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States' Medicaid Funds Tapped For Federal Health Overhaul

Apr 20, 2010

The new health care law could shift billions of dollars from cash-strapped states to the federal government by changing the way Medicaid prescription drug rebates are treated, according to state and industry officials and an examination of Medicaid spending data.

Democrats included a provision in the health law designed to raise $38 billion over 10 years by requiring greater discounts from drugmakers selling to Medicaid, the joint federal-state health insurance program for the poor. Previously, the rebates were divided between the states and the federal government. Under the law, a significant portion of the rebates will go solely to Washington beginning this year.

Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev., said the change was necessary to help pay for a $434 billion, 10-year increase in federal Medicaid funding. "Federalizing the rebate was a small piece compared to the many things we did to help states," she said in an e-mail.

In addition, for some states, the rebate losses may be offset by another part of the law. That provision would require drugmakers to provide discounts to states for drugs sold to Medicaid managed care plans hired by the states. Yet even with those new discounts, some states project that they will see overall losses in the rebate programs

California, for instance, stands to lose $50 million next year alone because of the changes, according to Toby Douglas, the state's deputy Medicaid director. Douglas said that estimate was "very preliminary." He expects firmer numbers after the federal government provides more details about the change, which could come as soon as Wednesday.

Anne Murphy, Indiana's secretary of the Family and Social Services Administration, circulated a memo predicting losses of $400 million over 10 years because the federal government plans to "confiscate" a portion of its rebates. A spokesperson added that the estimate is based on state officials' reading of the law and that they are awaiting guidance, too.

The new law will increase the minimum rebates that drug firms must offer Medicaid programs from 15.1 percent to 23.1 percent for most brand name medications. Minimum rebates would also be increased for other drugs, including generics.

Under the old policy, states sent Washington a proportion equal to the share of Medicaid funding the federal government paid. The law says that the federal government now will get 100 percent of the rebate funding "attributable" to the increase from 15.1 to 23.1 percent. (Any rebates above 23.1 percent will still be shared.)

Industry analysts have suggested that wording may give the agency overseeing Medicaid some leeway in how it administers the rebate change to soften the impact on states.

The federal Medicaid agency refused to discuss the effects the provision could have on states. But, a spokeswoman said the agency would release guidelines "very soon."

State officials worry that since states already were getting rebates well above the previously required 15 percent, the change will cost nearly all of them millions of dollars a year. Based on 2009 Medicaid data, states received average rebates of 38.5 percent.

Officials "are very unhappy that their money is being taken away at a time when the states cannot afford this," said Ann Kohler, the director of the National Association of State Medicaid Directors.

As of December, 44 states had exceeded Medicaid spending projections for the fiscal year that ends Sept. 30, according to a survey released in February by the Kaiser Family Foundation. And at least 29 states had either recently made reductions in benefits and physician pay to their programs or expected to do so soon. (KHN is a project of the Kaiser Family Foundation.)

All but three states, Arizona, Massachusetts and New Mexico, would stand to lose money, in many cases millions of dollars a year, because of the drug rebate changes, according to a state-by-state examination of 2009 Medicaid spending records by Kaiser Health News. The 47 other states and the District of Columbia had negotiated average rebates from drugmakers that are better than required and in many cases far surpass the 23.1 percent requirement. For example, Georgia's rebates average about 50 percent.

The analysis compared total rebates received by federal and state governments with total drug spending for each state's Medicaid program for 2009, according to data from the federal agency that oversees Medicaid.

Drugmakers did not return calls asking for comment, and state officials were reluctant to discuss rebates, which are protected by confidentiality agreements with the firms.

One caveat in trying to determine a state's losses is that each state negotiates rebates on a drug-by-drug basis and lower rebates apply to generics and other classes of drugs.

Some state lawmakers are already calling on federal officials to back away from the proposal. "Some things may need to be changed," said Sharon Treat, a Democratic Maine legislator. "For those of us that have been working hard to get health care passed, it would be a slap in the face if we lose money."

Maine could face particularly steep losses under the change because the state does not use managed care for any of its Medicaid enrollees and would not benefit from the provision offering discounts for managed care programs.

Forty-one states use managed care plans to cover about 70 percent of Medicaid enrollees nationwide. However, only 16 of them depend on the managed care programs to administer drug benefits, while others have opted to pay for many drugs directly to get rebates. Those 16 states would have the most to gain from the new managed care policy.

The provision might encourage additional states to use managed care plans for drug coverage. That could lead to a reduction in drug spending and is raising concerns among some pharmaceutical makers.

Arizona is one of the states that will see a major benefit. It runs the entire Medicaid program through managed care plans, so the state did not benefit in the past from the federally required rebates. Because of the change, the program will likely gain significant new funding.

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