What's the benefit? A new federal Medicare drug plan stimulates independent actions and new ideas, but what's the future role for states?

When the federal Medicare Prescription Drug Act was signed last December, it was hailed as a major landmark for health care--millions of people finally would get crucial help in paying for their medicines.

Along with the public and government cheers at its passage, however, came a chorus of questions and complaints, mostly from those who worked for different versions of a federal plan. In the states the view is quite different. State lawmakers are hoping Congress will add some money for the federal plan, but in the meantime they are busy piloting new features and ideas based on local needs and resources. Numerous existing state programs are already serving many seniors, while programs to save drug costs address issues not covered by Congress.

So what are the realities, myths, questions and the interestingly large number of choices that remain?

Surprisingly, in the same six-week period that the federal law was passed, several states launched their own major drug programs.

Ohio started the Best Rx discount program. Illinois seniors began using their state Rx discount cards. Maine inaugurated MaineRx+. More than a million seniors in Arizona received the CoppeRx discount card free of charge.

If Congress has mostly resolved prescription drug coverage, why are there so many other state-based initiatives?

A BUSY SIX MONTHS

Half a year after its passage, the federal Medicare Act is big news for the states, both for residents and for policymakers.

Briefly, the act's key features are:

* This year, most people enrolled in Medicare can apply to get a discount drug card, giving them immediate discounts of 10 percent or more below retail prices. Low-income people without private coverage or on Medicaid may receive $600 annually toward the purchase of their prescriptions in 2004 and 2005.

* In two years, Medicare's optional prescription drug benefit (Part D) will replace the cards. Part D will pay for a portion of pharmaceutical purchases for people covered by Medicare who choose the optional coverage.

Virtually all 50 states already have taken some action in response to the law. Some agencies view it as a vital opportunity and have launched outreach efforts to ensure participation. Others are designing far-reaching plans that will unfold over a two-year period. This year, the National Conference of State Legislatures tallied at least 50 bills in 24 states explicitly aimed at adjusting state pharmaceutical benefits in coordination with the new federal law.

"The new Medicare law exemplifies the tensions between efforts to lower prices through competition and to preserve profit incentives for the drug industry. No drug plan can minimize price without restricting choice," says Maine Representative Peter Mills. "This tension divides people at each end of the political spectrum."

DISCOUNT DRUG CARDS

For now, the most tangible parts of the federal law are the discount cards, which became effective in June. Thirty-one states already operate or have authorized some type of pharmacy assistance subsidy program. Separately, 11 states have their own operational discount programs.

Representative Mills says there will be few takers for the federal temporary card in Maine. The state program has better prices and no fee. States are able to keep prices down because officials are busy making bargains with manufacturers by using preferred drug lists and prior authorization techniques that trade market share for price concessions, he says.

Some cooperative solutions caught on quickly. Several state pharmaceutical assistance programs (known as SPAPs in federal jargon) are offering automatic enrollment into state-endorsed discount card options.

This fairly simple strategy can make a dramatic difference to confused consumers. For those already enrolled in a state program, they may get a better price on some products. Although not mandatory under state or federal laws, the single card selected by a particular state may help seniors who have never been signed up before. Some states are sending "opt-out" letters to current beneficiaries, in case they do not want to remain enrolled.

There also are dramatic financial savings to the states. Connecticut expects to save $17 million by using transitional assistance enrollment, and Pennsylvania, with the nation's largest SPAP, will save about $150 million.

Proving that legislatures can respond quickly when state funds and people's benefits are on the line, two states authorized seamless enrollment in Medicare cards (including use of the $600 federal assistance) in near record time during May.

It took only one day for New York to adopt a discount enrollment card. The bill was filed, passed both houses and was signed by the governor all on May 3.

Massachusetts took one day longer. A bill filed on May 10, passed the House and Senate the next day, and was signed into law less than 48 hours after that initial filing.

"We knew this would help seniors and save the state money, but we insisted on adding safeguards to protect benefits for those already in our state drug assistance program" says Senator Richard Moore, who co-chairs the Massachusetts Health Care Committee.

"Educating members and the public about the new Medicare benefit and the discount card is a tremendous challenge," says John Luehrs of AARP's state affairs office. "Deciding whether to enroll, and then which card is best for them is daunting."

REMAINING QUESTIONS

Unfortunately, there are no quick fixes for some of the complications caused by the new federal law. These snags involve both state pharmaceutical and Medicaid programs.

For Medicaid, states hoped for substantial

fiscal relief when Medicare's prescription drug coverage option kicks in. That's because state Medicaid programs currently spend billions c dollars on drugs for the 6 million low-income Medicare enrollees who also qualify for Medicaid assistance (dual eligibles).

States were excited about having Medicare pick up the drug expenses for these individuals, says Matt Salo of the National Governors Association. It affects between 50 percent and 60 percent of state's Medicaid drug budget.

"Unfortunately, for now, the actual benefit will not be a saving for states. In fact, the Congressional Budget Office has said the law will actually cost states $1.2 billion more between 2004 and 2006," Salo says. Several factors contribute to this estimate. States will have to pay a substantial share of the new Medicare drug benefit, and there will be considerably more administrative work.

In addition, questions remain about how low-income dual-eligible people who fail to enroll in a Medicare Part D plan will be covered. "They will have no safety net," Salo says. "Medicaid will not be allowed to provide any benefit."

More questions remain about what the new Medicare drug plan will cover. Medicaid may not deny payment for particular brands, but the new Medicare coverage plans have that option. "So what happens to a patient used to getting certain drugs? What kind of appeals will there be? Will states try to cover it with 100 percent state funds?" Salo asks.

"The real problem with the Medicare drug plan is how confusing it is," says Maryland Delegate John Hurson, NCSL president-elect. "One of the things we have to do, because we have no choice, is educate our constituents about its complexities."

Hurson says legislators are going to get hit with questions as they campaign this fall. "This is going to be one of the biggest issues," he says. "And frankly I don't think a lot of legislators understand it yet. This is going to be a major challenge."

STATES MAY WIN OR LOSE

Ironically, the financial losers, especially for 2006, may be the states with the most recent cost containment initiatives. Here's an example: In Iowa, at the start of 2004, Medicaid reduced the drug ingredient reimbursement formula by 2 percent and shaved the pharmacy dispensing fee by 89 cents. But these cost reductions will be ignored by the federal formula--based on 2003 drug spending figures--that will define the state's Medicaid share (known as "claw back") for 2006.

States will have complications with existing state pharmaceutical assistance programs. Many states have achieved substantial savings by using their large market share as a bargaining chip in negotiating prices. With the loss of their state program, enrollees age 65 and over and their dual-eligible Medicaid populations, the picture will change.

"Removal of dual eligibles from this market will take away a major portion of the state's bargaining power," says Mills.

State subsidy programs will face difficult financial decisions in the next year. Should states use their own money for programs that include people ages 55 to 65? Should they try to provide "fill the gap" or "wrap-around" benefits for low-income Medicare enrollees, including paying for the substantial federal deductibles, coinsurance and premiums? Can states shift to serve different populations? Or should they close the doors on popular state programs that seem outdated, yet are rated more user friendly?

Maryland Delegate Hurson says states face a great challenge trying to find the resources to 'plug the holes' in the federal plan. Where will the money come from for the additional administrative costs in implementing Part D, he asks, let alone the increases in Medicaid long-term care enrollment states expect to see. "In Maryland, we have a fairly sizable investment in our pharmacy assistance programs," he says. "We simply cannot wipe it out and put those savings somewhere else."

States with a short history of pharmacy assistance and that serve mostly Medicare beneficiaries may find the termination choice a welcome fiscal relief. Kansas plans to end its program the day federal insurance takes over. But more established programs such as PAAD in New Jersey that serve a broader population, have broad bipartisan support. Few think it will disappear in 2006.

Whatever happens in coming months, the benefits and the burdens contained in the almost 700-page federal Medicare Act of 2003 are likely to appear in state bills and state budgets for years to come.

"The confusion of having multiple programs that serve the same people is already here," says Hurson. "We are going to have to adjust a lot of our current laws. It is immediate, it is urgent."

HOW STATES HELP
WITH PHARMACEUTICAL COSTS

                                     State Rx
                       State Rx      Discount     State Medicare
State                  Subsidy Law   Program      Rx Bills

Alabama
Alaska                 2004 (b)                   2004 (b)
Arizona                2001 (a)      2003 (b)
Arkansas               2001 (a)      2001 (a)     NOT IN SESSION
California                           1999 (b)     2004 (c)
Colorado
Connecticut            1986 (b)      2000 (a)     2004 (b)
Delaware               1999 (b)
District of Columbia   2004 (a)
Florida                2000 (b)      2000 (b)     2004 (c)
Georgia
Hawaii                               2002 * (b)   2004 (c)
Idaho
Illinois               1985 (b)      2003 (b)     2004 (c)
Indiana                2000 (b)                   2004 (a)
Iowa                                 2002 (b)     2004 (c)
Kansas                 2000 (b)
Kentucky
Louisiana              2003 (a)
Maine                  1975 (b)      2000 (b)     2004
Maryland               1979 (b)      2001 (b)     2004
Massachusetts          1996 (b)      1999 (a)     2004
Michigan               1988 (b)      2004 (a)
Minnesota              1997 (b)
Mississippi
Missouri               1999 (b)
Montana                              2003 (a)     NOT IN SESSION
Nebraska
Nevada                 1999 (b)                   NOT IN SESSION
New Hampshire                        2000 (b)
New Jersey             1975 (b)                   2004 (c)
New Mexico             2003 (a)      2002 (a)
New York               1987 (b)                   2004 (b)
North Carolina         1999 (b)
North Dakota                                      NOT IN SESSION
Ohio                                 2002 (b)     2003 (a)
Oklahoma
Oregon                 2001 (a)      2003 (b)     NOT IN SESSION
Pennsylvania           1984 (b)                   2004 (c)
Rhode Island           1985 (b)                   2004 (c)
South Carolina         2000 (b)      2003 (a)
South Dakota                         2003 (a)     2004 (a)
Tennessee              2003 (a)                   2004 (c)
Texas                  2001 (a)                   NOT IN SESSION
Utah                                              2004 (c)
Vermont                1989 (b)      2000 (b)     2004 (c)
Virginia                                          2004 (b)
Washington             2003 (a)      2003 (a)
West Virginia                        2000 (b)
Wisconsin              2001 (b)
Wyoming                1988 (b)                   2004 (b)

(a) Signed law, not operational
(b) Operational law
(c) 2004 filed bill

* As of July 1, 2004

Source: NCSL data as of June 10.

FEDERAL MEDICARE RX LAW: HOW IT WORKS

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 makes one of the most dramatic changes in U.S. health care policy in recent times. For the first time ever, Medicare will include outpatient prescription drug coverage. A transitional discount program started last month. The permanent benefit will go into effect January 2006.

THE TRANSITIONAL DRUG CARD

Prescription drug cards became available in May to Medicare beneficiaries who are not receiving Medicaid drug coverage. Discount card sponsors (approved groups such as HMOs, pharmaceutical benefit management firms (PBMs) and insurance companies) may charge an annual enrollment fee of up to $30. Medicare beneficiaries who do not have Medicaid or private insurance coverage, with incomes below 135 percent of federal poverty guidelines ($12,569 for individuals and $16,862 for couples) are eligible for an annual subsidy of $600 for prescription drug costs. The federal government pays the annual enrollment fee for beneficiaries who qualify for the subsidy.

NEW MEDICARE BENEFITS

The 2003 act established a voluntary outpatient prescription drug benefit under Medicare. The new Medicare Part D program will become effective Jan. 1, 2006. Medicare beneficiaries may: (1) remain in the traditional Medicare fee-for-service program and enroll in a private prescription drug plan or (2) enroll in a Medicare managed care plan that will include a prescription drug benefit.

Each Medicare beneficiary will have a choice of at least two plans.

For Medicare enrollees with incomes above 150 percent of federal poverty guidelines, Part D coverage will require an estimated $35 per month premium and $250 annual deductible with adjustments over time. On an annual basis, the benefit would cover:

* 75 percent of drug expenses up to $2,250.

* Nothing for drug expenditures between the $2,250 threshold and approximately $5,100 (the so-called "donut hole" gap in coverage).

* Virtually all drug costs after the $5,100 out-of-pocket expenditure threshold, with a nominal coinsurance or copayment requirement.

For lower income Medicare enrollees, Medicare Part D will not require a premium or deductible, but will charge a small copayment for prescriptions (except for dual-eligible nursing home residents). In addition, lower income beneficiaries will be exempt from the "donut hole" coverage gap.

--Joy Johnson Wilson, NCSL

STATE PROGRAMS RESPOND

Most states with pharmaceutical assistance programs are changing to adapt to the new Medicare Rx benefit.

* By March, both Wyoming and Maine had enacted identical requirements that residents eligible for the $600 federal subsidized assistance sign up for and use the federal voluntary benefit before they tap the state-subsidized programs.

* Michigan teamed up with a vendor, First Health Services, to help residents take advantage of the $600 assistance for those with incomes below $12,569. But the state advises EPIC (Elder Prescription Insurance Coverage) enrollees with incomes up to $18,620 (200 percent of the federal poverty guidelines) to stay in their current state program. The conclusion: "There is no plan to phase out Michigan EPIC."

* Pennsylvania's 20-year-old PACE (Pharmaceutical Assistance Contract for the Elderly) program is automatically enrolling about 150,000 recipients who qualify for the Medicare $600 credit in a discount card sponsored by the state with no enrollment fee. That means the first $600 for medications will be paid by federal funds rather than the state program, which is funded by lottery revenue. "We will save about $150 million between June 2004 and March 31, 2006," says the PACE Director Tom Snedden. "That's not bad."

* Connecticut and Massachusetts passed laws for state-endorsed discount cards, and automatic enrollment of low-income residents eligible for the $600 federal assistance. A portion of the states' savings can go to pay enrollee cost sharing.

* South Dakota this March became the first state to authorize the discontinuance of their recently passed senior prescription drug program, effective four months after the federal discount cards start providing benefits.

* Two new Virginia laws (SB 158 and HB 1202) will require state agencies to develop a single application form to help residents seeking eligibility for various assistance and discount plans. The agencies also are to disseminate information about the Medicare benefit, including training senior volunteers.

* Indiana has created the Prescription Drug Advisory Committee, which is required to make program design recommendations to coordinate the Indiana drug subsidy program with the federal Medicare law. The committee is to "ensure that the program does not duplicate benefits." Reports are due this month and September for bills to be filed for 2005.

For additional information see: www.ncsl.org/programs/health/rxstatemma2.htm

--Richard Cauchi, NCSL

SO WHAT ABOUT THE MEDICAID "FISCAL RELIEF?"

States didn't get the immediate and substantial fiscal relief they hoped for in the new Medicare act. Yes, the feds have assumed the prescription costs of Medicare beneficiaries who are also on Medicaid (dual eligibles). And dual eligibles will in 2006 receive prescription drug coverage through Medicare. But states will continue to contribute a substantial sum on their behalf through a so-called "claw back" provision. Beginning in 2006, states must pay 90 percent of the prescription drug costs they paid in 2003 for the dual-eligible population adjusted for inflation. Over a 10-year period beginning in 2006, each state's share will decrease from 90 percent of the 2003 amount adjusted for inflation to 75 percent in 2014 and beyond.

With the 2006 date fast approaching, state policymakers will need to understand the Medicare law's provisions and plan for its effects on their own Medicaid programs.

STATE HIGHLIGHTS

* Effective Jan. 1, 2006, Medicaid-Medicare dual eligibles will receive prescription drug coverage solely through the new voluntary Medicare Part D program, but states will be required to make payments based on state expenditures for prescription drugs for dual eligibles in 2003.

* States are required to conduct eligibility determinations for the Medicare Part D prescription drug program. Although states will receive the standard 50 percent administrative match to conduct these services, they are likely to have substantial additional administrative costs for staff training, materials and computer hardware and software changes.

* Prescription drug prices negotiated under the provisions of the new Medicare law will not be included in the calculation of the Medicaid "best price," which is the basis for Medicaid drug rebates.

* Losing the dual eligibles as a purchasing group for prescription drugs is likely to make state negotiations for supplemental rebates under Medicaid more difficult.

* States will have to determine how Medicare Part D will affect existing state pharmaceutical assistance programs (SPAPs) and how to proceed with those programs.

* States will be eligible to receive incentive payments to maintain state retiree health benefits programs.

--Joy Johnson Wilson, NCSL

Richard Cauchi is NCSL's expert on pharmaceuticals in the Denver office.