Department of Health and Human Services 

OFFICE OF

INSPECTOR GENERAL

 

HIGHER REBATES FOR 

BRAND-NAME DRUGS RESULT IN 

LOWER COSTS FOR MEDICAID 

COMPARED TO MEDICARE PART D 

 

Daniel R. Levinson 

Inspector General 

August 2011 

OEI-03-10-00320 
 

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 EXECUTIVE SUMMARY

OBJECTIVES

1. To compare pharmacy reimbursement under Medicare Part D to 

pharmacy reimbursement under Medicaid for selected drugs.

2. To compare manufacturer rebates under Medicare Part D to 

manufacturer rebates under Medicaid for selected drugs. 

3. To compare net drug costs under both programs and determine the 

effect that differences may have on overall program costs. 

BACKGROUND

Section 3313(b) of the Affordable Care Act (ACA), P.L. 111-148, directs 

the Office of Inspector General to complete a study by October 1, 2011, 

that (1) compares the prices paid (including rebates) for 200 covered 

Part D drugs by Part D plan sponsors to the prices paid (including 

rebates) for the same drugs by State plans under Medicaid and 

(2) assesses the impact of price differences.

Medicare Part D provides an optional prescription drug benefit to all 

Medicare beneficiaries. The Centers for Medicare & Medicaid Services 

(CMS) contracts with private companies (hereinafter referred to as 

sponsors) to provide drug coverage to beneficiaries who choose to enroll 

in the program. The Part D program relies on sponsors to negotiate 

drug manufacturer rebates to reduce the cost of the program to 

beneficiaries and the Government. Because rebates are subtracted from 

the sponsor’s costs, they lower the beneficiary’s premium and the cost to 

the Government. 

The Medicaid drug rebate program was established to reduce 

expenditures for Medicaid prescription drugs. For Federal payment to 

be available for covered outpatient drugs under Medicaid, the Social 

Security Act mandates that drug manufacturers enter into rebate 

agreements with the Secretary of Health & Human Services, report 

quarterly average manufacturer prices (AMP) to CMS for each of their 

covered outpatient drugs, and pay quarterly rebates to State Medicaid 

agencies. The Medicaid rebate amount for any given drug generally 

depends on the quarterly AMP. In addition, if the AMP for a brandname drug has risen faster than inflation, then the manufacturer must 

pay an additional rebate. 

In 2005, Medicaid paid in excess of $43 billion for prescription drugs; 

however, drug expenditures decreased by almost half in the following 
 

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EXECUTIVE SUMMARY

year, when drug coverage for dual eligible beneficiaries (i.e., 

beneficiaries eligible for both Medicare and Medicaid) shifted from 

Medicaid to Medicare Part D. Medicaid expenditures for prescription 

drugs totaled just under $26 billion in 2009. In the last year before 

coverage for dual eligibles was moved to Part D (2005), Medicaid 

rebates totaled about 26 percent of drug expenditures. However, 

although Medicaid expenditures decreased by almost half after 2005, 

Medicaid rebates as a percentage of expenditures increased. As a result 

of these rebates, Medicaid recouped between 29 and 38 percent of its 

expenditures for prescription drugs each year between 2006 and 2009, 

yielding an average annual savings of about $8 billion. 

For this review, we compared pharmacy reimbursement and rebates 

under Medicare Part D and Medicaid for the 100 brand-name and 

100 generic drugs with the highest Part D expenditures. We then 

examined each program’s net costs and determined the effect of 

differences on overall costs.

FINDINGS

In 2009, pharmacy reimbursement amounts under Medicare Part D 

and Medicaid were similar for most selected brand-name drugs but 

differed substantially for over half of selected generic drugs. For 

70 of the 100 brand-name drugs under review, the difference between 

the average Part D and Medicaid unit reimbursement amounts was less

than 2 percent. For more than half (53) of the generic drugs under 

review, pharmacy reimbursement under Part D and Medicaid differed 

by more than 15 percent. 

For all 30 brand-name drugs for which the reimbursement difference 

exceeded 2 percent, it was Medicaid that paid more. Overall, Medicaid 

reimbursement was higher for 63 brand-name drugs; Part D 

reimbursement was higher for the remaining 37.

In 2009, Medicaid unit rebate amounts for brand-name drugs were 

substantially higher than Part D unit rebate amounts; rebates for 

generic drugs under both programs were negligible. Overall, 

Medicaid unit rebate amounts were 3 times greater than Part D unit 

rebate amounts at the median for the 100 brand-name drugs under 

review. For 68 of these drugs, manufacturers paid at least twice as 

much per unit in Medicaid rebates compared to amounts paid per unit 

under Part D. Conversely, Part D unit rebate amounts exceeded 
 

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EXECUTIVE SUMMARY

Medicaid unit rebate amounts for just five of the brand-name drugs 

under review. 

Unlike rebates for brand-name drugs, rebates for generic drugs had 

little impact in reducing expenditures. Part D sponsors collected 

virtually no Part D rebates for generic drugs, and Medicaid rebates for 

generic drugs reduced total expenditures by only 3 percent. 

Medicaid rebates were substantially higher than Part D rebates because 

manufacturers for virtually all brand-name drugs under review paid 

inflation-based rebates in addition to basic rebates. For 98 of the 

100 brand-name drugs under review, manufacturers paid this 

additional rebate in all 4 quarters of 2009. In the aggregate, 55 percent 

of the total Medicaid rebates owed by manufacturers for the 100 brandname drugs under review ($1.6 billion out of $2.9 billion) are owed 

because AMPs rose faster than inflation. 

After accounting for rebates, Medicaid net costs for selected 

brand-name drugs were much lower than Part D net costs. 

Although average Part D and Medicaid reimbursement amounts for 

most brand-name drugs under review were similar, Medicaid unit 

rebates for these drugs were substantially higher than those under Part 

D. Consequently, Medicaid’s net unit costs (i.e., pharmacy 

reimbursement minus rebates) were much lower than net unit costs 

under Part D in 2009. 

As previously stated, Medicaid unit reimbursement amounts were 

actually higher than Part D unit reimbursement amounts for 

63 brand-name drugs. However, after accounting for rebates, Medicaid 

net unit costs were higher than Part D net unit costs for only 7 drugs; 

Part D net unit costs exceeded Medicaid unit costs for the remaining 93.

As further evidence of Medicaid’s substantially higher unit rebate 

amounts, Medicaid collected nearly two-thirds as much in rebates as 

Part D ($2.9 billion vs. $4.5 billion) for the selected drugs despite having 

only about one-fourth of the expenditures ($6.4 billion vs. $24 billion). 

In 2009, rebates reduced Part D expenditures by 19 percent for the 

100 brand-name drugs under review (from $24 billion to $19.5 billion). 

Medicaid rebates accounted for a substantially higher percentage of 

total expenditures, reducing expenditures by 45 percent (from 

$6.4 billion to $3.5 billion) for these 100 drugs. 
 

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EXECUTIVE SUMMARY

CONCLUSION

Prescription drug rebates reduce the program costs of both Medicare 

Part D and Medicaid. Medicaid rebates are defined by statute; 

additional rebates are required when prices for brand-name drugs 

increase faster than inflation. Unlike the Medicaid program, Part D 

sponsors (or contractors acting on their behalf) negotiate rebates with 

drug manufacturers without any statutory requirements on rebate 

amounts. In fact, the law establishing the Part D program expressly 

prohibits the Government from instituting a price structure for the 

reimbursement of covered Part D drugs.

In this review, we found that Part D sponsors and State Medicaid 

agencies paid pharmacies similar amounts for most brand-name drugs

under review. However, statutorily defined Medicaid unit rebate 

amounts for brand-name drugs exceeded Part D unit rebate amounts by 

a substantial margin. As a result, Medicaid collected nearly two-thirds 

as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion 

vs. $4.5 billion), despite having only about one-fourth of the expenditure

($6.4 billion vs. $24 billion). 

Medicaid rebates for brand-name drugs may increase as a result of ACA 

provisions that raise the rebate percentage. Given the potential impact 

on beneficiary and Government expenditures, we believe that it is 

important for CMS to continually examine any differences in how each 

program collects rebates. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS agreed with our overall findings. CMS stated that it was pleased 

OIG confirmed that the Medicaid rebate program is working well and 

providing substantial rebates to offset the high costs of prescription 

drugs. CMS agreed that the ACA may further increase Medicaid 

rebates for brand-name drugs and that it is important to continue to 

examine the differences in how each program collects rebates. We did 

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

 
 TABLE OF CONTENTS

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

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

FINDINGS ................................................. 13

In 2009, pharmacy reimbursement amounts under Medicare 

Part D and Medicaid were similar for most selected brand-name 

drugs but differed substantially for over half of selected generic 

drugs................................................. 13

In 2009, Medicaid unit rebate amounts for brand-name drugs 

were substantially higher than Part D unit rebate amounts; 

rebates for generic drugs under both programs were negligible . . 15

After accounting for rebates, Medicaid net costs for selected 

brand-name drugs were much lower than Part D net costs ..... 17

CONCLUSION ............................................. 19

Agency Comments and Office of Inspector General Response.... 19

APPENDIX ................................................ 21

Agency Comments ...................................... 21

ACKNOWLEDGMENTS ..................................... 22
 

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 INTRODUCTION

OBJECTIVES 

1. To compare pharmacy reimbursement under Medicare Part D to 

pharmacy reimbursement under Medicaid for selected drugs.

2. To compare manufacturer rebates under Medicare Part D to 

manufacturer rebates under Medicaid for selected drugs. 

3. To compare net drug costs under both programs and determine the 

effect that differences may have on overall program costs. 

BACKGROUND

Section 3313(b) of the Affordable Care Act (ACA), P.L. 111-148, directs the 

Office of Inspector General (OIG) to complete a study by October 1, 2011, 

that (1) compares the prices paid (including rebates) for 200 covered 

Part D drugs by Part D plan sponsors to the prices paid (including rebates) 

for the same drugs by State plans under Medicaid and (2) assesses the 

impact of price differences.

Medicare Part D Drug Coverage

The Medicare prescription drug program, known as Medicare Part D, 

provides an optional prescription drug benefit to all Medicare 

beneficiaries.1 The Centers for Medicare & Medicaid Services (CMS) 

contracts with private companies, known as Part D plan sponsors 

(hereinafter referred to as sponsors), to provide drug coverage to the 

nearly 30 million beneficiaries who choose to enroll in the program.2 

Part D expenditures totaled $61 billion in 2009.3

Sponsors offer benefits through (1) stand-alone prescription drug plans 

(PDP) and (2) Medicare Advantage prescription drug plans (MA-PD). 

MA-PDs provide integrated medical coverage, including drugs, through 

managed care. Most beneficiaries are responsible for certain costs, 

which may include a monthly premium, an annual deductible, and 

 

1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 

P.L. 108-173.

2 CMS, 2010 Enrollment Information. Accessed at http://www.cms.hhs.gov on 

March 11, 2011. 

3 The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary 

Medical Insurance Trust Funds, 2010 Annual Report of the Boards of Trustees of the

Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 

p. 10. Accessed at http://www.cms.gov on October 13, 2010.
 

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INTRODUCTION

coinsurance or copayments. However, certain low-income beneficiaries 

are eligible to receive assistance to pay some or all of these costs.4 

Dual eligibles. When Medicare Part D was implemented in 2006, more 

than 6 million low-income senior citizens and disabled individuals were 

full-benefit dual eligibles, i.e., beneficiaries enrolled in both Medicare 

and Medicaid. Until December 31, 2005, dual eligibles received 

outpatient drug benefits through Medicaid. However, on 

January 1, 2006, Federal financial participation ended for Medicaid 

drug coverage for dual eligibles.5

Medicare Part D Drug Reimbursement

 Instead, dual eligibles now receive 

drug coverage under Part D. 

Beneficiaries enrolled in Medicare Part D typically obtain drugs from 

pharmacies. Pharmacy reimbursement (i.e., the point-of-sale price) 

under Part D is based on prices negotiated between pharmacies and 

sponsors (hereinafter referred to as negotiated prices). Regulation 

defines negotiated prices as prices for covered Part D drugs that: 

(1) the sponsor (or its affiliated contractor) and pharmacy have 

negotiated as the amount the pharmacy will receive for a particular 

drug, (2) are reduced by price concessions6 that the sponsor has elected 

to pass through to Part D enrollees at the point of sale, and (3) include 

any pharmacy dispensing fees.7 Negotiated prices contain two main 

elements:8

1. Ingredient cost – the amount paid to the pharmacy for the drug 

itself. 

 

2. Dispensing fee – the amount paid to the pharmacy for dispensing 

the drug. This amount includes only those activities related to the 

transfer of the drug from the pharmacy to the beneficiary, including 

charges associated with mixing the drug, delivery, and overhead.9

4 42 CFR § 423.780 and 42 CFR § 423.782.

5 Section 1935 of the Social Security Act (the Act).

6 Rebates from drug manufacturers are the most common type of price concession. 

7 42 CFR § 423.100. 

8 Negotiated prices for Medicare Part D also include a data element for sales tax. See 

CMS, Instructions: Requirements for Submitting Prescription Drug Event Data. Accessed 

at http://www.cms.hhs.gov on October 4, 2010.

9 CMS, Instructions: Requirements for Submitting Prescription Drug Event Data. 

Accessed at http://www.cms.hhs.gov on October 4, 2010. 
 

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INTRODUCTION

The ingredient cost of the drug is usually based on the lowest of 

(1) the average wholesale price (AWP) discounted by a specified 

percentage,10 (2) the maximum allowable cost, or (3) the pharmacy’s 

usual and customary charge to the public.11 The portion of the 

negotiated price paid by the plan sponsor and the portion paid by the 

beneficiary are determined by the plan’s cost-sharing rules. 

Reimbursement is negotiated among sponsors, manufacturers, and 

pharmacies; the law creating the Part D program expressly prohibits 

the Government from establishing a price structure for the 

reimbursement of drugs under Part D.12

All sponsors submit data and information necessary for CMS to 

determine and make payment.

 

13 Every time a beneficiary has a 

prescription filled under Part D, his or her plan must submit a 

prescription drug event (PDE) record. The PDE record contains drug 

cost, payment, and utilization data.14

Medicare Part D Rebates

 

Sponsors negotiate drug manufacturer rebates to reduce the cost of the 

Part D program to beneficiaries and the Government. Sponsors either 

negotiate directly with manufacturers for rebates or contract with a 

third party entity to negotiate on their behalf; in either case they are 

required to report these rebates to CMS.

Before the beginning of each year, sponsors submit a bid to CMS for 

each plan they intend to offer.15

10 AWPs are listed in commercial publications. They are derived from manufacturerreported data for both brand-name and generic drugs and are not defined in law or 

regulation. Previous OIG work found that AWPs are often significantly higher than the 

prices that drug manufacturers, wholesalers, and similar entities actually charge the 

physicians and pharmacies that purchase these drugs. For example, see OIG, Medicaid 

Pharmacy – Actual Acquisition Cost of Brand Name Prescription Drug Products 

(A-06-00-00023), August 2001; Medicaid Pharmacy – Actual Acquisition Cost of Generic 

Prescription Drug Products (A-06-01-00053), March 2002; and Medicaid’s Use of Revised 

Average Wholesale Prices (OEI-03-01-00010), September 2001.

 The bids are the sponsors’ estimates of 

the cost to provide the prescription drug benefit to each beneficiary and 

include drug costs, utilization, and rebates. In its bid instructions, CMS 

11 If ingredient cost is based on the usual and customary charge, the pharmacy is not 

paid a dispensing fee. 

12 Section 1860D-11(i) of the Act.

13 Sections 1860D-15(c)(1)(C) and (d)(2) of the Act, 42 CFR § 423.322.

14 CMS, Instructions: Requirements for Submitting Prescription Drug Event Data. 

Accessed at http://www.cms.hhs.gov on October 4, 2010. 

15 42 CFR § 423.265.
 

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INTRODUCTION

defines expected rebates as the sponsor’s best estimate of price 

concessions that decrease the sponsor’s costs for Part D drugs.16 CMS 

uses the bids to calculate each plan’s beneficiary premium. Because 

expected rebates are subtracted from the sponsor’s expected costs, they 

lower the bid amount and, thus, the beneficiary’s premium. 

CMS, using these bids, makes prospective payments to sponsors to cover 

the cost of providing the Part D benefit. Therefore, the overall cost of 

the program to the Government is reduced because expected rebates are 

subtracted from expected costs. In an annual rebate report after the 

end of the year, sponsors must provide CMS with information about the 

actual costs, including the amount of rebates that they received.17

Medicaid Drug Coverage

 CMS 

uses these reports to reconcile its prospective payments with sponsors’ 

actual costs and thus, to determine whether sponsors owe money to the 

Government or vice versa. 

Title XIX of the Act established Medicaid, a program administered by 

States and financed with State and Federal funds. Medicaid pays for 

medical care and health-related assistance for certain vulnerable and 

needy individuals and families. All 50 States and the District of 

Columbia provide coverage for drugs under Medicaid. In 2005, 

Medicaid paid in excess of $43 billion for prescription drugs; however, 

drug expenditures decreased by almost half in the following year, when 

drug coverage for dual eligible beneficiaries shifted from Medicaid to 

Part D. Since 2006, Medicaid payments for prescription drugs have 

remained relatively steady (see Table 1 on page 6). In 2009, Medicaid 

expenditures for drugs totaled approximately $26 billion. 

Medicaid Drug Reimbursement

Medicaid beneficiaries typically receive covered drugs through 

pharmacies, which are reimbursed for them by State Medicaid agencies. 

Federal regulations require, with certain exceptions, that each State 

Medicaid agency’s reimbursement for covered outpatient drugs not 

exceed (in the aggregate) the lower of the provider’s usual and 

customary charge to the public for the drugs or the estimated 

16 CMS, Instructions for Completing the Prescription Drug Plan Bid Pricing Tool for 

Contract Year 2011, April 2010.

17 CMS, Medicare Part D Reporting Requirements, January 2010.
 

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INTRODUCTION

acquisition cost for drugs (i.e., the ingredient cost) plus a reasonable 

dispensing fee.18 These costs are defined as: 

1. Ingredient cost. Medicaid payment for ingredient cost is based on 

the estimated acquisition cost. Regulations define estimated 

acquisition cost to be the State’s “best estimate” of the price 

generally and currently paid by providers for the drug.19 CMS 

allows States flexibility in determining what constitutes the 

ingredient cost of drugs covered by their Medicaid programs; 

therefore, Medicaid reimbursement varies across States. During the 

period covered by this review (i.e., 2009), most States calculated the 

estimated acquisition cost based on the AWP discounted by a 

specified percentage.20 For certain drugs, States also used the 

Federal upper limit or State maximum allowable cost programs in 

setting reimbursement amounts.21, 22

2. Dispensing fee. State Medicaid agencies also pay a “reasonable” 

dispensing fee to pharmacies for pharmacy services. Each State 

determines its Medicaid dispensing fee, which generally ranged from

$1.75 and $7.50 per prescription as of December 2009.23

The Medicaid Drug Rebate Program

To reduce expenditures for Medicaid prescription drugs, CMS and the 

States have implemented certain cost containment measures, including 

the Medicaid drug rebate program. For Federal payment to be available 

for covered outpatient drugs under Medicaid, the Act mandates that 

drug manufacturers enter into rebate agreements with the Secretary of 

18 42 CFR § 447.512. 

19 42 CFR § 447.502. 

20 CMS, Medicaid Prescription Reimbursement Information by State – Quarter Ending 

December 2009. Accessed at http://www.cms.hhs.gov on March 9, 2011.

21 The Federal upper limit program limits Medicaid reimbursement for certain generic 

drugs and ensures that the Federal Government acts as a prudent buyer by taking 

advantage of current market prices for generic drugs. 

22 A maximum allowable cost is a ceiling price that applies to a group of generic drugs. 

Individual States determine which drugs are included in their programs and the methods 

by which the maximum allowable cost for a drug is calculated.

23 CMS, Medicaid Prescription Reimbursement Information by State – Quarter Ending 

December 2009. Accessed at http://www.cms.hhs.gov on March 9, 2011. This range 

excludes drugs dispensed through nonretail pharmacies, compounded drugs, and home 

intravenous therapy. 
 

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Health & Human Services and pay quarterly rebates to State Medicaid 

agencies.24

In the last year before coverage for dual eligibles was moved to Part D 

(2005), Medicaid collected $11.2 billion in rebates from manufacturers 

(26 percent of total drug expenditures). However, as Table 1 illustrates, 

although Medicaid expenditures decreased by almost half after 2005, 

Medicaid rebates as a percentage of expenditures increased. As a result 

of these rebates, Medicaid recouped between 29 and 38 percent of its 

expenditures for prescription drugs each year between 2006 and 2009, 

yielding an average annual savings of about $8 billion.

 

25, 26

Table 1: Medicaid Expenditures and Rebates 2005–2009

 See Table 1 

for additional information on Medicaid expenditures and rebates. 

Year Expenditures Medicaid

Rebates

Rebates as a Percentage of 

Expenditures

2005 $43.2 billion $11.2 billion 26% 

2006 $22.5 billion $8.6 billion 38%

2007 $22.6 billion $6.6 billion 29%

2008 $24.0 billion $8.0 billion 33%

2009 $25.6 billion $9.0 billion 35%

Source: CMS Medicaid data for calendar years 2005–2009.

As part of the Medicaid drug rebate program, manufacturers must 

provide CMS with the average manufacturer price (AMP) for each of 

their national drug codes (NDC) on a quarterly basis.27 An NDC is a 

unique 11-digit identifier that represents a specific manufacturer, 

product, and package size. During the period covered by this review, 

the AMP was generally defined as the average price paid to the 

24 Sections 1927(a)(1) and (b)(1) of the Act. Sections 1927(k)(2–3) of the Act define a 

covered outpatient drug. 

25 According to CMS staff, the substantial increase in rebates as a percentage of 

expenditures from 2005 to 2006 may be partially explained by the time lag between when 

expenditures occur and when the rebates are actually collected. 

26 States can negotiate supplemental rebates with drug manufacturers that are in 

addition to the statutory rebates in Table 1. From 2005 to 2009, State Medicaid agencies 

collected approximately $1 billion per year in supplemental rebates that would further 

reduce Medicaid expenditures. 

27 Section 1927(b)(3) of the Act.
 

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manufacturer for the drug in the United States by wholesalers for 

drugs distributed to the retail pharmacy class of trade.28

The Medicaid unit rebate amount (URA) for a drug generally depends 

on the quarterly AMP submitted by the manufacturer, as well as 

whether the drug is brand-name or generic (because the Medicaid 

rebate for brand-name drugs is higher).

 

29 From 1996 to 2009, the basic 

URA for a brand-name drug was either 15.1 percent of the AMP or the 

difference between the AMP and best price (whichever was greater).30,

31

Furthermore, if the AMP for a brand-name drug has risen faster than 

inflation, then the drug’s manufacturer must pay an additional rebate.

 The basic URA for a generic drug was 11 percent of the AMP. 

32

CMS calculates a URA for each NDC and transmits that information to 

States. States then determine the total quarterly rebates that 

 

To determine whether a brand-name drug is subject to the increased 

rebate amount, CMS compares the reported AMP for a given quarter to 

its inflation-adjusted baseline AMP. The baseline AMP for a drug is the 

AMP for the first quarter after the drug’s initial market date. To adjust 

the baseline AMP for inflation, CMS first divides the baseline AMP by 

the baseline Consumer Price Index–Urban (CPI-U), which is the CPI-U 

for the first month prior to the first quarter after the drug’s initial 

market date. The result of that calculation is then multiplied by the 

quarterly CPI-U, which is the CPI-U for the month prior to the quarter 

being calculated. If the reported AMP is greater than the inflationadjusted baseline AMP, then the difference is added to the URA.

28 Section 1927(k)(1) of the Act. Section 2503 of the ACA changed the definition of AMP, 

effective October 2010. That change is not relevant for the purposes of this study.

29 Brand-name drugs are approved by the Food and Drug Administration (FDA) under a 

new drug application and are generally sold by one manufacturer. Generic drugs are 

approved by FDA under abbreviated new drug applications and are generally sold by 

multiple manufacturers at a lower cost. 

30 Section 1927(c) of the Act. Pursuant to section 1927(b)(3)(A)(i)(II) of the Act, 

manufacturers must provide a “best price” for each of their brand-name drugs on a 

quarterly basis. Generally speaking, best price is defined by section 1927(c)(1)(C) of the Act 

as the lowest price available from the manufacturer to any purchaser in the United States, 

with certain exceptions.

31 Effective January 2010, § 2501(a) of the ACA increases the URA for brand-name drugs 

to the greater of 23.1 percent of the AMP or the difference between AMP and best price 

(with certain exceptions). Section 2501(b) of the ACA increases the URA for generic drugs 

to 13 percent of the AMP.

32 Section 1927(c)(2) of the Act. 
 

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participating manufacturers owe by multiplying the URA for a specific 

drug by the number of units of that drug dispensed to Medicaid 

beneficiaries in that quarter. 

Related OIG Work

A February 2009 OIG report compared pharmacy reimbursement under

Medicare Part D and Medicaid for 79 drugs.33 It did not compare total 

program expenditures and did not determine the impact of rebates. The 

report found that, nationally, the average pharmacy reimbursement 

amounts for both programs were similar for most selected brand-name 

drugs. The report also found that nationally, Medicaid pharmacy 

reimbursement amounts typically exceeded those in Part D for selected 

generic drugs.

A March 2011 OIG report examined manufacturer rebates under 

Part D.34 That report found that sponsors reported receiving 

$6.5 billion in drug manufacturer rebates in 2008. These rebates should 

reduce the cost of the Part D program. However, the report also found 

that sponsors underestimated rebates in 69 percent of their bids for 

plan year 2008, causing beneficiary premiums and Government 

payments to be higher than they otherwise would have been. 

METHODOLOGY

Scope

For this review, we compared pharmacy reimbursement and rebates 

under Medicare Part D and Medicaid for selected high-expenditure 

brand-name and generic drugs (i.e., NDCs). We selected these drugs 

based on PDE data from both PDP and MA-PD sponsors. We selected

the 100 brand-name drugs with the highest Part D expenditures in 

retail pharmacies in 2009 and the 100 generic drugs with the highest 

Part D expenditures in retail pharmacies in 2009. Part D expenditures 

for these 200 drugs totaled $27 billion ($24 billion for brand-name drugs 

and $3 billion for generic drugs). Medicaid expenditures for these

33 OIG, Comparing Pharmacy Reimbursement: Medicare Part D to Medicaid, 

OEI-03-07-00350.

34 OIG, Concerns With Rebates in the Medicare Part D Program, OEI-02-08-00050.
 

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200 drugs totaled $6.8 billion ($6.4 billion for brand-name drugs and 

$449 million for generic drugs).35

Data Collection

 

Medicare Part D. We obtained PDE records from CMS for all covered 

drugs dispensed in retail pharmacies with dates of service in 2009 and 

aggregated these data to identify expenditures by NDC. We determined 

whether a drug was brand-name or generic using drug type information 

from two national drug compendia (Redbook and First DataBank), as 

well as Medicaid drug product data. We used data from the National 

Council of Prescription Drug Programs (NCPDP) that identify the 

primary pharmacy type to limit PDE records to drugs dispensed in

retail pharmacies.36 We then identified the top NDCs (100 brand-name 

drugs, 100 generic drugs) by total Part D expenditures (i.e., the sum of 

the ingredient cost and dispensing fee) based on these PDE claims data. 

The 200 selected NDCs were associated with 44 manufacturers. 

Medicaid. We obtained State Medicaid payment, utilization, and 

dispensing fee data for 2009 from CMS. Using these files, we 

determined State Medicaid agencies’ expenditures for and utilization of 

the 200 drugs identified above. 

Rebates. To obtain Medicare Part D rebate data, we sent letters to the 

44 manufacturers of the 200 selected drugs in December 2010. We 

asked them to report how much they paid in Part D rebates, by NDC, to 

Part D sponsors in 2009 for drugs dispensed in retail pharmacies. All 

manufacturers provided rebate data.37

Several manufacturers that paid Part D rebates were unable to limit 

their rebate data to drugs dispensed in retail pharmacies. Some of 

these provided estimates of rebates based on utilization; others did not 

provide these estimates. For drugs sold by manufacturers that did not 

provide actual or estimated retail-specific data, we calculated rebate 

estimates ourselves. To do this, we used PDE data to calculate what 

 

35 According to summary data for individual NDCs, Part D expenditures for these 

200 drugs accounted for almost half of program expenditures for drugs dispensed in retail 

pharmacies in 2009 and Medicaid expenditures for these 200 drugs accounted for about 

30 percent of program expenditures in 2009. 

36 A retail pharmacy has a dispenser type classification of “01” in NCPDP data. 

37 Manufacturers of eight of the selected brand-name drugs reported that either (1) they 

do not provide rebates for these drugs or (2) these drugs are not dispensed in retail 

pharmacies.
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 10

INTRODUCTION

percentage of a drug’s utilization was dispensed through retail 

pharmacies and calculated rebates proportionally. 

For Medicaid rebates, we obtained 2009 quarterly URAs from CMS for 

each of the drugs under review to calculate total rebates. URAs include 

both the basic and additional rebates (where applicable). 

Data Analysis

Pharmacy reimbursement amounts. We first compared 2009 pharmacy 

reimbursement of sponsors with that of State Medicaid agencies. To do 

this, we calculated the average Part D and Medicaid unit 

reimbursement amounts for each of the selected drugs by dividing total 

expenditures (ingredient costs and dispensing fees) by the total quantity 

dispensed. We calculated the percentage differences in pharmacy 

reimbursement between Medicare Part D and Medicaid for each 

brand-name drug and each generic drug under review and compared 

these differences. Additionally, we calculated the median percentage

differences in pharmacy reimbursement between Medicare Part D and 

Medicaid for all brand-name drugs and all generic drugs under review. 

Manufacturer rebates. We then calculated and compared Part D and 

Medicaid rebates. We calculated total 2009 Part D rebates for the 

200 drugs based on manufacturer submissions and then determined a 

unit rebate amount for each drug by dividing total rebates by quantity 

dispensed. For Medicaid, we calculated total 2009 rebates by 

multiplying the quarterly URAs38

To gain further insight into the differences between Part D and 

Medicaid rebates, we determined whether the manufacturers of the 

brand-name drugs under review paid inflation-based rebates to States 

in addition to the basic Medicaid rebates. To do this, we calculated the 

by quarterly utilization for each drug 

and adding these totals. We calculated a single Medicaid unit rebate 

amount in 2009 for each drug by dividing total rebates by quantity 

dispensed. We then determined the percentage differences in unit 

rebate amounts between the two programs for each brand-name and 

each generic drug under review and compared these differences. We 

also calculated the median percentage differences in rebates between

the two programs for all brand-name and all generic drugs under 

review. 

38 “URA” refers to CMS’s calculated amount to determine rebates; “unit rebate amount” 

hereinafter refers to OIG’s calculation of a volume-weighted average in 2009 of the 

quarterly URAs. 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 11

INTRODUCTION

quarterly basic rebate amount for each brand-name drug (i.e., 

15.1 percent of AMP or the difference between AMP and best price) and 

subtracted it from the drug’s quarterly URA. The difference was the 

amount of additional rebate that was owed because the drug’s price 

increased faster than the rate of inflation. 

Net costs

Limitations

. Finally, we determined the effect of differences in pharmacy 

reimbursement and rebates on expenditures by calculating net costs 

under each program. To calculate net costs, we subtracted unit rebate

amounts from unit reimbursement amounts for each drug under review. 

We calculated the percentage differences in net unit costs between 

Medicare Part D and Medicaid for each drug under review and 

compared these differences. We also calculated the median percentage

differences in net costs between Medicare Part D and Medicaid for all 

brand-name drugs and all generic drugs under review. 

The findings in this report apply only to the 200 drugs we reviewed 

and are not projectable to all drugs covered under Part D and 

Medicaid. We did not verify the accuracy or completeness of CMS’s 

Part D PDE data; CMS’s Medicaid utilization data; manufacturer 

rebate submissions; CMS’s Medicaid rebate data; pharmacy 

classifications; or drug type data from CMS, Redbook, or First

DataBank. 

The prices that serve as the bases for Medicaid rebate data (i.e., 

AMPs and best prices) are subject to revision. Therefore, the findings 

in this report are based on rebate data available at the time of the 

analysis. Part D and Medicaid rebate data are confidential; 

consequently, all of our findings are reported in the aggregate.39

Several manufacturers that paid Part D rebates were unable to limit 

their rebate data to drugs dispensed in retail pharmacies. In these 

cases, the manufacturers either provided estimates of these rebates or 

we calculated estimates based on reported rebates for drugs 

dispensed to all sources. 

 

Additionally, we did not collect data on supplemental rebates 

negotiated by States, nor did we include them in the analysis. 

39 Additionally, § 3313(b)(2)(B) of the ACA prohibits OIG from publishing proprietary 

information in this report. 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 12

INTRODUCTION

The ACA changed the definition of AMP as well as the URA for 

Medicaid drug rebates. In addition, provisions in the ACA increased 

Medicaid rebate percentages and additional Part D price reductions

on certain brand-name drugs for certain beneficiaries in 2011.40

Standards

 

However, these provisions were not in effect during the period under 

review. 

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.

40 Section 3301 of the ACA established a drug discount program for Part D beneficiaries 

that have entered the coverage gap (i.e., the period when a beneficiary is responsible for 

paying 100 percent of his or her drug costs), effective January 1, 2011. 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 13

FINDINGS FINDINGS

Part D sponsors and State In 2009, pharmacy reimbursement amounts under Medicaid agencies paid pharmacies Medicare Part D and Medicaid were similar for most similar amounts for most of the 

selected brand-name drugs but differed selected brand-name drugs.41 

substantially for over half of selected generic drugs However, for most of the generic 

drugs under review, differences in pharmacy reimbursement between 

the two programs were much greater. 

Pharmacy reimbursement amounts differed by less than 2 percent for over 

two-thirds of brand-name drugs

For 70 of the 100 brand-name drugs under review, the difference 

between the average Part D and Medicaid unit reimbursement amounts 

was less than 2 percent. Pharmacy reimbursement differed by less than 

10 percent for an additional 20 drugs. Only 5 of the 100 brand-name

drugs had a difference in pharmacy reimbursement that exceeded 

25 percent.42 

As Figure 1 illustrates, for all 30 drugs for which the reimbursement 

difference exceeded 2 percent, it was Medicaid that paid more. Overall, 

Medicaid reimbursement was higher for 63 drugs; Part D 

reimbursement was higher for the remaining 37. At the median, 

Medicaid reimbursement amounts to pharmacies were 1 percent higher 

than the Part D amounts for brand-name drugs. 

Pharmacy reimbursement amounts differed by more than 15 percent for 

over half of generic drugs 

As Figure 2 illustrates, pharmacy reimbursement amounts under 

Part D and Medicaid differed by more than 15 percent for 53 of the 

100 generic drugs under review. In fact, the difference in pharmacy 

reimbursement for 28 of these drugs exceeded 25 percent (6 of these 

drugs had differences that exceeded 50 percent).43 Overall, Medicaid 

reimbursement was higher for 62 of these drugs; Part D reimbursement 

was higher for the remaining 38.44 At the median, Medicaid 

41 This is generally similar to the results of our previous price comparison issued in 2009. 

See OIG, Comparing Pharmacy Reimbursement: Medicare Part D to Medicaid, 

OEI-03-07-00350.

42 Medicaid paid between 32 and 52 percent more than Part D paid for these five drugs. 

43 Medicaid paid between 57 and 138 percent more than Part D paid for four of these 

drugs. For the remaining two drugs, Medicaid paid 51 and 53 percent less than Part D. 

44 Although differences in reimbursement for most of these drugs exceeded 15 percent, in 

actual dollar terms, the differences were typically less than $0.25 per unit.
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 14

FINDINGS

reimbursement amounts were 3 percent higher than Part D amounts for 

selected generic drugs.

 Figure 1. Comparison of Unit Reimbursement Amounts in 2009 for the 

 100 Brand-Name Drugs Under Review 

 Source: OIG analysis of 2009 Part D PDE data and 2009 Medicaid utilization data. 

0 0 0 0

37

0

33

16

4 5 5

0

10

20

30

40

50

Drugs

Percentage Difference in Pharmacy Reimbursement -----------------------------------------

Medicaid Paid Less Than Part D

(n=37)

Medicaid Paid More Than Part D

(n=63)

Figure 2. Comparison of Unit Reimbursement Amounts in 2009 for the 100 Generic 

Drugs Under Review

 

 Source: OIG analysis of 2009 Part D PDE data and 2009 State Medicaid utilization data. 

2

18

9

7

1 1 0

3

13

22

16

4 4

0

10

20

30

Drugs

Percentage Difference in Pharmacy Reimbursement

Medicaid Paid Less Than Part D 

(n=38)

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

Medicaid Paid More Than Part D 

(n=62)
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 15

FINDINGS

 

In 2009, Medicaid unit rebate amounts for brandname drugs were substantially higher than Part D 

unit rebate amounts; rebates for generic drugs 

under both programs were negligible 

Overall, Medicaid unit rebate

amounts were 3 times greater 

than Part D unit rebate

amounts at the median for the 

100 brand-name drugs under 

review. For 68 of these drugs,

manufacturers paid at least twice as much per unit in Medicaid rebates 

in 2009 compared to amounts paid per unit under Part D (Medicaid unit 

rebate amounts were over 10 times greater than Part D unit rebate 

amounts for 10 of these drugs). Manufacturers for an additional eight

brand-name drugs responded that they did not provide any Part D 

rebates in 2009 (Medicaid rebates for these drugs ranged from 16 to 

54 percent of the unit costs for those drugs). Conversely, Part D unit 

rebate amounts exceeded Medicaid unit rebate amounts for just five of 

the brand-name drugs under review. Figure 3 illustrates the 

substantial difference in rebate amounts for Part D and Medicaid.45

 Figure 3. A Comparison of Unit Rebate Amounts for Brand-Name Drugs

 Source: OIG analysis of 2009 Part D rebate data and 2009 Medicaid rebate data. 

1 3 1 0

19 20

23

15

10

0

10

20

30

Drugs

Difference in Unit Rebate Amounts

Medicaid Rebates Are Lower Than Part D Rebates

(n=5)

Medicaid Rebates Are Higher Than Part D Rebates

(n=87)

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

Unlike rebates for brand-name drugs, rebates for generic drugs had 

little impact in reducing net expenditures. Part D sponsors collected 

virtually no rebates for generic drugs, according to manufacturer rebate 

45 Figure 3 includes only the 92 drugs for which there were both Medicaid and Part D 

rebates, thus enabling us to calculate the percentage difference. Manufacturers for the 

remaining eight brand-name drugs reported either (1) that they do not provide Part D 

rebates for these drugs or (2) that these drugs were not dispensed in retail pharmacies.
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 16

FINDINGS

data. Although manufacturers pay Medicaid rebates for generic drugs, 

they reduced total expenditures for the 100 generic drugs under review 

by only 3 percent. For individual generic drugs, Medicaid rebates 

ranged from less than 1 percent to 9 percent of reimbursement.46

Medicaid rebates were substantially higher than Part D rebates for 

brand-name drugs because manufacturers for virtually all brand-name 

drugs under review paid inflation-based rebates 

 The 

small amount of Medicaid expenditures and rebates attributed to 

generic drugs is due to the fact that the AMPs, on which rebates are 

based, for generic drugs are often much less than actual Medicaid

reimbursement amounts. 

From 1996 through 2009, the basic URA for a brand-name drug was the 

greater of 15.1 percent of the AMP or the difference between the AMP 

and best price. In addition, if the AMP for a brand-name drug rose

faster than inflation, then the drug’s manufacturer was (and still is) 

required to pay an additional rebate over and above the basic URA. For 

98 of the 100 brand-name drugs under review, manufacturers paid this 

additional rebate in all 4 quarters of 2009.47

The inflation-based additional rebate is the primary reason Medicaid 

rebates are substantially higher than Part D rebates. In the aggregate, 

55 percent of the total Medicaid rebates owed by manufacturers for the 

100 brand-name drugs under review ($1.6 billion out of $2.9 billion) are 

owed because AMPs rose faster than inflation. For 70 of the 

brand-name drugs, the additional rebate portion of the URA (i.e., the 

inflation-based amount) actually exceeded the basic rebate portion (i.e., 

either 15.1 percent of the AMP or the difference between the AMP and 

best price). The additional unit rebate amounts alone exceeded the 

Part D unit rebate amounts for 69 brand-name drugs

 

48 under review

and were at least two times more than the Part D rebate amounts for 

38 of these drugs. 

46 CMS’s rebate data did not contain rebate amounts for one of the selected generic 

drugs. We excluded the drug from this portion of the analysis. 

47 The manufacturer of one of the remaining two drugs paid the additional rebate for 

that drug in three of four quarters of 2009; the manufacturer for the other drug did not pay 

any additional rebates for that drug in 2009. 

48 This total does not include the eight brand-name drugs for which the manufacturers 

reported either (1) that they do not provide Part D rebates for these drugs or (2) that these 

drugs were not dispensed in retail pharmacies.
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 17

FINDINGS

Although average Part D and 

Medicaid reimbursement amounts 

for most brand-name drugs under 

review were similar, Medicaid 

unit rebates for these drugs were substantially higher than those under

Part D. Consequently, Medicaid’s net unit costs (i.e., pharmacy 

reimbursement minus rebates) were much lower (34 percent at the 

median) than net unit costs under Part D in 2009. 

As previously stated, Medicaid unit reimbursement amounts were 

actually higher than Part D unit reimbursement amounts for 

63 brand-name drugs. However, after accounting for rebates, Medicaid 

net unit costs were higher than Part D net unit costs for only 7 drugs; 

Part D net unit costs exceeded Medicaid net unit costs for the remaining 

93. In fact, Medicaid net unit costs were more than 25 percent below 

Part D net unit costs for nearly three-fourths of these brand-name 

drugs. Figure 4 illustrates the effect of rebates on drugs costs. 

Figure 4. Comparison of Average Medicare Part D and Medicaid Net and Gross 

Costs for Brand-Name Drugs

After accounting for rebates, Medicaid net costs 

for selected brand-name drugs were much 

lower than Part D net costs

63

7

37

93

0

25

50

75

100

125

Gross Unit Costs Net Unit Costs

Drugs

Medicaid 

Pays More

Medicaid 

Pays Less

___________________________________________

 Source: OIG analysis of 2009 Part D PDE data, Part D manufacturer rebates, Medicaid utilization data, and Medicaid rebates. 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 18

FINDINGS

Medicaid collected nearly two-thirds as much in rebates as Part D despite 

having only one-fourth of the expenditures

As further evidence of Medicaid’s substantially higher unit rebate 

amounts, Medicaid collected nearly two-thirds as much in rebates as 

Part D ($2.9 billion vs. $4.5 billion) for the selected brand-name drugs 

despite having only about one-fourth of the expenditures ($6.4 billion vs. 

$24 billion). 

Overall, rebates reduced Part D expenditures by 19 percent for the 

100 brand-name drugs under review (from $24 billion to $19.5 billion) in 

2009. Medicaid rebates accounted for a substantially higher percentage 

of total expenditures, reducing Medicaid spending for the 100 drugs 

under review by 45 percent (from $6.4 billion to $3.5 billion). See 

Figure 5 for an illustration on the effect of rebates on expenditures for 

brand-name drugs.

Figure 5. Rebates as a Percentage of Expenditures Under Part D and 

Medicaid

 Source: OIG analysis of 2009 Part D PDE data, manufacturer rebate data, 2009 Medicaid utilization data, and Medicaid rebate data. 

Medicaid Expenditures for 100 Brand-Name Drugs

Medicaid 

Costs

Medicaid 

Rebates 

(45%)

Part D 

Rebates 

(19%)

Part D Costs

Part D Expenditures for 100 Brand-Name Drugs

 

 

 

 

 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 19

FINDINGS CONCLUSION

Prescription drug rebates reduce the program costs of both Medicare 

Part D and Medicaid. Medicaid rebates are defined by statute; 

additional rebates are required when prices for brand-name drugs 

increase faster than inflation. Unlike the Medicaid program, Part D 

sponsors (or contractors acting on their behalf) negotiate rebates with 

drug manufacturers without any statutory requirements on rebate 

amounts. In fact, the law establishing the Part D program expressly 

prohibits the Government from instituting a price structure for the 

reimbursement of covered Part D drugs.

In this review, we found that Part D sponsors and State Medicaid 

agencies paid pharmacies similar amounts for most brand-name drugs 

under review. However, statutorily defined Medicaid unit rebate 

amounts for brand-name drugs exceeded Part D unit rebate amounts by 

a substantial margin. As a result, Medicaid collected nearly two-thirds 

as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion 

vs. $4.5 billion), despite having only about one-fourth of the 

expenditures ($6.4 billion vs. $24 billion). 

Despite Part D’s larger market share (including dual eligible 

beneficiaries who once received drug coverage under Medicaid), Part D 

does not collect as much in rebates that reduce program expenditures. 

A major driver of the higher Medicaid rebates was the additional 

amount owed when prices for brand-name drugs increase faster than 

inflation. This not only produces additional Medicaid rebates, but also 

helps protect the program from increased costs when manufacturers 

raise prices. 

Furthermore, Medicaid rebates for brand-name drugs may increase as a 

result of the ACA provisions that raise the rebate percentage. Given the 

potential impact on beneficiary and Government expenditures, we 

believe that it is important for CMS to continually examine any 

differences in how each program collects rebates. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS agreed with our overall findings. CMS stated that it was pleased 

OIG confirmed that the Medicaid rebate program is working well and 

providing substantial rebates to offset the high costs of prescription 

drugs. CMS agreed that the ACA may further increase Medicaid 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 20

CONCLUSION

rebates for brand-name drugs and that it is important to continue to 

examine the differences in how each program collects rebates. 

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

For the full text of CMS’s comments, see the Appendix.
A P PEN D x 

Agency Comments 

/"VlV~., 

( DEPARTMENT OF HEALTH & HUMAN SERVICES Centers tor Medicare & Medicaid Services ,'S!­ Deputy Administrator 

Baltimore. MD 21244-1850 

JUL 1 5 2011 DATE: 

TO: 	 Daniel R. Levinson 


Inspect,or eeneral 


FROM: 	 MMilyn Tavenner 


PrincipallDeputy Administrator 


SUBJECT: 	 Office ofInspector General (DIG) Draft Report: Higher Rebates for Brand-Name 

Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D 

(OEI-03-10-00320) 

Thank you for the opportunity to review and comment on the subject OIG Draft Report entitled: 

"Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to 

Medicare Part D" (OEI-03-1 0-00320). This report was required by Section 33J3(b), Study and 

Report on Prescription Drug Prices Under Medicare Part D and Medicaid, ofthe Affordable Care 

Act. This report compares pharmacy reimbursement and manufacturer rebates under Medicare 

Part D to Medicaid for the 100 brand-name and 100 generic drugs with the highest Part D 

expenditures using 2009 data. This report also compares each program's net drug costs and 

examines the effect that differences may have on overall program costs. The Centers for 

Medicare & Medicaid Services (CMS) agrees with the overall findings in the DIG report 

acknowledging the efforts CMS has made to improve lowering the costs in the Medicaid drug 

program. 

CMS was pleased the DIG confirmed that the Medicaid rebate program is working well, and 

providing substantial rebates to offset the cost ofthe high costs of prescription drugs. CMS also 

acknowledges that the OIG correctly attributed differences in cost to statutory requirements 

regarding rebates in Medicaid and Medicare Part D. Unlike in the Medicaid program, Part D 

sponsors (or contractors acting on behalf ofsponsors) negotiate rebates with drug manufacturers 

without any statutory requirements on rebate amounts, and the Government is expressly 

prohibited from instituting a price structure for the reimbursement of covered Part D drugs. 

Additionally, we agree with the DIG that the Affordable Care Act may further increase brand 

name drug rebates in the Medicaid program and that it is important for CMS to continually 

examine the differences in how each program collects rebates. 

We would like to thank the DIG for their efforts in reviewing pharmacy reimbursement and 

rebates under Medicare Part D and Medicaid and look forward to working with the OIG on (his 

and other issues in the future. 

OEI-03-10-00320 HIGHER REBATES RESULT IN LOWER DRUG COSTS FOR MEDICAID COMPARED TO MEDICARE PART D 21 
 

OEI - 0 3 - 1 0 - 00320 H IGHER R EBATES RESULT IN L OWER DRUG C OSTS FOR MEDICAID C OMPARED TO MEDICARE PART D 22

 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, Director of the Medicare and 

Medicaid Prescription Drug Unit. 

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

principal Office of Evaluation and Inspections staff from the 

Philadelphia regional office who contributed to the report include Daniel 

J. Mallinson; central office staff who contributed include Eddie Baker, 

Jr., and Kevin Manley. 
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.

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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. 

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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 

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

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

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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 

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