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State Administrators Say Feds Adding to Their Medicaid Costs

March 4, 2005—A panel of state Medicaid administrators appearing at a congressional forum Friday said between the Medicare drug benefit and a Medicaid overhaul plan proposed by the Bush administration, states face higher costs associated with the publicly funded insurance for the poor. However, CMS Administrator Mark McClellan denied the Medicare drug benefit would add to state costs, saying it would save them billions of dollars.

California Medicaid official Stan Rosenstein said at the forum the Medicare overhaul law (PL 108-173) is supposed to save his state 10 percent in 2006 on prescription drug costs for Medicare beneficiaries now receiving Medicaid drug benefits.

But Rosenstein said California will actually pay $215 million more in prescription drug costs for the one million "dual eligibles" in his state next year even though the federal Medicare program will cover their prescription drugs.

That's not the way it's supposed to be under the Medicare drug law. States are supposed to save money when the feds begin picking up the tab for the drug costs of people on both Medicaid and Medicare. That's the case even though so-called "clawback" payments by the states limit those savings.

Under the clawback mechanism, states must pay the federal government back for 90 percent of the duals' drug costs in 2006. Since states pay 100 percent of those costs now, California should save 10 percent compared to current spending.

But Medicare will calculate clawback payments based on state outlays in 2003 for the duals' drug costs. The use of those outlays is causing controversy in some cases.

A number of states including California say they restrained drug outlays after 2003 with preferred drug lists, rebates, and other cost control tactics. But since the clawback payments are based on the higher 2003 spending levels, California's clawback payment in 2006 will actually be higher than its drug expenses for the duals this year, even including the 10 percent reduction, Rosenstein said.

Over time, state clawback payments are supposed to decline as a percentage of Medicare's prescription drug outlays for the duals. The proportion eventually declines to 75 percent. But a yearly inflation factor gets built back in to clawback payments, limiting the savings to states from the decline to 75 percent.

States that have cracked down on duals' drug costs since 2003 argue they shouldn't be subject to the clawback inflation factor, and rebates they received in 2004 from 2003 outlays should be factored back in to the 2003 baseline for clawback payments.

States also complain they are saddled with other uncompensated expenses from enrolling residents in the new Medicare drug benefit. Enrollment efforts will identify people who qualify for Medicaid and will be enrolled in that program, adding to state costs, officials say.

And state outreach efforts for the Medicare drug benefit will also boost enrollment in other state programs to help poor people pay Medicare premium costs, officials add.

McClellan asserted each and every state will save money on drug costs related to the duals under CMS estimates, including in 2006. If states have questions about their savings, they should contact CMS, he said. "We want the states to be coming to us with the numbers," he reiterated.

McClellan added states, notably California, will see big savings as well from Medicare picking up the drug costs of retired state employees. Overall the drug benefit will save states a total of $8 billion over 10 years, McClellan said. States also will get matching payments for added administrative costs incurred with enrolling people in the Part D drug benefit, he added.

But states say they still have to come up with their own portion of such expenses, despite the federal matching payments. And if the administration's Medicaid overhaul plan passes, federal payments to states for Medicaid administrative expenses will be capped, they add.

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