Department of Health & Human Services 

OFFICE OF

INSPECTOR GENERAL

 

REPLACING AVERAGE 

WHOLESALE PRICE: MEDICAID 

DRUG PAYMENT POLICY 

 

Daniel R. Levinson 

Inspector General 

July 2011 

OEI-03-11-00060 
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 EXECUTIVE SUMMARY

OBJECTIVES

1. To determine how States will set reimbursement for Medicaid 

prescription drugs after First DataBank stops publishing average 

wholesale prices (AWP) in September 2011. 

2. To determine the role that States would prefer the Centers for 

Medicare & Medicaid Services (CMS) to play in developing 

Medicaid reimbursement methodologies for prescription drugs.

BACKGROUND

Federal regulations require, with certain exceptions, that Medicaid

reimbursement amounts for prescription drugs not exceed (in the 

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

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

public for the drug. CMS allows States flexibility in determining the 

estimated acquisition cost. In the first quarter of 2011, 45 States 

estimated the acquisition cost based on AWP; 37 of these States 

obtained AWP data from the pricing compendium published by First 

DataBank. However, Office of Inspector General reports have 

consistently found that the fundamentally flawed nature of AWP-based 

reimbursement has caused Medicaid to pay too much for certain drugs.

Following the filing of a lawsuit, First DataBank decided to stop 

publishing AWPs no later than September 26, 2011. This presents 

States with an opportunity to implement new reimbursement 

methodologies that more closely approximate pharmacy acquisition 

costs. States have a variety of other pricing options, such as obtaining 

AWP from a different source or replacing AWP with average sales price, 

average manufacturer price, average acquisition cost, or wholesale 

acquisition cost (WAC). 

In January 2011, we surveyed all 50 States and the District of Columbia 

(hereinafter referred to as States) and received responses from each. 

We asked States whether they intend to change their reimbursement 

methodologies once AWPs are no longer published by First DataBank. 

We then asked the States to describe any plans to replace AWP, the 

timeframe for implementation, and the actions necessary for 

implementation. We also asked States to describe the role they would 

prefer CMS to play in developing Medicaid reimbursement 

methodologies and whether States would prefer that CMS develop a 

single national benchmark. 
 

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EXECUTIVE SUMMARY

We interviewed CMS staff in February 2011 to determine whether the 

agency had provided guidance to all States regarding recent AWP 

issues. We also asked CMS to describe any guidance it is planning to 

provide States about this topic. 

FINDINGS

Twenty States had not developed any definitive plans for 

prescription drug reimbursement after First DataBank stops 

publishing AWPs. Of the 45 States with AWP-based reimbursement 

methodologies in the first quarter of 2011, 20 had not made any 

definitive plans regarding reimbursement for Medicaid prescription 

drugs after September 2011 (all 20 had obtained AWPs from First 

DataBank in the first quarter of 2011). Eight of the twenty States had 

not decided whether they will continue to use AWP (from another 

source) or instead select another benchmark. Among the remaining 

12 States, 6 intend to discontinue using AWP but had not yet taken any 

steps to select a new benchmark, 3 intend to continue using AWP but 

had not selected the publishing source for AWP data, and 3 are 

considering whether to use AWP from another source or to replace AWP 

with WAC.

Fifteen States have relatively well-developed plans to move away 

from AWP-based reimbursement. Of the 45 States, 15 have relatively 

well-developed plans to implement new reimbursement methodologies

that replace AWP with another benchmark. Among these 15 States, 

3 plan to replace AWP with average acquisition cost and 12 plan to 

replace AWP with WAC. 

Ten States will continue using AWP to set reimbursement, at least in 

the short term. Of the 45 States, 10 plan to continue using the AWP

after September 2011. This number includes 4 of the 37 States that 

currently obtain AWPs from First DataBank and now plan to obtain 

AWP data from another source (Medi-Span and/or Micromedex). The 

other six States that will continue using AWP were already getting the 

data from one of these other sources. 

Forty-four States would like CMS to develop a national benchmark 

to set Medicaid reimbursement for prescription drugs. Most States 

(44 of 51) would prefer that CMS develop a single national benchmark

to set Medicaid reimbursement rates. Twenty-four States specified that 

they want a benchmark based on pharmacy acquisition costs. 
 

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EXECUTIVE SUMMARY

According to CMS staff, the agency has not yet provided uniform 

guidance about options for Medicaid reimbursement after AWPs are no 

longer available from First DataBank, but is taking steps to address this 

issue and plans to provide guidance to States. CMS stated that although 

the agency does not mandate that a specific formula or methodology be 

used for reimbursement, it plans to conduct a nationwide survey to collect

retail community pharmacy prices for drugs (including acquisition costs) 

and intends to discuss the results and other options for States in future 

guidance and/or in proposed rulemaking. 

RECOMMENDATION

First DataBank will stop publishing AWPs no later than 

September 26, 2011, forcing many States to reevaluate how they will 

pay for prescription drugs. It will also present States with the 

opportunity to move to new reimbursement methodologies that could 

better reflect pharmacy acquisition costs. However, many States are 

not fully prepared to implement new reimbursement methodologies at 

this time. As a result, these States will need to develop, obtain CMS 

approval for, and implement new reimbursement methodologies in an 

extremely limited timeframe. In addition, a number of States will

either begin or continue to base reimbursement on WAC, a 

manufacturer-reported benchmark that, like AWP, is not based on 

actual sales transactions. 

States overwhelmingly would prefer that CMS, to address the 

uncertainty surrounding drug reimbursement decisions, develop a 

national benchmark to set reimbursement. A national benchmark that 

reflects actual pharmacy acquisition costs would eliminate States’ 

reliance on the inflated published prices that cause Medicaid and its 

beneficiaries to pay too much for certain drugs. Therefore, we 

recommend that CMS: 

Develop a national benchmark that accurately estimates acquisition 

cost and encourage States to consider it when determining 

Medicaid reimbursement for prescription drugs.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred with our recommendation. CMS stated that it is 

contracting with a vendor to develop a survey of retail prices and 

acquisition cost information. CMS expects to develop an estimate of 
 

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EXECUTIVE SUMMARY

average acquisition cost using the data from this survey. CMS also 

stated that it intends to include external stakeholders in this process to 

ensure that there is transparency in the average acquisition cost 

determination and that the methodology is implemented appropriately. 

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

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

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

FINDINGS ................................................. 11

Twenty States had not developed any definitive plans for 

prescription drug reimbursement after First DataBank stops 

publishing AWPs ....................................... 11

 

Fifteen States have relatively well-developed plans to move 

away from AWP-based reimbursement ..................... 11 

 

Ten States will continue using AWP to set reimbursement, at 

 least in the short term ................................... 13 

Forty-four States would like CMS to develop a national 

benchmark to set Medicaid reimbursement for 

prescription drugs ...................................... 13

RECOMMENDATION ....................................... 15

Agency Comments and Office of Inspector General Response.... 16

APPENDIX ................................................ 17 

A: Agency Comments ................................... 17 

ACKNOWLEDGMENTS ..................................... 19
 

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 INTRODUCTION

OBJECTIVES 

1. To determine how States will set reimbursement for Medicaid 

prescription drugs after First DataBank stops publishing average 

wholesale prices (AWP) in September 2011.

2. To determine the role that States would prefer the Centers for 

Medicare & Medicaid Services (CMS) to play in developing Medicaid 

reimbursement methodologies for prescription drugs.

BACKGROUND

Numerous reports by the Office of Inspector General (OIG) have found 

that the fundamentally flawed nature of AWP-based reimbursement 

has caused Medicaid to pay too much for certain drugs. OIG has 

recommended that CMS work with States and Congress to base 

payments on a figure that more accurately reflects pharmacy 

acquisition cost.1

However, as of the first quarter of 2011, 45 States still used AWP as a 

primary benchmark when setting Medicaid reimbursement amounts; 

37 of these States obtained AWP data from the publishing company 

First DataBank. Following the filing of a lawsuit, First DataBank 

decided to stop publishing AWPs no later than September 26, 2011.2 

This has forced many States to reevaluate how they will pay for 

prescription drugs after that date and presents States with the 

opportunity to move to new reimbursement methodologies that better 

reflect pharmacy acquisition costs. 

1 For example, see Comparison of Medicaid Federal Upper Limit Amounts to Average 

Manufacturer Prices (OEI-03-05-00110), June 2005; Variation in State Medicaid Drug 

Prices (OEI-05-02-00681), September 2004; Cost Containment of Medicaid HIV/AIDS Drug 

Expenditures (OEI-05-99-00611), July 2001; or Medicaid Pharmacy – Additional Analyses 

of the Actual Acquisition Cost of Prescription Drug Products (A-06-02-00041), 

September 2002. 

2 First DataBank, Drug Pricing Policy. Accessed at http://www.firstdatabank.com on 

November 22, 2010. First DataBank will continue to publish other pricing data, such as 

wholesale acquisition cost (WAC).
 

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INTRODUCTION

Medicaid Reimbursement for Prescription Drugs

The Medicaid program, established under Title XIX of the Social 

Security Act (the Act), is administered by States and financed using

State and Federal funds. Medicaid pays for medical and health-related

assistance for certain vulnerable and needy individuals and families. 

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

States) provide coverage for prescription drugs under Medicaid. In 

2009, Medicaid expenditures for prescription drugs totaled $26 billion.3

Medicaid beneficiaries typically receive covered drugs through 

pharmacies, which are reimbursed by State Medicaid agencies. Federal 

regulations require, with certain exceptions, that State Medicaid 

reimbursement for a covered outpatient drug not exceed (in the 

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

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

public for the drug.

 

4 Estimated acquisition cost refers to the State’s

best estimate of the price generally and currently paid by providers for 

the drug.5 CMS allows States flexibility in determining the estimated 

acquisition cost. Estimating pharmacy acquisition cost has historically 

presented a challenge for States because they lack access to pricing data 

that are based on actual drug sales. 

AWP and WAC. States typically estimate the acquisition cost for a drug 

based on published prices, such as AWP and WAC.6 Most States have 

historically used the pricing compendium published by First DataBank 

to obtain AWP and WAC data. First DataBank relies on manufacturers 

(or other third parties) to report or otherwise make available the values 

for AWP and WAC.7, 8

3 This was the most recent year for which complete expenditure data were available.

 

4 42 CFR § 447.512.

5 42 CFR § 447.502.

6 For certain generic drugs, States may also set reimbursement through the Federal 

upper limit and/or the State maximum allowable cost programs. 

7 Although most brand-name drugs have a WAC, many generic drugs do not. 

8 The term “manufacturers” refers to manufacturers, repackagers, private labelers, and 

other suppliers. First DataBank, Drug Pricing Policy. Accessed at 

http://www.firstdatabank.com on November 22, 2010. 
 

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INTRODUCTION

Neither AWP nor WAC is based necessarily on actual sales 

transactions. AWP is not defined in law or regulation and fails to 

account for prompt pay or other discounts, rebates, and reductions.9 

Section 1847A(c)(6)(B) of the Act defines WAC as the manufacturer’s list 

price for the drug to wholesalers or direct purchasers, not including 

prompt pay or other discounts, rebates, or reductions, for the most 

recent month for which information is available. 

Based on information from CMS’s Web site, at the end of 2010 all but a 

few States either used AWPs discounted by a certain percentage 

(5 to 50 percent) to determine estimated acquisition costs for most 

covered drugs or used AWP in combination with other available pricing 

data (e.g., WAC).10 

Dispensing fees. In addition to reimbursing pharmacies for the cost of 

the drug, States are required to determine a “reasonable” dispensing 

fee.11 This fee represents the charge for the professional services

provided by the pharmacist when dispensing a prescription (including 

overhead expenses and profit).12 In the fourth quarter of 2010, State 

dispensing fees paid to pharmacies ranged from $1.00 to $14.01 per 

prescription.13 

AWP Lawsuit Involving First DataBank and McKesson

Typically, a drug manufacturer sells a drug to a wholesaler, which then 

sells it to a pharmacy.14 The price wholesalers charge pharmacies for 

the drug is generally based on WAC. As previously mentioned, WAC is 

the undiscounted list price that manufacturers report to publishing 

companies, such as First DataBank, which use these data to produce 

9 First DataBank, Drug Pricing Policy. Accessed at http://www.firstdatabank.com on 

November 22, 2010.

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

December 2010. Accessed at http://www.cms.gov on February 22, 2011.

11 42 CFR § 447.512.

12 Health Resources and Services Administration, Pharmacy Affairs & 340B Drug 

Pricing Program. Accessed at http://www.hrsa.gov on April 26, 2011. 

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

December 2010. Accessed at http://www.cms.gov on February 22, 2011. This range 

excludes fees for IV therapy and compounded prescriptions. 

14 Prescription Access Litigation (PAL), Current Lawsuits: First DataBank McKesson 

Medi-Span. Accessed at http://www.prescriptionaccess.org on October 26, 2010.
 

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INTRODUCTION

pricing compendia. Pharmacies are reimbursed for most drugs covered 

under Medicaid based on the State’s estimated acquisition cost formula 

(e.g., based on AWP), plus the dispensing fee.15 Pharmacies can profit 

from the difference between what they pay to the wholesaler for the 

drug and what Medicaid reimburses for the drug (commonly referred to 

as the spread).16

In June 2005 and February 2006, members of PAL

 

17 filed a lawsuit 

alleging that First DataBank and a wholesaler, McKesson, engaged in a

scheme to increase the spread of certain prescription drugs by 

reporting higher AWPs.18 This case was eventually settled, and First 

DataBank announced it would discontinue publishing AWPs no later 

than September 26, 2011.19

Other Pricing Options for States 

Since the announcement of First DataBank’s settlement, many 

stakeholders (e.g., purchasers, pharmacies, providers) have speculated 

about the various other pricing benchmarks that could be used as the 

basis for Medicaid reimbursement. These include, but are not limited 

to, WAC, average acquisition cost (AAC), average manufacturer price 

(AMP), and average sales price (ASP). There is little industry 

consensus as to which, if any, of these benchmarks will be used by 

States. Some stakeholders believe that an AWP replacement may not 

even be necessary, at least not in the short term,20

15 42 CFR § 447.512.

as States will have 

16 PAL, Current Lawsuits: First DataBank McKesson Medi-Span. Accessed at 

http://www.prescriptionaccess.org on October 26, 2010.

17 According to its Web site, PAL is a national coalition of more than 130 organizations 

whose stated purpose is to challenge illegal drug pricing tactics and to work to make 

prescription drug prices more affordable for consumers through class action litigation and 

public education. Accessed at http://www.prescriptionaccess.org on November 9, 2010. 

18 PAL, Current Lawsuits: First DataBank McKesson Medi-Span. Accessed at

http://www.prescriptionaccess.org on October 26, 2010.

19 First DataBank, Drug Pricing Policy. Accessed at http://www.firstdatabank.com on 

November 22, 2010.

20 Journal of Managed Care Pharmacy, What Is the Price Benchmark to Replace Average 

Wholesale Price (AWP)? Accessed at www.amcp.org on October 22, 2010. Atlantic 

Information Services, Inc., Health Business Daily, Competing Stakeholders Disagree Over 

the Future of AWP Drug Pricing Benchmark and Possible Replacements. Accessed at 

www.aishealth.com on October 26, 2010. 
 

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INTRODUCTION

access to AWPs in pricing compendia published by other companies, 

such as Medi-Span. 

WAC. Although First DataBank will cease publication of AWPs, it will 

continue to publish other pricing information, such as WACs (pricing 

compendia published by other companies will also include WACs). In a 

June 2010 white paper, the American Medicaid Pharmacy 

Administrators Association and the National Association of State 

Medicaid Directors (AMPAA–NASMD) recommended that States use 

WAC along with a well-designed maximum allowable cost program21 as 

an interim alternative for AWP until a better option is developed.22 

According to AMPAA–NASMD, WAC should be only a temporary 

solution because it is practically impossible to audit, does not account 

for discounts and therefore does not reflect actual prices, and could be 

subject to inflation. 

AAC. Two States (Alabama and Oregon) recently switched from an

AWP-based reimbursement method to an AAC-based method. The first 

State to do so, Alabama, received CMS approval to implement a new 

methodology that uses AAC as the reimbursement benchmark for 

brand-name and generic drugs effective September 22, 2010.23

Effective January 1, 2011, CMS approved Oregon’s State Plan 

Amendment to replace AWP with AAC in setting payment for Medicaid 

 To 

determine AAC, Alabama (through a contractor) requests that randomly 

selected pharmacies submit 1 month’s worth of invoices semiannually. 

The State reviews these invoices and other applicable information to 

calculate AAC. CMS also approved Alabama’s request to increase the 

dispensing fee from $5.40 to $10.64 per prescription. Alabama’s Web 

site states that its AAC plan will establish a transparent, timely, and 

accurate pharmacy reimbursement system. 

21 States may develop maximum allowable cost programs to establish maximum 

reimbursement amounts for equivalent groups of multiple-source generic drugs. 

22 AMPAA–NASMD, Post AWP Pharmacy Pricing and Reimbursement. Accessed at 

http://hsd.aphsa.org on October 26, 2010. 

23 Alabama Medicaid Agency, AAC Program Implementation. Accessed at 

http://www.medicaid.state.al.us on October 25, 2010. In cases in which no AAC is available, 

reimbursement will be based on WAC plus 9.2 percent. 
 

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INTRODUCTION

prescription drugs. 24 Similar to Alabama’s new methodology, Oregon 

(through a contractor) will establish AAC by conducting rolling surveys 

of enrolled pharmacies to verify the actual invoice amount paid for a 

drug. Oregon is using a tiered per-prescription dispensing fee instead of 

a flat rate. 

AMP

Manufacturers that enter into a Medicaid rebate agreement must report 

AMPs to CMS monthly and quarterly.

. Section 1927(k)(1) of the Act, as amended by section 2503 of the 

Patient Protection and Affordable Care Act (ACA), P.L. 111-148, defines 

AMP as the average price paid to a manufacturer by wholesalers for 

drugs distributed to retail community pharmacies and by retail 

community pharmacies that purchase drugs directly from the 

manufacturer, with certain exclusions. 

25 AMPs provided monthly are 

used to establish Federal upper limit amounts,26 and AMPs provided 

quarterly are used primarily to calculate the rebate amounts owed to 

States under the Medicaid drug rebate program.27

The Deficit Reduction Act of 2005 (DRA), P.L. 109-171, required CMS to 

make AMP data available to all State Medicaid agencies.28 This would 

have enabled States to use monthly AMP data when setting Medicaid 

reimbursement rates for prescription drugs. However, section 2503 of 

the ACA modified this requirement in a way that limits the AMP 

information available to States for reimbursement or other purposes.29 

ASP. ASP is defined as a manufacturer’s sales of a drug to all 

purchasers in the United States in a calendar quarter divided by the 

total number of drug units sold by the manufacturer in that same 

24 Oregon Medicaid Agency, State Plan Amendment, Transmittal # 10-13. Accessed at 

http://www.oregon.gov on January 19, 2011.

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

26 Section 2503(a)(1)(B) of ACA.

27 Section 1927(c)(1)(A) of the Act. 

28 Section 6001 of the DRA required that CMS provide States with AMP data. Although 

the DRA did not require States to use AMP data in determining reimbursement, the 

dissemination of AMP data would have provided States with a new source for establishing 

estimated acquisition cost.

29 The ACA requires CMS to publish weighted AMPs for certain multiple-source drugs, 

instead of publishing AMPs for all drugs.
 

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INTRODUCTION

quarter, net of any discounts.30 Certain sales are exempt from the 

calculation of ASP, including sales at a nominal charge. Manufacturers 

report ASP data to CMS quarterly, with submissions due 30 days after 

the close of the quarter.31

As of January 2005, CMS replaced AWP with ASP as the basis for 

determining reimbursement for most drugs covered under Medicare 

Part B.

 

32 Manufacturers report ASPs to CMS only for certain drugs 

covered under Part B, which represent a limited subset of prescription 

drugs covered under Medicaid. The Medicare Part B payment amounts 

for these drugs are generally 106 percent of ASP.33

Previous OIG Work on AWP

 

OIG has produced a significant amount of work demonstrating that the 

AWPs States use to estimate acquisition costs often overstate the prices 

retail pharmacies pay to purchase drugs. This has resulted in inflated 

reimbursement rates and has led to excessive Medicaid expenditures for 

prescription drugs.34 Prior OIG reports concluded that the reliance on 

manufacturer-reported AWPs as a basis for drug reimbursement is 

fundamentally flawed and that AWPs exceed other pricing points.35 

OIG has also repeatedly recommended that CMS work with Congress to 

set Medicaid drug reimbursement amounts that more closely 

approximate pharmacy acquisition costs.36 CMS concurred with these 

recommendations and stated that OIG’s reports make clear that current 

30 Section 1847A(c) of the Act, as added by the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA), P.L. 108-173.

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

32 Sections 303(b) and 305(a) of the MMA.

33 Section 1847A(b)(1) of the Act. 

34 For example, see Medicaid’s Use of Revised Average Wholesale Prices 

(OEI-03-01-00010), September 2001.

35 For example, see Medicaid Drug Price Comparisons: Average Manufacturer Price to 

Published Prices (OEI-05-05-00240), June 2005; Medicaid Drug Price Comparison: Average 

Sales Price to Average Wholesale Price (OEI-03-05-00200), June 2005; or Medicaid’s Use of 

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

36 For example, see Comparison of Medicaid Federal Upper Limit Amounts to Average 

Manufacturer Prices (OEI-03-05-00110), June 2005; Variation in State Medicaid Drug 

Prices (OEI-05-02-00681), September 2004; Cost Containment of Medicaid HIV/AIDS Drug 

Expenditures (OEI-05-99-00611), July 2001; or Medicaid Pharmacy – Additional Analyses 

of the Actual Acquisition Cost of Prescription Drug Products (A-06-02-00041), 

September 2002. 
 

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INTRODUCTION

Medicaid payment rules result in overpayments for drugs and 

emphasize the need for reform. Although systemwide reforms were 

explored in 2004 and 2005 through congressional hearings37 and 

proposed in the President’s 2006 budget, many States continue to use 

AWP as their primary method for setting reimbursement. 

Ongoing Work Involving AWP

OIG is conducting an audit that will collect pharmacy invoice data for 

selected drugs. The purpose of the audit is to determine pharmacies’ 

actual acquisition costs and then to compare them to other benchmarks, 

such as AWPs, WACs, and AMPs. The audit will provide pricing data 

that can help States assess the various benchmarks that could be used 

when establishing Medicaid reimbursement methodologies for

prescription drugs. 

METHODOLOGY

Data Collection

In January 2011, we emailed online surveys to pharmacy program 

administrators at the 51 State Medicaid agencies and received complete 

responses from all.38 We also interviewed CMS staff in February 2011. 

Medicaid reimbursement survey. In the survey, we asked States to 

describe their reimbursement methodologies for Medicaid prescription 

drugs in the first quarter of 2011. We also asked States to report the 

sources of the data used to determine reimbursement during that 

quarter (e.g., First DataBank). 

To assess the effect of First DataBank’s ceasing publication of AWPs, we

first asked States that use AWP as the basis for reimbursement 

whether they intended to continue using it. If States intended to

continue using AWP, we asked what publishing company they would 

obtain these data from and whether they intend to use AWP in the long 

term. If the States did not intend to continue using AWP, we asked that 

they describe the changes they had made or anticipate making to their

37 For example, see Medicaid Prescription Drug Reimbursement: Why the Government 

Pays Too Much, House Committee on Energy and Commerce, Subcommittee on Oversight 

and Investigations, 108th Congress (2004).

38 This includes the 50 States and the District of Columbia.
 

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INTRODUCTION

reimbursement methodologies. These States were asked to provide the 

benchmark they intend to use to estimate acquisition cost, the actions 

necessary for implementation, and the expected date of implementation. 

We also asked all States to describe the role they would prefer CMS to

play in developing Medicaid reimbursement methodologies and whether 

States would prefer that CMS develop a single national benchmark. 

Interview with CMS. We asked staff from CMS’s Center for Medicaid, 

Children’s Health Insurance Programs and Survey & Certification

(CMCS)39 whether the agency has provided guidance to all States in 

regard to First DataBank’s ceasing publication of AWPs. If so, we asked 

that they provide us with copies of this guidance and the date it was 

released. In addition, we asked whether individual States had contacted 

CMS with concerns about this topic. We asked whether CMS intends to 

provide guidance to all States about AWP issues and Medicaid 

reimbursement and, if so, to describe it. 

Data Analysis

States’ reimbursement methodologies. We reviewed States’ responses to

the surveys and determined that 45 States had AWP-based 

reimbursement methodologies in the first quarter of 2011 (either alone 

or in combination with other pricing points, such as WAC) and 37 of 

these States obtained AWP information from First DataBank in that

quarter. Of the six States that did not use AWP as a basis for 

reimbursement, four usually used WAC (Rhode Island, Massachusetts, 

North Carolina, and Ohio) and two had recently switched from AWP to 

AAC (Alabama and Oregon). 

For the 45 States that reported using AWP-based reimbursement 

methodologies in the first quarter of 2011, we analyzed descriptions 

about any changes to their methodologies in relation to First DataBank 

and AWP. We determined the number of States that (1) were unsure 

about their plans to replace AWP, (2) intended to replace AWP with 

other benchmarks, or (3) intended to continue using AWP. We further 

analyzed the effect First DataBank’s ceasing publication of AWPs may 

39 CMCS performs many functions such as assisting States with improving the quality of 

their Medicaid operations, and identifying and proposing modifications to Medicaid 

program measures, regulations, laws, and policies. 
 

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INTRODUCTI INTRODUCTION 

have on reimbursement methodologies by calculating the number of 

States within each of the three groups that had obtained AWPs from 

First DataBank in the first quarter of 2011. 

If a State was unsure about its plans to continue using AWP, we 

reviewed its responses to other survey questions to gain a better 

perspective of how the State would likely proceed. For example, we 

reviewed answers about whether a new source for AWP had been 

considered and whether the State had begun to develop plans for a new 

methodology. 

If the State did not intend to continue using AWP, we reviewed State 

responses to determine the benchmark that would be used to replace 

AWP, the reasons for selecting the new benchmark, and when the new

methodology might be implemented.

For States that intend to continue using an AWP-based reimbursement 

methodology, we determined whether they had selected a publishing 

company to use in obtaining AWP, and if so, which source was selected. 

We also determined whether the States intend to use AWP in the long 

term.

CMS’s role in AWP issues. We reviewed responses from CMS staff to 

determine whether the agency has provided guidance (or intends to 

provide guidance) to all States in regard to AWP issues. We also 

determined whether individual States had contacted CMS with 

questions about the future of Medicaid reimbursement after AWPs are

no longer available from First DataBank. In conjunction with the CMS 

interview, we reviewed States’ responses about the role they would like 

CMS to play in regard to this topic. We calculated the number of States 

that would prefer CMS to develop one national benchmark to set 

Medicaid reimbursement. 

Limitations

Our findings are based on self-reported survey responses of State 

Medicaid agencies. We did not verify their accuracy. Responses were 

current as of February 2011; therefore, how States intend to pay for 

prescription drugs may have changed after that date.

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

Twenty States had not developed any definitive 

plans for prescription drug reimbursement 

after First DataBank stops publishing AWPs 

Twenty of the forty-five 

States that used AWP to set 

reimbursement for Medicaid 

prescription drugs in the 

first quarter of 2011 had not 

made any definitive plans regarding reimbursement for Medicaid 

prescription drugs after September 2011. These 20 States were among 

the 37 that obtained AWPs from First DataBank in the first quarter of 

2011. As a result, in an extremely short timespan, all 20 States will 

need to either contract with a new publishing company to obtain AWP 

data or implement new reimbursement methodologies that do not rely 

on AWPs. 

Eight of the twenty States were unsure about nearly every aspect of 

their post-September 2011 reimbursement plans. These eight States 

had not decided whether they will continue to use AWP (from another 

source) or instead select another benchmark. The remaining 12 States 

were able to provide some detail about their reimbursement plans. Six

States intend to discontinue using AWP but had not yet taken any steps 

to select a new benchmark, three States intend to continue using AWP 

but had not selected the publishing source for AWP data,40 and three

States are considering plans to either use AWP from another source or 

replace AWP with WAC.

 Thirteen of 

these fifteen States were among the 37 that used AWP data from First 

DataBank in the first quarter of 2011. In addition, two States that had 

Fifteen States have relatively well-developed 

plans to move away from AWP-based 

reimbursement 

In total, 15 of the 45 States 

that used AWP in determining

reimbursement for Medicaid 

prescription drugs in the first 

quarter of 2011 have relatively well-developed plans to implement new 

methodologies that replace AWP with another benchmark.41

40 One of these States noted that it is using AWP as a contingency plan until it can 

incorporate CMS-published prices, such as AMP or actual acquisition cost.

41 We considered a State to have a relatively well-developed plan if it could provide 

details about how drugs would be reimbursed after First DataBank stops publishing AWPs 

(e.g., the benchmark that would be used to replace AWP).
 

OEI - 0 3 - 11 - 00060 REPLACING AWP: MEDICAID DRUG PAYMENT P OLICY 12

FINDINGS

obtained AWP from a source other than First DataBank in the first 

quarter of 2011 still intend to replace AWP. 

Three of the fifteen States plan to replace AWP with acquisition cost

Three States are developing new reimbursement methodologies that use 

acquisition cost obtained through pharmacy surveys.42, 43 Two of these 

States had used First DataBank and the third State had used 

Medi-Span to obtain AWPs in the first quarter of 2011. Of the States 

using First DataBank, one has collected the pharmacy data needed to 

calculate AAC and hopes to use these data in calculating Medicaid 

reimbursement in the third quarter of 2011; the other State has 

proposed legislative changes and intends to complete a pharmacy 

acquisition cost survey. The State that obtained AWP from Medi-Span 

has drafted a preliminary reimbursement plan to use AAC. 

Twelve of the fifteen States plan to replace AWP with WAC

Twelve States intend to use WAC to determine Medicaid 

reimbursement amounts after AWPs are no longer available from First 

DataBank.44 The factors these States considered when selecting WAC 

as the new benchmark included its budget neutrality and availability. 

All but one of these States had obtained AWPs from First DataBank in 

the first quarter of 2011. 

Three of the 12 States already included WAC as a reimbursement 

option (in addition to AWP) prior to the first quarter of 2011.45 These 

three States intend to eliminate the AWP option from their 

methodologies once First DataBank stops AWP publication and instead 

use WAC exclusively. Among the remaining nine States, three did not 

have a set date for implementing the new WAC-based methodologies

42 In addition to these three States, Alabama and Oregon implemented reimbursement 

methodologies that replaced AWP with AAC in September 2010 and January 2011, 

respectively. 

43 Based on online reports, one of these States no longer intends to implement an 

AAC-based reimbursement method. Accessed at http://www.drugchannels.net on 

April 13, 2011.

44 This is in addition to the four States (Rhode Island, Massachusetts, North Carolina, 

and Ohio) that did not have AWP-based reimbursement methodologies in the first quarter 

of 2011 and were using WAC exclusively.

45 Two of the States had added the WAC option in December 2010; the remaining State 

has included WAC and AWP in its reimbursement plan since 2003.
 

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FINDINGS

and six provided tentative dates that ranged from July 2011 to “late” 

2011. 

Ten of the forty-five States that Ten States will continue using AWP to set

used AWP to set reimbursement reimbursement, at least in the short term for Medicaid prescription drugs in 

the first quarter of 2011 plan to continue using the benchmark after 

September 2011. Among these 10 States, 4 had obtained AWPs from 

First DataBank in the first quarter of 2011 and now plan to obtain AWP 

data from another source (Medi-Span and/or Micromedex). The other 

six States were already getting the data from one of these other sources. 

However, only 1 of the 10 States was certain it would use AWP to 

calculate reimbursement in the long term.46 The remaining nine States 

were either unsure whether they would use AWP as a long-term method 

(six States) or reported that they would use AWP as an interim plan 

until a new benchmark was selected (three States). 

Most States (44 of 51) wanted Forty-four States would like CMS to develop a

CMS to develop a single national benchmark to set Medicaid

national benchmark to set 

reimbursement for prescription drugs Medicaid reimbursement rates. 

Almost half of States (24) specified that they wanted a benchmark based 

on pharmacy acquisition costs (the majority of the remaining States did 

not specify a preferred benchmark). One State mentioned that CMS 

would have less of a challenge obtaining access to acquisition cost data 

than would individual States. In addition, if CMS obtained acquisition 

cost data, that would relieve States of the need for and expense of 

conducting an acquisition cost survey on their own. Certain States also 

mentioned that the acquisition cost benchmark should be updated 

frequently and consider regional (urban or rural) differences and

pharmacy-type differences (e.g., chain, independent, specialty). 

Among the seven States that did not want CMS to develop a national 

benchmark, the majority (four) had plans to continue using AWP (two 

had obtained AWPs from First DataBank and two from Medi-Span in 

the first quarter of 2011). Of the remaining States, one had already 

46 We did not provide States with a definition for what constitutes a long-term plan. 
 

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FINDINGS

switched from AWP to an AAC-based reimbursement method, one 

intended to switch to a WAC-based reimbursement method, and one did 

not have definitive reimbursement plans after First DataBank stops 

publishing AWPs. 

CMS is taking steps to address the AWP issue and plans to provide 

guidance in the future

Our interview with CMS staff in February 2011 indicated that the 

agency had not yet provided uniform guidance to all States about 

options for Medicaid reimbursement after AWPs are no longer available 

from First DataBank. However, CMS intends to provide guidance about 

this topic in the future. CMS stated that although the agency does not 

mandate that a specific formula or methodology be used for 

reimbursement, it plans to conduct a nationwide survey to collect retail 

community pharmacy prices for drugs47 (including acquisition costs) and 

intends to discuss the results and other options for States in future 

guidance and/or proposed rulemaking. In addition, when individual 

States contacted CMS about whether it plans to provide a new reference 

price that reflects pharmacy acquisition costs, CMS responded that it 

will make the data derived from this survey publicly available.48 When 

complete, these data would provide States with an additional 

benchmark option that reflects actual cost. 

47 As described in section 6001(e) of the DRA.

48 CMS, Statement of Work, Survey of Retail Prices; Payment and Utilization Rates; and 

Performance Rankings. Accessed at http://www.fbo.gov on February 22, 2011.
 

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FINDINGS RECOMMENDATION

To ensure that Medicaid pays appropriately for prescription drugs, any 

reimbursement methodology must be based on benchmarks that are 

accurate and reliable estimates of pharmacy acquisition costs. As of the 

first quarter of 2011, the majority of States used AWP data obtained 

from First DataBank as the primary benchmark. Several OIG reports

have shown that the inflated nature of AWPs causes Medicaid to pay too 

much for certain drugs, and as a result, we recommended that CMS 

work with States and Congress to base payments on a benchmark that 

more accurately reflects pharmacy acquisition costs. Regardless, many 

States continue to use AWPs to set drug reimbursement amounts. 

First DataBank will stop publishing AWPs no later than 

September 26, 2011. This has forced many States to reevaluate how 

they will pay for prescription drugs after that date and presents States 

with the opportunity to move to new reimbursement methodologies that 

would better reflect pharmacy acquisition costs. However, many States 

are not fully prepared to implement new reimbursement methodologies

at this time. As a result, they will need to develop, obtain CMS 

approval for, and implement new reimbursement methodologies in an 

extremely limited timeframe. In addition, a number of States will 

either begin or continue to base reimbursement on WAC, a 

manufacturer-reported benchmark that, like AWP, is not based on 

actual sales transactions. 

States overwhelmingly would prefer that CMS, to address the 

uncertainty surrounding drug reimbursement decisions, develop a 

national benchmark to set reimbursement. A national benchmark that 

reflects actual pharmacy acquisition costs would eliminate States’ 

reliance on the inflated published prices that cause Medicaid and its 

beneficiaries to pay too much for certain drugs. A CMS-developed 

national benchmark may also be more efficient and cost-effective than 

having 51 State Medicaid agencies individually collecting acquisition 

cost data from pharmacies. Therefore, we recommend that CMS: 

Develop a national benchmark that accurately estimates acquisition cost

and encourage States to consider it when determining Medicaid 

reimbursement for prescription drugs

A CMS contractor plans to administer a survey to collect monthly 

pharmacy pricing data, including acquisition costs. Using the data 

gathered in this survey, CMS should develop a national benchmark that 

reflects pharmacy acquisition costs (by the fourth quarter of 2011, if 
 

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RECOMMENDATION

possible), giving States an additional option to use in setting Medicaid 

reimbursement for prescription drugs. Among other things, this 

benchmark should account for differences in the types and the 

geographical locations of pharmacies. After the national benchmark is 

provided to States, CMS should update it frequently to reflect price 

changes in the market. In addition, with the implementation of any 

new methodology based on this benchmark, CMS should ask States to 

review their dispensing fees to ensure that payment levels for 

pharmacies are fair and appropriate.

Although we recognize that CMS currently does not mandate the 

method States use to set reimbursement rates, we believe CMS should

encourage all States to adopt the national benchmark. According to our 

survey, States are looking to CMS for guidance in setting a benchmark 

and would welcome one based on actual pharmacy acquisition costs. 

This benchmark would have the potential to streamline Medicaid 

reimbursement systems; provide a transparent basis for payment; and, 

if applied appropriately, significantly reduce Medicaid payment 

amounts for prescription drugs. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred with our recommendation. CMS stated that it is 

contracting with a vendor to develop a survey of retail prices and 

acquisition cost information. CMS expects the survey will provide the

ingredient costs of all covered outpatient drugs purchased by retail 

community pharmacies, including independent community pharmacies, 

chain pharmacies, and specialty pharmacies. CMS expects to use these

data to develop an estimate of AAC. CMS also stated that it intends to 

include external stakeholders in this process to ensure that there is 

transparency with the AAC determination and that the methodology is 

implemented appropriately. 

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

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


Agency Comments 

/S.$""VIr:~.~ 

( ~ DEPARTMENT OF HEALTH & HUMAN SERVICES Centers for Medicare & Medicaid Services 

,S~ Administrator 

Washington, DC 20201 

JUN 0 8 lOl1 DATE: 

TO: 	 Daniel R, Levinson 


Inspector General 


FROM: 	 Donald M. Berwick, M.D_ 


Administrator 


SUBJECT: 	 Office ofInspector General (OIG) Draft Report: "Replacing Average Wholesale 

Price: Medicaid Drug Payment Policy," (OEl-03-11-00060) 

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

"Replacing Average Wholesale Price: Medicaid Drug Payment Policy" (OEI-03·11-00060). 

The 010 surveyed aliSO States and the District of Columbia to determine how States will set 

reimbursement for Medicaid prescription drugs after First DataBank stops publishing average 

wholesale prices (AWP) in September.2011, and to determine the role that States would prefer 

the Centers for Medicare & Medicaid Services (CMS) to play in developing Medicaid 

reimbursement methodologies for prescription drugs. 

The OIG fOllnd that of the 45 States with an AWP-based reimbursement methodology in the tirst 

quarter of20II, 20 States had not developed any definitive plans for prescription drug 

reimbursement after First DataBank stops publishing AWPs. The OIG also reported that IS 

States have relatively well-developed plans to move away from AWP-based reimbursement. 

Finally, the OIG reported that there were 10 States that stated they would continue using A WP to 

set reimbursement aftet First DataBank ceases to publish these rates. Fo.ur of the 10 States were 

receiving AWP from First DataBank, and have now made plans to obtain AWP data from 

another sOllrce (Medi-Span and/or Micromedex). 

In addition, the OIG leamed that 44 States would like CMS to develop a national benchmark to 

use in setting Medicaid reimbursement for prescription drugs. 

OIG Recommendatiqn 

CMS should develop a national benchmark that accutately estimates acquisition cost and 

encourage States to consider it when determining Medicaid reimbursement for prescription 

drugs. 

OEI·03·11·00060 REPLACING AWP: MEDICAID DRUG PAYMENT POLICY 17 
 

OEI - 0 3 - 11 - 00060 REPLACING AWP: MEDICAID DRUG PAYMENT P OLICY 18

APPENDIX ~ A 
 

OEI - 0 3 - 11 - 00060 REPLACING AWP: MEDICAID DRUG PAYMENT P OLICY 19

 ACKNOWLEDGMENTS

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

Inspector General for Evaluation and Inspections in the Philadelphia 

regional office, and David E. Tawes, Director of the Medicare and 

Medicaid Prescription Drug Unit. 

Stephanie Yeager 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.