Trying not to be evasive, so I'll just say this is a government welfare program - the specifics of why are not relevant, but we are required to control our costs in an environment where we are not directly negotiating each purchase with each vendor. All that is to say, the method described above is not what is at question - this is what is happening and it isn't going to change. It is an approved method by our over-sight, and is used in many other states.
A in the process above is a simple average Total Dollars Paid / Total items purchased - sure we do some categorization, and there are complexities to it, but once everything is categorized appropriately nobody is questioning how we compute A.
What we are being asked to review and justify as "reasonable" is our choice for the value of X - the percentage applied to determine a maximum allowed price. As mentioned, we can explain in words how we arrived at this particular value for X, but we're now being asked to demonstrate that X is appropriate. To date, we've provided the qualitative analysis, but it would help us to establish an objective criteria.
Basically if we can come up with another method to look at our data which will say "cost containment haircut should be between Y and Z. X results in a reasonably sized haircut based on being in this range", it would simplify our lives a lot. I just don't know of a valid technique for coming up with that "valid range", because we're not being told anything other than "X must be reasonable".