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 New Jersey Department of Human Services," (A-06-95-00070)

December 6, 1996

Complete Text of Report is available in PDF format (844 kb). 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. New Jersey was one of the sample States selected, as well as California, Delaware, District of Columbia, Florida, Maryland, Missouri, Montana, Nebraska, 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 New Jersey, we obtained pricing information from 14 pharmacies. Specifically, we obtained 462 invoice prices for brand name drugs, and 192 invoice prices for generic drugs. For New Jersey, the overall estimate of the extent that invoice prices were discounted below AWP was 19.8 percent for brand name drugs and 39.9 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 New Jersey estimates do not include any rural categories. None of the estimates include the results obtained from non-traditional pharmacies.

We are recommending that the New Jersey Department of Human Services (State Agency) 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 State Agency responded to our draft report in a letter dated, October 30, 1996. The Commissioner stated that the State Agency had lowered Medicaid drug reimbursement from AWP less 2 to 8 percent, based on a pharmacy's prescription volume, to a flat AWP less 10 percent for all pharmacies. The Commissioner indicated that results of our review provided support for their decision to change reimbursement methodology.