New York Times Examines Concerns From State Officials Over Payments for Medicare Prescription Drug Benefit

The New York Times on Friday examined how some state officials are concerned that the Medicare prescription drug benefit, which was intended to reduce states' prescription drug costs, might actually cause states to lose money because the monthly payments states must make to the federal government could exceed any savings (Pear, New York Times, 3/25).

Prescription drug coverage for dual eligibles -- people covered by both Medicaid and Medicare -- will shift from Medicaid to Medicare when the new drug benefit takes effect in 2006. Under the clawback provision, states in 2006 will be required to pay the federal government 90% of dual eligibles' prescription drug costs.

Since states previously paid all of those costs, the Bush administration said that states under the new benefit will save 10% on drug costs. However, officials from a number of states said savings will not be realized because their clawback payments will be based on state outlays from 2003.

Some state officials said they have reduced drug outlays since 2003 through cost-saving measures -- such as preferred drug lists, rebates and other tactics -- so the 90% payment based on 2003 outlays will not accurately reflect current spending levels. State officials also said that rebates received in 2004 for 2003 outlays should be factored into the 2003 baseline for clawback payments. Another concern for states is an inflation factor built into the clawback payment formula.

Over time, state clawback payments will decline to 75% of prescription drug costs for dual eligibles, but the inflation factor will limit savings. Officials have said states that have cut dual eligibles' drug costs since 2003 should not be subject to the clawback inflation factor.

California Medicaid official Stan Rosenstein has said the state will pay $215 million more in prescription drug costs in 2006 under the plan (California Healthline, 3/7).

Ohio Medicaid director Barbara Coulter Edwards estimated that the state will have to pay $340 million to the federal government in 2007, $55.7 million more than savings the state expects to receive under the benefit. Edwards said, "To come up with that money, we are having to take benefits away from other people. I don't think it was deliberate by Congress, but the consequences are painful for states and for our beneficiaries."

Iowa Department of Human Services Director Kevin Concannon said, "I'm thrilled for the people who will get drug coverage and low-income subsidies. But we do not anticipate any savings in the next five years. At the end of the day, we believe, the net effect of the law is that it will cost states more."

James Gardner, a former state senator in Oregon, said, "The practical effect [of the required federal payments] is to commandeer state legislatures as revenue-raising agents. That may not be constitutional under the doctrine of federalism, as recently articulated by the Supreme Court and lower federal courts."

According to the Times, some attorneys and state officials have questioned the legality of requiring the states to subsidize the federal payments. The Supreme Court previously has ruled that a federal law can be "unconstitutionally coercive" if it "commandeers the legislative processes of the states" and forces them to carry out a federal program.

Trudi Matthews, chief health policy analyst at the Council of State Governments, said, "This is a sea change in the state-federal relationship. Money generally flows down from Washington to the states, but in this case it's flowing upward, from the states to the federal government" (New York Times, 3/25).