Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of Pharmacy Acquisition Costs for Drugs Reimbursed Under the Medicaid Prescription Drug Program of the District of Columbia Department of Human Services," (A-06-95-00064)

January 31, 1997

Complete Text of Report is available in PDF format (918K). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


At the request of the Health Care Financing Administration (HCFA), the Office of Inspector General (OIG) conducted a nationwide review of pharmacy acquisition costs for drugs reimbursed under the Medicaid prescription drug program. Since most States reimburse pharmacies for Medicaid prescriptions using a formula which discounts the average wholesale price (AWP), the objective of our review was to develop an estimate of the discount below AWP at which pharmacies purchase brand name and generic drugs.

To accomplish our objective, we selected a random sample of 11 States from a universe of 48 States and the District of Columbia. Arizona was excluded from the universe of States because the Medicaid drug program is a demonstration project using prepaid capitation financing and Tennessee was excluded because of a waiver received to implement a statewide managed care program for Medicaid. The District of Columbia was one of the sample States selected, as well as California, Delaware, Florida, Maryland, Missouri, Montana, Nebraska, New Jersey, North Carolina, and Virginia.

Additionally, we selected a sample of Medicaid pharmacy providers from each State and obtained invoices of their drug purchases. The pharmacies were selected from each of five categories--rural-chain, rural-independent, urban-chain, urban-independent and non-traditional pharmacies (nursing home pharmacies, hospital pharmacies, etc.). We included the non-traditional category so as to be able to exclude those pharmacies from our overall estimates. We believed such pharmacies purchase drugs at substantially greater discounts than retail pharmacies, and including them would have inflated our percentages.

We compared each invoice drug price to AWP for that drug and calculated the percentage, if any, by which the invoice price was discounted below AWP. We then projected those differences to the universe of pharmacies in each category for each State and calculated an overall estimate for each State. Additionally, we projected the results from each State to estimate the nationwide difference between AWP and invoice price for each category.

In the District of Columbia, we obtained pricing information from 13 District of Columbia pharmacies. Specifically, we obtained 343 invoice prices for brand name drugs, and 156 invoice prices for generic drugs. For the District of Columbia, the overall estimate of the extent that invoice prices were discounted below AWP was 17.3 percent for brand name drugs and 43.8 percent for generic drugs. The national estimates are 18.3 percent and 42.5 percent, respectively. The national estimates combine the results for four categories of pharmacies including rural-chain, rural-independent, urban-chain and urban-independent. The District of Columbia estimates do not include any rural categories as the District has no rural areas. The estimates exclude the results obtained from non-traditional pharmacies.

We are recommending that the District of Columbia Department of Human Services (District) consider the results of this review as a factor in any future changes to pharmacy reimbursement for Medicaid drugs. We will share the information with HCFA from all 11 States in a consolidation report for their use in evaluating the overall Medicaid drug program.

The Commissioner of the District Commission of Health Care Financing responded to our draft report in a letter dated November 26, 1996. While the Commissioner had some concerns about the report, he stated that the District would consider the results of our review when contemplating future changes to the pharmacy reimbursement for Medicaid drugs. The complete text of the Commissioner's comments are included in Appendix 4.