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Cage the "Clawback," Governors Urge

March 8, 2005—A mechanism within the 2003 Medicare overhaul law that aims to ease the cost burden on states for providing drug coverage to people enrolled simultaneously in Medicare and Medicaid follows a flawed formula that undermines its purpose, according to the National Governors Association.

Under the "clawback" mechanism, Medicare picks up the costs of drug coverage for those "dually eligible" for both Medicare and Medicaid, but states repay 90 percent of those costs next year through clawback payments. Since states now pay 100 percent of those costs, they save 10 percent compared to current spending.

Eventually, state clawback payments drop to 75 percent of the costs of drug coverage for the dual eligibles. But NGA says that flaws in the formula for calculating clawback payments undermine congressional intent to save states money.

In a resolution adopted at its just-concluded winter meeting, the NGA urges regulatory and legislative changes "to ensure that the congressional intent of the program is realized and all states gain some form of relief."

A California Medicaid official said last week that his state will pay $200 million more in 2006 because of flaws in the clawback mechanism (CQ HealthBeat, March 4, 2005).

The formula calculates a per capita rate of prescription drug spending per dual eligible, then requires the state to pay 90 percent of that amount to the federal government. The per capita rate is based on spending levels on dual-eligible drug costs in 2003. The higher that 2003 baseline, the higher the clawback payment.

Governors complain that the 2003 baseline doesn't fully subtract rebates obtained that year by state Medicaid programs. They add that clawback payments will get inflated every year under the formula by a "national growth average" exceeding spending growth in many state programs.

The NGA resolution adds that "many states are concerned that the [Medicare prescription drug plans] will not be as effective as the states were in negotiating drug prices, therefore establishing a national growth average that is too high at the outset."

"Because states never stop paying less than 75 percent of a baseline number that is too high to begin with, many feel that they will never be held harmless from the negative impacts of the clawback," the resolution adds.

The NGA also said state spending on duals may rise higher than it would have without the Medicare drug benefit (PL 108-173) for another reason. Outreach efforts to sign up people for the benefit likely will add to the number of people dually enrolled in both Medicaid and Medicare. That's because many people eligible for Medicaid are not now enrolled in the program.

"Because of the woodwork effect, the number of dual eligibles may increase substantially, resulting in a clawback payment for states that is higher than states would have spent on pharmacy absent" the drug benefit, the governors say.

How to fix the problem? NGA asserts that states have substantially lowered drug spending since the 2003 base year through a variety of cost control tactics. "A clawback estimate based on a more recent base year would more appropriately estimate the costs the state would have spent on this population absent" the Medicare law, the resolution concludes.

Centers for Medicare and Medicaid Services Administrator Mark B. McClellan said last week that every state will save money in 2006 on drug spending on dual eligibles. States that doubt such savings should bring their data to the agency for review, he said.

Under the regulations establishing the drug benefit, states will save $8 billion over 10 years, he said. Those savings reflect the decline of the clawback payment to 75 percent of Medicare's tab, and the fact that Medicare will pick up coverage costs for retired state employees, he added.

A CMS spokesman added Tuesday that the agency wants "states to get all the savings they are entitled to have." But if states want to change the baseline year, "they have to go to Congress for that," he said. The spokesman added that "new data show the woodwork effect is not going to be as great as we thought. We think states all will come out ahead."

Regarding how rebates are counted, the spokesman suggested that CMS has no choice under the Medicare law but to exclude rebates paid in 2004 from 2003 purchases. But by the same token, the agency does include 2002 rebates counted in 2003, he said.

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