Medicare Drug Plan a Headache for States

As legislatures draw up next year's budgets, worries are building that states will have to send more money than expected to Washington to help launch the first-ever federal prescription drug program for seniors.

States hoped they were getting a good deal when Congress OK'd the first-ever Medicare drug benefit. As part of that 2003 law, Washington agreed to pick up most of the tab for prescriptions for some 7 million poor seniors whose drugs already were covered by states.

But as states hammer out fiscal 2006 budgets that begin July 1, they have no way of knowing exactly how much money the new federal Medicare prescription drug benefit that begins January 2006 will save - or cost - them.

The prescription drug law "introduces substantial uncertainty into both federal and state budgeting," according to Vic Miller, senior fellow at the Federal Funds Information for States (FFIS), a joint subscription service for the National Conference of State Legislatures and the National Governors Association that tracks budget issues affecting states. 

What is a "clawback"?

It's not something you dig for at the beach, and it's not a sports team. Originating in Washington, D.C., a "clawback" is lingo for a certain kind of payment states will start making to the feds in 2006.

The clawback is part of the new federal Medicare prescription drug law. The law claws back the savings that states otherwise would reap because they won't have to spend state Medicaid dollars for seniors' prescriptions anymore, and requires states to hand the savings over to the federal government.

"The clawback provision is the first of its kind. States are actually going to pay the federal government," said Maryland state Del. John Hurson (D), president of the National Conference of State Legislatures.

The estimated price tag of the entire Medicare prescription plan continues to soar. Just this month, the federal government's official estimate went up again, climbing to $849 billion over 10 years. That amount is more than double the $400 billion estimate given to Congress before the measure became law.

When the Medicare drug bill was passed, Congress wanted to make sure states didn't reap a financial windfall when they stopped paying the drug bills of their poor elderly . So the new prescription drug law provides that instead of states picking up 100 percent of the bill for "dual eligibles," they will pay for 90 percent in the first year, declining to 75 percent over 10 years.

So starting in January 2006, each state will have to send a monthly payment to Washington that amounts to a portion of what the state would have spent on prescriptions for poor seniors if the Medicare drug law hadn't been enacted. In 2006 alone, states will have to fork over nearly $6 billion in payments to Uncle Sam, according to the Kaiser Commission on Medicaid and the Uninsured .

In jargon that makes little sense to people outside the Beltway, the payments are commonly known as the "clawback." The idea was to claw back the savings that states would reap because they wouldn't have to spend Medicaid dollars for seniors' prescriptions and funnel the money back to the federal government.

Andy Schneider, a consultant with Medicaid Policy LLC, said the payments "will constitute the largest single flow of funds from states to the federal government from 2006 forward."

The Bush administration figures that, even with the clawback payments, states will save nearly $8 billion in the first five years of the Medicare drug program's implementation.

Most states balk at the notion that they will save money. For starters, they argue that the federal government is using outdated information to calculate the "clawback" payment. California Medicaid official Stan Rosen figures his state will end up paying $215 million more because the clawback formula doesn't give the state credit for using preferred drug lists, rebates and other tactics that have cut state drug spending.

States expect other headaches - and costs - from the Medicare drug law. States are responsible, for example, for enrolling poor seniors into one of the new Medicare drug plans and for figuring out which poor seniors are eligible for a new subsidy. Both will take time and money.

Governors, when gathered in Washington earlier this month, called on Congress and the Bush administration to enact "legislative fixes" to the Medicare prescription law so that states don't lose money. Thus far, the interest on Capitol Hill has been to cut the federal funds states get for Medicaid, not to return to the Medicare drug law.

States also worry that dual eligibles may face problems getting medications they currently receive on Medicaid when they move to the new Medicare drug plan. Suppose a nursing home resident, for example, signs up for a Medicare drug plan that does not include the pharmacy that serves the nursing home.

States worry they - not the federal government - will get the blame.

We have tens of thousands of people on Medicaid, in nursing homes, who will call their state legislators. It will be Medicaid that will be blamed," according to one Medicaid director who participated in a "focus group" on the Medicare drug law last fall organized by the Kaiser Commission on Medicaid and the Uninsured and Health Management Associates. Kaiser released a 22-page report on the meeting that included Medicaid officials from California, Indiana, Iowa, Kansas, Missouri, New Jersey, New York, Ohio, Oklahoma, Utah, Washington, and West Virginia. The report declined to identify by name the officials on hand.

Most state Medicaid directors are deeply concerned about the impact the new Medicare drug plan will have, while most state legislators only now are starting to focus on it, said Jocelyn Guyer, an associate director at the Kaiser Commission. "We haven't felt the whole effect yet," she said.