct federal purchasers using the Federal Supply Schedule receive a price at 

least as low as a measure of the lowest price available to 

private-sector purchasers. In cases in which private-sector 

purchasers are not receiving a large discount, a minimum 

discount off of an average price takes effect for Medicaid 

and the Big Four. Furthermore, if manufacturers increase 

the prices they offer to private-sector purchasers faster 

than inflation, then Medicaid, the Federal Supply Schedule, and the Big Four have mechanisms in place to boost 

their discounts.

The price comparisons in this paper reflect prices paid to 

manufacturers and do not include the final cost of dispensing the drug to the patient. Moreover, except for the 

average manufacturer price and the nonfederal average 

manufacturer price, those estimates vary substantially 

across drugs, and their relative ranking may differ. For example, about one-fifth of the drugs examined in this 

analysis have a best price that is below the FSS price. And 

Medicaid pays manufacturers less than the VA for some 

drugs. 

38. 42 U.S.C. 256b.

39. Based on a phone call with staff at the U.S. Department of Health 

and Human Services, Health Resources and Services Administration, on April 7, 2005.
A

Data Used in This Analysis

The Congressional Budget Office (CBO) estimated 

the average price paid under federal programs in 2003 for 

a sample of top-selling single-source brand-name prescription drugs relative to their list prices. The sample includes about 130 drugs defined by their trade name (for 

example, Lipitor) that accounted for about 50 percent of 

U.S. sales through retail pharmacies and about 70 percent 

of U.S. sales of brand-name drugs through retail pharmacies in 2003. 

The analysis drew upon data from several different 

sources. The data came from two private companies that 

collect and sell information about the pharmaceutical industry (IMS Health and Thomson Micromedex) and 

from three government agencies—the Department of 

Veterans Affairs (VA), the Department of Defense 

(DoD), and the Centers for Medicare & Medicaid Services (CMS).

IMS Health’s National Sales

Perspectives

CBO purchased IMS Health’s National Sales Perspectives 

data set for 90 narrowly defined therapeutic classes that 

include 76 of the top 100 outpatient drugs sold in 2003 

and their closely related therapeutic substitutes. The data 

include dollar sales at wholesale prices and extended units 

of drugs (by National Drug Code, or NDC) purchased in 

the United States through both retail and nonretail channels of distribution, by quarter, for the years 1999 

through 2003.1 The 90 therapeutic classes account for 

about 60 percent of U.S. sales at wholesale prices.

Thomson Micromedex’s Red Book

CBO subscribes to Thomson Micromedex’s Red Book 

database. The database contains average wholesale prices 

(AWPs) for prescription and nonprescription drugs, by 

NDC, with dates for when the price went into effect, as 

well as other prices and descriptive information.

The Department of Veterans Affairs’ 

Data 

The VA provided Federal Supply Schedule (FSS) prices 

from contracts dating back to 1990. The files include 

each drug’s NDC, starting and ending dates for when the 

price was in effect, and the price per package. The VA 

also provided annual federal ceiling prices (FCPs) and 

nonfederal average manufacturer prices (non-FAMPs), by 

NDC, dating back to 1993. Finally, the VA provided data 

from its prime vendor program for the January 1999-September 2004 period. The data include total dollar expenditures and quantities purchased through VA’s prime vendor for the VA and a few other federal agencies (the 

Indian Health Service, the Bureau of Prisons, the Public 

Health Service, the Department of Health and Human 

Services, and the Immigration and Naturalization Service), by NDC. FSS price data are publicly available, but 

FCPs, non-FAMPs, and VA prime vendor data are not.

The Department of Defense’s Data

The Department of Defense provided total dollar expenditures and quantities for 2003, by NDC, for about 480 

drugs purchased by TRICARE military treatment facilities. The data file was compiled using DoD’s Pharmacy 

Data Transaction Service, with pricing information obtained using the prime vendor’s purchase records. The 

DoD’s prime vendor data are not publicly available. 

APPENDIX

1. Retail channels of distribution include independent pharmacies, 

chain drugstores, food stores with pharmacies, and mail-order 

pharmacies. Nonretail channels of distribution include nonfederal 

hospitals, federal facilities, clinics, health maintenance organizations, home health care, long-term care, prisons, universities, and 

other distribution channels not covered elsewhere. 
14 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

Medicaid’s Drug Rebate Program Data

The Centers for Medicare & Medicaid Services provided 

CBO with quarterly data for the Medicaid drug rebate 

program. The data include average manufacturer price 

and best price for drugs covered by Medicaid, by NDC. 

AMP and best price are private-sector transaction prices 

reported by manufacturers to CMS so that it can calculate the Medicaid rebate. The AMP in each quarter is the 

average price paid to a manufacturer by wholesalers during that period for drugs distributed to retail and mailorder pharmacies. The best price in each quarter is the 

lowest price paid to the manufacturer by any privatesector purchaser. AMP and best-price data are not publicly available. The data also include prescriptions and 

units dispensed to Medicaid recipients and payments to 

pharmacies by state Medicaid programs. 
B

Methodology of This Analysis

To determine the weighted average price relative to 

the average wholesale price (AWP), the Congressional 

Budget Office (CBO) calculated, for each quarter, the ratio of the cost of buying the U.S. quantities of the drug 

products in the sample at each price—the Federal Supply 

Schedule (FSS) price, the price available to the Big Four,1

the average manufacturer price (AMP), the best price, the 

nonfederal average manufacturer price (non-FAMP), the 

federal ceiling price (FCP), the Department of Veterans 

Affairs (VA) average price, and the Department of Defense’s (DoD’s) military treatment facility (MTF) average 

price—divided by the cost of buying them at the AWP. 

Following the formula for a price index, the mathematical expression for this calculation is:

Weighted Average Pricek Relative to AWP = 

, 

where the subscript k represents one of the program 

prices under study (FSS price, price available to the Big 

Four, AMP, best price, non-FAMP, FCP, VA average 

price, or DoD’s MTF average price), where denotes 

the sum over all drug products in the sample, P is the 

price per drug product, Q is the U.S. quantity of the drug 

product (for example, the number of tablets or capsules), 

and the subscript i represents the drug product i (a drug 

product is defined by its trade name, strength, and dosage 

form—for example, Lipitor 10 mg tablet).

To construct the study sample, CBO started with the 

IMS data set (see Appendix A) and limited it to singlesource brand-name prescription drugs (a drug is defined 

by its trade name—for example, Lipitor) in oral solid 

dosage forms (that is, tablets or capsules) with 2003 sales 

to retail channels of distribution (at wholesale prices) of 

$50 million or more. (Sales are totaled across all forms 

and strengths of the drug.) That data also provide total 

extended units (the number of tablets or capsules by 

strength) sold in the United States, by National Drug 

Code (NDC), for each quarter in calendar year 2003. 

Those extended units were used to construct the weights 

(Qi

) in the above formula.

Pricing Data 

Some of the prices studied are published (or appear on a 

publicly available list) and are in effect for a specified period of time. Those include the AWP and the FSS prices. 

CBO chose the AWP, FSS price, and FSS Big 4 price in 

effect at the midpoint of each quarter to represent the 

quarterly AWP, FSS price, and FSS Big 4 price.2

 Thomson Micromedex’s Red Book lists AWPs, by NDC, with a 

date that indicates when the AWP went into effect. The 

Federal Supply Schedule lists the FSS price and the FSS 

Big 4 price, by NDC, with contract start and stop dates. 

For each NDC, the quarterly price available to the Big 

Four is the FSS Big 4 price for drugs with dual prices and 

is the FSS price for drugs with single prices.

Other prices are based on sales to private-sector purchasers over a given quarter and are reported by manufacturers to the federal government. Typically, those prices are 

not publicly available. Under the Medicaid rebate program, manufacturers report to the Centers for Medicare 

& Medicaid Services quarterly AMPs and best prices by 

NDC. Under the federal ceiling price program, manufacAPPENDIX

1. The “Big Four” are the four largest federal purchasers of pharmaceuticals: the Department of Veterans Affairs, the Department of 

Defense, the Public Health Service, and the Coast Guard.

Σ( ) Pk i , • ( ) Qi

Σ( ) AWPi • ( ) Qi

---------------------------------------------

Σ

2. For the purposes of this analysis, February 15, 2003, is the midpoint of the first quarter of 2003; May 15, 2003, is the midpoint 

of the second quarter; August 15, 2003, is the midpoint of the 

third quarter; and November 15, 2003, is the midpoint of the 

fourth quarter.
16 PRICES FOR BRAND-NAME DRUGS UNDER SELECTED FEDERAL PROGRAMS

turers report the non-FAMP and the FCP to the VA by 

NDC. The non-FAMP is reported annually and quarterly. The FCP is reported annually. 

Estimating Prices for Drug Products

CBO estimated an average product price, weighted across 

package sizes, under each program for each product 

(Pk,i). For each quarter, CBO averaged the AWP, the FSS 

price, the price available to the Big Four, the AMP, the 

best price, the non-FAMP, and the FCP across drug package sizes, weighting by the number of tablets or capsules 

sold in the United States for each package size. That calculation created an average price (Pk,i) for each brandname drug product under each program.

Data from VA and DoD included total dollar expenditures and quantities purchased through their prime vendors. For each quarter and for each drug product, CBO 

summed VA expenditures across package sizes and divided by the total number of tablets (or capsules) 

summed across package sizes to create a VA average price 

per drug product (Pk,i). Similarly, for each quarter and for 

each drug product, CBO summed DoD’s MTF expenditures across package sizes and divided by the total number 

of tablets (or capsules) summed across package sizes to 

create a DoD average price per drug product (Pk,i).

Weighting by U.S. Quantities

The average product prices (AWP, FSS price, price available to the Big Four, AMP, best price, non-FAMP, FCP, 

VA price, and DoD’s MTF price) were matched to the 

data set of total extended units sold in the United States 

(Qi

) for each product and for each quarter. Drug products with any one of the average prices missing were deleted, resulting in a final data set with about 330 drug 

products or about 130 drugs that accounted for about 50 

percent of U.S. sales through retail pharmacies and about 

70 percent of U.S. sales of brand-name drugs through retail pharmacies in 2003. Following the formula for a 

price index, CBO estimated a weighted average price relative to the AWP for each program, using as the weight the 

number of tablets or capsules, by strength, of each drug 

product sold in the United States.