GAO-10-118R Medicaid Federal Upper Limits 

United States Government Accountability Office

Washington, DC 20548 

November 30, 2009 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Subject: Medicaid Outpatient Prescription Drugs: Second Quarter 2008 Federal Upper 

Limits for Reimbursement Compared with Average Retail Pharmacy Acquisition 

Costs 

Dear Senator Grassley: 

Medicaid—the joint federal-state program1

 that finances medical services for certain lowincome adults and children—spent $15.0 billion on outpatient prescription drugs in fiscal 

year 2007.2

 Instead of directly purchasing drugs, state Medicaid programs reimburse retail 

pharmacies for dispensing them to Medicaid beneficiaries.3

 The federal government provides 

matching funds to states to help cover the costs of their Medicaid programs, and states must 

pay the remaining costs to qualify for these federal funds. 

For certain outpatient prescription drugs, state Medicaid programs may only receive federal 

matching funds for reimbursements up to a maximum amount known as a federal upper limit 

(FUL).4

 Designed to control drug spending, FULs are currently calculated as 150 percent of a 

drug’s lowest published price in three national drug pricing compendia.5

 State Medicaid 

programs can determine reimbursements to retail pharmacies for each drug,6

 but the federal 

 

1

Medicaid consists of 56 distinct programs created within broad federal guidelines and administered by 

state Medicaid agencies. The 56 Medicaid programs include one for each of the 50 states; the District 

of Columbia; and the U.S. territories of American Samoa, Guam, Northern Mariana Islands, Puerto 

Rico, and the Virgin Islands. In this report, we use “states” and “state Medicaid programs” to refer to 

these 56 programs. 

2

Includes $22.3 billion in gross prescription drug expenditures which are offset by $7.3 billion in drug 

rebates paid by manufacturers to state Medicaid programs. 

3

Retail pharmacies are licensed nonwholesale pharmacies that are open to the public. 

4

The Centers for Medicare and Medicaid Services (CMS)—the agency that oversees Medicaid—

identifies which drugs are subject to FULs. 

5

The drug pricing compendia are published by private companies including First DataBank, Medi-Span, 

and Red Book. 

6

Many state Medicaid programs require retail pharmacies to dispense the lower cost therapeutically 

equivalent version of a drug to Medicaid beneficiaries when one is available. Under these mandatory 

generic substitution policies, the higher cost version of the drug remains available to beneficiaries if 

the prescribing physician receives prior authorization. In cases when retail pharmacies are authorized 

to dispense the higher cost version of the drug, the FUL does not apply. 
government will only provide matching funds to the extent that reimbursements for all drugs 

subject to FULs do not exceed established FULs in the aggregate.7

A 2005 report by the Department of Health and Human Services’ (HHS) Office of Inspector 

General (OIG) found that FULs were ineffective at controlling outpatient Medicaid 

prescription drug spending. The Deficit Reduction Act of 2005 (DRA) included provisions—

the implementation of which has been delayed by judicial and legislative action—that would 

change the methodology for calculating FULs.8

 Under the DRA, FULs would be calculated as 

250 percent of the average manufacturer price (AMP) for a drug’s least costly therapeutically 

equivalent version.9

 In 2006, the Congressional Budget Office estimated that the 

implementation of AMP-based FULs would reduce total Medicaid spending for prescription 

drugs by $11.8 billion from 2007 through 2015. 

However, retail pharmacies have raised concerns that AMP-based FULs would not be 

sufficient to cover their costs of acquiring drugs dispensed to Medicaid beneficiaries.10 Two 

retail pharmacy industry groups, the National Association of Chain Drug Stores (NACDS) and 

the National Community Pharmacists Association (NCPA), have claimed that AMP-based 

FULs would make some retail pharmacies unprofitable and thus limit certain Medicaid 

beneficiaries’ access to retail pharmacies. A 2006 GAO report and a 2007 report by the HHS 

OIG both found that AMP-based FULs would have been lower than average pharmacy 

acquisition costs, on a drug-by-drug basis, for most drugs included in the respective 

samples.11

To implement the DRA provisions pertaining to prescription drugs in Medicaid, CMS 

published a final rule in July 2007.12 This rule includes provisions regarding the calculation of 

AMP-based FULs that might also affect how they compare to pharmacy acquisition costs. For 

example, FULs apply only to certain outpatient prescription drugs—known as multiple-

 

7

For the group of drugs subject to FULs, CMS applies FULs at the aggregate level rather than at the 

individual drug level when determining the level of federal payments for a state’s Medicaid 

prescription drug expenditures. To calculate FULs at the aggregate level for a state, the FUL for each 

drug is multiplied by the total number of units of each drug that were reimbursed by a state Medicaid 

program and the total is summed across all drugs subject to FULs. Therefore, it might be possible for a 

state Medicaid program to reimburse pharmacies at an amount above the FULs for certain drugs if it 

also reimburses them at an amount below the FULs for other drugs. 

8

Pub. L. No. 109-171, § 6001(a)(2), 120 Stat. 4, 54-55 (2006) (codified at 42 U.S.C. § 1396r-8(e)(5)). 

9

AMP represents the average of prices paid to manufacturers in the United States by wholesalers for a 

drug distributed to the retail pharmacy class of trade, including independent pharmacies, chain 

pharmacies, and mail order pharmacies, and is typically less than any of a drug’s published prices in 

the three pricing compendia. 42 U.S.C. § 1396r-8(k)(1)(A). Under the DRA, manufacturers are required 

to submit monthly AMPs no later than 30 days after the end of the prior month. See 42 U.S.C. § 1396r8(b)(3)(A)(i); 42 C.F.R. §§ 447.504(a), (e); 447.510(d) (2008). The DRA also provided for CMS to 

disclose AMP data to the states and (through an accessible Web site) to the public. 42 U.S.C. § 1396r8(b)(3)(D)(iv)-(v). 

10The price a retail pharmacy pays to acquire a drug from a manufacturer or wholesaler is known as a 

pharmacy’s drug acquisition cost. 

11See GAO, Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper Limits for 

Reimbursement Compared with Retail Pharmacy Acquisition Costs, GAO-07-239R (Washington, 

D.C.: Dec. 22, 2006) and HHS OIG, Deficit Reduction Act of 2005: Impact on the Medicaid Federal 

Upper Limit Program, OEI-03-06-00400 (Philadelphia, Pa.: June 2007). 

1272 Fed. Reg. 39142 (July 17, 2007). 

 2 GAO-10-118R Medicaid Federal Upper Limits
source drugs—and the rule changed the definition of multiple-source drugs.13 Additionally, to 

minimize the effect of outliers, the final rule included a provision which would use the 

second-lowest AMP for a multiple-source drug to set the FUL if the lowest AMP is less than 

40 percent of the second-lowest AMP.14 The final rule requires drug manufacturers to report 

AMP data on a monthly basis, and drug manufacturers and state Medicaid programs were 

expected to begin complying with the provisions of the final rule by October 1, 2007.15

Although the AMP reporting requirements for pharmaceutical manufacturers have gone into 

effect, AMP-based FULs have not been implemented. In December 2007, as a result of 

litigation initiated by NACDS and NCPA, the U.S. District Court for the District of Columbia 

issued a preliminary injunction which prohibits CMS from implementing the final rule to the 

extent that it would affect Medicaid reimbursement rates for retail pharmacies and from 

disclosing AMP data reported by drug manufacturers, except under limited circumstances. As 

of October 1, 2009, that injunction remained in effect. Additionally, Congress passed 

legislation—the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)—

that prohibited CMS from taking any action to implement the AMP-based FULs or publicly 

disclose AMP data before October 1, 2009.16

To assist congressional consideration of this matter in light of the concerns that have been 

expressed by retail pharmacies; changes in the calculation of AMP-based FULs;17 and the 

October 1, 2009, expiration of the MIPPA provision delaying implementation of the AMPbased FUL, you requested that we reexamine the relationship between the AMP-based FULs 

that would be required under the DRA and pharmacies’ average acquisition costs. This report 

examines the relationship between these AMP-based FULs and average retail pharmacy 

acquisition costs for selected drugs and provides additional information on how these FULs 

would affect retail pharmacies. 

 

13A drug is considered a multiple-source drug when at least one other drug is therapeutically and 

pharmaceutically equivalent, as well as bioequivalent and is generally available to the public through 

retail pharmacies within a state. 42 U.S.C. § 1396r-8(k)(7)(A)(i); 42 C.F.R. § 447.502 (2008). 

Therapeutically equivalent drug products can be substituted with the full expectation that they will 

produce the same clinical effect as the prescribed drug. Under the 2007 final rule, a multiple-source 

drug that is available through two or more suppliers is subject to the FUL. 

1442 C.F.R. § 447.514(c)(2)(2008). For example, if there are three therapeutically equivalent versions of 

a drug, with AMPs of $.01, $.04, and $.05, the version with an AMP of $.04 would be used to set the 

FUL, because $.01 is less than 40 percent of $.04. This provision applies only when there are at least 

three therapeutically equivalent versions of the drug available. 

1542 C.F.R. § 447.510(d)(2008). Consistent with the DRA, the final rule also stated that FULs would be 

established for multiple-source drugs for which there were at least two therapeutically and 

pharmaceutically equivalent products. Previously, FULs were required only when there were at least 

three such products. 42 U.S.C. 1396r-8(e)(4); 42 C.F.R. § 447.514(a)(2008). 

16Pub. L. No. 110-275, § 203, 122 Stat. 2494, 2592 (2008). 

17Pending legislation would require changes to the calculation of AMP-based FULs. See, e.g., H.R. 3962, 

111th Cong. § 1741 (2009). 

 3 GAO-10-118R Medicaid Federal Upper Limits
To compare AMP-based FULs with average retail pharmacy acquisition costs, we acquired 

from CMS a list of drugs that would have been subject to AMP-based FULs for the second 

quarter of 200818 but for the judicial and legislative action discussed above.19 We then used 

Medicaid utilization data from the second quarter of 2008 to identify drugs with the highest 

Medicaid utilization and drugs with the highest Medicaid expenditures on a national level.20

Our resulting sample contained 83 multiple-source outpatient prescription drugs: 32 drugs 

with the highest Medicaid utilization, 34 drugs with the highest Medicaid expenditures, and 

17 drugs that appeared in both categories. Our sample of 83 drugs represented 64 percent of 

total Medicaid utilization and 52 percent of total Medicaid expenditures for drugs that would 

have been subject to AMP-based FULs in the second quarter of 2008. See enclosure I for a 

complete list of the 83 drugs in our sample and each drug’s classification—high utilization, 

high expenditure, or both—in the second quarter of 2008. 

For each of the 83 drugs in our sample, for April, May, and June of 2008, we obtained monthly 

AMP values for every therapeutically equivalent version as well as monthly AMP-based FUL 

data from CMS. We then used the monthly AMP-based FULs from April, May, and June 2008 

to calculate the median AMP-based FULs for the second quarter of 2008.21 We also obtained 

national average retail pharmacy acquisition cost data for the second quarter of 2008 for all 

therapeutically equivalent versions of the drugs in our sample from IMS Health, a contractor. 

On a monthly basis, IMS Health collects data on drugs purchased by retail pharmacies from 

about 100 drug manufacturers and about 500 distribution centers. These manufacturers and 

distribution centers provide data on the number of units sold, and a portion of them provide 

data on actual retail pharmacy acquisition costs. For those manufacturers and distribution 

centers that only provide data on the number of units sold, IMS Health estimates retail 

pharmacy acquisition costs based on the actual acquisition cost data it was able to obtain 

from others. Once IMS Health determines average retail pharmacy acquisition costs from 

data it collects, it projects these data to represent national average retail pharmacy 

acquisition costs using a model that is reviewed monthly.22 In addition, IMS Health conducts 

detailed data reliability assessments, which include comparing monthly data from drug 

manufacturers and distribution centers to data from the prior month and the prior year in 

order to ensure consistency and comparing reported pricing data against published prices. 

The national average retail pharmacy acquisition cost data that we obtained from IMS Health 

 

18The second quarter of 2008 was the most recent quarter for which most states had reported their 

utilization data to CMS at the time we began our analysis. 

19Throughout this report, “AMP-based FULs” refer to what the FULs would have been if they had been 

calculated using 250 percent of the AMP, as specified in the DRA. 

20Medicaid utilization data reported to CMS include information on the dollar amount and total number 

of units for which state Medicaid programs reimbursed retail pharmacies for covered drugs dispensed 

to Medicaid beneficiaries. As of July 2009, when we selected our sample, utilization data from 

Alabama, Arizona, Rhode Island, and Tennessee, and the U.S. territories of American Samoa, Guam, 

Northern Mariana Islands, Puerto Rico, and the Virgin Islands were not available. Therefore, our 

analysis is limited to 46 states and the District of Columbia. 

21We calculated the median FUL for the second quarter of 2008 from the 3 months of FUL data 

provided by CMS in order to compare the quarterly FUL data to the quarterly average pharmacy 

acquisition cost data. 

22For any given therapeutically equivalent version of a drug, the actual acquisition costs of individual 

retail pharmacies may be higher or lower than the national average we obtained from IMS Health. 

 4 GAO-10-118R Medicaid Federal Upper Limits
do not account for rebates and discounts that pharmacies may receive from wholesalers or 

manufacturers, if they are not reflected in invoice prices.23

To examine the relationship between AMP-based FULs and average retail pharmacy 

acquisition costs by individual drug, we compared the quarterly median AMP-based FULs we 

calculated for the second quarter of 2008 with the average retail pharmacy acquisition costs, 

weighted by utilization across all therapeutically equivalent versions of each drug, from the 

same period for each of the 83 drugs in our sample. We also examined the relationship 

between AMP-based FULs and average pharmacy acquisition costs in the aggregate by 

comparing the AMP-based FULs with the average pharmacy acquisition costs for our entire 

sample of drugs weighted by utilization. Because our sample of 83 drugs does not include all 

drugs that would have been subject to AMP-based FULs in the second quarter of 2008, our 

aggregate results cannot be generalized beyond our sample. Because the utilization of each 

drug in our sample differs from state to state, we performed this analysis at both the national 

and state levels using state utilization data and national average pharmacy acquisition costs. 

Further, we compared the AMP-based FULs with the average pharmacy acquisition costs for 

each of the therapeutically equivalent versions of all 83 drugs in our sample. This analysis 

allowed us to estimate the extent to which pharmacies may be able to purchase 

therapeutically equivalent versions of each drug at costs below the AMP-based FUL. 

Specifically, we determined the percentage of Medicaid utilization represented by 

therapeutically equivalent versions with pharmacy acquisition costs that are above the AMPbased FULs, as well as the percentage of Medicaid utilization represented by therapeutically 

equivalent versions with acquisition costs that are below the AMP-based FULs. To assess the 

extent to which AMP-based FULs vary over time, we obtained AMP data from CMS for 

January 2008 through December 2008 and examined the variation in AMP-based FULs for the 

drugs in our sample across those months. Based on the results of this analysis, we 

interviewed CMS officials about the factors that led to the month-to-month variation in the 

FULs and how this variation may affect state Medicaid programs. 

We discussed our data sources with knowledgeable officials from CMS and IMS Health. We 

also performed data reliability checks to test the internal consistency and reliability of the 

data, including manually and electronically checking the data for missing values and obvious 

errors, interviewing CMS officials about concerns we uncovered about AMP data, and 

reviewing steps that CMS uses to ensure that AMP data are complete and accurate. After 

taking these steps, we determined that the data were sufficiently reliable for our purposes. 

We conducted this performance audit from June 2009 through October 2009, in accordance 

with generally accepted government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis 

for our findings and conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our audit 

objectives. 

 

23These discounts and rebates may vary, as retail pharmacies negotiate them based on various factors, 

including the type of drug, manufacturer, and volume of purchases. In addition, retail pharmacies can 

negotiate rebates on a manufacturer’s entire line of products rather than per drug. We were unable to 

identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that 

account for these reductions in the cost of drugs to retail pharmacies. 

 5 GAO-10-118R Medicaid Federal Upper Limits
Results in Brief 

If AMP-based FULs had been in place in the second quarter of 2008, they would have been 

lower than average retail pharmacy acquisition costs, in general, for most of the drugs in our 

sample and in the national aggregate.24 The median AMP-based FULs for the second quarter 

of 2008 would have been lower than average retail pharmacy acquisition costs for 54 of the 

83 drugs in our sample; 44 drugs had FULs that would have been at least 25 percent below 

acquisition costs. In the aggregate, the FULs would have been 17 percent lower than 

acquisition costs, though the difference varied significantly by state, from 57 percent lower to 

49 percent higher. However, 64 drugs had at least one therapeutically equivalent version with 

acquisition costs below the FUL, indicating that pharmacies may be able to substitute lowerpriced therapeutic equivalents to bring their costs below the FUL. AMP-based FULs also 

varied significantly throughout 2008 for 38 drugs, in some cases exceeding the average retail 

pharmacy acquisition cost one month and falling below it in another month. While partly due 

to monthly increases or decreases in AMPs, variation also occurred because manufacturers 

did not report AMP data each month for 11 percent of the therapeutically equivalent versions 

of the drugs in our sample. If a manufacturer reports the AMP for the lowest-priced 

therapeutically equivalent version of a drug one month but does not report it the next month, 

the FUL may change. 

In its written comments on a draft of this report, CMS disagreed with our finding that if AMPbased FULs had been in place in the second quarter of 2008, they would have been lower than 

average retail pharmacy acquisition costs for most of the 83 drugs in our sample and in the 

national aggregate. See enclosure IV for CMS’s comments. In particular, CMS expressed 

concerns about our data source used to estimate average retail pharmacy acquisition costs, 

including that it does not take into account discounts and rebates that drug manufacturers 

may provide to retail pharmacies. CMS also expressed concerns about our methodology and 

inconsistencies between our finding and the findings of an HHS-OIG report, which the OIG 

shared with us because it has not been publicly issued as of November 2009. However, as we 

indicate in this report, data on discounts and rebates pharmacies receive are not readily 

available. We used the most complete, accurate, and verifiable data sources available at the 

time of our analysis to estimate average retail pharmacy acquisition costs. We believe that 

these data are sufficiently accurate to achieve the objective of our work. Furthermore, as 

discussed in detail later in this report, our methodology is sound and any inconsistencies 

between our finding and the findings of the HHS-OIG report, which was based on data from 

the fourth quarter of 2007, are largely due to significant fluctuations in drug prices over time. 

CMS also provided technical comments, which we incorporated as appropriate. 

Background 

Medicaid is a joint federal-state entitlement program that finances medical services for 

certain low-income adults and children.25 While federal law generally requires that all state 

Medicaid programs offer certain basic benefits, each state Medicaid program determines the 

extent to which it will cover optional benefits. Outpatient prescription drug coverage is an 

 

24The average retail pharmacy acquisition costs we used do not account for rebates and discounts that 

pharmacies may receive from wholesalers or manufacturers. We were unable to identify any data 

sources for these acquisition costs that account for rebates and discounts. 

25Within guidelines established by federal statutes, regulations, and policies, each state (1) establishes 

its own eligibility standards; (2) determines the type, amount, duration, and scope of services; (3) sets 

the rate of payment for services; and (4) administers its own program. 

 6 GAO-10-118R Medicaid Federal Upper Limits
optional benefit that all state Medicaid programs have elected to include in their Medicaid 

benefit packages. 

Medicaid Federal Upper Limits

FULs were established in 1987 as a cost-containment strategy to limit the amount that 

Medicaid could reimburse retail pharmacies for certain multiple-source outpatient 

prescription drugs.26 CMS publishes a list of drugs that have FULs in the State Medicaid 

Manual. FULs are expressed per unit—for example, per tablet. As of September 2009, the list 

included approximately 740 multiple-source drugs. 

CMS determines the FUL for a multiple-source outpatient prescription drug by grouping a 

drug’s therapeutically equivalent versions and setting a FUL for each group. Each of a drug’s 

therapeutically equivalent versions has several published prices associated with it, including 

the average wholesale price (AWP), wholesale acquisition cost (WAC), and direct price 

(DP).27 All these prices are published in each of the three national drug pricing compendia—

First DataBank, Medi-Span, and Red Book—which use different methods for determining 

these published prices. The lowest published price for a drug may be any one of these three 

prices. CMS sets a FUL by identifying a drug’s therapeutic equivalent with the lowest price—

either AWP, WAC, or DP—in any of the three national drug pricing compendia, and 

multiplying that price by 150 percent. A state’s total reimbursements for Medicaid 

prescription drugs subject to FULs must not exceed, in the aggregate, the payment levels 

established by the FULs over a year. States may exceed the FUL for an individual 

prescription drug as long as their aggregate expenditures for all prescription drugs subject to 

FULs do not exceed the amounts that are calculated using the rate established by the FUL. 

State Medicaid programs consider several methods for reimbursing pharmacies for multiplesource prescription drugs. In general, states base their Medicaid reimbursements to a retail 

pharmacy for a covered outpatient prescription drug on the lowest of the following: a state’s 

best estimate of retail pharmacies’ acquisition costs for the drug; the usual and customary 

charge28 of the retail pharmacy that dispensed the drug; the FUL for the drug, if applicable; or 

the state’s maximum allowable cost29 (MAC) for the drug, if applicable. When the FUL for a 

drug is not the lowest of these four amounts, Medicaid typically reimburses pharmacies at a 

rate lower than the FUL. 

 

2652 Fed. Reg. 28648 (July 31, 1987). Legislation was enacted in 1990 requiring the application of FULs. 

Pub. L. No. 101-508, § 4401(a)(3), 104 Stat. 1388, 1388-143, 151 (1990). 

27AWP is the average of the list prices that the manufacturer suggests wholesalers charge pharmacies. 

WAC is the manufacturer’s list price for wholesalers or other direct purchasers before any rebates, 

discounts, allowances, or other price concessions. DP as published by First DataBank represents the 

manufacturer’s published catalog or list price for a drug product to nonwholesalers. DP does not 

represent actual transaction prices and does not include prompt pay or other discounts, rebates, or 

reductions. 

28The usual and customary charge for a drug is the full retail price that individuals without prescription 

drug coverage pay when purchasing drugs at a retail pharmacy. 

29States that administer MACs publish lists of selected multiple-source drugs with the maximum price 

at which the state will reimburse for those medications. Pharmacies generally do not receive payments 

that are higher than the MAC price. The MAC lists differ from the FUL list, as states have more 

discretion in determining what drugs to include on their MAC lists. Generally, state MAC lists include 

more drugs and establish lower reimbursement prices than the FUL list. As of June 2009, 45 states 

administer MACs. 

 7 GAO-10-118R Medicaid Federal Upper Limits
Deficit Reduction Act of 2005

The DRA methodology for setting FULs would require CMS to calculate FULs as 250 percent 

of the AMP for the least costly of a drug’s therapeutically equivalent versions. AMP data are 

collected by CMS and are currently not publicly available. (Fig. 1 illustrates how Medicaid 

FULs are calculated using 150 percent of the lowest published price versus using 250 percent 

of the AMP for the least costly therapeutic equivalent.) 

Figure 1: Illustration of FUL Methodology 

Source: GAO.

FUL using 150% of the lowest published price:

WAC

0.41

0.40

0.39

DP 

0.59

0.60

0.62

AWP

1.10

0.97

1.06

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 3: Drug X (¢ per unit)

WAC

0.40

0.38

0.36

DP 

0.58

0.56

0.59

AWP

1.00

0.99

0.98

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 2: Drug X (¢ per unit)

WAC

0.35

0.37

0.39

DP 

0.45

0.52

0.58

 AWP

0.99

0.91

0.95

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

National drug pricing compendium 1: Drug X (¢ per unit)

0.35¢ per unit x 150% = 0.525¢ per unit

0.35

0.3

0

endi

FUL using 250% of the AMP for the least costly therapeutic equivalent:

AMP

0.25

0.15

0.22

Therapeutic equivalent 1.....

Therapeutic equivalent 2.....

Therapeutic equivalent 3.....

CMSf: Drug X (¢ per unit) 0.15¢ per unit x 250% = 0.375¢ per unit

0.15

¢

¢

¢

¢

bc d

e

a

Note: The drug pricing compendia in fig.1 are published by First DataBank, Medi-Span, and Red Book. 

a

FUL is the federal upper limit for reimbursement of certain Medicaid outpatient prescription drugs. 

b

WAC is the manufacturer’s list price for wholesalers or other direct purchasers before any rebates, discounts, allowances, or 

other price concessions. 

c

DP as published by First DataBank represents the manufacturer’s published catalog or list price for a drug product to 

nonwholesalers. DP does not represent actual transaction prices and does not include prompt pay or other discounts, rebates, 

or reductions. 

d

AWP is the average of the list prices that the manufacturer suggests wholesalers charge pharmacies. 

e

AMP represents the average of prices paid to manufacturers by wholesalers for a drug distributed to the retail pharmacy class 

of trade, including retail pharmacies. 

f

CMS is the agency that oversees Medicaid. 

 8 GAO-10-118R Medicaid Federal Upper Limits
The DRA included additional provisions relating to prescription drugs. One provision 

changed the criteria under which FULs must be established. Under the current methodology, 

FULs must be established for multiple-source drugs with three or more therapeutically 

equivalent products. However, the DRA would require the establishment of FULs for 

multiple-source drugs with two or more therapeutically equivalent products. The DRA also 

included several changes relating to the calculation of AMP. For example, it required that 

prompt payment discounts be excluded when manufacturers calculate AMP. 

Implementation of AMP-Based FULs

CMS issued a final rule in July 2007 to implement the AMP-based FUL provisions of the DRA. 

The final rule provides instructions for drug manufacturers in calculating and reporting 

AMPs, among other things. The final rule took effect in October 2007, which was the first 

month that drug manufacturers began reporting monthly AMP data to CMS. 

However, the November 2007 lawsuit filed by the NACDS and NCPA claimed that the AMP 

rule would unlawfully change the methodology for reimbursement of pharmacies on the 

grounds that it was contrary to statute, among other things. In December 2007, the U.S. 

District Court for the District of Columbia issued a preliminary injunction ordering CMS not 

to implement the final rule to the extent that it affects Medicaid reimbursement rates for 

retail pharmacies. However, the preliminary injunction allowed the use of AMP as defined in 

the final rule for purposes of the Medicaid drug rebate program.30 Therefore, drug 

manufacturers are continuing to report AMPs on a monthly and a quarterly basis in 

accordance with the provisions of the July 2007 rule and CMS is using these data for the 

purposes of the Medicaid drug rebate program. On July 15, 2008, MIPPA was enacted and 

prohibited CMS from taking any action before October 1, 2009, to implement the AMP-based 

FULs. As of October 1, 2009, the lawsuit was pending and the preliminary injunction 

remained in effect. 

Median AMP-Based FULs Would Have Been Generally Lower Than Average Retail 

Pharmacy Acquisition Costs 

Had AMP-based FULs been in place in the second quarter of 2008 they would have been 

lower than average retail pharmacy acquisition costs for most of the individual drugs in our 

sample and in the aggregate. However, pharmacies may be able to acquire therapeutically 

equivalent versions of most drugs at prices lower than the AMP-based FUL. Further, AMPbased FULs varied significantly throughout 2008 for about half the drugs in our sample. 

For Most Individual Drugs in Our Sample, AMP-Based FULs Would Have Been Generally 

Lower Than Average Retail Pharmacy Acquisition Costs

The median AMP-based FULs that we calculated for the second quarter of 2008 would have 

been generally lower than average retail pharmacy acquisition costs for 54 of the 83 drugs in 

our sample. Of these 54 drugs, 44 drugs had median AMP-based FULs that would have been 

at least 25 percent below average retail pharmacy acquisition costs. However, more than a 

third of the drugs in our sample (29 of 83) had median AMP-based FULs equal to or greater 

than acquisition costs. (See encl. II for a list of the 54 drugs in our sample for which the 

median AMP-based FULs would have been below the average retail pharmacy acquisition 

 

30Under the Medicaid drug rebate program, pharmaceutical manufacturers pay rebates to states for the 

drugs they purchase as a condition of participating in the state programs. 

 9 GAO-10-118R Medicaid Federal Upper Limits
costs and the 29 drugs for which the median AMP-based FULs would have been above the 

average retail pharmacy acquisition costs.) While median AMP-based FULs would have been 

generally lower than acquisition costs across our entire sample of drugs, this difference was 

most pronounced for the 34 high-expenditure drugs in our sample, compared with the 32 

high-utilization drugs and the 17 drugs that overlapped both categories. Our results were 

similar when we compared the monthly AMP-based FULs for April, May, and June of 2008 to 

acquisition costs for the second quarter of 2008. 

These findings differ somewhat from the findings in our 2006 report, which found that less 

than a quarter of the drugs in our sample (18 of the 77) had AMP-based FULs equal to or 

greater than acquisition costs. The outlier provision included in CMS’s July 2007 final rule—

and therefore not taken into account in our 2006 report—increased the number of drugs for 

which AMP-based FULs would have been sufficient to cover acquisition costs. Without the 

outlier provision, the number of drugs with AMP-based FULs sufficient to cover acquisition 

costs would have been 25 drugs instead of 29 drugs. 

High-Expenditure Drugs 

For 29 of the 34 high-expenditure drugs in our sample, the median AMP-based FULs we 

calculated for the second quarter of 2008 would have been lower than the average retail 

pharmacy acquisition costs for this period. The AMP-based FULs for 25 of these 29 drugs 

would have been at least 25 percent below average retail pharmacy acquisition costs. (See 

fig. 2.) 

Figure 2: Comparison of Median AMP-Based FULs and Average Retail Pharmacy Acquisition Costs for 

34 High-Expenditure Outpatient Drugs in Medicaid, Second Quarter 2008 

-100

-50

0

50

100

150

200

250

300

Percentage difference

Source: GAO analysis of utilization and FUL data from CMS and acquisition cost data from IMS Health.

High-expenditure drugs

The median AMP-based FULs for

these 29 drugs would have been lower than

the average retail pharmacy acquisition costs.

The median

AMP-based FULs

for these 5 drugs

would have been

higher than the

average retail

pharmacy 

acquisition

costs.

Note: The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and 

discounts that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We were 

unable to identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for 

rebates and discounts. 

 10 GAO-10-118R Medicaid Federal Upper Limits
High-Utilization Drugs 

Conversely, only 13 of the 32 high-utilization drugs in our sample had median AMP-based 

FULs that would have been lower than the average retail pharmacy acquisition costs. The 

AMP-based FULs for 9 of these 13 drugs would have been at least 25 percent below average 

retail pharmacy acquisition costs. (See fig. 3). 

Figure 3: Comparison of Median AMP-Based FULs and Average Retail Pharmacy Acquisition Costs for 

32 High-Utilization Outpatient Drugs in Medicaid, Second Quarter 2008 

-150

-100

-50

0

50

100

150

200

250

300

350

1,600

1,650

Percentage difference

Source: GAO analysis of utilization and FUL data from CMS and acquisition cost data from IMS Health.

High-utilization drugs

The median AMP-based FULs for

these 13 drugs would have been lower than

the average retail pharmacy acquisition costs.

The median AMP-based FULs for

these 19 drugs would have been higher than

the average retail pharmacy acquisition costs.

Note: The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and 

discounts that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We were 

unable to identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for 

rebates and discounts. 

High-Expenditure and High-Utilization Drugs 

For 12 of the 17 drugs in our sample that overlapped both categories, the median AMP-based 

FULs we calculated would have been below average retail pharmacy acquisition costs for the 

second quarter of 2008. Further, the median AMP-based FULs for 10 of these drugs would 

have been at least 25 percent below average retail pharmacy acquisition costs. (See fig. 4.) 

 11 GAO-10-118R Medicaid Federal Upper Limits
Figure 4: Comparison of Median AMP-Based FULs and Average Retail Pharmacy Acquisition Costs for 

17 Outpatient Drugs That Were Both High-Expenditure and High-Utilization in Medicaid, Second Quarter 

Note: T

2008 

he average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and 

discounts that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We were 

edian AMP-based FULs Would Have Been Lower Than Acquisition Costs in the Aggregate

-100

-50

0

50

100

150

200

250

300

Percentage difference

Source: GAO analysis of utilization and FUL data from CMS and acquisition cost data from IMS Health.

High-expenditure and high-utilization drugs

The median AMP-based FULs for

these 12 drugs would have been lower than

the average retail pharmacy acquisition costs.

The median AMP-based

FULs for these 5 drugs would have

been higher than the average retail

pharmacy acquisition costs.

unable to identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for 

rebates and discounts. 

M

In the aggregate, for our sample of 83 drugs, the median AMP-based FULs we calculated for 

s 

-

 

the second quarter of 2008 would have been 17 percent less than the average retail pharmacy

acquisition costs for the same period, when weighted by drug utilization at the national level. 

However, this difference varied significantly from state to state.31 Aggregate median AMPbased FULs would have been between 57 percent less than and 49 percent greater than the

aggregate acquisition costs, when weighted by drug utilization in each individual state. In 11

states, the aggregate AMP-based FULs covered at least 100 percent of aggregate acquisition 

costs, and in another 19 states, the aggregate AMP-based FULs covered more than 90, but les

than 100 percent. In 10 other states, however, the aggregate AMP-based FULs covered 80 

percent or less. (See fig. 5.) (See encl. III for a comparison in the aggregate of median AMP

based FULs to average retail pharmacy acquisition costs for the 83 drugs in our sample for 

each state.) 

31At the time we requested them from CMS, drug utilization data were not available for the second 

quarter of 2008 for Alabama, Arizona, Rhode Island, and Tennessee, and the U.S. territories of 

American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands. Because we 

lacked utilization data for these states and territories, they have been excluded from our aggregate 

analyses. 

 12 GAO-10-118R Medicaid Federal Upper Limits
Figure 5: Comparison, in the Aggregate for 83 Drugs, of Median AMP-based FULs to Average Retail 

Pharmacy Acquisition Costs, Second Quarter 2008 

 were 

, 

for these states and territories, they have been excluded from

e Able to Acquire Therapeutically Equivalent Versions of Most Drugs at 

0

20

40

60

80

100

120

140

160

180

200

Percentage covered by the aggregate FUL

Source: GAO analysis of utilization and FUL data from CMS and acquisition cost data from IMS Health.

States

In the aggregate, AMP-based FULs would have

been less than average retail pharmacy 

acquisition costs in 36 states and nationally.

National aggregate

83%

In the aggregate, AMP-based

FULs would have been greater

than average retail pharmacy

acquisition costs in 11 states.

Note: The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and 

discounts that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We

unable to identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for 

rebates and discounts. We used national pharmacy acquisition costs to conduct this analysis because acquisition cost data

were not available from IMS Health at the state level. 

At the time we requested them from CMS, drug utilization data were not available for the second quarter of 2008 for Alabama

Arizona, Rhode Island, and Tennessee and the U.S. territories of American Samoa, Guam, Northern Mariana Islands, Puerto 

Rico, and the Virgin Islands. Because we lacked utilization data 

our aggregate analyses. 

Pharmacies May B

Costs Below Their FULs

ur sample, or 77 percent, we found that at least one therapeutically 

equivalent version had average retail pharmacy acquisition costs that would have been below 

Pr 

, 

 that 

For 64 of the 83 drugs in o

the median AMP-based FUL in the second quarter of 2008. (See table 1.) For 38 of these 

drugs, at least half of the Medicaid utilization during this quarter was for therapeutically 

equivalent versions for which acquisition costs would have been less than the median AM

based FUL, including 23 drugs for which at least 90 percent of Medicaid utilization was fo

such versions. Across all 83 drugs, 43 percent of each drug’s Medicaid utilization, on average

was for therapeutically equivalent versions for which acquisition costs would have been 

below the AMP-based FUL. (See encl. I for the percentage of utilization accounted for by 

therapeutically equivalent versions of each drug with average pharmacy acquisition costs

would have been below the AMP-based FUL.) 

 13 GAO-10-118R Medicaid Federal Upper Limits
Table 1: Percentage of Each Drug’s Medicaid Utilization That Is Accounted for by Therapeutic 

Equivalents with Average Retail Pharmacy Acquisition Costs That Would Have Been Below the Median 

AMP-based FULs, Second Quarter 2008 

Percentage of Medicaid utilization Number of drugs

90.0 percent – 100.0 percent 23

75.0 percent – 89.9 percent 6

50.0 percent – 74.9 percent 9

25.0 percent – 49.9 percent 5

0.1 percent – 24.9 percent 21

Zero percent 19

Total 83

Source: GAO analysis of utilization and FUL data from CMS and average retail pharmacy acquisition cost data from IMS Health. 

average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and 

invoice prices. We were 

drugs that account for 

 54 drugs in our sample with average retail pharmacy acquisition costs that 

ould have been above the median AMP-based FULs, 35 had one or more therapeutically 

s of 

expenditure drugs to have therapeutically equivalent versions with average retail pharmacy 

on 

nly 

e 

me Drugs in 2008, Affecting the Relationship 

Note: The 

discounts that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in 

unable to identify any data sources of acquisition costs for multiple-source outpatient prescription 

rebates and discounts. 

In addition, of the

w

equivalent versions with average retail pharmacy acquisition costs that would have been 

below the FUL, which accounted for an average of 27 percent of each drug’s Medicaid 

utilization. Therefore, to the extent that the lower cost, therapeutically equivalent version

these drugs are readily available to pharmacies—and that pharmacies choose to acquire 

them—it may be possible for pharmacies to reduce their costs for many of these drugs to 

levels below the FUL by increasing their use of lower-priced therapeutic equivalents. 

We also found that the high-utilization drugs in our sample were more likely than the highacquisition costs that would have been below their FULs. Specifically, for 22 of 32 (69 

percent) high-utilization drugs, at least half of the Medicaid utilization during the second 

quarter of 2008 was accounted for by therapeutically equivalent versions with acquisiti

costs that would have been below their median AMP-based FULs, while this was true for o

10 of 34 (29 percent) high-expenditure drugs and 6 of 17 (35 percent) of the drugs that wer

both high-expenditure and high-utilization. 

AMP-Based FULs Varied Significantly for So

Between FULs and Acquisition Costs

—or 46 percent—monthly AMP-based FULs varied by 

at least 100 percent throughout 2008, which affected the relationship between FULs and 

, 

Ls 

For 38 drugs in our sample of 83 drugs

average retail pharmacy acquisition costs and in some cases affected whether AMP-based 

FULs would have been higher or lower than acquisition costs in each month. For example

for 16 of the 83 drugs in our sample, we found that the monthly variation in AMP-based FU

would have resulted in the FUL for a drug exceeding the average retail pharmacy acquisition

cost in at least one month during the second quarter of 2008 and falling below the acquisition 

cost in another month during that same quarter. 

 14 GAO-10-118R Medicaid Federal Upper Limits
While monthly variation in AMP-based FULs was partly due to monthly increases or 

decreases in the AMPs used to set the FULs, missing AMP data in each month of 2008 also 

monthly 

MP 

t 

hly variation in AMP-based FULs may make it difficult for states to reimburse 

pharmacies in accordance with AMP-based FULs, because they may need to adjust their 

ent 

ly. 

o 

nts on a draft of this report. The agency’s 

comments are reprinted in enclosure IV. CMS disagreed with our finding that if AMP-based 

tail 

dily 

d 

oned the validity of our estimation of national average retail pharmacy acquisition 

costs because we were unable to account for certain discounts and rebates retail pharmacies 

may receive from wholesalers and drug manufacturers, if they are not accounted for in 

 

accounted for some variation. Although CMS requires drug manufacturers to submit 

AMP data no later than 30 days after the end of the prior month, in 2008, manufacturers did

not report AMP data to CMS for an average of 11 percent of the therapeutically equivalent 

versions of the 83 drugs in our sample in each month. We found that missing AMP data 

affected the AMP-based FULs because CMS calculates them monthly, generally using the 

lowest AMP for each drug subject to a FUL.32 Therefore, if a manufacturer reports the A

for the lowest-priced therapeutically equivalent version of a drug in one month but does no

report it in a subsequent month, the FUL for the second month will be based on the AMP for

a different version of that drug, which may result in a change in the FUL between the two 

months. 

The mont

reimbursement rates on a monthly basis in order to reimburse pharmacies the amounts 

corresponding to the FULs. CMS officials told us that, if the agency is permitted to implem

AMP-based FULs, CMS will assist states in preparing to use FULs that are updated month

The officials also stated that public disclosure of AMP data along with the implementation of 

AMP-based FULs should lessen the monthly variation in the FULs because manufacturers 

would likely increase their compliance with the monthly AMP reporting requirement. CMS 

officials believe that manufacturers would increase compliance because manufacturers wh

do not comply with the requirement could be easily identified. 

Agency Comments and Our Evaluation 

HHS provided us with CMS’s written comme

FULs had been in place in the second quarter of 2008, they would have been lower than

average retail pharmacy acquisition costs for most of the 83 drugs in our sample and in the 

national aggregate. In particular, CMS expressed concerns about our data source used to

estimate average retail pharmacy acquisition costs, including that it does not take into 

account discounts and rebates that drug manufacturers and wholesalers may provide to re

pharmacies. CMS also expressed concerns about our methodology and inconsistencies 

between our finding and the findings of an HHS-OIG report. However, as we indicate in this 

report and address below, data on discounts and rebates pharmacies receive are not rea

available. We used the most complete, accurate, and verifiable data source available at the 

time of our analysis to estimate average retail pharmacy acquisition costs. We believe that 

these data are sufficiently accurate to achieve the objective of our work. Furthermore, as 

discussed below, our methodology is sound and any inconsistencies between our finding an

the findings of the HHS-OIG report are largely due to significant fluctuations in drug prices

over time. 

CMS questi

3242 C.F.R. § 447.514(c)(2)(2008). Under the outlier provision, if the lowest AMP is less than 40 percent 

of the second-lowest AMP, CMS uses the second-lowest AMP for a multiple-source drug to calculate 

the AMP-based FUL. The outlier provision only applies to multiple-source drugs with three or more 

therapeutically equivalent versions. 

 15 GAO-10-118R Medicaid Federal Upper Limits
invoice prices. In our report, we state that the IMS Health data did not account for such 

discounts and rebates, and we identified this as a limitation of our analysis. Had we been able 

to fully include discounts and rebates in our estimation of average retail pharmacy 

acquisition costs, these discounts and rebates would had to have averaged at least 17 per

of the average retail pharmacy acquisition cost in order to offset the difference between 

AMP-based FULs and pharmacy acquisition costs in the aggregate.

cent 

iscounts and rebates. 

CMS stated that an HHS-OIG report, which the OIG shared with us because it has not been 

ost data 

m 

nt variation between these data and the pharmacy acquisition 

cost data used by the OIG. While we cannot speak to the validity of the OIG’s survey data 

s 

 fourth 

 in 

 

33

Further, we know of no data sources of national average pharmacy acquisition costs for 

multiple-source outpatient prescription drugs that fully account for d

publicly issued as of November 2009, was able to partially account for discounts and 

rebates.34 However, as CMS acknowledges, the data on which the OIG relied also had 

limitations. Specifically, only half of the drug distributors that responded to the OIG’s survey

reported data on discounts and rebates. The OIG collected its pharmacy acquisition c

for the 50 drugs in its sample from a selection of 4 drug distributors. Two of the 4 drug

distributors did not report data on discounts and rebates.35 Moreover, accounting for 

discounts and rebates is difficult because retail pharmacies negotiate their discounts and 

rebates based on various factors and can negotiate them on a manufacturer’s entire line of 

products rather than per drug. 

CMS also questioned the validity of the pharmacy acquisition cost data that we acquired fro

IMS Health, because of significa

because we did not evaluate it, we used the most complete and accurate data available at the 

time of our analysis to estimate average retail pharmacy acquisition costs, as stated 

previously. Furthermore, we do not believe that the variation between the two data source

indicates that either is invalid because significant variation in both pharmacy acquisition 

costs and AMPs can be expected to occur over time, and the OIG data were from the

quarter of 2007 and therefore 6 months older than our data, on average. To illustrate this, we

analyzed variation in AMP data for each therapeutically equivalent version of the 83 drugs

our sample across 2008. We found that AMPs, which represent actual transaction prices 

between drug manufacturers and wholesalers, varied by as much as 1,100 percent throughout

2008 for individual therapeutically equivalent versions of drugs and that 24 percent of 

therapeutically equivalent versions of the drugs in our sample varied by more than 100 

percent during that year. In addition, we compared average retail pharmacy acquisition costs 

between the first quarter of 2006 and the second quarter of 2008 for the therapeutically

equivalent versions of drugs that were included in both our previous report on AMP-based 

33While the average amount of rebates for pharmacies is unknown, rebates in other parts of the 

pharmaceutical industry are considerably less than 17 percent. For example, in a 2003 report, we 

found that the range of rebates paid by pharmacy benefit managers to three health plans participating 

in the Federal Employees’ Health Benefit Program ranged from 3 to 9 percent. See GAO, Federal 

Employees’ Health Benefits: Effects of Using Pharmacy Benefits Managers on Health Plans, 

Enrollees, and Pharmacies, GAO-03-196 (Washington, D.C.: Jan. 10, 2003). In addition, the statutory 

rebate for drug manufacturers to reimburse state Medicaid programs for generic drugs is 11 percent of 

AMP. 

34We reviewed this report and discussed it with OIG officials. However, we did not evaluate the OIG's 

data sources.

35Entities may be reluctant to disclose drug pricing data, because doing so may place them at a 

competitive disadvantage. 

 16 GAO-10-118R Medicaid Federal Upper Limits
FULs and this report.36 We found that the pharmacy acquisition costs in the second quar

2008 were between 97 percent lower and 993 percent higher than in the first quarter of 2006. 

ter of 

Consequently, our finding should not be compared directly to the OIG’s findings, because the 

alyze the lowest 

pharmacy acquisition cost among all transactions. While we did not conduct our comparison 

e able 

ersion 

on. We clarified our report to explain that on a monthly 

basis, IMS Health collects data on drugs purchased by retail pharmacies from about 100 drug 

rs. 

, 

 a 

e 

s. 

ition 

e AMP-based FULs are calculated on a 

monthly basis. We used the median AMP-based FULs for the second quarter of 2008 because 

thly 

have 

 

two studies were conducted using data from different time periods. 

CMS also stated that the OIG report provides a more accurate comparison of AMP-based 

FULs to pharmacy acquisition costs, because the OIG was able to an

based on the lowest pharmacy acquisition cost, our report includes an analysis of the 

therapeutically equivalent versions of each drug in our sample that pharmacies may b

to acquire at a cost below AMP-based FULs. As we state in our report, we found that for 64 

drugs or 77 percent of the drugs in our sample, at least one therapeutically equivalent v

had average retail pharmacy acquisition costs that would have been below the median AMPbased FUL in the second quarter of 2008. However, in many cases, pharmacies are not 

currently purchasing these versions. 

CMS stated that we did not release source data or evidence of how IMS Health arrived at the 

acquisition costs used in our comparis

manufacturers and about 500 distribution centers. These manufacturers and distribution 

centers provide data on the number of units sold, and a portion of them provide data on 

actual retail pharmacy acquisition costs. For those manufacturers and distribution centers 

that only provide data on the number of units sold, IMS Health estimates retail pharmacy 

acquisition costs based on the actual acquisition cost data it was able to obtain from othe

Once IMS Health determines average retail pharmacy acquisition costs from data it collects

it projects these data to represent national average retail pharmacy acquisition costs using

model that is reviewed monthly. In addition, IMS Health conducts detailed data reliability 

assessments, which include comparing monthly data from drug manufacturers and 

distribution centers to data from the prior month and the prior year in order to ensure 

consistency and comparing reported pricing data against published prices to ensure that th

data IMS Health receive are in fact transaction prices rather than the published price

Consistent with our data use agreement with IMS Health, we did not include the acquis

cost data used in our analysis in our report or otherwise disclose them to CMS because, while

they are commercially available, they are proprietary. 

CMS stated that it was concerned about our use of median AMP-based FUL data to compare 

AMP-based FULs to pharmacy acquisition costs becaus

CMS reports utilization data on a quarterly basis and in order to mitigate the effects of 

monthly variation in AMP-based FULs on this comparison. As we stated in our report, for 16 

of the 83 drugs in our sample, monthly variation in the AMP-based FULs was significant 

enough to have resulted in the FUL for a drug exceeding the average retail pharmacy 

acquisition cost in at least one month during the second quarter of 2008 and falling below the

acquisition cost in another month during that same quarter. Comparing the data on a mon

basis would have increased the risk that monthly variation in AMP-based FULs would 

inappropriately affected the results of our analysis. 

36We used average retail pharmacy acquisition cost data from the first quarter of 2006 for this analysis 

because our previous report comparing AMP-based FULs to average retail pharmacy acquisition costs 

was based on data from that quarter. See GAO, Medicaid Outpatient Prescription Drugs: Estimated 

2007 Federal Upper Limits for Reimbursement Compared with Retail Pharmacy Acquisition Costs,

GAO-07-239R (Washington, D.C.: Dec. 22, 2006). 

 17 GAO-10-118R Medicaid Federal Upper Limits
CMS also stated that our sample of 83 drugs is not a true reflection of all drugs that would 

have been subject to AMP-based FULs in the second quarter of 2008 because it only included

6 percent of such drugs. As we stated in our report, our sample of drugs is not representative 

of all drugs that would have been subject to AMP-based FULs. However, our sample 

 costs 

tail 

ition costs to current FULs was outside the scope of this report. 

Furthermore, this comparison has been well-documented by the HHS-OIG and others.37 In 

, 

ntainment 

 that 

 data in 

a timely manner. The agency also noted that public disclosure of AMP data would help bring 

– – – – – 

ort earlier, 

we plan no further distribution until 30 days after its issue date. At that time, we will send 

copies to the Secretary of Health and Hum s and interested congressional 

committees. The report will also be available at no charge on GAO’s Web site at 

represented 64 percent of total Medicaid utilization and 52 percent of total Medicaid 

expenditures for drugs that would have been subject to AMP-based FULs in the second 

quarter of 2008. 

CMS noted that our analysis did not address how average retail pharmacy acquisition

compare to current FULs that are based on published prices. A comparison of average re

pharmacy acquis

addition, CMS noted that our analysis did not address existing state cost-containment efforts

such as MAC programs, to reduce Medicaid reimbursements for outpatient prescription 

drugs. While the relationship between AMP-based FULs and state Medicaid cost-co

efforts is a valid area of analysis, this issue was also beyond the scope of our report. 

In response to our concerns about monthly variation in the AMP-based FULs, CMS noted

it is aware of monthly fluctuations in AMP-based FULs and that it is considering measures to 

ensure that pharmacy reimbursement is fair and that drug manufacturers report AMP

transparency to drug prices and help ensure that pharmacies can determine which 

therapeutically equivalent version of each drug could be acquired at a cost below its AMPbased FULs. 

CMS also provided technical comments, which we incorporated as appropriate. 

As agreed with your office, unless you publicly announce the contents of this rep

an Service

http://www.gao.gov. 

 

37For example, a 2007 HHS-OIG report found that for 23 out of 25 selected drugs, FULs that are based 

on published prices were more than double the average pharmacy acquisition costs. See, HHS OIG, 

Deficit Reduction Act of 2005: Impact on the Medicaid Federal Upper Limit Program, OEI-03-06-

00400 (Philadelphia, Pa.: June 2007). 

 18 GAO-10-118R Medicaid Federal Upper Limits
If you or your staff have any questions regarding this report, please contact me at (202) 512-

7114 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and 

ublic Affairs may be found on the last page of this report. GAO staff members who made 

key contributions to this report are listed in enclosure V. 

P

Sincerely yours, 

John E. Dicken 

Director, Health Care 

 19 GAO-10-118R Medicaid Federal Upper Limits
Enclosure I 

20 GAO-10-118R Medicaid Federal Upper Limits 

The 83 Medicaid Outpatient Prescription Drugs GAO Reviewed, Sample Category 

into which Each Drug Falls, and Percentage of Each Drug’s Medicaid Utilization for 

which the Average Pharmacy Acquisition Cost Would Have Been Below the Median 

AMP-Based FUL, Second Calendar Quarter of 2008 

Drug name and strength Dosage form 

Sample category 

into which each drug 

falls (high utilization, 

high expenditure, or 

high utilization and 

high expenditure) 

Percentage of each drug’s 

Medicaid utilization that was 

accounted for by 

therapeutically equivalent 

versions with an average 

pharmacy acquisition cost 

that would have been below 

the median AMP-based FUL

Acetaminophen; hydrocodone 

bitartrate 

500mg/15ml; 7.5mg/15ml 

Solution High utilization 2.3

Acetaminophen; hydrocodone 

bitartrate 325mg; 10mg 

Tablet High utilization and 

high expenditure 

10.0

Acetaminophen; hydrocodone 

bitartrate 500mg; 10mg 

Tablet High utilization and 

high expenditure 

99.5

Acetaminophen; hydrocodone 

bitartrate 500mg; 5mg 

Tablet High utilization 97.2

Acetaminophen; oxycodone 

hydrochloride 325mg; 5mg 

Tablet High utilization 85.7

Albuterol sulfate 0.083% Solution High utilization and 

high expenditure 

100.0

Alendronate sodium 70mg Tablet High expenditure 54.1

Alprazolam 0.25mg Tablet High utilization 0.0

Alprazolam 0.5mg Tablet High utilization 0.0

Alprazolam 1mg Tablet High utilization 0.0

Amlodipine besylate 10mg Tablet High expenditure 0.0

Amlodipine besylate 5mg Tablet High expenditure 3.8

Amoxicillin 125mg/5ml Suspension High utilization 99.4

Amoxicillin 250mg/5ml Suspension High utilization 99.7

Amoxicillin 400mg/5ml Suspension High utilization and 

high expenditure 

79.6

Amoxicillin; clavulanic acid 

400mg/5ml; 57mg/5ml 

Suspension High utilization and 

high expenditure 

54.4

Amoxicillin; clavulanic acid 

600mg/5ml; 42.9mg/5ml 

Suspension High utilization and 

high expenditure 

7.8

Amoxicillin; clavulanic acid 

875mg; 125mg 

Tablet High expenditure 93.1

Azithromycin 100mg/5ml Suspension High expenditure 72.0

Azithromycin 200mg/5ml Suspension High expenditure 0.0

Azithromycin 250mg Tablet High expenditure 35.0

Bupropion hydrochloride 150mg Extended release 

tablet 

High expenditure 1.2

Bupropion hydrochloride 300mg Extended release 

tablet 

High expenditure 55.0
Enclosure I 

 21 GAO-10-118R Medicaid Federal Upper Limits

Drug name and strength Dosage form 

Sample category 

into which each drug 

falls (high utilization, 

high expenditure, or 

high utilization and 

high expenditure) 

Percentage of each drug’s 

Medicaid utilization that was 

accounted for by 

therapeutically equivalent 

versions with an average 

pharmacy acquisition cost 

that would have been below 

the median AMP-based FUL

Carbamazepine 100mg/5ml Suspension High utilization 99.8

Cefdinir 300mg Capsule High expenditure 14.6

Cefdinir 125mg/5ml Suspension High expenditure 86.2

Cefdinir 250mg/5ml Suspension High utilization and 

high expenditure 

65.1

Cephalexin 250mg/5ml Suspension High utilization 99.4

Chlorhexidine gluconate 0.12% Solution High utilization 77.2

Clonazepam 0.5mg Tablet High utilization 7.4

Clonazepam 1mg Tablet High utilization and 

high expenditure 

41.0

Clonidine hydrochloride 0.1mg Tablet High utilization 99.7

Clozapine 100mg Tablet High expenditure 91.4

Codeine phosphate; 

promethazine hydrochloride 

10mg/5ml; 6.25mg/5ml 

Syrup High utilization 98.7

Cyclobenzaprine hydrochloride 

10mg 

Tablet High utilization 0.0

Desmopressin acetate 0.2mg Tablet High expenditure 0.0

Dextromethorphan hydrobromide; 

promethazine hydrochloride 

15mg/5ml; 6.25mg/5ml 

Syrup High utilization 100.0

Diazepam 10mg Tablet High utilization 99.9

Diphenhydramine hydrochloride 

12.5mg/5ml 

Elixir High utilization 100.0

Fentanyl 100mcg Film High expenditure 0.0

Fentanyl 50mcg/hr Film High expenditure 0.0

Fentanyl 75mcg/hr Film High expenditure 0.0

Fluoxetine hydrochloride 20mg Capsule High utilization 0.3

Fluticasone propionate 0.05mg Spray High expenditure 0.0

Folic acid 1mg Tablet High utilization 0.0

Gabapentin 300mg Capsule High utilization and 

high expenditure 

0.7

Gabapentin 600mg Tablet High expenditure 0.0

Gabapentin 800mg Tablet High expenditure 4.7

Griseofulvin microcrystalline 

125mg/5ml 

Suspension High utilization and 

high expenditure 

7.0

Hydrochlorothiazide 25mg Tablet High utilization 0.0

Ibuprofen 100mg/5ml Suspension High utilization 99.9

Ibuprofen 600mg Tablet High utilization 99.9

Ibuprofen 800mg Tablet High utilization 99.9

Lactulose 10gm/15ml Solution High utilization 99.3

Lamotrigine 25mg Chewable tablet High expenditure 100.0
Enclosure I 

 22 GAO-10-118R Medicaid Federal Upper Limits

Drug name and strength Dosage form 

Sample category 

into which each drug 

falls (high utilization, 

high expenditure, or 

high utilization and 

high expenditure) 

Percentage of each drug’s 

Medicaid utilization that was 

accounted for by 

therapeutically equivalent 

versions with an average 

pharmacy acquisition cost 

that would have been below 

the median AMP-based FUL

Lorazepam 0.5mg Tablet High utilization 0.4

Lorazepam 1mg Tablet High utilization and 

high expenditure 

3.0

Medroxyprogesterone acetate 

150mg/ml 

Injectable High expenditure 42.7

Metformin hydrochloride 500mg Tablet High utilization and 

high expenditure 

0.0

Methadone hydrochloride 10mg Tablet High utilization 99.3

Metoclopramide hydrochloride 

5mg/5ml 

Solution High utilization 58.4

Mupirocin 2% Ointment High expenditure 97.8

Nystatin 100000u/ml Suspension High utilization 74.0

Ofloxacin 0.3% Solution/drops 

(ophthalmic) 

High expenditure 58.8

Ofloxacin 0.3% Solution/drops 

(otic) 

High expenditure 0.4

Omeprazole 20mg Delayed release 

capsule 

High expenditure 20.8

Oxcarbazepine 300mg Tablet High expenditure 0.1

Oxcarbazepine 600mg Tablet High expenditure 0.1

Pantoprazole sodium 40mg Delayed release 

tablet 

High expenditure 100.0

Paroxetine hydrochloride 20mg Tablet High expenditure 17.9

Phenytoin sodium 

100mg extended 

Capsule High utilization and 

high expenditure 

0.5

Polyethylene glycol 3350 

17gm/scoopful 

Solution High utilization and 

high expenditure 

0.0

Ranitidine hydrochloride 

15mg/ml 

Syrup High utilization and 

high expenditure 

0.0

Ranitidine hydrochloride 150mg Tablet High utilization 80.5

Ribavirin 200mg Capsule High expenditure 28.3

Sertraline hydrochloride 100mg Tablet High utilization and 

high expenditure 

0.1

Sertraline hydrochloride 50mg Tablet High expenditure 0.0

Simvastatin 20mg Tablet High expenditure 0.0

Simvastatin 40mg Tablet High expenditure 0.6

Tramadol hydrochloride 50mg Tablet High utilization and 

high expenditure 

73.2

Triamcinolone acetonide 0.1% Cream High utilization 79.3

Valproic acid 250mg/5ml Syrup High utilization 94.1

Zolpidem tartrate 10mg Tablet High expenditure 37.0

Source: GAO analysis of utilization and FUL data from CMS and average retail pharmacy acquisition cost data from IMS Health. 
Enclosure I 

 23 GAO-10-118R Medicaid Federal Upper Limits

Notes: Our sample contained 83 multiple-source outpatient prescription drugs for the second quarter of 2008, which comprised 

32 drugs that were in the top 50 for Medicaid utilization, 34 drugs that were in the top 50 for Medicaid expenditures, and 17 

drugs that were in the top 50 for both utilization and expenditures. Dispensing fees were excluded when calculating Medicaid 

expenditures. 

The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and discounts 

that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We were unable to 

identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for rebates and 

discounts. 
Enclosure II 

24 GAO-10-118R Medicaid Federal Upper Limits 

Comparison of Average Retail Pharmacy Acquisition Costs to Median Average 

Manufacturer Price (AMP)-Based Federal Upper Limits (FUL) for the 83 Medicaid 

Outpatient Prescription Drugs GAO Reviewed, Second Quarter of 2008 

Drugs with AMP-based FULs that would have 

been above the average retail pharmacy 

acquisition cost 

Drugs with AMP-based FULs that would have been

below the average retail pharmacy acquisition cost 

• Acetaminophen; hydrocodone bitartrate 

500mg; 10mg (tablet) 

• Acetaminophen; hydrocodone bitartrate 

500mg; 5mg (tablet) 

• Acetaminophen; oxycodone hydrochloride 

325mg; 5mg (tablet) 

• Albuterol sulfate 0.083% (solution) 

• Amoxicillin 125mg/5ml (suspension) 

• Amoxicillin 250mg/5ml (suspension) 

• Amoxicillin 400mg/5ml (suspension) 

• Amoxicillin; clavulanic acid 400mg/5ml; 

57mg/5ml (suspension) 

• Carbamazepine 100mg/5ml (suspension) 

• Cefdinir 125mg/5ml (suspension) 

• Cefdinir 250mg/5ml (suspension) 

• Cephalexin 250mg/5ml (suspension) 

• Chlorhexidine gluconate 0.12% (solution) 

• Clonidine hydrochloride 0.1mg (tablet) 

• Clozapine 100mg (tablet) 

• Codeine phosphate; promethazine 

hydrochloride 10mg/5ml; 6.25mg/5ml (syrup)

• Dextromethorphan hydrobromide; 

promethazine hydrochloride 

15mg/5ml;6.25mg/5ml (syrup) 

• Diazepam 10mg (tablet) 

• Diphenhydramine hydrochloride 

12.5mg/5ml (elixir) 

• Ibuprofen 100mg/5ml (suspension) 

• Ibuprofen 600mg (tablet) 

• Ibuprofen 800mg (tablet) 

• Lactulose 10gm/15ml (solution) 

• Lamotrigine 25mg (chewable tablet) 

• Methadone hydrochloride 10mg (tablet) 

• Metoclopramide hydrochloride 5mg/5ml 

(solution) 

• Mupirocin 2% (ointment) 

• Pantoprazole sodium 40mg (delayed release 

tablet) 

• Triamcinolone acetonide 0.1% (cream) 

• Acetaminophen; hydrocodone bitartrate 500mg/15ml; 

7.5mg/15ml (solution) 

• Acetaminophen; hydrocodone bitartrate 325mg; 10mg 

(tablet) 

• Alendronate sodium 70mg (tablet) 

• Alprazolam 0.25mg (tablet) 

• Alprazolam 0.5mg (tablet) 

• Alprazolam 1mg (tablet) 

• Amlodipine besylate 10mg (tablet) 

• Amlodipine besylate 5mg (tablet) 

• Amoxicillin; clavulanic acid 600mg/5ml; 42.9mg/5ml 

(suspension) 

• Amoxicillin; clavulanic acid 875mg; 125mg (tablet) 

• Azithromycin 100mg/5ml (suspension) 

• Azithromycin 200mg/5ml (suspension) 

• Azithromycin 250mg (tablet) 

• Bupropion hydrochloride 150mg (extended release 

tablet) 

• Bupropion hydrochloride 300mg (extended release 

tablet) 

• Cefdinir 300mg (capsule) 

• Clonazepam 0.5mg (tablet) 

• Clonazepam 1mg (tablet) 

• Cyclobenzaprine hydrochloride 10mg (tablet) 

• Desmopressin acetate 0.2mg (tablet) 

• Fentanyl 100mcg (film) 

• Fentanyl 50mcg/hr (film) 

• Fentanyl 75mcg/hr (film) 

• Fluoxetine hydrochloride 20mg (capsule) 

• Fluticasone propionate 0.05mg (spray) 

• Folic acid 1mg (tablet) 

• Gabapentin 300mg (capsule) 

• Gabapentin 600mg (tablet) 

• Gabapentin 800mg (tablet) 

• Griseofulvin microcrystalline 125mg/5ml (suspension) 

• Hydrochlorothiazide 25mg (tablet) 

• Lorazepam 0.5mg (tablet) 

• Lorazepam 1mg (tablet) 

• Medroxyprogesterone acetate 150mg/ml (injectable) 
Enclosure II 

 25 GAO-10-118R Medicaid Federal Upper Limits

Drugs with AMP-based FULs that would have 

been above the average retail pharmacy 

acquisition cost 

Drugs with AMP-based FULs that would have been

below the average retail pharmacy acquisition cost 

• Metformin hydrochloride 500mg (tablet) 

• Nystatin 100000u/ml (suspension) 

• Ofloxacin 0.3% (solution/drops – ophthalmic) 

• Ofloxacin 0.3% (solution/drops – otic) 

• Omeprazole 20mg (delayed release capsule) 

• Oxcarbazepine 300mg (tablet) 

• Oxcarbazepine 600mg (tablet) 

• Paroxetine hydrochloride 20mg (tablet) 

• Phenytoin sodium 100mg extended (capsule) 

• Polyethylene glycol 3350 17gm/scoopful (solution) 

• Ranitidine hydrochloride 15mg/ml (syrup) 

• Ranitidine hydrochloride 150mg (tablet) 

• Ribavirin 200mg (capsule) 

• Sertraline hydrochloride 100mg (tablet) 

• Sertraline hydrochloride 50mg (tablet) 

• Simvastatin 20mg (tablet) 

• Simvastatin 40mg (tablet) 

• Tramadol hydrochloride 50mg (tablet) 

• Valproic acid 250mg/5ml (syrup) 

• Zolpidem tartrate 10mg (tablet) 

Source: GAO analysis of utilization and FUL data from CMS and average retail pharmacy acquisition cost data from IMS Health. 

Notes: Our sample contained 83 multiple-source outpatient prescription drugs for the second quarter of 2008, which comprised 

32 drugs that were in the top 50 for Medicaid utilization, 34 drugs that were in the top 50 for Medicaid expenditures, and 17 

drugs that were in the top 50 for both utilization and expenditures. Dispensing fees were excluded when calculating Medicaid 

expenditures. 

The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and discounts 

that pharmacies may receive from wholesalers or manufacturers, if they were not included in invoice prices. We were unable to 

identify any data sources of these acquisition costs that account for rebates and discounts. 
Enclosure III 

26 GAO-10-118R Medicaid Federal Upper Limits 

Comparison in the Aggregate of Median AMP-based FULs to Average Retail 

Pharmacy Acquisition Costs for 83 Drugs, Second Quarter 2008 

Statea

Percentage of acquisition 

costsb

 that would have been 

covered by the AMP-based FUL, 

in the aggregate, for 83 drugs

Percent of Medicaid utilization 

represented by 83 drugs

Alaska 72.3 56.1

Arkansas 96.4 57.8

California 42.7 54.9

Colorado 105.6 55.3

Connecticut 94.4 53.9

Delaware 64.5 56.6

District Of Columbia 71.0 43.9

Florida 78.3 52.6

Georgia 95.9 47.4

Hawaii 98.1 49.5

Idaho 86.3 57.3

Illinois 104.2 58.1

Indiana 94.9 54.2

Iowa 64.5 60.1

Kansas 100.6 53.7

Kentucky 104.1 54.0

Louisiana 90.4 54.6

Maine 93.5 50.7

Maryland 78.5 50.5

Massachusetts 112.9 56.7

Michigan 107.1 57.9

Minnesota 97.8 52.7

Mississippi 99.2 53.0

Missouri 95.3 46.4

Montana 64.6 50.3

Nebraska 94.6 62.2

Nevada 88.2 53.4

New Hampshire 116.8 57.3

New Jersey 93.2 53.9

New Mexico 99.3 57.2

New York 86.8 48.7

North Carolina 97.5 58.6

North Dakota 97.5 59.6

Ohio 78.5 58.4

Oklahoma 97.0 56.5

Oregon 109.3 51.5
Enclosure III 

 27 GAO-10-118R Medicaid Federal Upper Limits

Statea

Percentage of acquisition 

costsb

 that would have been 

covered by the AMP-based FUL, 

in the aggregate, for 83 drugs

Percent of Medicaid utilization 

represented by 83 drugs

Pennsylvania 89.7 56.4

South Carolina 85.6 56.7

South Dakota 106.7 61.9

Texas 92.4 66.4

Utah 82.7 59.9

Vermont 93.2 52.7

Virginia 87.0 57.8

Washington 117.6 49.1

West Virginia 79.6 56.3

Wisconsin 98.3 48.4

Wyoming 149.1 72.3

Source: GAO analysis of utilization and FUL data from CMS and average retail pharmacy acquisition cost data from IMS Health. 

Notes: 

a

At the time we requested them from CMS, drug utilization data were not available for the second quarter of 2008 for Alabama, 

Arizona, Rhode Island, and Tennessee, and the U.S. territories of American Samoa, Guam, Northern Mariana Islands, Puerto 

Rico, and the Virgin Islands. Because we lacked utilization data for these states and territories, they have been excluded from

our aggregate analyses. 

b

The average retail pharmacy acquisition cost data that we obtained from IMS Health do not account for rebates and discounts 

that pharmacies may receive from wholesalers or manufacturers, if they are not reflected in invoice prices. We were unable to 

identify any data sources of acquisition costs for multiple-source outpatient prescription drugs that account for rebates and 

discounts. We used national pharmacy acquisition costs to conduct this analysis because acquisition cost data were not 

available at the state level. 
Enclosure IV 

28 GAO-10-118R Medicaid Federal Upper Limits 

Agency Comments 
Enclosure IV 

 29 GAO-10-118R Medicaid Federal Upper Limits
Enclosure IV 

 30 GAO-10-118R Medicaid Federal Upper Limits
Enclosure IV 

 31 GAO-10-118R Medicaid Federal Upper Limits
Enclosure IV 

 32 GAO-10-118R Medicaid Federal Upper Limits
Enclosure V 

33 GAO-10-118R Medicaid Federal Upper Limits 

GAO Contact and Staff Acknowledgments 

GAO Contact 

John E. Dicken, (202) 512-7114 or DickenJ@gao.gov 

Staff Acknowledgments 

In addition to the contact named above, key contributors to this report were Will Simerl, 

Assistant Director; Rashmi Agarwal; Karen Howard; Julian Klazkin; Alexis MacDonald; Daniel 

Ries; Timothy Walker; and Michael Zose. 

(290747) 
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