Rx For a Headache

States are experiencing a lot of pain in switching seniors out of state programs and into the Medicare Part D drug plan.
by | October 2006

Nevada thought it had a good thing going: In addition to Medicaid, it had a simple, straightforward prescription drug plan for needy senior residents. Then came January 1--D-Day for the federal government's Medicare Part D prescription drug plan. Ever since then, the state has been overwhelmed by the complications that come from moving thousands of seniors out of state-run programs and into Part D. It's been like sending a bicycle repairman to fix a Hummer. Nevada employees have had to deal with a tangle of deductibles, premiums, benchmark formulas, data exchange problems, clawbacks, doughnut holes and excluded drugs.

It's been frustrating, and it may also be expensive. The state won't know for a while whether it saves or loses money in the transfer of so many beneficiaries from state-run programs to a federal benefit plan.

But Medicare Part D is more than a headache. It represents a new chapter in the fiscal relationship between the federal government and the states. For the first time since 1965, when the Medicaid and Medicare programs were created, states will have to ante up a large chunk of change for a Medicare benefit. Although they will no longer be covering prescription drugs for dual-eligibles--elderly and disabled residents who qualify for both Medicaid and Medicare (Medicare will do that now)--they are finding that when the feds giveth, they also taketh away, particularly when it comes to Medicaid.

The money states save by removing a large portion of prescription drug costs from their Medicaid budgets has to be remanded to the federal government. It's called a clawback--technically, the "phased- down state contribution"--and the formula the feds devised for figuring out how much the states have to give back is creating a considerable amount of angst. Meanwhile, as state program staffs scramble to get a handle on the transition, several have started crafting ways to ease the pain Part D is inflicting on the sickest of the dual-eligibles--the ones whose drug bills are high enough that they fall into a dead spot in federal coverage, a place known as the doughnut hole.


When the U.S. Congress and the Centers for Medicare & Medicaid Services first published the clawback formula two years ago, a survey of the states by the Kaiser Commission on Medicaid and the Uninsured found that 26 states predicted that Medicare Part D would raise their costs, 15 thought they might break even and nine expected to save money.

That was then. Now, states must begin making monthly payments to the federal government that are based roughly on what they would have been paying for Medicaid drug costs. Federal law dictates that states pay 90 percent of their estimated Medicaid drug savings toward Medicare Part D coverage. The percentage decreases over the next decade until it reaches 75 percent in 2015, and that's where it will stay.

The problem is that calculations for the clawback formula are based on Medicaid drug expenditures in 2003. The peculiar aspect of the formula is that states that have done nothing to control their drug costs since 2003 are better off with the formula than states that have taken action. In other words, if a state had been spending, say, $10 million per year on drugs for its dual-eligibles in 2003, it would now owe the feds $9 million in clawback payment. If the state cut its drug buy to $8 million by 2005, it would still owe the feds $9 million. "If you did a lot to control the costs, you're not in a good place," says Jude Walsh, special assistant to Governor John Balducci of Maine, a state that has been aggressive in taming its drug costs.

Missouri also sees itself coming out on the short end of the stick. In 2003, Missouri was just beginning to ramp up management tools to rein in drug costs. It was aggressively seeking rebates from drug companies and had created a preferred drug list. It also began targeting patients' medication to their medical conditions by doing internal reviews of diagnoses. A "step therapy" process was put in place, a program in which less expensive medication alternatives are tried first. If someone suffered from hyperacidity, for instance, they might be started on over-the-counter Zantac to see if that could resolve the problem before more expensive prescription medicines, such as the "purple pill," Nexium, were ordered.

The state hadn't fully achieved its cost-containment goals when the federal government was doing the numbers for the clawback formula. But despite success in managing costs in the past three years, the higher costs from 2003 are the base for calculating Missouri's payment to the federal government. "It is what it is regardless of what you do afterward," says George Oestreich, deputy director of Missouri's Division of Medical Services.

The clawback is not the only costly aspect of Part D for the states. So is a loss in purchasing power. When Medicare started covering Maine's dual-eligibles, for instance, the state's Medicaid drug buy was diminished by 40 percent. That affected the state's leverage in negotiations with pharmaceutical companies. While some states outsource these negotiations, Maine had been bargaining drug by drug with 59 manufacturers on more than 1,300 drugs and getting results: rebates of 32 percent on the cost of prescription drugs.

In an effort to preserve the price breaks it had won for its Medicaid program, the state has formed a drug-purchasing pool with Vermont and Iowa (with hopes that others will join). Maine expects to save $5 million in fiscal 2007 through pool rebates. Since the pool is run online, manufacturers can sign on and see what the potential market share is. They can group all the cholesterol-lowering drugs, for example, and see usage and cost and decide what it's worth to their company to strike a deal. Each of the three states has its own contracts and makes its own buying choices.


While states may cut some of their losses, many dual-eligibles still face fiscal hurdles with the changeover. While some very-low-income people may qualify for assistance from Medicare for payment of monthly premiums, co-pays and deductibles, many needy people are still in danger of not being able to pay for medications. Several states are stepping into the breach and instituting programs to catch some of the uncovered costs. For instance, in Missouri, the co-pays for prescription drugs for needy residents doubled under Medicare to $1 for generics and $3 for brand-name drugs. The state picks up the difference--half the costs--so seniors don't pay any increase.

Massachusetts, which had been fully covering prescription costs for some residents, changed its program so that it wraps around the federal benefit and fills in gaps, more particularly, the doughnut hole. That's the uncovered drug costs between the first $2,250 spent on drugs and $5,100 in expenditures. The patient has to pay for drugs in the $2,850 gap--unless a state such as Massachusetts opts to wrap a program around Part D and help cover the doughnut hole.

Nevada's wraparound offers needy recipients premium assistance. The state will pay up to $23.46 of the premium charged by the Part D plans. And that has added to administrative burdens. It requires a lot of tracking. "We have to make sure to pay the right plan for a person for the right amount in the right month," says Laurie Olson, program manager of Nevada Senior Rx and Disability Rx. And the program has to check that it isn't duplicating federal assistance for any recipients.

Another administrative headache for states stems from the freedom Part D allows: Enrollees are permitted to change Medicare Part D plans every month. People might do so if, for instance, they are put on an expensive drug not covered by their plan. Each plan has its own drug formulary--a list of approved and therefore covered drugs. Since members can change plans each month, that leaves the state scrambling to track effective dates of new Part D plans as well as the wraparound benefits.

It also means offering assistance to find the best plan. When Medicare Part D went into effect, the federal government randomly assigned many people to inexpensive plans that weren't necessarily the most beneficial for the recipient. Maine did an analysis and found that one in four plans covered less than 60 percent of the drugs members needed. The state ended up providing a help line to shepherd people through reassignment so that they would be in plans that cover 90 percent of the medications they need.


Little things also add up. States have to pay attention every day to who is missing out on their benefits. Every week in Maine, there are 1,800 to 2,000 people who don't have access to their Medicare Part D benefits for one reason or another. Perhaps the formulary of their plan doesn't cover a new drug they need, or they need prior approval for a certain drug. If there's a temporary gap in getting the necessary medicine, Medicare recipients in some states can turn to the state. It's been costing Maine between $70,000 and $100,000 per week to make sure that people get their necessary medications. The federal government has said it will not reimburse the state for all of this emergency coverage. Maine has received about $5.9 million of the $7.1 million it believes it is owed.

Nevada's state-run pharmaceutical assistance program had to contract with some 45 different Medicare Part D plans, and 8,000 members of the assistance program had to enroll in a plan. Many of those plans provided inexact invoices so that Nevada has had to spend a lot of time reconciling numbers.

States also complain about the data flow between them and the Centers for Medicare & Medicaid Services, which administers Part D for the federal government. Sometimes dual-eligibles change plans but are not recognized immediately as having done so because of a lag in the exchange of data, creating problems at the pharmaceutical counter. If some prescription is not covered, a process for retroactive coverage kicks in.

The ideal would be a real-time eligibility system, not a monthly one with arbitrary cutoff dates that leave people without coverage for days or weeks at a time. "It's fair to say there are significant costs the state has to deal with because the system is less than perfect," says Maine's Walsh.

Some states have few complaints. Massachusetts isn't certain how much the state will pay this year under the complicated clawback formula. But it feels like a winner in the conversion of dual-eligibles to Medicare Part D. "Part D is going to save Medicaid and the state as a whole," says Alison Kirchgasser, director of federal and national policy management for the state's Office of Medicaid.

The state also was providing drug coverage for its retired state employees. Under another section of the new law, states can get a federal subsidy that will reduce that cost or put their reitrees in a Part D plan. Given such options, the new law is, Kirchgasser says, "a net positive for the state."

In Nevada, though, the workload keeps expanding and the fiscal payoff is unclear. "It's been an incredibly difficult transition from the way we used to run the program," Olson says. "Everything is a monumental task."

Ellen Perlman
Ellen Perlman | Former columnist | mailbox@governing.com