The Medicaid drug rebate program, the 340B drug pricing program, and the Medicare Part D program help pay for or reduce the costs of prescription drugs for eligible individuals and entities. Medicaid is the joint federal-state program that finances medical services for certain low-income adults and children. CMS, an agency of the Department of Health And Human Services (HHS), administers and oversees the program. While some benefits are federally required, outpatient prescription drug coverage is an optional benefit that all states have elected to offer. State Medicaid programs, though varying in design, cover both brand and generic drugs. Retail pharmacies distribute drugs to Medicaid beneficiaries, then receive reimbursements from states for the acquisition cost of the drug and a dispensing fee. In 2004, Medicaid outpatient prescription drug spending reached $31 billion, of which $19 billion was paid by the federal government. To help control Medicaid drug spending, federal law requires manufacturers to pay rebates to states as a condition for the federal contribution toward covered outpatient prescription drugs. Rebates manufacturers must pay states for brand drugs under the Medicaid drug rebate program are based on two prices that drug manufacturers must report to CMS: the average manufacturer price (AMP) (the average price paid to a manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade) and best price (the lowest price available from the manufacturer to any purchaser with certain exceptions). Both amounts are to reflect certain financial concessions that are available to drug purchasers. The statute governing the program and the standard rebate agreement that CMS signs with each manufacturer define AMP and best price and specify how these prices are to be used to determine the rebates due to states. CMS provides additional guidance to manufacturers regarding the calculation of these amounts. After manufacturers report the required price information to CMS, CMS uses it to calculate the rebate due for each unit of a brand drug and reports this to the states. The state Medicaid programs use the information to determine the amount of rebates to which they are entitled from the manufacturers based on the volume of drugs paid for by the programs. The 340B drug pricing program gives more than 12,000 eligible entities of various types—community health centers, disproportionate share hospitals, and AIDS Drug Assistance Programs (ADAP) among them— access to discounted drug prices, called 340B prices. To access these prices, entities must enroll in the program, which is administered by HRSA. Drug manufacturers must offer covered drugs to enrolled entities at or below 340B prices in order to have their drugs covered by Medicaid. Enrolled entities may generally purchase drugs in two ways. They may choose the direct purchase option to receive the 340B prices up front, or they may choose the rebate option, typically purchasing drugs through a vendor and later receiving a rebate from the manufacturer covering any amount they paid above the 340B prices. Enrolled entities spent an estimated $3.4 billion on drugs in 2003. To determine the 340B prices, HRSA uses a statutory formula that relies on AMP and Medicaid rebate data that it receives from CMS. Manufacturers separately calculate the 340B prices for their drugs using the statutory formula, and use these calculations as the basis for the prices they charge eligible entities. HRSA does not share the 340B prices with the eligible entities due to the statutory provisions regarding the confidentiality of information used to determine them. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a voluntary outpatient prescription drug benefit effective January 1, 2006, as Part D of the Medicare program. Under Part D, Medicare beneficiaries may choose a prescription drug plan (PDP) from multiple competing PDPs offered by private organizations, often private insurers, that sponsor the plans. PDP sponsors enter into contracts with CMS, the agency that administers Medicare. PDPs may differ in the drugs they cover, the pharmacies they use, and the prices they negotiate with drug manufacturers and pharmacies. PDP sponsors may use pharmacy benefit managers (PBM) to negotiate with drug manufacturers and retail pharmacies for the prices of the drugs that each PDP covers. PDP sponsors are required to report to CMS the price concessions they negotiate; these price concession include discounts, rebates, direct or indirect subsidies, and direct or indirect remunerations. We and others have reported inadequacies in CMS’s oversight of the price information reported by manufacturers under the Medicaid drug rebate program, including a lack of clarity in CMS’s guidance to the manufacturers for calculating prices. We reported in 2005 that CMS conducted only limited checks for errors in manufacturer-reported drug prices and that it did not generally review the methods and underlying assumptions that manufacturers use to determine AMP and best prices. We also noted in that report that OIG found that CMS did not provide clear program guidance for manufacturers to follow when determining those prices—for example, how to treat sales to certain health maintenance organizations (HMO) and PBMs. OIG stated that its review efforts were hampered by unclear CMS guidance on how manufacturers were to determine AMP, a lack of manufacturer documentation, or both. Our review also examined the pricing methodologies of several large drug manufacturers and found considerable variation in the methods they used to determine AMP and best price, and some of these differences could have affected the accuracy of these prices and thereby reduced or increased rebates to state Medicaid programs. OIG similarly identified problems with manufacturers’ price determination methods and their reported prices in four reports issued from 1992 to 2001. Recent litigation has highlighted the importance of the accuracy of prices manufacturers report to CMS and the rebates they pay to states. For example, two drug manufacturers agreed to pay about $88 million and $257 million, respectively, to states in 2003 to settle allegations that they failed to include in their best price determinations certain sales to an HMO. Another manufacturer agreed to pay $345 million to states in 2004 to settle several allegations, including that it did not account for drug discounts provided to two health care providers, resulting in an overstated best price for one of its top-selling drugs and reduced state rebates. CMS issued a proposed rule in December 2006 to, among other things, implement provisions of the Deficit Reduction Act of 2005 (DRA) related to prescription drugs under the Medicaid program. This rule is intended to provide more clarity to manufacturers in determining AMPs reported to CMS, by indicating which sales, discounts, rebates, and price concessions are to be included or excluded. For example, it specifies that sales to PBMs and mail-order pharmacies must be included in AMP. The proposed rule also specifies that best price must include sales to all purchasers, including HMOs, that are not explicitly excluded and specifies the prices that must be included or excluded from those sales. Recognizing the evolving marketplace for the sale of prescription drugs, the proposed rule states that CMS plans to issue future clarifications of AMP and best price in an expeditious manner. In its notice of proposed rulemaking, CMS also referred to the DRA requirement that CMS disclose AMP data to states and post these data on a public Web site. AMP data are currently not made public. The changes represented by this proposed rule would likely affect the prices that manufacturers report to the federal government. Only after these regulations are finalized and implemented will there be an opportunity to assess the extent to which they improve the accuracy of prices reported and rebates paid by manufacturers. We and others have reported inadequacies in HRSA’s oversight of the 340B drug pricing program, problems related to the lack of transparency in the 340B prices, and overpayments to drug manufacturers. OIG recently reported that some of the 340B prices that HRSA calculated were inaccurate and that HRSA did not systematically compare the 340B prices with those that were separately calculated by drug manufacturers for consistency. In addition, we recently reported that HRSA did not routinely compare 340B prices with prices paid by certain eligible entities. We and OIG both found that many entities reviewed paid prices for drugs that were higher than the 340B prices. OIG estimated that 14 percent of total drug purchases made by entities in June 2005 exceeded the 340B prices, resulting in $3.9 million in overpayments. We also found that the prices of the eligible entities using the rebate option reported to HRSA did not reflect all rebates they later received from manufacturers, and thus we could not determine whether these entities paid prices that were at or below the ceiling established by the 340B prices. Because the 340B prices are not disclosed to eligible entities, the entities cannot know how the prices they pay compare with the 340B prices. Finally, because 340B prices are based on AMP and Medicaid drug rebate data, inaccuracies in those amounts affect the 340B drug pricing program. Recent legal settlements related to drug manufacturers’ overstatement of best prices used in the Medicaid rebate program also led to settlements related to the 340B program. This was because overstated best prices could affect rebates and result in inaccurate 340B prices. HRSA has made changes to its oversight of the 340B drug pricing program that are intended to address some of the concerns we and OIG raised in our respective reports. For example, while manufacturers are not required to submit their calculated 340B prices to HRSA, the agency has requested that each manufacturer voluntarily submit its calculated 340B prices for comparison to the 340B prices calculated by HRSA. It has also indicated that it was planning to develop systems to allow eligible entities to check that the drug prices they are charged are appropriate while still maintaining the confidentiality of those prices. Because AMP is used to calculate 340B prices, the requirement under DRA that AMP become publicly available may enable HRSA to improve the transparency of these prices. However, the public reporting of AMP, which is only one element of the 340B price calculation, can only partially improve the transparency of 340B prices. The Medicare Part D program shares in common certain features with other federal programs that help pay for or reduce the cost of prescription drugs.