Battle Looms Over Drug Payments

By: - December 2, 2005 12:00 am

More than half of the states expect to face higher costs in 2006 when the federal government begins paying prescription drug costs for 6.4 million elderly people whose pharmacy bills had been paid in part by the states. 

The new burden on states has prompted a legal challenge from Kentucky Attorney General Greg Stumbo (D). In October Stumbo announced that he was suing the federal government over demands that the state pay $7.5 million per month to help cover the cost of prescription drugs for these seniors, who qualify for both Medicaid and Medicare. The payments, which are part of the 2003 Medicare reform law, will be due from every state.


“It’s my job to protect taxpayers from unlawful demands on their money. Never before has the federal government made such a bold, and I believe unconstitutional, attack on Kentucky’s right to control the spending of its own money,” Stumbo said.


Other states are also thinking about suing, and New Hampshire and Texas, President George W. Bush’s home state, have said they will withhold payments under the program.


In the past, Medicare, the federal health care program for people 65 and older, has not covered the cost of outpatient prescription drugs, so Medicaid, the state-federal program that provides health care for the poor and disabled, has footed the bill for low-income seniors. On Jan. 1, 2006, Medicare will start picking up the tab for the 6.4 million so-called dual eligibles. States are required to reimburse the federal government for 90 percent of the state’s projected costs in 2006, according to a federal formula, declining to 75 percent by 2015.


States originally anticipated a windfall from the new Medicare prescription drug benefit, given that the federal government was to begin paying the tab. But Congress at the eleventh hour required the payments from states to drive down – or “clawback” – the program’s cost to the federal government. “What had been expected to bring relief to state budgets has instead turned out to be an unmanageable and uncontrollable cost to state budgets,” said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured , a nonpartisan health research group.


State officials are balking at the clawback payments, saying they set a bad precedent and mark the first time states have been called on to finance a federal program. The nation’s governors also complain that many states that in recent years have implemented policies designed to contain drug costs will be unfairly punished. The required reimbursements are based on costs in 2003, which state officials say was a high water mark for prescription drug costs in the states. Since then, states have implemented a number of initiatives – such as preferred drug lists – to reduce drug costs.


On balance, 26 states expect their payments to the federal government to cost them more in 2006 than they would have paid to provide drug coverage for their dual eligibles through the Medicaid program if the Medicare drug plan did not take effect, according to a recent survey from the Kaiser Commission on Medicaid and the Uninsured. Nine states expect to save money, and 15 project they will break even, according to the survey, which polled state Medicaid directors.


The survey doesn’t indicate how individual states would fare. But states such as Arkansas, Mississippi and West Virginia, where the federal government pays the largest share of the total cost of Medicaid, are more likely to save money or break even since the clawback payments are calculated in part based on a state’s portion of Medicaid drug spending. 
State officials also say the push to enroll seniors in the new Medicare prescription drug benefit will have the indirect consequence of swelling states’ Medicaid rolls; they say some low-income elderly people will discover while signing up for the Medicare drug benefit that they also qualify for Medicaid, creating new Medicaid beneficiaries who will likely seek costly long-term care and other medical services that states subsidize through Medicaid. Seniors began signing up for the prescription drug coverage Nov. 15.


Kentucky is the only state to formally announce plans to sue over the clawback payments. But Inside CMS , a trade publication that tracks the agency, reported Aug. 25 that officials from 20 states met with lawyers in Washington, D.C., to discuss mounting a legal challenge to the payments.


Assistant Kentucky Attorney General Jennifer Hans said the state’s lawsuit likely will be filed in early 2006 and will hinge largely on a claim that the payments violate the U.S. Constitution’s 10th Amendment, which aims to protect states from federal encroachment.
In June, Gov. Rick Perry (R) of Texas vetoed the portion of the state’s budget that would have provided $154 million in 2006 and $290 million in 2007 in clawback payments to the federal government on the basis that the payments unfairly penalized states such as Texas that have taken steps since 2003 to control drug costs.  Perry also sent a letter to all 49 other governors urging their assistance in ensuring all states are held harmless.


New Hampshire officials reportedly are waiting for a ruling on the constitutionality of the clawback payments before sending any of the $43 million lawmakers allocated for 2006 and 2007 to Washington. States’ first payments are due in February.


If a state fails to make its clawback payment, CMS can withhold that amount – plus interest – from the state’s Medicaid reimbursement.


In a set of recommendations to reform Medicaid released earlier this year, the National Governors Association called for Congress or the administration to revisit the clawback formula to “ensure that all states gain some form of relief” from the new prescription drug benefit.


Matt Salo, who handles health care issues for the NGA, said neither of the vastly different spending bills passed by the House and Senate in November would alter the clawback formula. An earlier version of the House bill would have made $100 million in grants available to states that could demonstrate they had actively reduced prescription drug costs, a provision Salo described as a “nod to states that had enacted cost-savings since 2003.”


In 2006 alone, states will have to fork over nearly $6 billion in payments to Washington, according to the Kaiser Commission on Medicaid and the Uninsured. The Bush administration claims that states as a whole will save nearly $8 billion in the first five years of the Medicare drug program’s implementation. 
The U.S. Centers for Medicare and Medicaid Services (CMS) on October 14 sent letters to state Medicaid directors outlining each state’s monthly clawback payment for the 2006 fiscal year. The agency will recalculate states’ monthly payments each year. 

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