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Medicare to Use New Wholesale Drug Prices, Says Shalala

Cheryl A. Thompson

The Department of Health and Human Services (HHS) plans to reduce Medicare’s expenses by relying on a new wholesale drug-pricing plan proposed by Medicaid, Secretary Donna E. Shalala informed the House committee investigating drug prices.

In her letter last week to House Commerce Committee Chairman Tom Bliley (R-Va.), Shalala said that HHS will "take advantage of the newly available, more accurate data on average wholesale prices developed for Medicaid as a result of Department of Justice investigations."

Both Medicaid, which pays for health care for the nation’s needy, and Medicare, which provides health insurance for the elderly, use published average wholesale prices (AWPs) in setting payment rates for outpatient drugs.

Through the investigations, wrote Shalala, the Justice Department and state Medicaid fraud control units uncovered data about the wholesale prices for about 50 drugs. Those products account for about one third of Medicare’s drug expenses.

The Justice Department forwarded the information to First DataBank Inc., the San Bruno, Calif.-based company that compiles the drug-pricing data used by state Medicaid programs to determine payment rates. [ASHP copublishes drug information products with First DataBank but does not contribute to the drug-pricing database.]

Shalala informed Bliley that HHS will provide Medicare carriers—the insurance companies contracted to pay claims for covered drugs—with the prices recently recalculated by First DataBank.

The carriers will use these new prices to determine average wholesale prices for the quarterly update of Medicare-allowed payments that goes into effect Oct. 1.

ASHP and five other national pharmacy organizations wrote state Medicaid directors May 25 asking them not to use the drug prices calculated specifically for Medicaid. The pharmacy groups offered to work with state Medicaid agencies to improve their programs and more explicitly recognize professional pharmacy services as separate from drug dispensing services. Lack of this recognition, coupled with lowered payments for drug dispensing, could reduce the ability of pharmacists to provide services beneficial to the health of Medicaid beneficiaries, the groups stated.

The Clinton administration’s original proposal for reining in expenses, according to Shalala, involved basing "Medicare’s payment for drugs on...actual acquisition costs, perhaps adjusted for a reasonable handling fee." That proposal may be revived, she noted.

Separately from HHS’s efforts, Bliley’s committee has been examining the prices Medicare pays for the relatively few outpatient drugs it covers.

Through inquiries to pharmaceutical companies, the Commerce Committee has learned that the AWP for certain Medicare-covered drugs does not really reflect an average of prices used at the wholesale level.

Further, as Bliley stated in letters dated May 4 to the heads of seven companies, "it appears that very few, if any, purchasers actually pay the AWP or any price close to it—except, of course, the Federal government."

Information obtained by the HHS Office of Inspector General (OIG), and subsequently mentioned in Bliley’s letters, show that the Medicare-allowed payments in fiscal year 1996 for five drugs varied substantially from their actual wholesale price (box).


Prices for Medicare-Covered Drugs, Fiscal Year 1996

Medicare-Covered Drug

Medicare-Allowed Amount ($)

Highest Available Wholesale Price ($)

Actual Wholesale Price ($)

Albuterol sulfate








Immune globulin




Leuprolide acetate








Source: Letters from Congressman Bliley, May 4, 2000. Dosage forms were not mentioned.

Bliley’s indignation extends beyond OIG’s finding that Medicare pays substantially more for the same drugs that the private sector buys—$447 million more in fiscal year 1996 alone.

The Commerce Committee has learned that some manufacturers maneuver to inflate an AWP, and thus the Medicare-allowed payment, as part of a marketing plan, Bliley told the company heads. By increasing the gap between a product’s AWP and the actual price paid by Medicare providers, a manufacturer can market its drug as a profitable treatment option.

But this maneuvering increases the amount Medicare beneficiaries must pay out of their pockets for covered drugs, since the AWP influences the copayment amount. Bliley indicated he intends to find out whether "senior citizens are being financially gouged for certain drugs."