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Assessing the Medicare Prescription Drug Benefit Impact on Medicaid

Vernon K. Smith, Ph.D.HEALTH MANGEMENT ASSOCIATES

For

Invitational Summit for State Policy MakersMedicare Part D Implementation Issues

Conducted by

AcademyHealth andThe Rutgers Center for State Health Policy

PhiladelphiaOctober 7, 2004

vsmith@healthmanagement.com

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Medicaid in 2004: The Nation’s Largest Public Health Care Program

– Medicaid Spending in FY 2004 ~ $300 billion (Compared to Medicare ~ $290 billion)

• $130 billion state and local funds

• $170 billion federal (44% of all federal funds to states)

– Health coverage for over 52 million in U.S. (Compared to Medicare: 42 million)

Sources: CMS, CBO Medicaid Baseline March 2004

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Medicaid’s Role in the Health System, 2002

17% 17%12%

18%

49%

TotalPersonal

Health Care

HospitalCare

ProfessionalServices

NursingHome Care

PrescriptionDrugs

SOURCE: Levit, et al, 2004. Based on National Health Care Expenditure Data, Centers for Medicare and Medicaid Services, Office of the Actuary.

Total National

Spending(billions)

$1,340 $486.5 $501.5 $103 $162

Medicaid as a share of national personal health care spending:

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Medicaid Pharmacy Costs: A Major Share of State Spending

• “The total cost of the pharmacy benefit alone in TennCare has become greater than the total cost of Tennessee’s higher education system. Just two drugs in TennCare – Zyprexa and Zocor – cost our state more than we appropriate to run the University of Tennessee medical school. That is a fire bell in the night.”

– Tennessee Governor Phil Bredesen, in address to General Assembly, February 17, 2004

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Average Annual Growth Rates of Total Medicaid Spending

10.0%

3.6%

7.8%

11.9%

9.4% 9.5%

1992-95 1995-98 1998-2000 2000-2002 2003 2004

SOURCE: For 1992-2002: Urban Institute estimates based on data from Medicaid Financial Management Reports (HCFA/CMS Form 64); For 2003 and 2004: Health Management Associates estimates based on information provided by state officials.

Annual growth rate:

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Medicaid – Medicare Dual Eligibles: Key Factor in Medicaid Spending

• Medicaid covers over 6.2 million low-income elderly and disabled persons also on Medicare for Rx, nursing home care, other services, premiums, coinsurance and deductibles

• Duals account for 42% of all Medicaid spending

• Duals account for slightly more than half of all Medicaid spending for prescription drugs.

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States Undertaking New Medicaid Cost Containment Strategies FY 2002 – FY 2005

32

22

8 9

4

117

4650

25

18

1310

4850

2018

14

9 9

28

17171921

47

14

43

ControllingDrug Costs

Reducing/FreezingProvider

Payments

Reducing/RestrictingEligibility

ReducingBenefits

IncreasingCopayments

DiseaseManagement

Long-TermCare

Implemented 2002 Implemented 2003 Implemented 2004 Adopted for 2005

SOURCE: KCMU survey of Medicaid officials in 50 states and DC conducted by Health Management Associates, September and December 2003 and October 2004.

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Medicaid Prescription Drug Policy Changes FY 2004 and FY 2005

7

8

15

19

21

27

33

3

8

3

26

16

29

21

Reduce Dispensing Fee

AWP Less Greater Discount

New or Higher Copays

Seek Supplemental Rebates

New or Lower State MAC Rates

Preferred Drug List

More Rx Under Prior Authorization

FY 2004 FY 2005

SOURCE: KCMU survey of Medicaid officials in 50 states and DC conducted by Health Management Associates. See: October 2004.

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Growth in U.S. Health Care Per Capita Spending, by Service: 1991-2003

-5.0

0.0

5.0

10.0

15.0

20.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

An

nu

al

Pe

rce

nt

Ch

an

ge

Pe

r C

ap

ita

Source: Bradley Strunk and Paul Ginsburg, “Tracking Health Care Costs:

Trends Turn Downward in 2003,” Health Affairs, Web Exclusive, 9 June 2004.

Hospital Inpatient

Physician

Prescription Drugs

Hospital Outpatient

All Services

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Part D Drug Benefit : The Basics• Coverage is to begin: …… Jan. 1, 2006

• Enrollment: …………….... Voluntary

• Initial enrollment period: ... Nov. 15, 2005 for 6 mos.

• Annual enrollment periods: Nov. 15 to Dec. 31

• Premiums: ……………… Est. $35/month in 2006Those who don’t enroll initially, or who don’t maintain

continuous coverage, will pay higher premiums

• Employers: ……………… Incentive subsidy to maintain retiree

Rx benefit 28% between $250 & $5,000

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Administration of Part D Benefit• The Part D benefit will be administered by:

– PDPs: Prescription Drug Plans

– MA-PDs: Medicare Advantage Prescription Drug plans

– Federal fall-back plan

• PDPs & MA-PDs will be risk-bearing private plans.• Beneficiaries will be able to choose from at least 2

plans, if available, or the fall-back.– A fall-back non-risk bearing plan will be available if other

plans are not offered in an area.

• HHS is prohibited from controlling or negotiating prices for PDPs & MA-PDs.

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Part D Standard Benefit in 2006 :Beneficiary Coverage and Out-of-Pocket Drug Costs

Medicare Pays 95%

$2,850 Gap (“Doughnut Hole”)

25% Medicare Pays 75%

5%

Deductible

Partial Coverage Up to a Limit

Coverage

No Coverage

Catastrophic Coverage

$250

$2,250 (initial coverage limit”)

$5,100 (equivalent to $3,600 in out-of-pocket spending)

Beneficiary Out-of-Pocket

Spending

+~$420 in annual premiums

SOURCE: Adapted from The Henry J. Kaiser Family Foundation, “Medicare Fact Sheet: The Medicare Prescription Drug Law,” March 2004.

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Part D Beneficiary Out-Of-Pocket Costs Indexed

Growth in Out-of-Pocket Costs Below the Catastrophic Threshold (Excluding Premiums)

$0

$2,000

$4,000

$6,000

$8,000

2006 2007 2008 2009 2010 2011 2012 2013

Deductible 25% Coinsurance Doughnut Hole

$6,400

Projected Increases from 2006 to 2013: Deductible: from $250 to $445

Donut hole: from $2,850 to 5,066

Catastrophic threshold: from $5,100 to $9,600

SOURCE: Congressional Budget Office letter to the Honorable Don Nickles, November 20, 2003.

$3,600

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2004 Federal Poverty Levels (FPL)

HHS Poverty Guidelines for 2004Family Size 100% FPL 135% FPL 150% FPL

1 $ 9,310 $12,568 $13,965

2 12,490 16,862 18,735

3 15,670 21,155 23,505

SOURCE: Federal Register, Vol. 69, No.30, February 13, 2004, pp. 7336-7338.

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FPL in 2004: $13,965 (individual)$18,735 (couple)

Asset Test:$10,000 (individual) $20,000 (couple)

Premium: Sliding Scale, based on income

Deductible: $50

Coinsurance: 15% before catastrophic threshold

Donut Hole: None

Catastrophic: $2 for generics and $5 for brands

Part D “Partial” Low-Income Subsidies Non-Medicaid Beneficiaries

Individuals w/ Incomes Up to 150% FPL

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Part D “Full” Low-Income Subsidy Non-Medicaid Beneficiaries

Individuals w/ Incomes Up to 135% FPL

FPL in 2004: $12,568 (individual)$16,862 (couple)

Asset Test:$6,000 (individual) & $9,000 (couple)

Premium: $0 up to Low-Income Benchmark

Deductible: $0

Copayment: $2 for generics and $5 for brands

before catastrophic threshold Donut Hole: None

Catastrophic: No copayments

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Part D Low-Income Subsidy Beneficiaries on Medicaid (the Duals)

Premium: $0 up to Low-Income Benchmark Deductible: $0

Copayments:$1 for generics & $3 for brandsup to 100% FPL*$2 for generics and $5 for brands at & above 100% FPL**$0 copay, if institutionalized

Donut Hole: None Catastrophic: $0 copay

Beyond 2006, copays * For persons below 100% FPL, copays indexed to growth in CPI. ** For persons above 100% FPL, copays indexed to Part D growth.

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Part D Benefit: Covered Drugs• Part D coverages include:

– Drugs & biologicals required for Medicaid

– Insulin & supplies for its administration

– Smoking cessation products

• Plans can create closed formularies (i.e., exclude specific drugs within classes)

• Formularies must include at least two drugs in each therapeutic category

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Part D Benefit Excludes Coverage for Some Drugs

– Weight loss/gain

– Fertility– Cosmetic or hair growth– Cough or cold relief– Vitamins and minerals– Over-the-counter (OTC) drugs, normally

available without a prescription– Barbiturates– Benzodiazepines– Drugs covered under Medicare Parts A or B

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Implications of Part D for Medicaid

• Medicaid pharmacy coverage for duals ends on January 1, 2006– MMA prohibits federal Medicaid matching

funds to states for Part D drugs

• Part D drugs are only from Medicare plans (PDPs, MA-PDs or federal Fall-Back plans)

• States continue to pay deductible & coinsurance amounts for Part B drugs

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Part D Has Significant Issues for State Medicaid Programs

• Clawback

• Rebate impacts

• Woodwork effect

• Overall financial impact

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Clawback Formula

Multiply:

1Per Capita

Monthly Amount

2Full-Benefit DualsEnrolled in Month

3Monthly Factor

AdjustmentX

X

A1/12th

CY 03 Rx Payments

Full-Benefit Duals

BState

Match Rate For

Clawback Month

X

75%2015 & After

76.67%2014

78.33%2013

80%2012

81.67%2011

83.33%2010

85%2009

86.67%2008

88.33%2007

90%2006

FactorFor a month in:

Clawback Total Amount

Clawback Basics

X XC

MfgRebate

%

D Growth Factor

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Clawback – Base Year Calculation• The Clawback base-year calculation is complex

– “We are calculating the clawback. It is proving to be more difficult than anticipated due to the spend downs – they are in and out of Medicaid.”

– “I don’t think anyone’s base year will reflect the way things will be in 2006.”

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured. Report forthcoming, October 2004.

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National Health Expenditure Growth Factor for Pharmacy

11.90% 11.30% 11.10%

38.40%

0.00%

5.00%10.00%

15.00%

20.00%25.00%

30.00%

35.00%40.00%

45.00%

2004 2005 2006 2004 - 20063-Year Total

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Clawback – Other Issues

• Clawback base does not adjust for Third Party “pay & chase” recoveries, post-payment audits, or state actions to control drug spending

– The Clawback offsets hoped-for state savings

– “The legislature thinks we are going to get 10% savings. We don’t see any savings there.”

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured. Forthcoming, October 2004.

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Other Financial Impacts for Medicaid

• Rebates: Decreased market share erodes States’ ability to negotiate manufacturer supplemental rebates

• Enrollment: A “Woodwork Effect’ is expected.– There will be more dual eligibles on Medicaid as

more low-income Medicare beneficiaries find they are eligible for Medicaid.

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured. Forthcoming, October 2004.

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States Indicated Concerns about Beneficiary Impacts of Part D Coverage

• Dual eligibles will almost certainly have less coverage under Part D plans

• States cannot receive FMAP if they “wrap-around” to fill the gaps or subsidize copayments– “If we cover four anti-psychotics, and Part D covers

one, what do we do?” – Part D drug exception process is likely to be less

responsive than Medicaid

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured, Forthcoming October 2004.

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Beneficiary Issues for Medicaid Copayments & Nursing Homes

• Part D copayments are set nationally– “Dual eligibles [in our state] currently have

no cost sharing for pharmacy. Under Part D, cost sharing will be required.”

• Nursing home patients under Part D present a difficult challenge

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured, Forthcoming October 2004.

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Beneficiary Issues for Medicaid Medical Management

• Medicaid has invested much effort into Drug Utilization Review and Disease Management

– “The biggest issue is loss of data. We have duals in disease management programs and in nursing homes.”

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured, Forthcoming October 2004.

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Administrative Impacts for Medicaid

• Eligibility determination for benefits for low-income beneficiaries

• System change requirements & timeframes

• Availability of staff and resources

• Other administrative implications

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Administrative Issues for MedicaidNew Eligibility Determinations

• States must determine eligibility for low-income subsidies

– “Eligibility will be an enormous problem for us. There won’t be enough time to implement.”

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured, Forthcoming October 2004.

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Administrative Issues for Medicaid System Development & Operations

• States must make major eligibility system changes to implement Part D.

– “We are going to have to request more funds to do this.”

Source: Health Management Associates interviews of State Medicaid Directors,for Kaiser Commission on Medicaid and the Uninsured, Forthcoming October 2004.

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Summary• All States must be ready for significant

Medicaid impacts from Part D.– Clawback.– Eligibility determinations for low-income

subsidies.– Prepare for enrollment of duals into Part D.

• Some new costs, some new savings.– Net impact still not clear