Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

STATES’ USE OF NEW DRUG 


PRICING DATA IN THE MEDICAID 


PROGRAM


Daniel R. Levinson


Inspector General 


April 2007


OEI-03-06-00490

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 all 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. Specifically, these evaluations focus on preventing fraud, waste, or 

abuse and promoting economy, efficiency, and effectiveness in departmental programs. 

To promote impact, the reports also present practical recommendations for improving 

program operations. 

Office of Investigations 

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

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 

and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 

convictions, administrative sanctions, 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 in OIG's internal operations. OCIG imposes program exclusions and civil 

monetary penalties on health care providers and litigates those actions within HHS. 

OCIG also represents OIG in the global settlement of cases arising under the Civil False 

Claims Act, develops and monitors corporate integrity agreements, develops compliance 

program guidances, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
Δ E X E C U T I V E SUM M A RY 

OBJECTIVE 

To provide an early assessment of whether States are considering using 

new pricing data for Medicaid prescription drug reimbursement. 

BACKGROUND 

All States and the District of Columbia offer prescription drug coverage 

under Medicaid. In 2005, Federal and State expenditures for 

prescription drugs in the Medicaid program reached $41 billion. 

Pursuant to the Deficit Reduction Act of 2005 (DRA), the Centers for 

Medicare & Medicaid Services (CMS) is providing States with 

sales-based drug pricing information that was previously not available 

for their use. Recent studies have found that published prices, such as 

average wholesale price and wholesale acquisition cost used by States to 

estimate drug acquisition costs, are higher than prices based on actual 

sales transactions. In July 2006, CMS began sending States average 

manufacturer price (AMP) data monthly. CMS will also provide retail 

sales price (RSP) data to States starting in early 2007. However, the 

DRA does not require States to use AMP or RSP data to revise their 

current Medicaid drug reimbursement formulas. Pursuant to the DRA, 

CMS must promulgate a regulation that clarifies AMP requirements by 

July 1, 2007.

1 

To assess whether States are considering using new pricing data for 

Medicaid prescription drug reimbursement, we surveyed Medicaid 

pharmacy directors in all 50 States and the District of Columbia. We 

asked States whether they are planning to use AMP and/or RSP data 

for Medicaid drug reimbursement. We also asked States to describe any 

factors that are influencing their decisions and indicate what additional 

information they would like to receive before deciding whether to use 

the new drug pricing data. Forty-seven States completed the survey. 

FINDINGS 

Most States have not decided whether to use AMP data for Medicaid 

drug reimbursement. Thirty-nine of forty-seven States have not 

decided whether to use AMP data for Medicaid drug reimbursement. Of 

the remaining eight States, four are planning to use AMP data for 

1 Deficit Reduction Act of 2005, section 6001(c)(3)(B). 

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EXE CUTIVE S U MMAR Y

Medicaid drug reimbursement but have not yet implemented changes. 

Another three States do not plan to use AMP data. One State indicated 

that it is using AMP data to help determine maximum allowable costs 

(MAC) for most drug products under its MAC program. 

States raised concerns about the AMP data received from CMS. 

States described inconsistencies between the AMP amounts provided by 

CMS and the typical unit definition of the associated drug products. In 

addition, some States reported that several drug products in CMS’s data 

file did not have associated AMPs, that there were both unusually high 

and low values (outliers) in the data, or that the AMP data seemed 

unrelated to pharmacy acquisition costs. States also questioned 

whether the vendors that already provide them with drug pricing 

information for claims processing would have access to AMP data. 

States that are undecided about using the AMP would like assurances 

from CMS that the AMP data are accurate and valid. States are 

anticipating CMS’s final regulations to clearly explain how the AMP 

will be defined and calculated, including how the AMP would take into 

account price differences among different pharmacy types within the 

retail pharmacy class of trade. 

Few States have decided whether to use RSP data for Medicaid drug 

reimbursement. Of the 47 States, 1 indicated that it plans to use RSP 

data and 3 indicated that they do not. The remaining 43 States have 

not decided whether to use RSP data. 

States had many of the same concerns regarding RSP data that they 

had with AMP data and want assurances that RSP data will be valid 

and accurate. States also want to know how RSP data will be 

determined and defined, how RSP data will be collected, what 

geographic areas the RSP data will represent, and how RSP data will 

compare to other pricing data. 

RECOMMENDATIONS 

Pursuant to the DRA, CMS must promulgate regulations clarifying the 

requirements for the AMP. In a May 2006 report, mandated by the 

DRA, the Office of Inspector General made recommendations to CMS 

regarding the clarification of AMP definitions and the issuance of 

guidance to the States regarding the AMP-related reimbursement 

provisions of the DRA. 

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EXE CUTIVE S U MMAR Y

In this study, we conducted an early assessment of whether States are 

considering using new pricing data for Medicaid prescription drug 

reimbursement. Overall, many States have not decided whether they 

will use either AMP or RSP data for Medicaid drug reimbursement. 

States reported that AMP and RSP data must be accurate, reliable, and 

accessible if they are to use these data in their Medicaid prescription 

drug programs. 

To ensure this, CMS should: 

Explicitly detail AMP’s definition and calculation, including the definition 

of retail pharmacy class of trade, when promulgating final regulations 

regarding the AMP. Consistent with our previous recommendations, 

States’ concerns about how the AMP will take into account different 

types of pharmacies reinforce the need for CMS to clarify requirements 

in regard to the definition of retail pharmacy class of trade. 

Furnish States with interim guidance and/or information regarding AMP 

data. We continue to recommend that CMS issue guidance to States 

that addresses AMP-related reimbursement provisions of the DRA. 

More specifically, based on the concerns raised by States in this review, 

we recommend that CMS provide States with the unit definition for 

drug products in AMP files distributed to States. In addition, before the 

final regulations are published, CMS should work with States to 

address their concerns regarding whether and how data would be 

provided to their vendors for incorporation into their pricing and claims 

processing systems. 

Explicitly detail RSP’s definition, calculation, and method of collection 

when distributing RSP data to States. CMS should detail whether and 

how it will take into account differences in prices among pharmacy 

types and within various geographical areas when determining RSPs. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS generally agreed with our recommendations and has taken several 

steps toward addressing them. CMS published a proposed regulation on 

December 22, 2006, addressing the definition, calculation, and method 

of collection for the AMP and reported that it will also address these 

issues when it promulgates the final regulations. CMS also provided 

guidance to State Medicaid directors on December 15, 2006; however, 

the guidance does not address the States’ concerns regarding whether 

OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA iii 
EXE CUTIVE S U MMAR Y 

and how the new pricing data could be provided to their vendors for 

incorporation into their pricing and claims processing systems. We 

continue to recommend that CMS provide this information to States as 

they consider the use of the new drug prices. CMS stated that unit 

definitions for AMPs are available on its Web site; however, we 

recommend incorporating this information in the AMP data file to make 

the file a more effective and efficient tool for States. 

 OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA iv 
Δ T ABLE OF CONTENTS 

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

INTR O D U C T I ON ........................................... 1

FINDI NGS ................................................. 8

Most States have not decided whether to use the AMP ......... 8

States raised concerns about the AMP data received ........... 8

Few States have decided whether to use the RSP .............. 9

RECOM M E NDATI O NS ..................................... 11

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

APPENDI X ................................................ 13

Agency Comments...................................... 13

ACKN O W LEDGMENTS .................................... 15
Δ INTRODU C TION 

OBJECTIVE 

To provide an early assessment of whether States are considering using 

new pricing data for Medicaid prescription drug reimbursement. 

BACKGROUND 

Pursuant to the Deficit Reduction Act of 2005 (DRA), the Centers for 

Medicare & Medicaid Services (CMS) is providing States with 

sales-based drug pricing information that was previously not available 

for their use. Recent studies have found that published prices, such as 

average wholesale price and wholesale acquisition cost used by States to 

estimate drug acquisition costs, are higher than prices based on actual 

sales transactions. In July 2006, CMS began sending States average 

manufacturer price (AMP) data monthly. CMS will also provide retail 

sales price (RSP) data to States starting in early 2007. There is the 

potential that States could reduce Medicaid drug expenditures by 

incorporating the new drug pricing data into their reimbursement 

formulas. This study provides an early look at whether States are 

considering using the new pricing data and it identifies potential 

barriers to States’ use of the new drug pricing data for Medicaid drug 

reimbursement. 

State Drug Reimbursement Methodologies 

All States and the District of Columbia offer prescription drug coverage 

under the Medicaid program (throughout the report, the District of 

Columbia will be referred to as a State). Medicaid prescription drugs 

are generally dispensed to beneficiaries through pharmacies that are 

then reimbursed for the drugs by State Medicaid agencies. In 2005, 

Federal and State expenditures for prescription drugs in the Medicaid 

program reached $41 billion.2 

Federal regulations require, with certain exceptions, that States 

reimburse Medicaid prescription drugs in the aggregate at rates that do 

not exceed the lower of (1) the estimated acquisition cost plus 

reasonable dispensing fees, or (2) the provider’s usual and customary 

2 Calculated using national summary data for 2005. Available online at 

http://www.cms.hhs.gov/MedicaidDrugRebateProgram/SDUD/list.asp. Accessed on 

October 30, 2006. 

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INTROD UCT ION 

charge to the public for the drug.

3 The regulations define estimated 

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

and currently paid by providers for the drug.4 States have flexibility in 

determining what will constitute an estimated acquisition cost for their 

Medicaid program. Most States currently use the average wholesale 

price (AWP) discounted by a specified percentage to determine 

estimated acquisition cost. Fewer States use wholesale acquisition cost 

(WAC) plus a markup percentage.5 The AWP and the WAC are drug 

prices that are published in compendia produced by private companies. 

There are several cost containment programs in place that impact 

Medicaid drug spending. For example, the Federal Upper Limit (FUL) 

program was established to ensure that the Government is a prudent 

purchaser of Medicaid prescription drugs.6 Under the FUL program, at 

the time of our review, reimbursement for drugs that have at least three 

therapeutically equivalent drugs available was capped so that each drug 

is reimbursed at 150 percent of the published price for the lowest cost 

equivalent drug.7 States are required to meet the FUL requirements 

only in the aggregate. Therefore, a State can pay more than the FUL 

amount for certain products as long as it pays less than the FUL 

amount for other products. States may also establish Maximum 

Allowable Cost (MAC) programs that stipulate maximum drug prices for 

Medicaid reimbursement. Compared to the FUL program, States 

generally have more latitude in determining which drugs to include in 

their MAC programs and at what prices to set MACs. As of fiscal year 

2006, 32 States reported having MAC programs in place to help contain 

their Medicaid drug costs.8 

3 42 CFR § 447.331(b). In December 2006, CMS issued a proposed regulation that 

removes 42 CFR § 447.331 but includes the substance of that section in a new section 

designated as 42 CFR § 447.512. 

4 42 CFR § 447.301. In the December 2006 proposed regulation, this definition is 

included in a new section designated as 42 CFR § 447.502. 

5 “Medicaid Prescription Reimbursement Information by State – Quarter Ending 

September 2006.” Available online at 

http://www.cms.hhs.gov/MedicaidDrugRebateProgram/Downloads/RxReimbursementRate 

September2006Qtr.pdf. Accessed October 16, 2006. 

6 State Medicaid Manual, section 6305.1. 

7 Section 1927(e)(4) of the Social Security Act and 42 CFR § 447.332. 

8 “Low Medicaid Spending Growth Amid Rebounding State Revenues,” The Kaiser 

Commission on Medicaid and the Uninsured. Available online at 

http://www.kff.org/medicaid/upload/7569.pdf. Accessed October 10, 2006. 

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INTROD UCT ION 

The dispensing fees that States pay in addition to estimated acquisition 

cost currently range from approximately $2 per prescription to $12.50 

per prescription.

9 

The Deficit Reduction Act and Medicaid Drug Prices 

Enacted in February 2006, the DRA contains several provisions that 

impact Medicaid reimbursement for prescription drugs. Pursuant to the 

DRA, AMP and RSP data are to be made available to States for their 

use in Medicaid drug reimbursement. Furthermore, the DRA modifies 

the way FULs for Medicaid drugs will be calculated. 

Average Manufacturer Prices. Sections 1927(a)(1) and (b)(1) of the Social 

Security Act (the Act) mandate that for Federal payment to be available 

for covered outpatient drugs provided under Medicaid, drug 

manufacturers enter into rebate agreements with the Secretary of the 

Department of Health and Human Services (HHS) and pay quarterly 

rebates to State Medicaid agencies. Under these rebate agreements and 

pursuant to section 1927(b)(3) of the Act, manufacturers must provide 

CMS with the AMP for each of their covered outpatient drugs by the 

national drug code (NDC). Pursuant to section 1927(b)(3)(A) of the Act, 

manufacturers must report AMP data no later than 30 days after the 

last day of the rebate period. Before the passage of the DRA, CMS did 

not provide AMP data to States. Although the DRA does not require 

States to use AMP data in their Medicaid drug reimbursement 

formulas, the dissemination of AMP data to States in accordance with 

the DRA would provide States with a new source of pricing data for 

establishing estimated acquisition cost. 

AMP data are based on actual sales transactions and, during the time of 

our review, was defined 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, after deducting customary prompt 

pay discounts.10 The AMP is calculated as a weighted average of all 

prices for all of a manufacturer’s package sizes of a covered outpatient 

9 This range excludes dispensing fees for home IV therapy. “Medicaid Prescription 

Reimbursement Information by State – Quarter Ending September 2006.” 

Available online at 

http://www.cms.hhs.gov/MedicaidDrugRebateProgram/Downloads/RxReimbursementRate 

September2006 Qtr.pdf. Accessed October 16, 2006. 

10 Section 1927(k)(1) of the Act. The DRA (section 6001(c)(1)(C)) modified the AMP 

definition effective January 1, 2007, and requires that AMP calculations be determined 

without regard to customary prompt pay discounts extended to wholesalers. 

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I N T R O D U C T I ON 

drug sold during a given time period and is reported for the lowest 

identifiable unit of the drug (e.g., 1 milligram, 1 milliliter, 1 tablet, 

1 capsule). 

Section 6001(b) of the DRA mandates that CMS share AMP data with 

States on a monthly basis beginning in July 2006. As required by the 

DRA, CMS sent AMP data in compact disc (CD) format to States on 

July 5, 2006.

11 According to CMS staff, AMP data will be provided to 

the States on an ongoing basis by the 12th of each month. 

The DRA also mandated that the HHS Office of Inspector General (OIG) 

review and report on the requirements for, and the manner in which, 

AMPs are determined under the Act and recommend appropriate 

changes to the Secretary of HHS (hereafter referred to as the Secretary) 

and Congress.12 Pursuant to the DRA, after considering OIG’s findings 

and recommendations, the Secretary must promulgate a regulation that 

clarifies AMP requirements by July 1, 2007.13 CMS issued a proposed 

regulation addressing AMP and other issues in December 2006. 

In May 2006, CMS noted pharmacists’ concerns that AMP data need to 

consistently include prices available to the retail pharmacy class of 

trade before they are used as reference points in setting pharmacy 

reimbursement. CMS also noted that “the more specific definition of 

AMP” that is to be included in the forthcoming regulation is not 

reflected in the current AMP data. CMS stated that it will release 

certain AMP data as the DRA mandates, but only to help States “set up 

their billing systems appropriately and not for the purposes of setting 

reimbursements.”14 

11 The following disclosure was printed on each CD sent to States, “Section 1927(b)(3)(D) 

of the Social Security Act requires that, notwithstanding any other provision of law, these 

AMPs be kept confidential and shall not be disclosed by a State agency (or contractor 

therewith) in a form which discloses the identity of the manufacturer or any prices charged 

for drugs by that manufacturer. States are restricted from disseminating, distributing, or 

using AMP data, except as specifically authorized by the drug rebate statute.” 

12 Deficit Reduction Act of 2005, section 6001(c)(3)(A). In May 2006, OIG issued a report, 

“Determining Average Manufacturer Prices for Prescription Drugs Under the Deficit 

Reduction Act of 2005” (A-06-06-00063). 

13 Deficit Reduction Act of 2005, section 6001(c)(3)(B). 

14 “National Community Pharmacists Association’s (NCPA) 38th Legislation and 

Government Conference, Remarks of Mark B. McClellan, MD, Ph.D., as delivered to the 

NCPA 38th Legislation and Government Conference, May 22, 2006.” Available online at 

http://www.cms.hhs.gov/apps/media/press/speech.asp?Counter=1866. Accessed July 26, 

2006. 

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INTROD UCT ION 

Retail Sales Prices. Section 6001(f) of the DRA also contains provisions 

on the collection and dissemination of RSPs to States. These provisions 

state that the Secretary is permitted to contract with a vendor to collect 

information on RSPs that represent a nationwide average of consumer 

purchase prices, net of all discounts and rebates (to the extent 

information on discounts and rebates is available) for Medicaid covered 

outpatient drugs.15 This vendor will provide RSP data to the Secretary 

on a monthly basis. According to CMS staff, the vendor was selected 

and a kickoff meeting was held on October 5, 2006. Furthermore, the 

DRA directs the Secretary to provide a means for States to access RSP 

data on at least a monthly basis.16 CMS staff expect that RSP data will 

be made available to States by January or February 2007. 

As outlined in section 6001(f)(3) of the DRA, the Secretary is to compare 

RSP data to Medicaid price data for the 50 most widely prescribed 

Medicaid outpatient drugs by State. The Secretary is also to ensure 

that annual reports on these rankings are available for review by 

Congress and the States. The vendor will also produce these annual 

reports and provide them to CMS starting in March 2008.17 

Changes to the Federal Upper Limit. Pursuant to the DRA, the FUL for 

multiple source drugs will be based on 250 percent of the AMP (instead 

of 150 percent of the lowest published price) for the least costly 

therapeutic equivalent effective January 1, 2007.18 The DRA also 

requires that at that time Medicaid drugs have two therapeutic 

equivalents (instead of three) to be included on the FUL list.19 

Related Office of Inspector General Work 

Average Manufacturer Prices and the Deficit Reduction Act. Pursuant to 

DRA requirements, OIG released a report in May 2006, “Determining 

Average Manufacturer Prices for Prescription Drugs Under the Deficit 

Reduction Act of 2005” (A-06-06-00063), which concluded, among other 

things, that manufacturers’ methods of calculating AMPs were 

inconsistent. Specifically, the report found that manufacturers did not 

consistently define the retail pharmacy class of trade when compiling 

15 Deficit Reduction Act of 2005, section 6001(f)(1).

16 Deficit Reduction Act of 2005, section 6001(f)(1)(E). 

17 The planned timeframe of these annual reports is specified in CMS’s request for 

proposals, “Survey of Retail Prices; Payment and Utilization Rates; and Performance 

Rankings” (RFP-CMS-2006-0010ERD). 

18 Deficit Reduction Act of 2005, section 6001(a). 

19 Ibid. 

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INTROD UCT ION 

AMP calculations. OIG recommended that the Secretary direct CMS, in 

promulgating AMP regulation, to clarify requirements in regard to the 

definition of retail pharmacy class of trade and the treatment of 

pharmacy benefit manager rebates and Medicaid sales and to consider 

addressing issues raised by industry groups. OIG also recommended 

that the Secretary direct CMS to issue, in the near future, guidance that 

specifically addresses the implementation of the AMP-related 

reimbursement provisions of the DRA and encourage States to analyze 

the relationship between AMPs and pharmacy acquisition costs to 

ensure that the Medicaid program appropriately reimburses pharmacies 

for estimated acquisition costs. 

Published Prices and Sales-Based Prices. Previous OIG work shows that 

Medicaid reimbursement for prescription drugs often exceeds actual 

pharmacy drug acquisition costs.20 In addition, more recent studies 

have found that published prices (i.e., AWP and WAC) used by States to 

estimate drug acquisition costs are higher than prices based on actual 

sales transactions.21 Specifically, one OIG report found that the AMP is 

59 percent lower than the AWP at the median and 25 percent lower 

than the WAC at the median.22 The report also found that the 

difference between the AMP and published prices currently used by 

States is even more pronounced for generic drugs, for which the AMP is 

70 percent lower than the AWP at the median. 

METHODOLOGY 

Scope and Data Source 

To determine whether States are planning to use the new pricing data 

for Medicaid drug reimbursement, we surveyed Medicaid pharmacy 

directors in all 51 States. 

Data Collection and Analysis 

A survey was e-mailed to State Medicaid pharmacy directors on 

September 7, 2006, and data collection was completed on October 3, 

20 “Medicaid Pharmacy – Additional Analyses of the Actual Acquisition Cost of 

Prescription Drug Products” (A-06-02-00041, September 2002). 

21 “Medicaid Drug Price Comparison: Average Sales Price to Average Wholesale Price” 

(OEI-03-05-00200, June 2005) and “Medicaid Drug Price Comparisons: Average 

Manufacturer Price to Published Prices” (OEI-05-05-00240, June 2005). 

22 “Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices” 

(OEI-05-05-00240, June 2005). 

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I N T R O D U C T I ON 

2006. Forty-seven pharmacy directors completed the survey, for a 

response rate of 92 percent. 

State pharmacy directors were asked about their review of the AMP 

data provided by CMS, including whether they found the data format 

useful and whether they had noted any potential problems with the 

data file (such as outliers). We asked pharmacy directors to indicate 

whether their States plan to use AMP data for Medicaid drug 

reimbursement, do not plan to use AMP data, or had not yet decided on 

its use. Pharmacy directors of States that were planning to use the 

AMP were asked how they plan to use the data, either in their drug 

acquisition cost formulas or State MACs. These pharmacy directors 

were asked to describe any influencing factors in their decisions to use 

AMP data as well as any obstacles that might prevent their use of the 

data. We asked pharmacy directors what information would help them 

to make decisions about using AMP data for Medicaid drug 

reimbursement. For pharmacy directors who indicated that their States 

do not plan to use AMP data, we requested reasons that the data would 

not be used. We also asked pharmacy directors if their States plan to 

use RSP data for Medicaid drug reimbursement when the data became 

available and what information would help them to make decisions 

about using RSP data. 

From the survey data, we determined the frequency counts of closedended survey questions. We reviewed open-ended survey questions and 

categorized the responses for analysis and reporting. The term “State” 

is used interchangeably with “pharmacy director” throughout the report 

to describe the responses of individual State Medicaid pharmacy 

directors who provided information on behalf of their States’ Medicaid 

programs. 

Standards 

This study was conducted in accordance with the “Quality Standards for 

Inspections” issued by the President’s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

 OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA 7 
Δ F I NDING S FINDINGS 

Thirty-nine of forty-seven States 

have not decided whether to use 

Most States have not decided whether to use 

AMP data for Medicaid drug reimbursement 

AMP data for Medicaid drug 

reimbursement. Of the remaining eight States, four are planning to 

use AMP data for Medicaid drug reimbursement but have not yet 

implemented changes. Of these four States, two are unsure as to how 

they plan to use AMP data for Medicaid drug reimbursement, one State 

plans to use the AMP for estimated acquisition costs, and another State 

plans to compare it’s MACs to its current drug prices and to the new 

AMP-based FULs. Another three States do not plan to use AMP data. 

One State indicated that it is using AMP data to help determine MACs 

for most drug products under its MAC program. 

Fourteen of the thirty-nine States that are undecided reported that they 

would consider using the AMP to determine estimated acquisition costs. 

Four States reported that they would consider using the AMP to 

establish State MACs. The remaining undecided States either did not 

know or did not indicate how they would consider using AMP data. 

States that are undecided want to perform analysis of AMP data 

Fifteen States that are undecided about using the AMP reported that 

they want to perform an analysis to determine how incorporating the 

AMP into their reimbursement methodology would affect 

reimbursement amounts. Three of these States would like to further 

determine how a new pricing methodology would compare to current 

methodologies. States reported that an analysis must be conducted to 

determine the impact of a new reimbursement methodology on State 

budgets, providers, and beneficiaries. 

States raised concerns about the AMP data Thirty-three of forty-seven States 

received from CMS expressed at least one concern 

about AMP data. Of the 33 States 

that have data concerns, 30 were undecided about using the AMP, 2 do 

not plan to use the AMP, and 1 plans to use the AMP. Five States 

described inconsistencies between the AMP units reported by CMS to 

States and the typical unit definition of the associated drug products. 

For example, one of these States commented that there are 

“discrepancies between the units used for AMP pricing and the units 

used for other pricing methodologies,” and another State commented 

that “the AMPs that have been provided appear to have different unit 

definitions than those provided by the drug file vendors.” Nine States 

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F I NDING S 

would like the unit definition on which the AMP is based to be included 

in the AMP files provided by CMS. Five States also questioned whether 

the vendors that already provide them with drug pricing information for 

claims processing would have access to AMP data. States raised other 

concerns about the AMP data they received: 

• Six States reported that some drug products did not have 

associated AMPs in the data file that CMS provided. For 

example, one pharmacy director reported that “approximately 

7 percent (over 2,600) of the NDCs listed have no data supplied.” 

• Four States described problems with both unusually high or low 

values (outliers) in the AMP files. One State pointed out that 

the aberrantly low AMPs that it found in the AMP file are 

problematic because FULs are based on the lowest AMP for the 

drug product. 

• Four States commented that there was little correlation between 

the AMP data supplied to them and pharmacy acquisition costs. 

For example, one State’s analysis of AMP data showed that 

values were often “far below or far above the average acquisition 

cost” they calculate among providers in their State. 

States that are undecided about using the AMP would like assurances 

from CMS that AMP data are accurate and valid. States are 

anticipating CMS’s final regulations to clearly explain how the AMP 

will be defined and calculated, including how the AMP would take into 

account price differences among different pharmacy types (e.g., 

independent, chain, long term care, specialty, mail order) within the 

retail pharmacy class of trade. Nine States expressed hesitation about 

using AMP data before CMS has issued final regulations regarding its 

definition. 

Few States have decided whether to use RSP Of the 47 States, 1 indicated that

it plans to use RSP data and 

3 indicated that they do not. The 

remaining 43 States have not decided whether to use RSP data. Two of 

the three States that do not plan to use the RSP are also not planning to 

use the AMP. Until they received our survey, 16 of the 47 States 

surveyed were not aware that CMS is collecting and will be 

disseminating RSP data. 

data for Medicaid drug reimbursement 

OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA 9 
F I NDING S 

States want more information about RSP data before making decisions 

States had many of the same concerns regarding RSP data that they 

had regarding AMP data and wanted additional information about the 

RSP: 

• Twenty States wanted to know how RSP data will be 

determined or defined before they make decisions about their 

use. Some States emphasized the importance of knowing the 

types of pharmacies that will be included in RSP calculations or 

preferred that RSP data be provided separately for the different 

pharmacy types. 

• Nine States wanted information about the methods that will be 

used to collect RSP data or how frequently RSP data will be 

updated. For example, one pharmacy director asked whether 

RSP information will be gathered by “phone surveys, walk-in, 

[or] e-mail” or whether pharmacies would be aware that they 

are being surveyed. 

• Seven States reported that they want assurances that RSP data 

are valid and accurate before using them for Medicaid drug 

reimbursement. 

• Seven States wanted to know the geographical area that will be 

represented by the RSP data, with a few States specifying that 

they want the data to be representative of their States before 

deciding on their use. 

• Six States commented that, before deciding whether to use the 

data, they would want to evaluate how RSPs compare to their 

current drug prices. Three States would want to evaluate how 

RSPs compare to AMPs. 

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Δ RECOMME NDA TIONS 

RECOMMENDATIONS 

Pursuant to the DRA, CMS must promulgate regulations clarifying the 

requirements for the AMP and make the AMP and the RSP available to 

States for their use in Medicaid drug reimbursement. In a May 2006 

report, mandated by the DRA, OIG made recommendations to CMS 

regarding the clarification of AMP definitions and the issuance of 

guidance to the States regarding AMP-related reimbursement 

provisions of the DRA. 

In this study, we conducted an early assessment of whether States are 

considering using new pricing data for Medicaid prescription drug 

reimbursement. Overall, many States have not decided whether they 

will use either AMP or RSP data for Medicaid drug reimbursement. 

Many of these States have concerns regarding AMP and RSP data. 

Concerns about the AMP were focused both on the quality of the AMP 

data provided and on the need for clearly defined CMS regulations. 

States want the AMP and the RSP to be defined appropriately and 

consistently before using the data to implement Medicaid drug 

reimbursement changes. States reported that AMP and RSP data must 

be accurate, reliable, and accessible if they are to use these data in their 

Medicaid prescription drug programs. 

To ensure this, CMS should: 

Explicitly detail AMP’s definition and calculation, including the definition 

of retail pharmacy class of trade, when promulgating final regulations 

regarding the AMP. Consistent with our previous recommendations, 

States’ concerns about how the AMP will take into account different 

types of pharmacies reinforce the need for CMS to clarify requirements 

in regard to the definition of retail pharmacy class of trade. 

Furnish States with interim guidance and/or information regarding AMP 

data. We continue to recommend that CMS issue guidance to States 

that addresses AMP-related reimbursement provisions of the DRA. 

More specifically, based on the concerns raised by States in this review, 

we recommend that CMS provide States with the unit definition for 

drug products in AMP files distributed to States. In addition, before the 

final regulations are published, CMS should work with States to 

address their concerns regarding whether and how data would be 

provided to their vendors for incorporation into their pricing and claims 

processing systems. 

 OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA 11 
R E C O MMENDA T I O N S 

Explicitly detail RSP’s definition, calculation, and method of collection 

when distributing RSP data to States. CMS should detail whether and 

how it will take into account differences in prices among pharmacy 

types and within various geographical areas when determining the 

RSP. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS believes the timing of our report caused inconclusive results 

because it would have been premature for States to have made decisions 

about the use of the new drug prices as early as September 2006. 

However, CMS generally agreed with our recommendations and has 

taken several steps toward addressing them. CMS published a 

proposed regulation on December 22, 2006, addressing the definition, 

calculation, and method of collection for the AMP and reported that it 

will also address these issues when it promulgates the final regulations. 

CMS stated that it provided guidance to State Medicaid directors on 

December 15, 2006, concerning AMP issues and provides the unit 

definition of the AMP on its Web site. CMS also reported it will provide 

sufficient detail regarding the RSP when those data are provided to 

States. The full text of CMS’s comments is provided in the Appendix. 

While CMS believes this study was premature, OIG believes it was 

important to conduct this study to provide an early assessment of 

States’ plans and concerns regarding the new drug pricing data, so that 

CMS could address these concerns in its regulations and other guidance. 

CMS has taken steps toward addressing our first two recommendations; 

however, we recommend additional actions in those areas. The 

guidance provided by CMS in December does not address the States’ 

concerns regarding whether and how the new pricing data could be 

provided to their vendors for incorporation into their pricing and claims 

processing systems. We continue to recommend that CMS provide this 

information to States as they consider the use of the new drug prices. 

Also, while unit definitions are available on CMS’s Web site, we 

recommend incorporating this information in the AMP data file to make 

the file a more effective and efficient tool for States. 

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Agency Comments 

Δ APPENDIX 
 

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APPENDIX 
Δ 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 Linda M. Ragone, Deputy Regional Inspector 

General. 

Tanaz Dutia and Tara Bernabe served as the team leaders for this 

study. Other principal Office of Evaluation and Inspections staff from 

the Philadelphia regional office who contributed to this report include 

Diane Epstein, and central office staff who contributed include Sarah 

Craren, Kevin Farber, Melissa Montgomery, and Cynthia Thomas. 

 OE I-03-06-00 490 S TAT E S ’ USE OF NEW DR U G P R I C I NG DATA 15