Department of Health and Human Services

OFFICE OF

INSPECTOR GENERAL

 

ANALYZING CHANGES TO 

MEDICAID FEDERAL UPPER 

LIMIT AMOUNTS 

Daniel R. Levinson 

Inspector General

October 2012

OEI-03-11-00650 
EXECUTIVE SUMMARY: ANALYZING CHANGES TO MEDICAID FEDERAL 

UPPER LIMIT AMOUNTS

OEI-03-11-00650

WHY WE DID THIS STUDY 

Prior Office of Inspector General (OIG) work consistently found that the published prices 

used to set Medicaid’s Federal upper limit (FUL) amounts often greatly exceeded prices 

available in the marketplace. Partly because of OIG work, provisions of the Deficit 

Reduction Act of 2005, P.L. 109-171, were crafted to substantially change the method for 

calculating FULs and most likely would have resulted in lower FUL amounts; however, these 

changes were never implemented because of an injunction against the Centers for Medicare & 

Medicaid Services (CMS) and subsequent changes in the law. The Affordable Care Act 

(ACA), P.L. 111-148, enacted in March 2010, also includes provisions that seek to change

FUL amounts. In September 2011, CMS began releasing the new FUL amounts to the public

in draft form. Given our previous findings that FUL amounts based on published prices 

greatly exceeded pharmacy acquisition costs and that the new FUL amounts have not taken 

effect, we compared FUL amounts based on published prices to FUL amounts based on 

average manufacturer prices (AMP) and then compared both FUL amounts to pharmacy 

acquisition costs. 

HOW WE DID THIS STUDY

We compared aggregate pharmacy acquisition costs for selected drugs to (1) FUL amounts 

based on published prices and (2) FUL amounts based on post-ACA AMPs. We also 

compared FUL amounts based on published prices to FUL amounts based on post-ACA 

AMPs and calculated the difference for each drug. 

WHAT WE FOUND

We found that FUL amounts based on published prices were more than four times greater 

than sampled pharmacy acquisition costs. We also found that FUL amounts based on AMPs 

were 61 percent lower than FUL amounts based on published prices, at the median. Despite 

the reduction in proposed reimbursement, FUL amounts based on AMPs still exceed sampled 

pharmacy acquisition costs by 43 percent in the aggregate. CMS had not implemented FUL 

amounts based on AMPs as of August 2012. Although CMS has taken steps to implement 

FUL amounts based on AMPs by calculating the new amounts and issuing draft files for 

review, FUL amounts continued to be based on published prices as of August 2012. 

WHAT WE RECOMMEND

Given the results of the body of OIG work and the potential reduction in Medicaid 

expenditures, we recommend that CMS complete the implementation of the post-ACA 

AMP-based FUL amounts. CMS concurred with our recommendation and stated that it plans 

to implement FUL amounts based on AMPs in the near future. 
TABLE OF CONTENTS

Objectives ....................................................................................................1

Background..................................................................................................1

Methodology................................................................................................6

Findings........................................................................................................9

FUL amounts based on published prices were more than four 

times total pharmacy acquisition costs ............................................9

FUL amounts based on AMPs were 61 percent lower than FUL 

amounts based on published prices, at the median ..........................9

Even with the reductions resulting from the new methodology,

FUL amounts based on AMPs would still have exceeded 

pharmacy acquisition costs in the aggregate..................................10

CMS had not completed implementation of AMP-based FUL 

amounts as of August 2012............................................................10

Conclusion and Recommendation .............................................................12

Agency Comments and Office of Inspector General Response.....12

Appendixes ................................................................................................13

A: Detailed Sampling Plan............................................................13

B: Agency Comments...................................................................14

Acknowledgments......................................................................................16
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 1

OBJECTIVES

1. To compare pharmacy acquisition costs for selected drugs to Federal 

upper limit (FUL) amounts based on published prices.

2. To determine how FUL amounts would change under the average 

manufacturer price (AMP)-based methodology required by the 

Affordable Care Act (ACA), P.L. 111-148.

3. To compare pharmacy acquisition costs for selected drugs to FUL 

amounts based on AMPs. 

4. To assess the Centers for Medicare & Medicaid Services’ (CMS) 

implementation of FUL amounts based on AMPs. 

BACKGROUND

The FUL program was established to ensure that Medicaid takes 

advantage of lower market prices for multiple-source drugs.1 Prior Office 

of Inspector General (OIG) work consistently found that the published 

prices used to set FUL amounts often greatly exceeded prices available in 

the marketplace. Partly because of OIG work, provisions of the Deficit 

Reduction Act of 2005 (DRA), P.L. 109-171, were crafted to substantially 

change the method for calculating FULs and most likely would have 

resulted in lower FUL amounts; however, these changes were never 

implemented because of an injunction against CMS and subsequent 

changes in the law. The ACA, enacted in March 2010, includes provisions 

that seek to change FUL amounts. In September 2011, CMS began 

releasing files containing draft FUL amounts based on the new 

methodology required by the ACA. 

Medicaid Reimbursement for Prescription Drugs

Medicaid, established under Title XIX of the Social Security Act (the Act), 

is administered by States and financed using State and Federal funds. All 

50 States and the District of Columbia (hereinafter referred to as States) 

offer prescription drug coverage as part of their Medicaid benefit 

packages. Medicaid expenditures for prescription drugs totaled 

approximately $29 billion in 2010.

2

 

Medicaid beneficiaries typically receive covered drugs through 

pharmacies, which are reimbursed by State Medicaid agencies. Federal 

regulations require, with certain exceptions, that each State Medicaid 

1 Generally, a drug is considered multiple-source if generic versions are available. 2 Medicaid expenditures were calculated using data from CMS’s Medicaid Budget and 

Expenditure System. This total does not reflect rebates collected through the Medicaid 

drug rebate program.
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 2

agency’s reimbursement for a covered outpatient drug not exceed (in the 

aggregate) the lower of (1) the estimated acquisition cost plus a reasonable 

dispensing fee or (2) the provider’s usual and customary charge to the 

public for the drug.3 CMS allows States flexibility to define estimated 

acquisition cost; most States base their calculations on average wholesale 

prices (AWP) or wholesale acquisition costs (WAC).

4, 5

 

CMS is collecting national average drug acquisition cost data to develop a 

new reimbursement benchmark for State Medicaid agencies that is more 

reflective of pharmacies’ acquisition costs. To develop this benchmark, 

CMS will obtain actual pharmacy drug acquisition costs from a random 

sample of pharmacies using a monthly nationwide survey. 

Medicaid FUL Program

To reduce expenditures for Medicaid prescription drugs, CMS and the 

States have implemented certain cost containment measures, including the 

FUL program.6 The FUL program limits Medicaid reimbursement for 

certain multiple-source drugs and seeks to ensure that the Federal 

Government acts as a prudent buyer by taking advantage of market prices 

for these drugs. CMS calculates a FUL amount for specific forms and 

strengths for each multiple-source drug that meets the established 

criteria.7, 8 According to CMS data, FUL drugs accounted for $2.4 billion 

in Medicaid expenditures in 2010.9

3 42 CFR § 447.512. CMS issued a proposed rule in February 2012 that would replace 

estimated acquisition cost with actual acquisition cost as the basis of Medicaid pharmacy 

reimbursement. In the proposed rule, CMS states that the data used to calculate actual 

acquisition costs will be more reflective of pharmacies’ purchase prices. See 77 Fed. 

Reg. 5318, 5320–5321 (Feb. 2, 2012). 4 The majority of States obtained AWPs from the publisher First DataBank. However, 

First DataBank stopped publishing AWPs as of September 2011. This has forced many 

States to reevaluate their reimbursement methodologies. See OIG, Replacing Average 

Wholesale Price: Medicaid Drug Payment Policy (OEI-03-11-00060), July 2011. 5 CMS, Medicaid Prescription Reimbursement Information by State – Quarter Ending 

December 2011. Accessed at http://www.cms.hhs.gov on February 17, 2012. 6 Other examples of cost containment measures include State maximum allowable cost 

(MAC) programs and the Medicaid drug rebate program. 

7 CMS, Transmittal No. 37 – Federal Upper Limit Drug List. Accessed at 

http://www.cms.hhs.gov on July 15, 2011. 8 Section 1927(e)(4) of the Act generally requires CMS to establish a FUL amount when 

three or more formulations of the drug were rated as therapeutically and pharmaceutically 

equivalent by the Food and Drug Administration. Additional requirements as set forth in 

42 CFR § 447.332 include that at least three suppliers of the drug are listed in current 

editions (or updates) of published compendia of cost information for drugs available for 

sale nationally. 

9 Medicaid expenditures were calculated from CMS’s 2010 Medicaid Drug Rebate 

Program Utilization Data. This total does not include rebates. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 3

Calculating FUL Amounts

Historically, CMS set FUL amounts equal to 150 percent of the price 

published in national compendia for the least costly therapeutically 

equivalent product that could be purchased by pharmacists in quantities of 

100 tablets or capsules, plus a reasonable dispensing fee. (If the drug is 

not commonly available in quantities of 100, the package size commonly 

listed is used; in the case of liquids, the commonly listed size is used.)

10 

The most commonly used published prices in setting FULs are WACs, 

AWPs, and direct prices.11 National compendia, such as Redbook, publish 

these figures based on information provided by drug manufacturers. 

Previous OIG work consistently found that the published prices used to set 

Medicaid FUL amounts often greatly exceeded prices available in the 

marketplace.12 

Proposed Changes to FUL Amounts Under the DRA. Partly because OIG 

work showed that FUL amounts based on published prices were 

significantly higher than AMPs, the DRA proposed significant changes to 

the FUL program.13 Section 6001(a) of the DRA changed the basis of 

FUL amounts from 150 percent of the lowest price published in national 

compendia to 250 percent of the lowest reported AMP.14 

In July 2007, CMS promulgated a final rule that implemented the DRA 

provisions related to FULs.15 The final regulation took effect on 

October 1, 2007, and CMS planned to issue the first AMP-based FULs on 

December 30, 2007. However, two trade associations representing retail 

pharmacies filed a lawsuit because they were concerned that the proposed 

FUL amounts calculated using the DRA method might not adequately 

reimburse providers for their costs, thereby limiting access to certain 

10 See, for example, 42 CFR § 447.332. This regulation has been removed. However, as 

of May 2012, CMS continues to use the FUL criteria found in 42 CFR § 447.332. 11 Although the definition of WAC is prescribed by Federal law (at 42 U.S.C. 

§ 1395w-3a (c)(6)), neither AWP nor direct price is defined in statute or regulation. 12 For example, see OIG, A Comparison of Medicaid Federal Upper Limit Amounts to 

Acquisition Costs, Medicare Payment Amounts, and Retail Prices (OEI-03-08-00490), 

August 2009. 

13 OIG, Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer 

Prices (OEI-03-05-00110), June 2005. 14 Before October 2010, the AMP was generally defined by statute (at 42 U.S.C. 

§ 1396r-8(k)(1)) to be the average price paid to the manufacturer for the drug in the 

United States by wholesalers for drugs distributed to the retail pharmacy class of trade. 

Pursuant to § 1927 (b)(3) of the Act, for Federal payment to be available for their covered 

outpatient drugs under Medicaid, manufacturers must provide AMPs to CMS monthly 

and quarterly.

15 72 Fed. Reg. 39142, 39244 (July 17, 2007). 42 CFR § 447.504 of the 2007 regulation 

outlined the manner in which the AMP is to be determined, and 42 CFR § 447.514 

addressed the new criteria for the establishment of FUL amounts.
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 4

drugs.16 In December 2007, a Federal judge issued a preliminary 

injunction preventing CMS from implementing the DRA-mandated AMPbased FUL amounts. In July 2008, the Medicare Improvements for 

Patients and Providers Act (MIPPA), P.L. 110-275, further delayed 

implementation of the DRA-mandated AMP-based FUL amounts.17 

CMS formally withdrew the regulations implementing the DRA-based 

changes to FULs, effective December 2010, and the injunction against

CMS was lifted in the same month.

18

Proposed Changes to FUL Amounts Under the ACA. Section 2503 of the 

ACA amended section 1927(e) of the Act by revising FUL amounts to be 

no less than 175 percent of the weighted average of the most recently 

reported monthly AMPs.19 This section of the ACA also amended section 

1927(k) of the Act by revising the definition of AMP.20, 21 

As of August 2012, CMS has continued to base FUL amounts on 

150 percent of the lowest published price.22 However, CMS has issued 

draft FUL amounts based on AMPs for review and comment.23 

Table 1 summarizes the proposed and actual methodology for calculating 

FUL amounts. 

16 National Association of Chain Drug Stores (NACDS) and National Community 

Pharmacists Association (NCPA), Frequently Asked Questions (FAQs) Lawsuit Filed by 

NACDS and NCPA Against CMS Challenging AMP Rule. November 7, 2007. Accessed 

online at http://www.ncpanet.org on December 2, 2011. 17 Consistent with §§ 203(a) and (b) of the MIPPA, CMS could not implement 

AMP-based FUL amounts or publicly disclose AMP data before October 2009. 18 See 75 Fed. Reg. 69591, 69597 (Nov. 15, 2010). See National Association of Chain 

Drug Stores, et al., v. U.S. Department of Health and Human Services, et al., Civil 

Action No. 1:07cv02017, order dated December 15, 2010.

19 Changes to the FUL amount in the ACA superseded the DRA changes. 20 Under the ACA provisions, the new definition of AMP is the average price paid to the

manufacturer for the drug in the United States by (1) wholesalers for drugs distributed to 

retail community pharmacies and (2) retail community pharmacies that purchase drugs 

directly from the manufacturer.

21 Pursuant to § 1927(k)(10) of the Act, “retail community pharmacy” means an 

independent, chain, supermarket, or mass-merchandiser pharmacy that is licensed as a 

pharmacy by the State and that dispenses medications to the general public at retail 

prices. Such term does not include a pharmacy that dispenses prescription medications to 

patients primarily through the mail; nursing home, long-term care, or hospital 

pharmacies; clinics; charitable or not-for-profit pharmacies; government pharmacies; or 

pharmacy benefit managers. 

22 CMS has calculated FUL amounts based on the requirements set forth in ACA, 

although it has not yet implemented them.

23 CMS, Draft Affordable Care Act Federal Upper Limit. Accessed at 

http://www.cms.gov on February 9, 2012.
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 5

Table 1: Methodology for Calculating FUL Amounts

Timeframe Statutory Methodology Methodology Used

Pre-DRA (before October 1, 2007) 150% of the lowest published price 150% of the lowest published price

Post-DRA, Pre-ACA (October 1, 2007–

September 30, 2010) 250% of the lowest AMP

150% of the lowest published price 

(changes not implemented because 

of injunction and MIPPA)

Post-ACA (October 1, 2010–August

2012) 

No less than 175% of the weighted 

average AMP

150% of the lowest published price 

(interim methodology) 

Source: OIG analysis of CMS FUL methodology, 2012. 

Previous OIG and Government Accountability Office Work

An August 2009 OIG report found that FUL amounts based on published 

prices were substantially higher than acquisition costs, Medicare payment 

amounts, and retail prices, causing Medicaid to overpay hundreds of 

millions of dollars per year. OIG recommended that CMS continue to 

work with Congress to identify strategies that would lower inflated 

Medicaid payments for multiple-source drugs.24 CMS concurred with this 

recommendation. 

A September 2010 OIG report found that the majority of drug 

manufacturers did not comply with CMS’s requirements for reporting 

monthly AMP data (i.e., the basis for FUL amounts required by the ACA). 

Because AMP data play a critical role in Medicaid payments for 

prescription drugs, OIG recommended that CMS take action against 

manufacturers that do not comply with AMP data submission 

requirements.25 CMS concurred with this recommendation. In accordance 

with an enforcement initiative announced in September 2010, OIG has 

begun imposing civil money penalties (CMP) on certain manufacturers 

that fail to report timely AMPs.

A December 2010 Government Accountability Office (GAO) report found 

that FUL amounts based on AMPs were lower than FUL amounts based on 

published prices (i.e., pre-ACA FUL amounts) but still significantly higher 

than average retail pharmacy acquisition costs.26 However, that study did 

not incorporate the new definition of AMP, and the retail pharmacy 

acquisition costs did not include rebates that pharmacies may receive from 

wholesalers or manufacturers.

24 OIG, A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, 

Medicare Payment Amounts, and Retail Prices (OEI-03-08-00490), August 2009. 25 OIG, Drug Manufacturers’ Noncompliance With Average Manufacturer Price 

Reporting Requirements (OEI-03-09-00060), September 2010. 26 GAO, Medicaid Outpatient Prescription Drugs: Estimated Changes to Federal Upper 

Limits Using the Formula under the Patient Protection and Affordable Care Act (GAO11-141R), December 2010.
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 6

METHODOLOGY

Data Sources and Collection

FULs. We obtained the November 2010, July 2011, and September 2011 

draft files from CMS containing FUL amounts based on AMPs (i.e., the 

FUL amounts that would have been in effect had the ACA methodology 

been implemented).

27 We also obtained first- and fourth-quarter 2011 

Redbook files containing FUL amounts based on published prices (i.e., the 

FUL amounts in effect). We also obtained CMS’s policies and procedures 

regarding the FUL program. 

Medicaid Utilization Data. We obtained a file from CMS containing 

2010 State Medicaid expenditure (ingredient costs and dispensing fees), 

payment, and utilization data.

28

Pharmacy Acquisition Cost. We collected drug acquisition cost data from 

a stratified random sample of pharmacies.29 To obtain these data, we sent 

letters to 120 pharmacies in January 2011. We asked each pharmacy to 

provide drug acquisition costs by submitting its largest invoice for 

November 2010 from each source of supply.30 Sources of supply include 

wholesalers, chain warehouse distribution centers, and generic 

distributors; and we also obtained data for direct manufacturer purchases. 

We received data from 117 of the 120 sampled pharmacies. We asked 

pharmacies to report any discounts applicable to the invoices provided. 

See the Appendix for a detailed description of the sampling design. 

Data Analysis

We reviewed all of CMS’s policies and procedures regarding the FUL 

program. We compared aggregate pharmacy acquisition costs in 

November 2010 to aggregate FUL amounts based on published prices 

(i.e., pre-ACA FUL amounts that were in effect as reported in the firstquarter 2011 Redbook file) and FUL amounts based on AMPs 

(i.e., post-ACA AMP-based FUL amounts as reported in the November 

2010 draft CMS file). First, we identified all drugs associated with FUL 

amounts purchased by sampled pharmacies and totaled the pharmacy 

acquisition costs for these drugs. Then we estimated how much 

pharmacies would have been reimbursed by Medicaid for these drugs by 

27 CMS publicly released the first draft FUL amounts based on AMPs in September 2011; 

however, the agency internally calculated draft FUL amounts based on AMPs starting in 

November 2010. 

28 This file included data from 48 States. Three States (Alabama, Nevada, and Rhode 

Island) were not included in CMS’s data at the time we obtained the file. 

29 The Office of Audit Services collected drug acquisition cost data from the sampled 

pharmacies. See Review of Drug Costs to Medicaid Pharmacies and Their Relation to 

Benchmark Prices (A-06-11-00002), October 2011. 30 We defined largest invoice as that with the largest number of legend drug line items. 
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 7

multiplying the number of units purchased by FUL amounts based on 

published prices, as well as by FUL amounts based on AMPs, and totaled 

these respective amounts.

31 Finally, we compared actual pharmacy 

acquisition costs to estimated reimbursement amounts under both 

methodologies. 

To determine how FULs would change under the ACA, we compared FUL 

amounts based on published prices from the fourth-quarter 2011 Redbook

file to FUL amounts based on AMPs from the September 2011 draft CMS 

file and calculated the difference for each drug. We determined the 

number of drugs for which the FUL amount was higher and the number of 

drugs for which the FUL amount was lower under the new methodology. 

We also calculated the median percentage difference between the FUL 

amounts. 

Further, we estimated how much Medicaid expenditures would have been 

reduced in November 2010 if reimbursement had been based on the draft 

FUL amounts from that month. State Medicaid expenditure data include 

dispensing fees; therefore, we calculated expenditures for the ingredient 

cost portion only.

32, 33 Because Medicaid utilization data are reported 

quarterly, we first calculated the quarterly expenditures for ingredient cost 

only and then divided by three to determine monthly expenditures.34 We 

multiplied FUL amounts based on AMPs by the drug’s fourth quarter-2010 

utilization, summed the total, divided by three, and compared the estimate 

to actual November 2010 Medicaid expenditures based on ingredient cost 

only. 

Finally, we examined CMS’s ability to calculate FUL amounts based on 

AMPs by determining the availability of manufacturer-reported pricing

data. See Table 2 for a description of the number of drugs included in 

each portion of our analysis. 

31 These totals do not include dispensing fees. 32 In addition to the three States without any 2010 data, four other States did not have any 

utilization data for the fourth quarter of 2010 and were excluded from this analysis. 

33 We could only calculate ingredient costs for States that had relatively simple formulas 

for determining dispensing fees paid to pharmacies (e.g., $5 for generic drugs). Thirtysix of the 44 States included in this analysis had a relatively simple dispensing fee 

formula; we excluded the remaining 8 States from this portion of the analysis. For the 36 

States, we calculated the total Medicaid ingredient cost for FUL drugs by subtracting the 

total dispensing fees paid from total expenditures in the fourth quarter of 2010. To 

calculate dispensing fees, we multiplied the State’s dispensing fee from the fourth quarter 

of 2010 by the total number of prescriptions for each FUL drug. 34 This calculation assumes utilization was consistent from 1 month to the next. 
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 8

 

 

 Table 2: Number of Drugs Included in Analysis

Analysis Number of Drugs

Comparison of pharmacy acquisition costs to 

FUL amounts based on published prices 601

Comparison of FUL amounts based on 

published prices to FUL amounts based on 

AMPs

518

Comparison of actual Medicaid expenditures to 

estimated Medicaid expenditures had post-ACA 

AMPs served as the basis for FUL amounts

(ingredient cost only)

416

Comparison of pharmacy acquisition costs to 

FUL amounts based on AMPs 328

 Source: OIG analysis of CMS and Redbook files, 2012. 

Limitations

We are not projecting these results to the population of pharmacies in 

November 2010. The acquisition cost data were for the largest invoices in 

November 2010 and may not necessarily be representative of average 

invoices from sampled pharmacies. We reported our findings in the 

aggregate and not for each drug because of the small amount of data for 

some drugs collected from sampled pharmacies. Therefore, we did not 

determine, for individual drugs, whether acquisition costs exceeded FULs. 

We did not verify the completeness or accuracy of self-reported 

acquisition cost data from responding pharmacies. We did not attempt to 

identify any discounts, rebates, or price incentives not reflected in the 

invoice prices. 

Further, we did not verify the completeness or accuracy of CMS’s FUL 

amounts. The FUL amounts based on AMPs provided by CMS have not 

been used for Medicaid reimbursement. The number of drugs included in 

each portion of the analysis varied depending upon the availability of data 

in each source for the time periods under review. The estimated reduction 

in November 2010 Medicaid expenditures was calculated using FUL 

amounts based on AMPs from 1 month and assumes that these FUL 

amounts would remain consistent throughout the quarter. If FUL amounts 

were higher or lower during the other months in the quarter, the savings 

associated with FUL amounts based on AMPs would have been different. 

Standards

This study was conducted in accordance with the Quality Standards for 

Inspection and Evaluation issued by the Council of the Inspectors General 

on Integrity and Efficiency.
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 9

FINDINGS

FUL amounts based on published prices were more 

than four times total pharmacy acquisition costs 

In November 2010, FUL amounts based on published prices were more 

than 4 times greater than sampled pharmacy acquisition costs for 

601 drugs, in the aggregate. During that month, pharmacy acquisition 

costs for these drugs among sampled pharmacies totaled $139,949; 

pharmacy reimbursement by Medicaid for these drugs would have totaled 

$607,376 using the FUL amounts in effect at the time.

35 

FUL amounts based on AMPs were 61 percent lower 

than FUL amounts based on published prices, at the 

median 

CMS’s September 2011 draft FUL file and the fourth-quarter 2011 

Redbook file included 518 drugs with FUL amounts based on both 

post-ACA AMPs and published prices. Implementing the AMP-based 

methodology required by the ACA would lower FUL amounts for most 

drugs. At the median, FUL amounts based on AMPs were 61 percent 

lower than FUL amounts based on published prices. FUL amounts were 

lower under the new methodology for 461 of the 518 individual drugs. 

Further, for 72 percent (330 of 461) of these drugs, the FUL amount based 

on AMP is less than half the FUL amount based on published prices. See 

Table 3 for the range of differences in FUL amounts. 

Table 3: Comparison of FUL Amounts Based on AMPs to FUL Amounts 

Based on Published Prices 

Difference Between FUL Amounts Based on AMPs and 

FUL Amounts Based on Published Prices Number of Drugs

More than 50.01% lower 330

Between 25.01% and 50% lower 81

Between 0.01% and 25% lower 50

Total Drugs for which FUL amounts based on AMPs < FUL amounts based on published prices 461

Between 0.01% and 25% higher 21

Between 25.01% and 50% higher 9 

More than 50.01% higher 27 

Total Drugs for which FUL amounts based on AMPs > FUL amounts based on published prices 57

 Total 518

 Source: OIG analysis of 2011 FUL amounts. 

35Actual Medicaid reimbursement for these drugs can be lower because of other cost 

containment measures, such as State MAC programs. This total does not include 

dispensing fees.
Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 10

We also calculated the potential reduction in November 2010 Medicaid 

expenditures if reimbursement had been based on post-ACA FULs (i.e., 

FUL amounts based on AMPs) from that month. We estimate that 

Medicaid expenditures would have been 29 percent ($19 million) lower in 

that month had FUL amounts based on AMPs been used for 

reimbursement.36, 37 Given that this estimate is based only on 36 States 

and includes only the 416 drugs associated with FUL amounts based on 

AMPs in CMS’s draft file, total savings would likely be different. 

Even with the reductions resulting from the new 

methodology, FUL amounts based on AMPs would 

still have exceeded pharmacy acquisition costs in the 

aggregate

Despite the reduction in proposed reimbursement for most drugs, 

post-ACA FUL amounts based on AMPs still exceed sampled pharmacy 

acquisition costs in the aggregate. For 328 drugs under review, FUL 

amounts based on AMPs were 43 percent higher than sampled pharmacy 

acquisition costs from November 2010, in the aggregate. During this

period, pharmacy acquisition costs for these drugs among sampled 

pharmacies totaled $80,922; had acquisition costs for these drugs been 

based on post-ACA FULs (i.e., FUL amounts based on AMPs),

expenditures would have totaled $115,812.

38, 39 In other words, the 

reduced FUL amounts required by the ACA are still greater than pharmacy 

acquisition costs in the aggregate. 

CMS had not completed implementation of 

AMP-based FUL amounts as of August 2012

CMS’s withdrawal of the previous FUL and AMP rules related to the 

DRA took effect in December 2010; the Federal injunction against the 

agency was lifted in the same month. As a result, CMS was able to begin 

implementation of the ACA-required FUL amounts based on AMPs by 

calculating the new amounts and issuing draft files for review. However, 

as of August 2012, FUL amounts are still based on published prices. 

36 This estimate is based on 1 month of FUL amounts and assumes that they were 

consistent from 1 month to the next. 

37 This total is based on ingredient costs and utilization from 36 States with reported 

Medicaid utilization for the fourth quarter of 2010 and a simple formula for calculating 

dispensing fees (e.g., $5 for generic drugs). This total includes only the 416 drugs 

associated with an AMP-based FUL amount in CMS’s November 2010 draft file. 

Additionally, this total represents one-third (i.e., 1 month) of the quarterly utilization. 38 We are unable to compare AMP-based FUL amounts to pharmacy acquisition costs for 

individual drugs because of the sample size. 

39 This total does not include dispensing fees. 
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 11

Manufacturer reporting of AMP data improved between 2010 

and 2011 

CMS’s draft FUL files indicate that manufacturer reporting of AMP data 

improved substantially between 2010 and 2011. CMS staff attribute the 

increase to manufacturers’ learning how to calculate post-ACA AMPs. 

Additionally, in accordance with an enforcement initiative announced in 

September 2010, OIG has begun imposing CMPs on certain manufacturers 

for not reporting pricing data (including AMPs) or reporting them late. 

CMS’s November 2010 draft file contained FUL amounts based on AMPs 

for 416 drugs. However, an additional 435 drugs were included in the 

draft file that did not have a FUL amount based on AMPs because 

manufacturers associated with at least one of the national drug codes 

(NDC) did not report AMP data. 

The number of drugs associated with FUL amounts based on AMPs in the 

July and September 2011 draft files increased substantially (719 and 

826 drugs, respectively). Conversely, the number of drugs that did not 

have a FUL amount based on AMP because of missing AMP data from 

November 2010 to September 2011 fell 95 percent (from 435 to 22 drugs). 

See Figure 1 for the difference in availability of FUL amounts based on 

AMPs between 2010 and 2011. 

Figure 1: Availability of FUL Amounts Based on AMPs

416

719

826

435

212

22

0

100

200

300

400

500

600

700

800

900

November 2010 July 2011 September 2011

Number of Drugs

AMP-Based FUL Amount

Missing AMP Data

 Source: OIG analysis of CMS draft FUL files November 2010, July 2011, and September 2011. 

 
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 12

CONCLUSION AND RECOMMENDATION

A series of OIG reports consistently found that the published prices used 

to set FUL amounts (and the related Medicaid reimbursement) frequently 

exceeded prices available in the marketplace by substantial margins. Our 

findings in this report indicate that FUL amounts based on published 

prices exceed not only sampled pharmacy acquisition costs but FUL 

amounts based on AMPs as well, albeit by a much smaller margin. We 

also found that despite the substantial reduction in proposed 

reimbursement, FUL amounts based on AMPs are still greater than 

sampled pharmacy acquisition costs, in the aggregate. 

CMS has started to implement FUL amounts based on AMPs by releasing 

draft files, but has yet to complete implementation as required by the 

ACA. During this process, CMS has ensured transparency by releasing 

several draft files for public review and comment. Given the results of the 

body of OIG work and the potential reduction in Medicaid expenditures, 

we recommend that CMS: 

Complete the Implementation of the Post-ACA AMP-based FUL 

Amounts

 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred with our recommendation and stated that it plans to 

implement FUL amounts based on AMPs in the near future. CMS noted 

that FUL reimbursement continues to be established in the aggregate and 

that States maintain the right to adjust reimbursement on a drug-by-drug 

basis. CMS also stated that 175 percent of weighted monthly AMPs 

should yield adequate reimbursement for pharmacies while achieving 

Medicaid cost savings. 

We will continue to monitor CMS’s efforts to implement FUL amounts 

based on AMPs as well as the relationship between pharmacy acquisition 

cost and FULs. 

We did not make any changes to the report based on CMS’s comments. 

For the full text of CMS’s comments, see Appendix B. 
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 13

APPENDIX A 

Detailed Sampling Plan

We identified a stratified random sample of 120 traditional retail 

pharmacies from a sampling frame of 58,545 pharmacies selected by the 

Office of Inspector General’s Office of Audit Services (OAS).

40 The 

sampling frame for this analysis includes all traditional retail pharmacies 

for 49 States and the District of Columbia (Arizona is not included)41 that 

were open for business as of November 10, 2010, and listed in the 

National Council for Prescription Drug Programs dataQ Pharmacy 

Database file. The sampling frame excludes pharmacies identified as 

government, managed care, or nontraditional. We selected a stratified 

sample with 4 strata and selected 30 pharmacies from each stratum for a 

total of 120 pharmacies. See Table A-1 for a description of the sampling 

frame. 

 Table A-1: Sampling Frame

Stratum Description Universe Size

1 Urban independent 17,362 

2 Urban chain 36,452 

3 Rural independent 2,798

4 Rural chain 1,933

Total 58,545 

 Source: OAS final amended sampling plan for Review of Drug Costs to Medicaid Pharmacies and Their Relation to 

 Benchmark Prices (A-06-11-00002). 

40 We are using data that were previously collected for work related to pharmacy 

acquisition cost and Medicaid reimbursement for prescription drugs. See Review of Drug 

Costs to Medicaid Pharmacies and Their Relation to Benchmark Prices (A-06-11-

00002), October 2011. 

41 Arizona had a managed care system for providing drugs to Medicaid beneficiaries at 

the time OAS collected pharmacy acquisition costs. After discussions with CMS, OAS 

chose to omit Arizona from its review. 
APPENDIX 8 

Agency Comments 

,.l. tl'JYICF.t, 

<""" "" t.::i-	DEPARTMENT OF HEALTH & HUMAN SERVICES Centers for Medicare & Medicaid Services 

Administrator 

Washington, DC 20201 

DATE: AUG 0 8 2012 

TO: 	 Daniel R. Levinson 


Inspector General 


FROM: 	 Marilyn TAI\ceriner 


Acting Atlmmistrator 


SUBJECT: 	 Office of Inspector General (OIG) Draft Report: "Analyzing Changes to Medicaid 

Federal Upper Limit Amounts" (OEI-03-11-00650) 

The Centers for Medicare & Medicaid Services (CMS) appreciates the opportunity to review and 

comment on the OIG draft report entitled ''Analyzing Changes to Medicaid Federal Upper Limit 

Amounts. " This report provides an analysis of Medicaid pharmacy reimbursement comparing federal 

upper limit (FUL) amounts based on published prices to FUL amounts based on average 

manufacturer prices (AMP) currently in statute. Further, this report provides analysis of both 

published pricing and AMP-based FUL<> to pharmacy acquisition costs. 

Prior to the enactment of the Deficit Reduction Act of 2005 (DRA), FUI..s were established based on 

commercial compendia pricing. The DRA revised section 1927 of the Social Security Act (the Act) 

to require that the Secretary establish the FUI..s using AMP, a pricing methodology based on actual 

sales data. However, CMS was enjoined from implementing the FUI..s using this methodology. The 

Affordable Care Act again revised the Act to require that the Secretary calculate the FUL at no less 

than 175 percent of the weighted average of monthly AMPs for pharmaceutically and therapeutically 

equivalent multiple source drugs that are available for purchase on a nationwide basis. Beginning in 

September 2011, we issued draft FUI...s based on the current statutory requirements for review and 

comment only. In addition, we have posted the draft methodology used to calculate the FUL<>. These 

draft FUL prices are based on the most recently reported monthly AMP and AMP unit data, as 

required by statute. 

OIG Findings 

The OIG found that FUL amounts based on compendia prices were more than four times greater than 

sampled pharmacy acquisition costs for 601 drugs in the aggregate. This confirmed findings from 

prior OIG reports which consistently found that using compendia prices to set FUL amounts 

frequently exceeded prices available in the marketplace by substantial margins. OIG also found that 

the AMP-based FUL amounts were 61 percent lower than FUL amounts based on compendia prices 

at the median. OIG concluded that the AMP-based FUL amounts exceeded sampled pharmacy 

acquisition costs in the aggregate. 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11 -00650) 14 
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 15

Agency Comments (continued)
 

Analyzing Changes to Medicaid Federal Upper Limit Amounts (OEI-03-11-00650) 16

ACKNOWLEDGMENTS

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

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office, and David E. Tawes, Regional Inspector General in the 

Baltimore regional office. 

Edward K. Burley served as the team leader for this study. Other Office of 

Evaluation and Inspections staff from the Philadelphia regional office who 

conducted the study include Eric Merron. Central office staff who

provided support include Althea Hosein, Kevin Manley, Debra Roush, and 

Tasha Trusty. Office of Audit Services staff who provided support include 

Paul Chesser. 
Office of Inspector General

http://oig.hhs.gov

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

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

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

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

investigations, and inspections conducted by the following operating components:

Office of Audit Services

The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 

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

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

out their respective responsibilities and are intended to provide independent assessments of 

HHS programs and operations. These assessments help reduce waste, abuse, and 

mismanagement and promote economy and efficiency throughout HHS.

Office of Evaluation and Inspections

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on significant 

issues. These evaluations focus on preventing fraud, waste, or abuse and promoting 

economy, efficiency, and effectiveness of departmental programs. To promote impact, OEI 

reports also present practical recommendations for improving program operations. 

Office of Investigations

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, operations, and beneficiaries. With 

investigators working in all 50 States and the District of Columbia, OI utilizes its resources 

by actively coordinating with the Department of Justice and other Federal, State, and local 

law enforcement authorities. The investigative efforts of OI often lead to criminal 

convictions, administrative sanctions, and/or civil monetary penalties.

Office of Counsel to the Inspector General

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

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

legal support for OIG’s internal operations. OCIG represents OIG in all civil and 

administrative fraud and abuse cases involving HHS programs, including False Claims Act, 

program exclusion, and civil monetary penalty cases. In connection with these cases, OCIG 

also negotiates and monitors corporate integrity agreements. OCIG renders advisory 

opinions, issues compliance program guidance, publishes fraud alerts, and provides other 

guidance to the health care industry concerning the anti-kickback statute and other OIG 

enforcement authorities.