Medicaid Cuts Could Target Drug Costs

The pharmaceutical industry could shoulder almost half of the $10 billion in anticipated cuts to Medicaid, if Congress heeds the advice of a panel charged with finding ways to rein in spending on the joint federal-state program.

The Republican-led Congress is trying to decide by Oct. 1 how to trim the $330 billion Medicaid program, whose rising costs are a growing budget burden for states as well as the federal government.

Among the top proposals under consideration is a plan from a commission led by U.S. Health and Human Services Secretary Mike Leavitt that would achieve $6.3 billion of $11 billion in proposed cuts by changing how Medicaid purchases medicine. Both moves are supported by the nation's governors.

Congressional Democrats, though, have seized on the catastrophe brought by Hurricane Katrina on low-income residents of New Orleans to argue that now is the wrong time to cut Medicaid, which provides health insurance to 53 million low-income and disabled Americans.

If Congress adopts the Medicaid Commission's plans for prescription drugs, it'll be zeroing in on the fasting increasing element of state Medicaid budgets but one that will shrink dramatically next year when new federally funded Medicare drug benefits kick in for low-income seniors.Other proposals from Leavitt's commission are drawing more fire on Capitol Hill, but they would save less money than reforming prescription drug reimbursements. Among the most contentious is a proposal to clamp down on elderly people who give away assets before applying to Medicaid. Another would allow states to charge some recipients higher co-payments for prescription drugs.

In the drug area, the Leavitt Commission borrowed ideas from the National Governors Association . A change in the pricing mechanism for Medicaid patients' drugs would save an estimated $4.3 billion over five years. Another $2 billion could be trimmed by extending drug rebates to states for Medicaid patients in managed-care plans.

The pharmaceutical industry warns that cutbacks in spending on medicine could make drugs scarce. Medicaid already gets some of the best prices around for the drugs it buys, an industry spokesman said.

"If they slash drug spending, that would have the effect of penalizing some of the sickest, most vulnerable patients," argued Jeff Trewhitt, a spokesman for the Pharmaceutical Research and Manufacturers of America .

Trewhitt, though, declined to comment on specific proposals before Congress drafts legislation.

To save $4.3 billion over five years, the commission recommends changing the base rate that states use when negotiating the price of medicines they buy for their Medicaid patients. The NGA also recommended the change.

A 1990 federal Medicaid law already requires pharmaceutical companies to sell their goods to states at a discount. But states haven't been privy to the drug makers' pricing figures. Instead, they've had to rely on average prices charged by drug wholesalers.

The nation's governors think they can cut a better deal - and save state taxpayers money - if they knew what the federal government knows about drug manufacturers prices. The governors want to begin using the average manufacturing prices as the starting point to negotiate what they'll pay.

Matt Salo, the director of the NGA's health and human services committee, compared the situation to buying a used car.

Salo said the wholesale price averages used by states now are unreliable, akin to the sticker price on a car. That means states are "in the dark" when negotiating prices, he said.

But manufacturers' average prices are more useful information. "It's more like the blue book price instead of the (sticker price)," Salo explained.

The National Association of Chain Drug Stores has raised several objections to the switch because lower Medicaid drug prices might squeeze the fees drug stores collect for filling prescriptions, which often depends on the price of the drug.

One of the other measures pushed by the NGA and recommended by the Leavitt commission is designed to keep drug costs down for Medicaid patients enrolled in managed care plans, primarily women and children.

Currently, those plans can't receive the drug rebates for Medicaid recipients that states can, even though the states eventually pick up the tab. Changing that could save $2 billion over five years, the commission reported.

The panel also picked up on an NGA proposal to allow states to charge Medicaid recipients different co-payments for their prescriptions, in order to encourage patients to choose cheaper drugs when they're available and appropriate. That would amount to another $2 billion.

Beyond prescription drugs, the Medicaid Commission predicted it could save $1.5 billion by recalculating the penalties it assesses on people who transfer their assets in the years before applying for government aid. The purpose is to trim nursing home expenses, which are a major component of Medicaid budgets. Half of all nursing home services are paid for by Medicaid.

Currently, a senior citizen who gives away money or other assets and then applies for Medicaid within three years will be penalized. That three years is called the "look-back period." The penalty depends on the size of the transfer and the estimated costs of his nursing home care.

So, if a senior citizen gives away $120,000 and nursing home care costs $60,000 a year, he would be barred from Medicaid for two years from the date of the transfer.

President Bush asked Congress to change that, and the Medicaid Commission seconded the idea. Under their plan, the same senior citizen wouldn't be eligible for Medicaid for two years after applying for help. The move is designed to encourage elderly people to pay for their own medical care.The governors also promoted a related provision that would stretch the look-back period from three years to five, a move that would save another $100 million during that span.

The senior citizens group AARP opposes both ideas.

"While some loopholes can be closed, those individuals who simply helped family members or contributed to charities or made other similar decisions with no intention of gaming the system should not later be denied care," wrote William D. Novelli, the group's chief executive officer, in a July letter to the Medicaid Commission.