Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices
Published: 2014-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2011, federal spending for prescription drugs by DOD, Medicaid, and Medicare Part D totaled $71.2 billion—representing about 85 percent of all federal prescription drug expenditures—for about 114.4 million beneficiaries. Each program reimbursed retail pharmacies for outpatient prescriptions filled at these pharmacies by their beneficiaries.
GAO was asked to compare prices paid for prescription drugs across federal programs. This report compares retail reimbursement prices paid by DOD, Medicaid, and Medicare Part D for a sample of prescription drugs and describes factors affecting these prices. Using agency data for the third quarter of 2010 (the most recent data available at the time of GAO's analysis), GAO selected a sample of 50 high-utilization and 50 high-expenditure drugs; after accounting for overlap between the two groups, the final sample contained 78 drugs. GAO calculated average gross unit prices paid to pharmacies by each program by adding total program-paid and beneficiary-paid amounts and dividing by total utilization for each drug, the entire sample, and the subsets of brand-name and generic drugs. GAO calculated net unit prices paid by each program by subtracting all agency-reported beneficiary-paid amounts, rebates, refunds, and other price concessions from the gross unit prices. GAO also interviewed DOD, Medicaid, and Medicare Part D officials and reviewed literature describing factors affecting drug prices.
section_title: What GAO Found
paragraphs: GAO found that Medicaid paid the lowest average net prices across a sample of 78 high-utilization and high-expenditure brand-name and generic drugs when compared to prices paid by the Department of Defense (DOD) and Medicare Part D. Specifically, Medicaid's average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, Medicaid paid the lowest net price for the subset of brand-name drugs in the sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 69 percent more. Medicaid also paid the lowest net price for the subset of generic drugs, while Medicare Part D paid 4 percent more and DOD paid 50 percent more.
GAO found that multiple factors affected the net prices paid by each program. Specifically, a key factor for the entire sample and the brand-name subset was the amount of any post-purchase price adjustments, which are the refunds, rebates, or price concessions received by each program from drug manufacturers after drugs have been dispensed to program beneficiaries. These price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across the entire sample. The gross prices each program negotiated with pharmacies and the magnitude of beneficiary-paid amounts also contributed to differences in net prices paid by the three programs, but to a lesser degree.
GAO provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated.

section_title: Letter
paragraphs: The Department of Defense (DOD), Medicaid, and Medicare Part D drug  programs all incur substantial costs each year paying for prescription  drugs for their beneficiaries. In 2011, federal spending for prescription  drugs in these programs was a combined $71.2 billion—representing  about 85 percent of all federal prescription drug expenditures—for  approximately 114.4 million beneficiaries.
DOD, Medicaid, and Medicare Part D each reimburse retail pharmacies  for outpatient prescriptions that beneficiaries fill at these pharmacies.
Prices for prescription drugs purchased in retail pharmacies generally  include markups by one or more intermediaries (such as wholesalers and  distributors) as well as storage, overhead, and dispensing costs.
Given the significant level of federal spending on prescription drugs, you  requested that we compare prices paid for these drugs across federal  programs. In this report, we compare prices paid by DOD, Medicaid, and  Medicare Part D for a sample of prescription drugs dispensed by retail  pharmacies to program beneficiaries, and we describe factors  contributing to differences in these prices. Our April 2013 report  compares direct purchase prices paid by DOD and the Department of  Veterans Affairs (VA) for a sample of prescription drugs dispensed to  beneficiaries through the agencies’ own facilities and mail order  pharmacies.
To compare prices paid by DOD, Medicaid, and Medicare Part D for  prescription drugs beneficiaries obtained at retail pharmacies, we  selected a sample of drugs and then calculated gross and net unit prices  paid by the programs we reviewed. To select the sample, we obtained  prescription drug claims data from DOD and the Centers for Medicare &  Medicaid Services (CMS) for the third calendar quarter of 2010.
We then  selected drugs based on high utilization or high expenditures using DOD  and Medicare Part D data. The sample we selected included the top 50  brand-name and top 50 generic drugs based on combined utilization  ranks and combined expenditure ranks for DOD and Medicare Part D.  After accounting for overlap between the high utilization and high  expenditure drugs, the final sample contained 78 drugs—33 brand-name  and 45 generic—and accounted for at least 25 percent of utilization and  25 percent of expenditures for both DOD and Medicare Part D retail  prescriptions filled by beneficiaries in the third calendar quarter of 2010.
We then calculated the following program prices for the individual drugs in  the sample, the entire sample, and each subset of brand-name drugs and  generic drugs: gross unit prices paid to retail pharmacies (representing total  program-paid plus beneficiary-paid amounts), net unit prices (representing program-paid amounts minus offsetting  rebates, refunds, and other price concessions, which we refer to in  this report collectively as post-purchase price adjustments).
To determine gross unit prices we used DOD Pharmacy Data Transaction  Service (PDTS) data on prescription drugs dispensed to DOD  beneficiaries by non-DOD retail pharmacies, the Medicaid Analytic  eXtract (MAX) prescription drug data file, and Medicare Part D  Prescription Drug Event (PDE) claims data. For all three programs, we  excluded claims with third-party payments, physician-administered  outpatient drugs, and items that are not traditionally considered drugs  such as bandages and syringes. To determine post-purchase price  adjustments for calculating net unit prices, we used PDTS data from  DOD; unit rebate amount (URA) and CMS-64 data from Medicaid; and  the 2010 Direct and Indirect Remuneration (DIR) Detailed Report from  Medicare.
To describe factors contributing to differences in net prices paid by the  three programs, we examined differences between the gross and net unit  prices paid by each program. We also interviewed DOD, Medicaid, and  Medicare Part D officials and reviewed literature describing factors that  affect drug prices. The results of our analyses are limited to the 78 high- utilization and high-expenditure drugs in our sample for the third calendar  quarter of 2010 and are not necessarily applicable across all drugs or any  other time periods.
We reviewed agency data for reasonableness and consistency, including  screening for outlier prices and examining possible reasons for  inconsistencies between the data sources. We also reviewed  documentation and talked to agency officials about steps they take to  ensure data reliability. We determined that the data were sufficiently  reliable for our purposes. We conducted this performance audit from May  2013 through June 2014 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.
See appendix I for additional details on our scope and methodology,  including the list of drugs in our sample.
subsections: section_title: Background
paragraphs: DOD, Medicaid, and Medicare Part D use different methods to pay for  prescription drugs dispensed in retail pharmacies based on program  design differences and statutory requirements. Specifically, DOD  reimburses retail pharmacies directly for drugs dispensed to its  beneficiaries, state Medicaid programs reimburse pharmacies and then  receive federal matching funds for a portion of these expenditures, and  Medicare Part D pays pharmacies indirectly through plan sponsors.  Under the Medicare Part D program, beneficiaries may choose from  competing prescription drug plans offered by plan sponsors (primarily  private health insurers), and those plan sponsors are responsible for  paying pharmacies. In addition, DOD and Medicaid are statutorily entitled  to certain refunds or rebates from drug manufacturers for drugs  dispensed to their beneficiaries, while Medicare Part D plan sponsors  negotiate with manufacturers for rebates and other price concessions.
In fiscal year 2011, DOD provided prescription drug coverage to about   9.7 million beneficiaries through retail pharmacies, its military treatment  facilities, and its mail order pharmacy. Active duty service members  (including activated National Guard and Reserve members) are not  charged for covered prescriptions. For all other beneficiaries, the  beneficiary-paid amount (i.e., the amount they pay to the pharmacy when  filling a prescription) varies based on the type of medication and where  the prescription is filled.
For certain drugs dispensed to beneficiaries at retail pharmacies after  January 28, 2008, DOD is statutorily entitled to pay the federal ceiling  price (FCP), which also pertains to its directly-purchased drugs. In  practice, DOD obtains these prices through post-purchase refunds paid  by the manufacturers of certain drugs—primarily brand-name drugs. In  fiscal year 2011, DOD’s prescription drug spending totaled about   $7.48 billion, according to DOD officials, representing about 8.9 percent  of federal spending for prescription drugs.
subsections: section_title: Medicaid
paragraphs: In fiscal year 2011, Medicaid provided prescription drug coverage to  about 71.5 million low income beneficiaries. Prescription drug coverage is  an optional benefit under federal Medicaid law that all states and the  District of Columbia provide. States establish and administer their own  Medicaid programs within broad federal guidelines. Thus, Medicaid  programs vary from state to state. Most states require a nominal  beneficiary copayment for prescription drugs.
State Medicaid programs reimburse retail pharmacies for drugs  dispensed to Medicaid beneficiaries and then report these payments to  CMS. The federal government provides matching funds to state programs  to cover a portion of these costs. Federal law requires manufacturers to  pay rebates to state Medicaid agencies for drugs dispensed to Medicaid  beneficiaries. These statutorily mandated rebates are calculated based  on two prices manufacturers must report to CMS—the average  manufacturer price (AMP) and the “best price.”
For brand-name drugs: the rebate equals the greater of 23.1 percent  of the AMP or the difference between the AMP and the best price. If  the AMP rises faster than inflation as measured by the change in the  consumer price index, the manufacturer is required to provide an  additional rebate to the state Medicaid program. The rebate is capped  at 100 percent of AMP.
For generic drugs: the rebate equals 13 percent of AMP. Best price  is not a factor and there are no additional rebates or caps.
In addition, most state Medicaid programs negotiate additional rebates— known as state supplemental rebates—from drug manufacturers. In fiscal  year 2011, total federal and state Medicaid net spending on prescription   The federal share was $8.6 billion, accounting  drugs was $13.7 billion.for about 10.3 percent of federal drug expenditures.
section_title: Medicare Part D
paragraphs: In 2011, about 33.2 million Medicare beneficiaries were enrolled in the  Medicare Part D program. Medicare beneficiaries can obtain coverage  for outpatient prescription drugs by choosing from multiple competing  plans offered by plan sponsors—primarily private health insurers—that  contract with CMS to offer the prescription drug benefit. The plan  sponsors are responsible for reimbursing retail pharmacies for drugs  dispensed to Medicare Part D beneficiaries. Drug plans may differ in the  premiums charged to CMS and beneficiaries; beneficiary deductibles and  copayments (i.e., beneficiary-paid amounts); the drugs covered;  pharmacies available to beneficiaries for filling prescriptions; and the drug  prices, rebates, and other price concessions negotiated with  manufacturers and pharmacies.
Although Medicare Part D plans can design their own formularies, CMS  generally requires that each formulary include at least two drugs within  each therapeutic class and has also designated six categories of clinical  concern for which plans must cover all or substantially all of the drugs.  As we previously reported, plan sponsors have indicated that these  formulary requirements limit their ability to negotiate lower prices for some  drugs. Medicare Part D beneficiaries fill prescriptions at retail or mail  order pharmacies affiliated with their plans; these pharmacies then submit  claims to the plan sponsors for reimbursement. Plan sponsors often  negotiate point-of-sale and post-purchase rebates and other price  concessions with manufacturers and pharmacies; these must be reported  to CMS each year at the national drug code (NDC) level in the DIR  reports. In 2011, federal spending on Medicare Part D totaled  approximately $55.2 billion, accounting for about 65.9 percent of total  federal drug expenditures.
section_title: Medicaid Paid Lower Net Prices Than DOD and Medicare Part D, Largely Due to Differences in Post- Purchase Price Adjustments
paragraphs: Medicaid paid a lower average net unit price—that is, the price after  subtracting any beneficiary-paid amounts and post-purchase price  adjustments—than DOD and Medicare Part D across the entire sample of  78 prescription drugs and the subsets of brand-name and generic drugs.  Specifically, Medicaid’s average net price for the entire sample was   $0.62 per unit, while Medicare Part D paid an estimated 32 percent more  ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). (See  fig. 1.) Similarly, Medicaid’s average net price for the subset of brand- name drugs in our sample was $1.57 per unit, the lowest among the three  programs, while DOD paid 34 percent more ($2.11 per unit), and  Medicare Part D paid an estimated 69 percent more ($2.65 per unit).  Medicaid also paid the lowest net price for the subset of generic drugs in  our sample ($0.28 per unit), while Medicare Part D paid 4 percent more  ($0.29 per unit) and DOD paid 50 percent more ($0.42 per unit).
When we examined the net prices that each program paid for the  individual drugs in the sample after subtracting all reported beneficiary- paid amounts and post-purchase price adjustments, we found that  Medicaid paid the lowest prices for 25 brand-name and 3 generic drugs,  while DOD paid the lowest net price for 5 brand-name and 22 generic  drugs, and Medicare Part D paid the lowest estimated net price for 3  brand-name and 20 generic drugs.
We found that multiple factors affected the net prices paid by each  program, including the amount of post-purchase price adjustments each  program received, the gross prices paid to pharmacies, the beneficiary- paid amounts, and market dynamics. Of these, a key factor for the entire  sample and for the brand-name subset was the amount of manufacturer  post-purchase price adjustments received. (See fig. 2.) On average  across the entire sample, these price adjustments ranged from about 15  percent of the gross price for Medicare Part D to about 31 percent for  DOD, and nearly 53 percent for Medicaid. For the brand-name subset of  the sample, these rebates ranged from about 19 percent of the gross  price for Medicare Part D to nearly 39 percent for DOD and 62 percent for  Medicaid.
The statutory framework allowing each program to obtain post-purchase  price adjustments contributes to the wide range of percentages observed.  Medicaid’s federally mandated rebates apply to virtually all drugs, while  DOD’s refunds only apply to certain drugs (i.e., primarily brand-name  drugs). Furthermore, we found that even when DOD received a refund for  a given drug, DOD’s per-unit refund amount was less than Medicaid’s  per-unit rebate for most of the drugs in our sample even though we  applied only the federally mandated (i.e., URA-based) rebates for the  calculation of Medicaid net prices. If we had been able to accurately apply  the Medicaid state supplemental rebates, the per-unit Medicaid rebate  amounts would be even larger (i.e., a greater percentage of the gross unit  price) than we report. Finally, we found that Medicare Part D obtained the  lowest per-unit price adjustments among the three programs. In contrast  to the statutory authority allowing DOD and Medicaid to collect specific  refunds and rebates, Medicare Part D plan sponsors rely on independent  negotiations to obtain price concessions from drug manufacturers. As we  have previously reported, plan sponsors have noted limitations on their  ability to negotiate price concessions for some drugs due to formulary  requirements set by CMS, lack of competitors for some drugs, or low  utilization for some drugs that limit incentives for manufacturers to provide  price concessions.
The gross unit prices paid to retail pharmacies by each program and the  magnitude of beneficiary-paid amounts also contributed to the differences  in net prices, although to a lesser degree than post-purchase price  adjustments. As shown in figure 2, each of the three programs paid the  lowest gross unit price to pharmacies for one of the groups of sample  drugs: Medicare Part D for the sample as a whole, DOD for the subset of  brand-name drugs, and Medicaid for the subset of generic drugs. These  different gross unit prices act as a “starting point” for determining net  prices paid by the programs—a lower gross price negotiated between the  program and the pharmacy makes it easier for the program to achieve a  lower net unit price after accounting for beneficiary-paid amounts and  post-purchase price adjustments.
Beneficiary-paid amounts also affected the net prices paid by each  program; larger beneficiary payments contributed to lower net prices paid  by the agency. The average beneficiary-paid amounts varied across the  three programs; for example, on average for all 78 drugs in our sample,  beneficiaries paid nearly 19 percent—or $0.23—of Medicare Part D’s  gross price per unit, while DOD beneficiaries paid about 7 percent—or  $0.12—of DOD’s average gross price per unit. Beneficiary-paid  amounts also varied depending on the category of drugs examined. For  the subset of brand-name drugs in our sample, beneficiary-paid amounts  ranged from 6 percent of the gross price for DOD to 17 percent for  Medicare Part D, while for the subset of generic drugs these amounts  ranged from 14 percent of the gross price for DOD to 21 percent for  Medicare Part D.
Market dynamics—such as manufacturer responses to offset discounts,  the number of competitors for a given drug, and varying utilization of  specific drugs by different programs—can also affect the net prices paid  by these and other drug programs and thus the amount of savings the  programs might be able to achieve. For example, the DOD, Medicaid, and  Medicare Part D drug programs theoretically could have achieved savings  had they been able to pay the lowest price for each of the drugs in our  sample through having access to the post-purchase price adjustments  available to the program with the lowest net price for each drug. However,  market dynamics, such as manufacturer responses, likely would offset at  least some of the savings. Previous reports by GAO and the  Congressional Budget Office have noted that making rebates or other  discounts available to federal programs could provide savings for the  newly eligible programs but could result in higher prices for other  programs—including those already eligible for the discounts—as drug  manufacturers respond by raising their prices to offset the change.
The magnitude of these potential offsetting price increases could depend  on a number of factors. For example, if a large federal program with many  beneficiaries became eligible for the discounts, manufacturers might  choose to raise prices by a greater amount than they would if a smaller  program with fewer beneficiaries became eligible. Manufacturers might  choose to raise prices more for drugs with fewer competitors than for  drugs with many competitors. Furthermore, because federal prices are  generally based on prices paid by nonfederal purchasers such as private  health insurers, manufacturers would have to raise prices to those  purchasers in order to raise the federal prices. The magnitude of these  potential effects would vary by drug and would depend on a number of  factors, including the relationship between the specific federal price  extended to newly eligible programs and the price paid by nonfederal  purchasers.
Other factors that may affect the magnitude of savings, if any, which  could be achieved by DOD, Medicaid, and Medicare Part D include  differences between the programs with regard to: programs’ formulary practices—for example, in exchange for price  concessions, a program may offer a reduced copayment or preferred  placement of a manufacturer’s drug in the formulary to encourage  beneficiaries to choose that drug rather than a similar alternative. In  addition, programs may differ in their ability to exclude certain drugs  from their formularies, which can limit their ability to negotiate; for  example, DOD officials told us that they must cover all drugs within a  class. number of beneficiaries enrolled—that is, a program or plan with  more beneficiaries can generally negotiate lower gross prices with  pharmacies and more rebates from manufacturers through offering  greater anticipated utilization of drugs than a program with fewer  beneficiaries. utilization practices based on differences in beneficiary  populations—for example, Medicare Part D’s predominantly elderly  population is likely to use a different mix of drugs than a program such  as Medicaid, which serves a younger population, and these utilization  differences can affect each program’s ability to obtain discounts on  certain drugs based on volume. copayment structure—for example, one program may achieve lower  net prices on certain drugs by charging beneficiaries a higher  copayment for the drug.  type of pharmacy—for example, the Medicare Part D net prices we  are reporting include data from prescriptions filled at mail order  pharmacies used by the plans, which typically charge the plans less  overhead than retail store-based pharmacies, while DOD prices are  limited to prescriptions filled at store-based pharmacies; if the mail  order prescriptions were excluded, the average Medicare Part D  prices would likely be higher than those we report.
section_title: Agency Comments
paragraphs: We provided a copy of the draft report to DOD and the Department of  Health and Human Services (HHS) for comment. DOD stated that it had  no comments. HHS provided a technical comment, which was  incorporated.
We will send copies of this report to relevant congressional committees  and other interested members. The report also will be available at no  charge on the GAO Web site at http://www.gao.gov.
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 Public Affairs may be found on  the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: In this appendix we describe our data sources, the selection of the drug  sample, and calculations of gross and net unit prices paid by the  Department of Defense (DOD), Medicaid, and Medicare Part D for  prescription drugs dispensed to their beneficiaries at retail pharmacies.
subsections: section_title: Data Sources
paragraphs: We obtained prescription drug claims data from DOD and the Centers for  Medicare & Medicaid Services (CMS) for the third calendar quarter of  2010. Specifically, we obtained Pharmacy Data Transaction Service  (PDTS) data from DOD covering prescription drugs dispensed to its  beneficiaries by non-DOD retail pharmacies and we obtained Medicaid  Analytic eXtract (MAX) data and Medicare Part D Prescription Drug Event  (PDE) claims data from CMS. For each data source, we excluded claims  with third-party payments; we also excluded physician-administered  outpatient prescription drugs and items that are not traditionally  considered drugs such as bandages, syringes, needles, diabetes test   For Medicaid, we excluded Arizona and Delaware  strips, and saline.because claims from those states did not include third-party payment  data. We included only fee-for-service Medicaid claims because claims  paid under a capitated managed care plan or similar methods would not  provide an accurate picture of drug prices actually paid. We also  excluded Medicaid claims for beneficiaries who were also eligible for  Medicare because retail prescription drugs for those beneficiaries are  covered by Medicare Part D. We excluded Medicare Part D claims from  plans that restrict enrollment, such as employer plans, Program of All- Inclusive Care for the Elderly (PACE) plans, and demonstration plans. We  used Red Book data from Truven Health Analytics to determine the  brand-name or generic status of each drug.
We reviewed agency data for reasonableness and consistency, including  screening for outlier prices and examining possible reasons for  inconsistencies between the data sources. We also reviewed  documentation and talked to agency officials about steps they take to  ensure data reliability. We determined that the data were sufficiently  reliable for our purposes.
section_title: Selection of the Drug Sample
paragraphs: We determined utilization using units of each (for drugs measured in  discrete units such as tablets, capsules, vials, or kits), milliliters (for drugs  measured in liquid volume), and grams (for drugs measured by weight).  When calculating expenditures, we used the sum of the programs’  payments for each drug plus any reported beneficiary-paid amounts   (e.g., deductibles and copayments). Cleaned and validated Medicaid data  for 2010 were not available at the time that we selected our sample.  Therefore, we used only DOD and Medicare Part D data to select our  sample. However, such data became available later and we were able to  use these data to determine Medicaid gross and net unit prices. To select  the highest utilization and highest expenditure drugs for the sample,   we aggregated the utilization and expenditure data at the drug level   (i.e., drug name, strength, and dosage form) separately for DOD and  Medicare Part D. For example, all national drug codes (NDC)  corresponding to 10 mg tablets of Lipitor reimbursed by DOD on behalf of  its beneficiaries were aggregated and the associated utilization and  expenditures were summed and compared to other brand-name drugs,  while NDCs corresponding to 10 mg tablets of atorvastatin (the generic  equivalent of Lipitor) reimbursed by DOD were aggregated separately  and compared to other generic drugs.
Because we encountered difficulty in identifying and removing outliers  from the Medicare Part D PDE data due to issues with the reliability of the  “Quantity Dispensed” field, we narrowed the drugs considered for  inclusion in the sample by first using DOD utilization and expenditure data  to rank the top 150 brand-name and top 150 generic drugs in each  category (high utilization and high expenditure). We were then able to  clean the data by identifying and removing outliers from the much smaller  subset of PDE claims corresponding to these drugs. We ranked the  brand-name and generic drugs based on utilization and expenditures for  Medicare Part D. We then combined the DOD and Medicare Part D  rankings to determine the top brand-name and generic drugs that were  reimbursed by both agencies.
The drug sample was selected to include the top 50 brand-name and top  50 generic drugs; 25 of the brand-name drugs and 25 of the generic  drugs were selected on the basis of the combined DOD and Medicare  Part D utilization ranks, and the other 25 brand-name and 25 generic  drugs were selected on the basis of the combined DOD and Medicare  Part D expenditure ranks. After accounting for drugs that were in both the  high-expenditure group and the high-utilization group, the final sample  contained 33 brand-name drugs and 45 generic drugs and accounted for  at least 25 percent of utilization and 25 percent of expenditures for both  DOD and Medicare Part D retail prescriptions filled by beneficiaries in the  third calendar quarter of 2010 (see table 1). (See table 2 for a list of the  drugs in the sample.)
section_title: Calculation of Gross Unit Prices
paragraphs: After selecting the sample, we calculated gross unit prices paid to  pharmacies by DOD, Medicaid, Medicare Part D, and their beneficiaries  for all individual drugs. We calculated gross unit prices by first adding the  program-paid and beneficiary-paid amounts for each drug, then dividing  these expenditures by total utilization. For Medicaid, we were unable to  include beneficiary-paid amounts because CMS does not collect these  data. Therefore the Medicaid gross prices we report are somewhat lower  than the actual gross prices would have been had beneficiary-paid  amounts been included. However, beneficiary-paid amounts for Medicaid  are generally nominal and it is likely that they would be smaller than  corresponding amounts for DOD and Medicare Part D. We also  calculated gross unit prices for the entire sample, the subset of brand- name drugs, and the subset of generic drugs by dividing the total  expenditures for all relevant drugs by the total utilization for those drugs.
section_title: Calculation of Program- Paid Net Unit Prices
paragraphs: All three programs (DOD, Medicaid, and Medicare Part D) obtain refunds,  rebates, or other price concessions from drug manufacturers for at least  some drugs dispensed to their beneficiaries by retail pharmacies. In order  to more accurately calculate reimbursement prices paid to pharmacies by  each program, we accounted for these post-purchase price adjustments  by calculating program-paid net unit prices. To calculate these prices for  DOD, we obtained post-purchase refund data from DOD for prescription  drugs dispensed to its beneficiaries at non-DOD retail pharmacies.These refunds were subtracted from the NDC-level gross unit prices to  determine net unit prices paid by DOD for each NDC. We then  aggregated these net NDC-level prices as appropriate to determine  average net unit prices for each individual drug in our sample, for the  entire sample, for the subset of brand-name drugs, and for the subset of  generic drugs.
Manufacturers are required to provide rebates (which are calculated on the basis of URA  data) to state Medicaid agencies for covered drugs. See 42 U.S.C. § 1396r-8. States may  also negotiate supplemental rebates directly with manufacturers for drugs dispensed to  Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a  standardized quarterly expenditure report that states submit to CMS documenting  payments and rebates or offsets in various medical categories, including prescription  drugs, to obtain federal matching funds to which states are entitled. each individual drug in our sample, for the entire sample, for the subset of  brand-name drugs, and for the subset of generic drugs.
For Medicare Part D, plan sponsors may negotiate rebates and other  price concessions from manufacturers for drugs dispensed to their  beneficiaries. Beginning in 2010, the annual total of all such price  concessions at the NDC level must be reported to CMS on the annual  Medicare Part D Direct and Indirect Remuneration (DIR) Detailed  Report. However, because plan sponsors have several options for  allocating DIR to the NDC level, calculation of the net drug price using the  NDC-level DIR data provides only an estimate of the net prices paid by  plan sponsors. We also evaluated the impact of point-of-sale (POS)  rebates as reported in the PDE data to our calculation of net prices for  Medicare Part D and determined that POS rebates were insignificant in  comparison to DIR amounts; we therefore ignored POS rebates in our  calculation of net prices.
To estimate program-paid net prices for Medicare Part D, we obtained the  2010 DIR Detailed Report from CMS. To calculate the total DIR for each  NDC, we added the “rebate” and “all_other_dir” variables. Because the  DIR report includes annual—rather than quarterly—data on price  concessions, we estimated the proportion of Medicare Part D price  concessions applicable to our sample by determining the proportion of  2010 expenditures that occurred in the third calendar quarter for each  NDC in our sample. We multiplied this result by the total amount of price  concessions reported in the 2010 DIR Detailed Report for a given NDC to  estimate the proportion of each NDC’s DIR (in dollars) to apply to our  analysis. We divided this result by the NDC-level utilization and  subtracted the resulting per-unit price concession amount from the  Medicare Part D gross unit price for that NDC. We then aggregated the  results for the appropriate NDCs to determine average net unit prices for  the entire sample, the subset of brand-name drugs, and the subset of  generic drugs.
We interviewed DOD and CMS officials and reviewed literature describing  factors that affect drug prices. The results of our analyses are limited to  the 78 high-utilization and high-expenditure drugs in our sample for the  third calendar quarter of 2010 and are not necessarily applicable across  all drugs or any other time periods.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard;  Laurie Pachter; and Carmen Rivera-Lowitt.