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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Medicaid Pharmacy: Actual Acquisition Cost of Prescription Drug Products for Brand Name Drugs" (A-06-96-00030)

April 10, 1997

Complete Text of Report is available in PDF format (743 kb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This report provides the results of our audit on the consolidated results of our review of pharmacy acquisition costs for brand name drugs reimbursed under the Medicaid prescription drug program. The report is in response to a request from the Medicaid Bureau that the Office of Inspector General (OIG) perform an audit of the use of average wholesale price (AWP) as part of the Medicaid drug reimbursement policies. The request stated that it would be useful for the OIG to document the size of the difference between AWP and actual invoice prices paid by retail pharmacies to purchase drugs. Most States use AWP, minus a percentage discount which varies by State, as a basis for reimbursing pharmacies for drug prescriptions. Although this discount is most commonly about 10 percent nationally, it has been recognized as not being a sufficient discount to ensure that the reasonable price is paid for drugs. Therefore, the objective of our review was to develop an estimate of the discount below AWP at which pharmacies purchase brand name drugs. Estimates were also developed for the discount below AWP at which pharmacies purchase generic drugs and those results will be summarized in a separate report.

Through use of statistical sampling, we obtained pricing information from 315 pharmacies in 11 States and obtained 18,973 invoice prices for brand name drug products. We estimated that actual acquisition cost was a national average of 18.3 percent below AWP. This estimate combined the results for four categories of pharmacies including rural-chain, rural-independent, urban-chain, and urban-independent and excluded the results obtained from non-traditional pharmacies. Using the results of our review, we calculate that as much as $225 million could have been saved for 100 drugs with the greatest amount of Medicaid reimbursements in Calendar Year 1994, if reimbursement had been based on the findings of this report.

We are recommending that the Health Care Financing Administration (HCFA) work to ensure that States reimburse the ingredient portion of Medicaid drugs in a manner more consistent with the findings of this report. Additionally, we are recommending that HCFA study any of the other factors (for example dispensing fees) which they believe could significantly impact pharmacy reimbursement. We remain available to assist HCFA in conducting other studies that will aid in the implementation of these recommendations. The HCFA Administrator responded to our draft report in a memorandum dated March 18, 1997. In that memorandum, HCFA agreed with the findings and recommendations of this report.