Department of Health & Human Services 

OFFICE OF

INSPECTOR GENERAL

 

MEDICAID BRAND-NAME DRUGS: 

RISING PRICES ARE OFFSET 

BY MANUFACTURER REBATES 

 

Daniel R. Levinson 

Inspector General 

August 2011 

OEI-03-10-00260 
 

 

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EXECUTIVE SUMMARY EXECUTIVE SUMMARY

OBJECTIVE

To assess changes in prices for brand-name prescription drugs since 

2005 and their potential financial impact on the Medicaid program.

BACKGROUND

According to a series of reports issued by AARP, published prices for the 

most widely used brand-name prescription drugs have risen 

significantly since 2002, substantially outpacing the inflation rate. 

Senator Bill Nelson expressed concern over the reported price increases 

and requested that the Office of Inspector General (OIG) review drug 

pricing changes and their impact on Government health care programs, 

such as Medicaid. To address Senator Nelson’s concerns, this study 

looked beyond reported increases in published prices to examine 

changes in transaction-based drug prices and Medicaid payments.

In 2009, Medicaid spent approximately $26 billion for prescription 

drugs (not including rebates), with brand-name drugs generally 

accounting for about 80 percent of this total. For Federal payment to be 

available for covered outpatient drugs under Medicaid, drug 

manufacturers must, among other things, enter into rebate agreements 

with the Secretary of Health & Human Services, report quarterly 

average manufacturer prices (AMP) to the Centers for Medicare 

& Medicaid Services (CMS) for each of their covered outpatient drugs, 

and pay quarterly rebates to State Medicaid agencies. The rebate 

amount for any given drug generally depends on the quarterly AMP 

submitted by the manufacturer, as well as whether the drug is brandname or generic. Manufacturers pay a higher rebate for brand-name 

drugs than for generic drugs. 

For this study, we selected all brand-name drugs used by Medicaid 

beneficiaries in 2009 and calculated median changes in their wholesale 

acquisition costs (WAC—the published prices examined by AARP), 

AMPs, Medicaid payment amounts, and rebate-adjusted Medicaid 

payment amounts during the 5-year period between the first quarter of 

2005 and the first quarter of 2010.

We then examined these changes in relation to the consumer price 

index, which measures the inflation rate for a market basket of 

consumer goods and services. We also analyzed a subset of high-dollar 

brand-name drugs used by Medicaid beneficiaries in 2009. 
 

 

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EXECUTIVE SUMMARY

FINDINGS

Overall, prices and payment amounts for Medicaid brand-name

drugs increased at about three times the inflation rate between 

2005 and 2010. Over this 5-year period, WACs, AMPs, and Medicaid 

payment amounts increased between 34 and 40 percent at the median 

while the inflation rate increased only 13 percent. In addition to 

outpacing inflation overall, increases in WACs, AMPs, and Medicaid 

payment amounts for brand-name drugs outpaced the inflation rate in 

each of the 5 years under review. For the 50 Medicaid brand-name 

drugs with the highest expenditures, total median increases in prices 

and payment amounts not only outpaced the inflation rate, but also 

outpaced total median increases in prices and payment amounts for 

brand-name drugs as a whole. 

Significant increases in prices and payment amounts for 

brand-name drugs were offset by savings generated from the 

Medicaid drug rebate program. We found that when the per-unit 

payment amounts for all Medicaid brand-name drugs were adjusted 

to account for the rebates paid to States by manufacturers, the 

per-unit net cost to Medicaid increased at a much lower rate than 

other points of comparison between 2005 and 2009 (rebate data were 

not available for 2010). In fact, Medicaid’s rebate-adjusted payment 

amounts for brand-name drugs actually declined at the median in 3 of 

4 years, lagging behind the inflation rate. 

CONCLUSION

Taken as a whole, the results of our study indicate that price increases 

for brand-name drugs may not necessarily translate to corresponding 

increases in Medicaid costs. Much like AARP, we found that median 

increases in WACs for Medicaid brand-name drugs outpaced the 

inflation rate during the 5-year period under review, as did AMPs and 

the amounts Medicaid paid to cover pharmacies’ ingredient costs. 

However, these increases were offset by rebates that manufacturers 

paid to States. Because of the savings generated by the rebate program, 

Medicaid’s net costs for brand-name drugs actually increased at a lower 

rate than other points of comparison, including the inflation rate. 
 

 

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EXECUTIVE SUMMARY

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS expressed its belief that the Medicaid drug rebate program has 

been effective in helping to offset the increasing cost of drugs in the 

Medicaid program. CMS also offered two technical comments, both of 

which reiterated information provided by OIG in the body of the report. 

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

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

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

FINDINGS ................................................. 10

Overall, prices and payment amounts for Medicaid brand-name 

drugs increased at about three times the inflation rate 

between 2005 and 2010 .................................. 10

Significant increases in prices and payment amounts for 

brand-name drugs were offset by savings generated from the 

Medicaid drug rebate program ............................ 12 

CONCLUSION ............................................. 15 

Agency Comments and Office of Inspector General Response.... 15 

APPENDIXES ............................................. 16 

A: Detailed Methodology for Identifying State Dispensing 

Fees and Calculating Medicaid Payment Amounts 

for Ingredients ...................................... 16 

B: Additional Information About Changes in Prices and Payment 

Amounts for the Top 50 Medicaid Brand-Name Drugs ...... 17 

C: Agency Comments ................................... 19 

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

 

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INTRODUCTION INTRODUCTION

OBJECTIVE

To assess changes in prices for brand-name prescription drugs since 

2005 and their potential financial impact on the Medicaid program.

BACKGROUND

According to a series of reports issued by AARP, published prices for the 

most widely used brand-name prescription drugs have risen

significantly since 2002.1 For example, one of the more recent reports

found that published prices for widely used brand-name drugs increased 

by 9.7 percent from April 2009 to March 2010, exceeding both the 

inflation rate and the rate of increase for the same group of drugs 

during any of the previous 8 years.2 Senator Bill Nelson expressed 

concern over the reported price increases and requested that the Office 

of Inspector General (OIG) review changes in drug pricing and their

effects on Government health care programs, such as Medicaid. 

OIG has a long history of examining Medicaid payment amounts for 

prescription drugs, which are typically based on published prices like 

those examined in AARP’s reports. A number of OIG studies have 

demonstrated that these published prices, which do not represent actual 

transaction prices, often exceed actual drug acquisition costs.3 To 

address Senator Nelson’s concerns, this current study looked beyond the 

reported increases in published prices by examining changes in

transaction-based prices, as well as the financial effect of price changes

on the Medicaid program.

Medicaid Payments for Prescription Drugs

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

States) offer prescription drug coverage under Medicaid. Beneficiaries 

typically obtain covered drugs from pharmacies, which bill and are 

1 Reports in AARP’s Rx Watchdog series are available online at http://www.aarp.org. 

2 L. Purvis and S.W. Schondelmeyer, Rx Watchdog Report: Brand Name Drug Prices 

Continue to Climb Despite Low General Inflation Rate, May 2010. Accessed at 

http://www.aarp.org on May 19, 2010.

3 OIG, Medicaid Pharmacy – Additional Analyses of the Actual Acquisition Cost of 

Prescription Drug Products, A-06-02-00041, September 2002; OIG, Deficit Reduction Act of 

2005: Impact on the Medicaid Federal Upper Limit Program, OEI-03-06-00400, June 2007; 

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

Payment Amounts, and Retail Prices, OEI-03-08-00490, August 2009.
 

 

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INTRODUCTION

reimbursed by State Medicaid agencies.4 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 (i.e., beneficiaries eligible for both Medicaid 

and Medicare) shifted from Medicaid to Medicare Part D. Since 2006, 

Medicaid payments for prescription drugs have remained relatively 

steady. In 2009, Medicaid drug expenditures totaled approximately 

$26 billion (not including rebates). Brand-name drugs generally 

account for about 80 percent of the total dollars reimbursed. 

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 estimated acquisition cost 

plus a reasonable dispensing fee or the provider’s usual and customary 

charge to the public.5 The Centers for Medicare & Medicaid Services 

(CMS) allows States the flexibility to define estimated acquisition cost, 

with most States basing their calculations on the average wholesale 

prices (AWP) or wholesale acquisition costs (WAC) published in national 

compendia, adjusted by a certain percentage.6, 7, 8 

The AWP is not defined in law or regulation. Rather, it is a list price 

that is typically either suggested by the manufacturer or calculated 

based on a markup of another price, such as WAC.9 Pursuant to the 

Social Security Act (the Act), the WAC is defined as the manufacturer's 

list price for the drug or biological to wholesalers or direct purchasers in 

the United States as reported in wholesale price guides or other 

publications of drug or biological pricing data.10 WACs and AWPs do 

4 Most States require some beneficiary cost sharing for Medicaid prescription drugs. In the 

fourth quarter of 2010, 40 States required copayments from beneficiaries, ranging from 

$0.50 to $3 per prescription. One State required certain beneficiaries to pay 2.5 percent of 

drug costs in the form of coinsurance (up to $300). The remaining 10 States did not require 

any beneficiary cost sharing for prescription drugs. 5 42 CFR § 447.512. 

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

December 2010, accessed at www.cms.gov on January 28, 2011. 

7 States also have flexibility when determining dispensing fees. In the fourth quarter of 

2010, State dispensing fees for brand-name drugs ranged from $1.50 to $10.64, excluding 

fees for compounded and mail-order prescriptions and intravenous therapy. 

8 To limit reimbursement amounts for certain multiple-source drugs, Medicaid also uses the 

Federal upper limit (FUL) and State maximum allowable cost programs. 

9 First Data Bank, Inc., NDDF Plus Documentation, April 2008.

10 Section 1847A(c)(6)(B) of the Act.
 

 

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INTRODUCTION

not represent actual transaction prices and do not include prompt pay 

or other discounts, rebates, or price reductions.11

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 Health & Human Services and pay 

quarterly rebates to States.12, 13

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.

 As a result of these rebates, Medicaid 

recouped approximately one-third of its expenditures for prescription 

drugs between 2006 and 2009, yielding an average annual savings of 

about $8 billion. 

14 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 in statute as 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.15, 16

The Medicaid unit rebate amount (URA) for any given drug generally 

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

as whether the drug is a brand-name or generic. Manufacturers pay a 

higher rebate for brand-name drugs than for generic drugs. From 1996 

to 2009, the URA for a generic drug was 11 percent of the AMP and the 

basic URA for a brand-name drug was the greater of 15.1 percent of the 

 

11 First Data Bank, Inc., NDDF Plus Documentation, April 2008.

12 Sections 1927(a)(1) and (b)(1) of the Act.

13 Sections 1927(k)(2–3) of the Act define a covered outpatient drug. 

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

15 Section 1927(k)(1) of the Act. 

16 Section 2503 of the Patient Protection and Affordable Care Act (Affordable Care Act), 

P.L. 111-148, changed the definition of AMP, effective October 2010. However, those 

changes are not relevant for the purposes of this study.
 

 

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INTRODUCTION

AMP or the difference between the AMP and best price.17, 18, 19 If the 

AMP for a brand-name drug has risen faster than inflation, then the 

drug’s manufacturer must pay an additional rebate over and above the 

basic URA.20

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

States. States then determine the total quarterly rebates that

participating manufacturers owe by multiplying the URA for a specific 

drug by the number of units of that drug dispensed to beneficiaries in 

that quarter.

 

METHODOLOGY

Scope

For this study, we selected all brand-name drugs (i.e., NDCs) used by 

Medicaid beneficiaries in 2009 and calculated median changes in their

WACs, AMPs, and Medicaid payment amounts during the 5-year period 

between the first quarter of 2005 and the first quarter of 2010. Because 

data on Medicaid rebates were not available for 2010, we performed the 

same calculations described above for rebate-adjusted Medicaid 

17 Section 1927(c) of the Act.

18 Pursuant to § 1927(b)(3)(A)(i)(II) of the Act, manufacturers must provide a quarterly

“best price” for each of their brand-name drugs. Best price is generally defined by 

§ 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.

19 Effective January 2010, § 2501(a) of the Affordable Care Act 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 Affordable Care Act 

increases the URA for generic drugs to 13 percent. 

20 Section 1927(c)(2) of the Act. 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 for all urban consumers 

(consumer price index), which is the consumer price index 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 consumer price index, which is the consumer price index for the 

month prior to the quarter being calculated. If the reported AMP is greater than the 

inflation-adjusted baseline AMP, then the difference is added to the URA.
 

 

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INTRODUCTION

payment amounts during the 4-year period between the first quarter of 

2005 and the first quarter of 2009.21

Data Sources and Data Collection

We obtained files from CMS containing Medicaid drug utilization data 

for the 5-year period between 2005 and 2010. These files, which were 

current as of July 19, 2010, included the total Medicaid expenditures 

(ingredient costs plus dispensing fees), the total number of 

prescriptions, and the total number of units dispensed by each State for 

each NDC in each quarter.22

As an additional source for determining whether an NDC represents a

brand-name or generic drug, we downloaded the Medicaid drug product 

file for the second quarter of 2010 from CMS’s Web site, which was the 

most current file available at the time of our analysis.

 In addition, CMS provided us with States’ 

dispensing fees for the first quarter of each year from 2005 to 2010. We 

also obtained CMS’s AMP data for the first quarter of each year 

between 2005 and 2010, including the URA for each NDC and whether 

that NDC represented a brand-name or generic drug. AMP data for the 

first quarters of 2005 through 2009 were current as of July 13, 2010. 

AMP data for the first quarter of 2010 were current as of May 10, 2010.

23

We obtained WACs from 2005 through 2010 from First Data Bank’s 

National Drug Data File. WACs were available monthly rather than 

quarterly; therefore, we used data from March of each year when 

tracking this pricing point. 

To examine price trends for consumer goods in general, we used the 

consumer price index as calculated by the Bureau of Labor Statistics 

(BLS). According to BLS, the consumer price index measures “the 

average change over time in the prices paid by urban consumers for a 

21 We were unable to obtain URAs for the first quarter of 2010 from CMS because the 

agency’s systems had not yet been modified to reflect the rebate changes implemented by 

the Affordable Care Act. In lieu of calculating and sending URAs to States to determine the 

rebate amounts owed by participating manufacturers, CMS instructed manufacturers to 

calculate and pay first-quarter 2010 rebates directly to States in accordance with the rebate 

changes. 

22 At the time of our analysis, Arizona did not participate in the rebate program and had no 

reported utilization data. Therefore, Arizona was not included in our review.

23 CMS, Medicaid Drug Rebate Program Drug Product Data, accessed at 

http://www.cms.gov on August 10, 2010.
 

 

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INTRODUCTION

market basket of consumer goods and services.”24

Analysis Variables Defined

 For the purposes of 

this study, we used the consumer price index for all items, with 

adjustments made for seasonal variations. Because the consumer price 

index is calculated monthly rather than quarterly, we used data from 

March of each year when tracking this measure.

For the purposes of this report, the points of comparison used to 

examine pricing and payment trends are defined as follows: 

WACs. A WAC is a published price that does not represent actual sales 

transactions and does not account for price concessions. WACs and 

other published prices, such as AWPs, are often used by States to 

establish Medicaid payment amounts.25 

AMPs. Generally speaking, an AMP is the average price paid by 

wholesalers for a drug distributed to pharmacies, accounting for certain 

price concessions. AMPs are based on actual sales transactions and are 

used to calculate Medicaid URAs.

Medicaid payment amounts. A Medicaid payment amount is the average 

per-unit amount jointly paid by the Federal Government and State 

Medicaid agencies to cover pharmacies’ ingredient costs for an 

outpatient prescription drug. Medicaid payment amounts do not 

include dispensing fees and do not account for rebates collected under 

the rebate program.

Rebate-adjusted Medicaid payment amounts

24 BLS, Consumer Price Index Frequently Asked Questions, accessed at 

. A rebate-adjusted payment 

amount is the Medicaid payment amount minus the URA paid to States by 

manufacturers. The rebate-adjusted payment amount represents the net 

cost to Medicaid for an outpatient prescription drug.

http://www.bls.gov

on December 8, 2010. According to BLS, the all-urban consumer group represents about 

87 percent of the total U.S. population and includes “professionals, the self-employed, the 

poor, the unemployed, and retired people, as well as urban wage earners and clerical 

workers. Not included in the CPI are the spending patterns of people living in rural 

nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, 

such as prisons and mental hospitals.”

25 We did not include AWPs in our analysis because they have typically been calculated as a 

markup of WACs and therefore generally have rates of change that are identical to the 

rates of change in WACs. 
 

 

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INTRODUCTION

Inflation rate. The inflation rate represents changes in the consumer price 

index, which reflects spending patterns for almost all residents of urban or 

metropolitan areas for all goods and services purchased for consumption.

Analysis of All Brand-Name Drugs Reimbursed by Medicaid

Using the utilization, AMP, and drug product files, we identified 

6,821 NDCs representing brand-name drugs paid for by Medicaid in 

2009.26 We calculated changes in prices and payments for these drugs 

and compared those changes to the inflation rate.

Changes in drug prices. To capture trends in prices for brand-name 

drugs as a whole, we first calculated the total percentage changes in 

WACs and AMPs for each NDC over the entire 5-year period between 

the first quarter of 2005 and the first quarter of 2010. We then used 

first-quarter data in each year to calculate annual percentage changes 

in WACs and AMPs for each NDC. Using those data, we then 

calculated median total rates of change and median annual rates of 

change in WACs and AMPs for the entire group of brand-name drugs 

over the past 5 years. The number of Medicaid brand-name NDCs with 

WACs and AMPs in each year is listed in Table 1. 

Table 1: Number of NDCs Included in OIG’s Analysis of Price Changes

Number of Brand-Name NDCs

First Quarter 

of the Year With AMPs With WACs

With 

Medicaid 

Payment 

Amounts

With 

Rebate-Adjusted 

Medicaid Payment 

Amounts

2005 4,168 3,595 3,582 3,355

2006 4,734 4,220 4,066 3,816

2007 5,350 4,832 4,633 4,245

2008 5,932 5,436 5,219 4,594

2009 6,426 5,966 5,905 5,225

2010 6,193 6,227 5,894 N/A

OIG identified 6,821 NDCs representing brand-name drugs paid for by Medicaid in 2009. For the purposes of our study, 

Medicaid payment amounts represent the ingredient cost portion only. 

Source: OIG analysis of AMPs and Medicaid payment amounts from the first quarter of 2005 to the first quarter of 2010 and 

WACs from March 2005 to March 2010.

26 Four States (California, Kansas, Missouri, and New York) had utilization data for only 

three of the four quarters of 2009; two States (Alabama and Arkansas) had utilization data 

for only two of the four quarters in 2009; and one State (Wisconsin) had no utilization data 

for any quarter of 2009. 
 

 

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INTRODUCTION

Changes in Medicaid payment amounts. For the first quarter of every 

year from 2005 to 2010, we calculated an average Medicaid payment 

amount per unit for each brand-name NDC.27

We calculated the total percentage change in Medicaid payment

amounts for each NDC from the first quarter of 2005 to the first quarter 

of 2010, as well as the year-to-year percentage changes. Using those 

data, we then calculated median total rates of change and median 

annual rates of change in Medicaid payment amounts for the entire 

group of brand-name drugs during the 5-year period under review. 

 Because Medicaid’s total 

expenditure data include dispensing fees, we calculated the average 

Medicaid payment amount for only the ingredient cost by subtracting 

the total dispensing fees from the total expenditures for each drug. To 

calculate total dispensing fees, which vary by State, we multiplied each 

State’s dispensing fee by the total number of prescriptions dispensed for 

each drug in that State. We then summarized the ingredient-cost 

expenditures for each drug across States and divided those total 

expenditures by the total units. For more details regarding our 

calculation of ingredient costs and the use of dispensing fees, see 

Appendix A.

To determine the extent to which any increases in Medicaid payment 

amounts were offset by increases in Medicaid rebate amounts, we 

subtracted the URA from the average Medicaid payment amount per 

unit for each brand-name drug. We then calculated changes in these 

rebate-adjusted payment amounts. Because rebate amounts were not 

available for the first quarter of 2010, we were able to calculate median

rates of change in rebate-adjusted payment amounts only for the 

4-year period between 2005 and 2009. 

The number of Medicaid brand-name NDCs with ingredient costs and 

rebate-adjusted reimbursement amounts is specified in Table 1. 

Changes in the consumer price index. To measure changes in the 

inflation rate, we calculated the total percentage change in the 

consumer price index over the entire 5-year period between March 2005 

27 Some States did not have utilization data for the first quarter of every year between 2005 

and 2010. South Dakota had no utilization data for the first quarter of 2007; Wisconsin had 

no utilization data for the first quarter of 2009; and Alabama, Arkansas, California, Kansas, 

Nevada, New York, Rhode Island, South Dakota, and Wisconsin had no utilization data for 

the first quarter of 2010. 
 

 

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INTRODUCTION

and March 2010, as well as the total percentage change in the consumer 

price index over the 4-year period between March 2005 and March 2009. 

We also calculated year-to-year percentage changes in the consumer 

price index. 

Analysis of High-Dollar Brand-Name Drugs Reimbursed by Medicaid

To determine whether pricing and payment trends differed for 

high-dollar Medicaid drugs, we selected the 50 NDCs representing 

brand-name drugs that had the highest Medicaid expenditures in 2009. 

We then compared the rates of change in prices and payment amounts 

for each of the top 50 NDCs (as calculated above) to the rates of change 

in prices and payment amounts for brand-name drugs as a whole. 

Limitations

Because drugs reimbursed by Medicaid in 2009 may not have been 

marketed or covered in previous years, prices and Medicaid payment 

amounts were not available for all brand-name drugs in all 5 years 

under review. Therefore, the number of drugs in our analysis files 

tended to decrease as we trended back in time (see Table 1 on 

page 7). 

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

accuracy of data in First Data Bank’s National Drug Data File. 

Furthermore, AMP data submitted by manufacturers are subject to 

revision. Because manufacturers are generally required to report any 

revisions to their AMP data within 12 quarters from the quarter in 

which the data were initially due, some of the AMPs and URAs may 

have changed since the time of our analysis. 

We did not evaluate the appropriateness of Medicaid payment amounts

for brand-name drugs relative to pharmacy acquisition costs. Also, in 

calculating the per-unit net cost of drugs to Medicaid, we did not include 

the additional rebates that individual State Medicaid agencies are 

permitted to negotiate and collect from manufacturers. 

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.
 

 

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 FINDINGS

-2%

0%

2%

4%

6%

8%

2005– 2006– 2007– 2008– 2009–

2006 2007 2008 2009 2010

Median Percentage Change

WAC Inflation Rate

Overall, prices and payment amounts for Medicaid 

brand-name drugs increased at about three times 

the inflation rate between 2005 and 2010

For brand-name drugs covered 

by Medicaid, WACs, AMPs, and 

Medicaid payment amounts rose 

about three times faster than 

the inflation rate between 2005 and 2010. Over this 5-year period, 

WACs for all Medicaid brand-name drugs increased 34 percent at the 

median, AMPs increased 40 percent at the median, and payment

amounts increased 39 percent at the median. During those same 

5 years, the inflation rate increased only 13 percent. 

Increases in prices and payment amounts for Medicaid brand-name drugs 

outpaced the inflation rate in each individual year as well

In addition to outpacing overall inflation from 2005 to 2010, median 

increases in WACs, AMPs, and Medicaid payment amounts outpaced 

the inflation rate in each of the 5 years under review. 

WACs for Medicaid brand-name drugs consistently increased about 5 percent per 

year, while the inflation rate increased no more than 4 percent per year. As 

shown in Chart 1, the median annual increase in WACs for all Medicaid 

brand-name drugs remained constant from 2005 to 2010 at a rate of 

approximately 5 percent. During that same time, the inflation rate did not 

rise above 4 percent and actually dipped below zero over the 1-year period 

ending with the first quarter of 2009. From the first quarter of 2009 to the 

first quarter of 2010, the median increase in WACs was more than double 

the inflation rate. 

Chart 1: Medicaid Brand-Name Drugs: Median Annual Increases 

in WACs Outpaced the Inflation Rate From 2005 to 2010

Source: OIG 2010 analysis of WAC and consumer price index data from March 2005 to March 2010. 
 

 

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FINDINGS

AMPs and Medicaid payment amounts fluctuated at roughly the same rate,

outpacing the inflation rate in every year, often by a substantial margin. During 

the 5-year period between 2005 and 2010, the amount Medicaid paid to 

cover pharmacies’ ingredient costs for brand-name drugs fluctuated at 

roughly the same rate as manufacturers’ AMPs, which are based on actual 

sales transactions. As shown in Chart 2, the median annual rate of 

increase for both points of comparison grew substantially from 2005 to 

2008 but then slowed from 2008 to 2010.28 

Chart 2: Medicaid Brand-Name Drugs: Median Annual 

Increases in AMPs and Medicaid Payment Amounts Outpaced 

the Inflation Rate From 2005 to 2010 

-2%

0%

2%

4%

6%

8%

10%

2005– 2006– 2007– 2008– 2009–

2006 2007 2008 2009 2010

Median Percentage Change

AMP Medicaid Payment Amount Inflation Rate

Source: OIG 2010 analysis of AMP data and Medicaid utilization data from the first quarter of 2005 to the first 

quarter of 2010 and consumer price index data from March 2005 to March 2010. 

28 The accelerated median rate of increase in AMP between 2007 and 2008 generally 

coincides with a number of significant AMP-related changes that took effect as a result of 

the Deficit Reduction Act of 2005, P.L. 109-171. Such changes included requiring

manufacturers to determine AMPs without regard to customary prompt pay discounts and 

using AMPs to establish FUL amounts for certain multiple-source drugs in the Medicaid 

program. Regulations implementing these provisions took effect in October 2007; however, 

on December 19, 2007, the U.S. District Court for the District of Columbia issued a 

preliminary injunction prohibiting CMS from using AMPs in a way that affects Medicaid 

reimbursement rates (National Association of Chain Drug Stores, et al., v. U.S. Department 

of Health & Human Services, et al., Civil Action No. 1:07cv02017). This injunction was 

vacated in December 2010. 
 

 

OEI - 0 3 - 1 0 - 0026 0 R ISING P RICES FOR MEDICAID BRAND - N AME D RUGS A RE OFFSET B Y REBATES 12

FINDINGS

In each year, the median increases in AMPs and Medicaid payment 

amounts rose faster than the inflation rate for other consumer goods 

and services. As shown in Chart 2, discrepancies between the inflation 

rate and the two other points of comparison were greatest between 2006 

and 2009, when annual median increases in AMPs and Medicaid 

payment amounts were at least double the increases in the consumer 

price index. In fact, between 2008 and 2009, AMPs and payment 

amounts for all Medicaid brand-name drugs each grew about 6 percent 

at the median while the cost of other common consumer goods and 

services shrank by almost half a percent.

Prices and payment amounts increased at a higher rate for the 

top 50 Medicaid brand-name drugs than for brand-name drugs as a whole

For the 50 Medicaid brand-name drugs with the highest expenditures, 

total median increases in prices and payment amounts from 2005 to 

2010 not only outpaced the inflation rate, but also outpaced total 

median increases in prices and payment amounts for brand-name drugs 

as a whole. 

During the 5-year period under review, WACs and AMPs for the top 

50 brand-name drugs each increased a total of 49 percent at the median 

and Medicaid payment amounts increased 43 percent at the median 

(compared to total median increases of 34 percent, 40 percent, and 

39 percent, respectively, for brand-name drugs as a whole). This 

pattern held true not only for the top 50 drugs in the aggregate, but also 

for the majority of individual drugs in the top 50. For additional 

information about changes in prices and payment amounts for the top 

50 Medicaid brand-name drugs, see Appendix B.

Significant increases in prices and payment amounts 

for brand-name drugs were offset by savings 

generated from the Medicaid drug rebate program

We found that when the 

per-unit payment amounts for 

all Medicaid brand-name 

drugs were adjusted to 

account for rebates paid to States by manufacturers, the per-unit net 

cost to Medicaid increased at a much lower rate than other points of 

comparison between 2005 and 2009.29 While WACs, AMPs, and 

unadjusted Medicaid payment amounts each increased by roughly 

29 Because URAs were not available for the first quarter of 2010, we were able to examine 

the effects of rebates on Medicaid payment amounts only for the period from 2005 to 2009. 
 

 

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FINDINGS

30 percent over the 4-year period under review and the consumer price 

index increased by 10 percent, rebate-adjusted Medicaid payment 

amounts for all brand-name drugs increased by only 2 percent. In other 

words, although Medicaid payment amounts for brand-name drugs rose 

faster at the median than inflation, rebates paid by manufacturers 

helped protect the program from rising costs. 

Medicaid’s net costs for all brand-name drugs actually declined at the 

median in 3 of 4 years, lagging behind the inflation rate

In 3 of the 4 years under review, rebate-adjusted payment amounts for 

Medicaid brand-name drugs actually declined at the median, dropping 

by as much as 3 percent over 1 year. As shown in Chart 3, decreases in 

rebate-adjusted amounts during these 3 years lagged behind the 

inflation rate for other consumer goods and services. 

Chart 3: Medicaid Brand-Name Drugs: Rebate-Adjusted Medicaid 

Payment Amounts Declined at the Median in 3 of 4 Years 

-4%

-2%

0%

2%

4%

6%

8%

2005– 2006– 2007– 2008–

2006 2007 2008 2009

Median Percentage Change

Rebate-Adjusted Amount Inflation Rate

Overall, changes in Medicaid net costs for the top 50 drugs also lagged 

behind the inflation rate

Trends in Medicaid’s net costs for the top 50 brand-name drugs closely 

resembled those for brand-name drugs as a whole, with rebates 

effectively mitigating rising prices and payments. During the 4-year 

period between 2005 and 2009, rebate-adjusted Medicaid payment 

amounts for the top 50 drugs increased a total of only 6 percent at the 

median while the consumer price index increased 10 percent and WACs, 

Source: OIG 2010 analysis of URAs and Medicaid utilization data from the first quarter of 2005 to the first quarter 

of 2009 and the consumer price index from March 2005 to March 2009. 
 

 

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FINDINGS

AMPs, and unadjusted Medicaid payment amounts each increased by 

more than a third. 

This pattern was evident not only for the top 50 drugs in the aggregate, 

but also for the majority of individual drugs with the highest 

expenditures. We were able to calculate rebate-adjusted payment 

amounts for 35 high-dollar drugs for the entire period from 2005 to 

2009. For many of these drugs, Medicaid net costs either increased at a 

lower rate than prices, unadjusted payment amounts, and inflation 

(15 of 35); or actually decreased (11 of 35). For example, the 

rebate-adjusted payment amount for one high-dollar drug decreased by 

31 percent over 4 years, while the WAC, AMP, and unadjusted payment 

amount increased between 27 and 40 percent (as shown in Table 2).30 

Table 2: Changes in Pricing and Payment Amounts for One 

High-Dollar Brand-Name Drug Between 2005 and 2009 

Point of Comparison

First-Quarter 

2005 

Price per Unit 

First-Quarter 

2009

Price per Unit 

Dollar 

Difference

Percentage 

Difference

WAC $3.96 $5.01 $1.05 27%

AMP $3.28 $4.39 $1.10 34%

Medicaid Payment Amount $3.68 $5.17 $1.48 40%

Rebate-Adjusted Payment Amount $2.97 $2.07 -$0.91 -31% 

The dollar differences between per-unit AMPs, Medicaid payment amounts, and rebate-adjusted payment amounts are off by 

$0.01 because of rounding.

Source: OIG 2010 analysis of AMP data and Medicaid utilization data from the first quarter of 2005 to the first quarter of 2009 and 

WAC data from March 2005 to March 2009. 

For the remaining 9 of the 35 high-dollar drugs, rebate-adjusted 

payment amounts increased faster than inflation. However, net costs 

for all but three of these increased at a lower rate than prices and 

unadjusted payment amounts. 

30 Section 1927(b)(3)(D) of the Act broadly guarantees the confidentiality of AMP data 

reported by manufacturers (with certain limited exceptions); therefore, we cannot disclose 

the names of the brand-name drugs in conjunction with AMP data. 
 

 

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 CONCLUSION

A series of reports issued by AARP found that average increases in 

WACs for the most widely used brand-name prescription drugs far 

surpassed the price increases for other consumer goods and services. 

Given that Medicaid drug reimbursement amounts are typically based 

on published prices, such as WACs, AARP’s findings raised concerns 

about the effects of the reported price increases on the Medicaid 

program. 

Taken as a whole, the results of our study indicate that price increases 

for brand-name drugs may not necessarily translate to corresponding 

increases in Medicaid costs. Much like AARP, we found that median

increases in WACs for Medicaid brand-name drugs outpaced the 

inflation rate during the 5-year period under review, as did AMPs and 

the amounts Medicaid paid to cover pharmacies’ ingredient costs. 

However, these increases were offset by rebates that manufacturers 

paid to States. Because of the savings generated by the rebate program, 

Medicaid’s net costs for brand-name drugs actually increased at a lower 

rate than other points of comparison, including the inflation rate. 

Furthermore, States may have been deriving even greater benefit from 

the rebate program since January 2010, when the rebate percentage for 

brand-name drugs increased from 15.1 percent to 23.1 percent. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS expressed its belief that the Medicaid drug rebate program has 

been effective in helping to offset the increasing cost of drugs in the 

Medicaid program. CMS also offered two technical comments, both of 

which reiterated information provided by OIG in the body of the report. 

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

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

 

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 APPENDIX ~ APPENDI X ~ AB

Detailed Methodology for Identifying State Dispensing Fees and 

Calculating Medicaid Payment Amounts for Ingredients

Generally speaking, State Medicaid agencies reimburse pharmacies for 

the ingredient costs of prescription drugs and for the costs of dispensing 

those drugs to beneficiaries. However, the Centers for Medicare 

& Medicaid Services’ Medicaid utilization data do not provide separate 

expenditure data for ingredient costs and dispensing fees; rather, they

provide only the total Medicaid expenditures for each drug in each 

State. To identify trends in ingredient costs for Medicaid brand-name 

drugs over the 5-year period between the first quarter of 2005 and the 

first quarter of 2010, it was necessary to subtract the total dispensing 

fees from the total expenditures for each national drug code (NDC) 

included in our study. 

Dispensing fees vary by State, and each State may have different 

dispensing fees for different types of drugs dispensed in different types 

of settings. For the purposes of our study, we selected only those 

dispensing fees provided to outpatient, for-profit retail, and independent

pharmacies. Dispensing fees provided to nursing or long-term-care

facilities were excluded from our analysis, as were dispensing fees for 

compounded drugs, unit dose drugs, and intravenous therapy. Six

States (Alaska, Nebraska, Tennessee, Texas, Utah, and Washington) 

had dispensing fees that could not easily be determined; therefore, 

utilization data from these States were excluded from our analysis. 

Dispensing fees for the remaining States ranged from $1.75 to $7.25.

For the first quarter of each year from 2005 to 2010, we calculated total 

dispensing fees for each NDC in each State by multiplying the State’s 

dispensing fee by the total number of prescriptions dispensed in that 

State. To identify total ingredient-cost expenditures for each NDC, we

then subtracted the total dispensing fees from the total expenditures. 

We excluded any NDCs for which the ingredient cost was negative

(assuming that this was the result of problematic expenditures data). 

To calculate an average Medicaid payment amount per unit for each 

brand-name NDC in our study, we then summarized the ingredient-cost 

expenditures for each drug across States and divided those total 

expenditures by the total units. 
 

 

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 APPENDIX ~ B

Additional Information About Changes in Prices and Payment 

Amounts for the Top 50 Medicaid Brand-Name Drugs

For the top 50 Medicaid brand-name drugs, median annual increases in 

prices and unadjusted payment amounts not only outpaced the inflation 

rate, but also generally outpaced annual increases in wholesale 

acquisition costs (WAC), average manufacturer prices (AMP), and 

Medicaid payment amounts for brand-name drugs as a whole.

As shown in Chart B-1a, median annual changes in WACs for the 

top 50 drugs trended upward from 2005 to 2010, increasing from a low 

of approximately 6 percent in the first 2 years to a high of over 

10 percent in the fifth year. In contrast, median changes in WACs for 

brand-name drugs as a whole remained relatively constant at about 

5 percent, so that by 2010 the median increase in WACs for drugs in the 

top 50 was double that for brand-name drugs as a whole. 

AMPs also typically increased at a higher rate for drugs in the 

top 50, particularly during the last 2 years under review. Between 2008 

and 2010, median rates of increase for AMPs rose steadily for highdollar drugs but declined steadily for brand-name drugs as a whole. As 

shown in Chart B-1b, AMPs for the top 50 drugs increased 11 percent at 

the median by 2010, whereas AMPs for all brand-name drugs increased 

only about 5 percent. 

Trends in median payment amounts for high-dollar drugs somewhat 

resembled those for brand-name drugs as a whole, with median rates of 

increase growing from 2005 to 2009 and declining from 2009 to 2010. 

However, as shown in Chart B-1c, median changes in unadjusted 

payment amounts were greater for the top 50 drugs, outpacing those for 

all brand-name drugs in 4 of the 5 years under review. 
 

 

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APPENDIX ~ B

Chart B-1. Median Increases in WACs, AMPs, and Medicaid 

Payment Amounts Were Generally Greater for High-Dollar Drugs

a. WACs

b. AMPs

c. Medicaid Payment Amounts

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005– 2006– 2007– 2008– 2009–

2006 2007 2008 2009 2010

Median Percentage Change

All

Top 50

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005– 2006– 2007– 2008– 2009–

2006 2007 2008 2009 2010

Median Percentage Change

All

Top 50

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005– 2006– 2007– 2008– 2009–

2006 2007 2008 2009 2010

Median Percentage Change

All

Top 50

Source: Office of Inspector General 2010 analysis of WACs, AMP, and Medicaid utilization data from 2005 to 2010. 
A P PEN D x c 

Agency Comments 

(~~ DEPARTMENT OF HEALTH & HUMAN SERVICES Centers for Medicare & Medioaid Services ,S'r- Administrator 

Washinglon. DC 20201 

JUN 2 9 2011 DATE: 

TO: 	 Daniel R. Levinson 


Inspector General 


FROM: 	 Donald M. Berwick, M:D. 


Administrator 


SUBJECT: Office of Inspector General (OlG) Draft Report: Medicaid Brand-Name Drugs: 

Rising Prices are Offset by Manufacturer Rebates (OEI-03-IO-00260) 

Thank you for the opportunity to review and comment on the OlG Draft Report entitled, 

"Medicaid Brand-Name Drugs: Rising Prices are Offset by Manufacturer Rebates," (OEI-03-10­

00260). This report assesses changes in prices for brand-name prescription drugs since 2005 and 

their potential financial impact on the Medicaid program. The basis for the report was a series of 

reports issued by the American Association of Retired Persons (AARP) indicating that published 

prices for the most widely used brand-name prescription drugs have risen Significantly since 

2002, substantially outpacing inflation. To address Congressional concerns, this study looked 

beyond published prices to transaction based prices and Medicaid payments. 

While the OlG confirmed the AARP findings that price and payment amount increases did 

exceed the rate ofinflation, the OIG also found that price increases for brand-name drugs do not 

necessarily translate to corresponding increases in costs for the Medicaid program. The OlG 

stated that the price and payment increases were offset by the Medicaid drug rebate amounts that 

manufacturers paid to States. 

Specifically, the OIG found that overall, prices and payment amounts for Medicaid brandname drugs increased at about three times the general rate ofinflation between 2005 and 

2010. Over this 5-year period, the OIG stated that Wholesale Acquisition Cost (WAC), 

Average Manufacturer Price (AMP), and Medicaid payment amounts increased between 34 

percent and 40 percent at the median, while the general inflation rate increased only 13 

percent. In addition to outpacing the overall inflation rate, the OlG stated that these 

amounts outpaced the general inflation rate in each ofthe 5 years under review. The 01G 

also reported that the total median increases in prices and payment amounts for the 50 

Medicaid brand-name drugs with the .highest expenditures also outpaced general inflation 

rate as well as outpaced total increases in prices and payment amounts for brand-name drugs 

as a whole. 

However, the OIG noted that these increases in prices and payment amounts for brand-name 

drugs were offset by savings generated from the Medicaid. Drug Rebate Program. When the perOEI·03·10-00260 RISING PRICES FOR MEDICAID BRAND-NAME DRUGS ARE OFFSET BY REBATES 19 
 

 

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APPENDIX ~ C
 

 

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APPENDIX ~ C
 

 

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 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 Tawes, Director of the Medicare and Medicaid 

Prescription Drug Unit. 

Lauren McNulty served as the team leader for this study. Central office 

staff who contributed include 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 & 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.