Implications of the Medicare Prescription Drug Benefit for Dual Eligibles and State Medicaid Programs

CRS Report for Congress
Implications of the Medicare Prescription
Drug Benefit for Dual Eligibles and
State Medicaid Programs
Karen Tritz
Analyst of Social Legislation
Domestic Social Policy Division
Summary
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA, P.L. 108-173), added a new Medicare prescription drug benefit, which was
implemented in January 2006. This benefit has a significant effect on Medicaid
beneficiaries who also have Medicare coverage (i.e., “dual eligibles”) and on state
Medicaid programs, as discussed in this report. In fact, this group is the focus of recent
implementation concerns regarding the new benefit. The report does not include
changes to Medicaid that may be made if the Deficit Reduction Act of 2005 (S. 1932)
is enacted. This report will be updated.
Introduction
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA, P.L. 108-173) enacted in December 2003, changed the Medicare program in
several areas. This report focuses on those MMA provisions that added a voluntary
prescription drug benefit under a new Medicare Part D, and the effect of this new benefit
both on individuals who are dually eligible for Medicaid and Medicare, and on state
Medicaid programs.
Implications for Medicare/Medicaid Dual Eligibles
The term “dual eligibles” refers to individuals who qualify for services under both
Medicare and Medicaid. Most of these individuals are considered “full benefit duals.”¹
In general, Medicare is the primary payer for those services covered by both Medicare and
Medicaid (e.g., hospital services). Medicaid usually covers those costs in excess of what

¹ Some groups (including the Centers for Medicare and Medicaid Services, CMS) include in the
definition of “dual eligibles” those low-income Medicare beneficiaries for whom Medicaid only
covers some Medicare cost-sharing.
Congressional Research Service ˜ The Library of Congress

is covered by Medicare. For those Medicaid benefits not available under Medicare (e.g.,
personal care), Medicaid covers the entire cost unless there is another payer. While these
rules still apply for most Medicare and Medicaid services, MMA changed the interaction
of Medicare and Medicaid for coverage of prescription drugs.
Changes to Eligibility for Dual Eligibles’
Prescription Drug Coverage
As of March 2005, all states and the District of Columbia covered prescription drugs
for at least some Medicaid beneficiaries. Starting in 2006, dual eligible individuals were
no longer eligible for the state’s prescription drug benefit provided under the Medicaid²³
state plan or a comprehensive Section 1115 waiver. To receive coverage of prescription
drugs, dual eligibles were required to enroll in the Medicare Part D benefit. The benefit
is offered through prescription drug plans (PDPs) that have received approval from the
Secretary of Health and Human Services (HHS).
MMA also affects dual eligibles whose eligibility pathway for Medicaid is
“medically needy.” These individuals qualify for Medicaid because they incur medical
expenses that “spend-down” or deplete their income to a state-specified standard. Some
currently medically needy dual eligibles may no longer qualify for Medicaid if their
prescription drugs are covered by Medicare and are no longer out-of-pocket expenses.⁴
Changes to the Scope of
Prescription Drug Coverage for Dual Eligibles
Medicaid generally covers a broad range of prescription drugs. States may create
lists of preferred drugs or require prior approval for non-preferred drugs, but statutory⁵
requirements insure that Medicaid covers a comprehensive list of drugs. Most states
limit coverage of prescription drugs through, for example, the number of refills, or the
number of prescriptions in a given time period.
Generally, drugs covered under the Part D benefit include those drugs that states are
required to cover under Medicaid. Except for smoking cessation drugs, the Part D drug
benefit will not include those drugs that are optional for states to cover under Medicaid
(e.g., over-the-counter drugs). Within the list of covered Part D drugs, PDPs are
permitted to establish a formulary as long as it includes drugs (though not necessarily all
drugs) within each therapeutic category and class. As requested in MMA, the United

² The Medicaid state plan is the document that states submit to the federal government for
approval which describes the eligibility groups covered and the services provided.
³ Section 1115 of the Social Security Act allows the federal government to waive sections of
Medicaid law as long as the demonstration project is budget neutral over five years. Several
states provide a substantial portion of their Medicaid program under a Section 1115 waiver.
⁴ The number of individuals who may no longer qualify for Medicaid is unknown; data about out-
of-pocket expenditures for medically needy individuals are not available.
⁵ For additional information see CRS Report RL30726, Prescription Drug Coverage Under
Medicaid, by Jean Hearne, and April Grady.

States Pharmacopeia (USP) has released a draft list of therapeutic categories and classes
— one for 2006 formularies, and a revised version for 2007 formularies.
PDPs can use the classification system developed by USP or can develop an
alternative classification system to develop its formulary. In either case, CMS stated that
it reviews the formularies by looking at best practices in existing drug benefits and
ensuring that drugs covered in the formulary are adequate, and do not discriminate against
a specific disability or condition.
States covering other drugs in a class or category included under MMA may not use
federal Medicaid dollars to do so. This differs from other benefits covered by both
Medicaid and Medicare in which Medicaid supplements Medicare coverage. States may
continue to use Medicaid funding to cover those drugs not covered by MMA.
For dual eligibles, the scope of benefits has likely changed. Unlike Medicaid, MMA
does not limit the number of prescriptions one can receive or require prior authorization
for particular drugs. However, individuals must determine whether the drugs they take
are on the PDP formulary and, if needed, request coverage of a different drug. MMA
gives individuals [or their authorized representative(s)] rights to access a particular drug
not covered by the formulary through an exceptions or appeals process.⁶ Requests for
exceptions to the formulary or appeals of a PDP decision must be made by the PDP within
72 hours (or 24 hours for expedited requests.) If necessary, other levels of appeal are also
available.
Changes to Premiums and Cost-sharing for Prescription Drugs
Most dual eligibles do not have a premium to enroll in Medicaid, but they may have
nominal co-payments for the services they use. To enroll in the Medicare drug benefit,
most persons have to pay the PDP a premium for coverage, and cost-sharing amounts
when they use benefits. MMA, however, established special rules for dual eligible
individuals. All dual eligibles qualify for low-income subsidies for premiums and co-
payments. Full benefit dual eligibles are entitled to a subsidy equal to the weighted
average premium of all plans in the region, or if greater, the lowest premium for a plan
in the region. In 2006, the monthly premium subsidy varied from $23.25 in California to
$36.39 in Mississippi.⁷ If a dual eligible chooses a drug plan with a higher premium than
the amount of the subsidy, he or she is required to pay the difference.
Cost-sharing requirements differ for dual eligibles depending upon whether or not
the individual resides in an institution. Individuals who reside in an institution have no
additional cost-sharing obligations under MMA (e.g., deductible, co-payment for drugs).⁸

⁶ To appeal coverage of a drug not on the formulary, the individual’s prescribing physician must
determine that all covered drugs on the formulary would not be as effective for the individual as
the non-covered drug or would have adverse effects for the individual.
⁷ The Goldman Sachs Group, Inc. Health Care Services, United States: Medicare drug benefit,
Oct. 10, 2005.
⁸ Medicaid beneficiaries residing in institutions are required to contribute most of their income
(continued...)

For dual eligibles who do not reside in an institution, the amount that they pay for
prescription drugs has likely changed. State Medicaid programs are permitted to impose
nominal cost-sharing on non-institutionalized Medicaid beneficiaries. Generally, the cost-
sharing imposed for prescription drugs has ranged from $.50 per prescription to $3.00.
Under MMA, PDPs may charge non-institutionalized dual eligibles co-payments for
prescription drugs. Dual eligibles whose income (as calculated by the Supplemental
Security Income program) is less than 100% of the federal poverty level can be charged
up to $1 for a generic drug or a preferred drug that is considered a “multiple source”⁹ drug
and $3 for any other drug. This co-payment amount is adjusted annually based on the
Consumer Price Index (CPI). For other dual eligibles, their co-payments are $2 for a
generic drug or a preferred drug that is considered a “multiple source” drug and $5 for any
other drug. This co-payment amount is increased annually based on the percentage
increase in per capita expenditures for the Medicare Part D benefit. No co-payments
apply after a beneficiary has total drug costs of $5,100 in 2006; this amount is also
increased in subsequent years by the increase in Medicare per capita drug spending.
It appears that some non-institutionalized dual eligibles will be paying more per
prescription under the Medicare Part D benefit than they had been paying under Medicaid.
The size of that increase is unknown and will vary by person depending upon income
level, the prescription drugs used, and increases in the CPI and Part D expenditures.
Enrollment of Dual Eligibles in the Medicare Part D Benefit
Under Medicaid, dual eligibles received prescription drug benefits as part of a
package of Medicaid services, with the same prescription drug coverage rules applying
to all Medicaid beneficiaries. Under the Medicare drug benefit, drug plans offer different
formularies and have different premiums or co-payments, and may have multiple options
within a drug plan. Dual eligible beneficiaries are having to decide which PDP plan they
want to enroll in. For 2006, the average number of PDP options within a region is 42 —
ranging from 27 in Alaska to 52 in Pennsylvania and West Virginia.¹⁰ In October 2005,
CMS randomly assigned dual eligible individuals to a low-cost PDP and notified them
of this assignment to decrease the likelihood that a dual eligible’s drug coverage will lapse
when switching from Medicaid to Medicare. As a backup plan, CMS contracted with
Wellpoint, a national PDP, to provide access for dual eligibles who arrive at a pharmacy
and are not enrolled in a PDP. As of January 2006, there have been significant challenges
in operationalizing the transition of dual eligibles from Medicaid to Medicare. As a
result, several states are paying for prescription drugs for dual eligibles with the
expectation that they will be reimbursed. Several Senators have expressed interest in
sponsoring legislation to reimburse these states for their costs. HHS has also taken steps
to address the confusion and operational challenges by, for example, adding resources to

⁸ (...continued)
to the cost of their care (referred to as “post-eligibility treatment of income”). MMA does not
change this requirement.
⁹ Section 1927(k)(7)(A)(i) of the Social Security Act.
¹⁰ The Goldman Sachs Group, Inc. Health Care Services, United States: Medicare drug benefit,
Oct. 10, 2005.

handle calls from beneficiaries and pharmacists, and directing PDPs to provide a 30-day
transitional supply of prescription drugs.¹¹
Changes for Dual Eligibles Residing in Institutions
To access prescription drugs, dual eligibles residing in institutions are also required
to enroll in Medicare Part D and select a PDP. Under Medicaid, institutions (e.g., nursing
facilities) were required to provide pharmacy services for Medicaid residents (including
dual eligibles). Generally, facilities contracted with a single long-term care (LTC)
pharmacy that supplies prescription drugs for those residents. Since residents of
institutions access prescription drugs somewhat differently than those in the community,
MMA requires PDPs to provide “convenient access” for prescription drugs for
institutional residents.¹²
Federal regulations implementing MMA require PDPs to contract with any LTC
pharmacy that meets certain standards and that is willing to participate in the PDP’s
network. CMS have required PDPs to demonstrate that there is a sufficient network of
participating LTC pharmacies to meet MMA’s convenient access requirements.
Institutions may select and contract with the LTC pharmacy(ies) that best meets their
needs, and residents will receive information about those PDPs that provide access to
LTC pharmacy benefits in their specific institution.
Implications for State Medicaid Programs
Ability to Negotiate Drug Prices
Medicaid law requires drug manufacturers that wish to have their drugs available for
Medicaid enrollees to enter into rebate agreements with the Secretary of HHS, on behalf
of the states. Under these agreements, manufacturers must provide state Medicaid
programs with rebates on drugs paid for Medicaid beneficiaries. In exchange, states are
required to cover all drugs offered by those manufacturers. A few states have also
negotiated supplemental rebates in addition to the federal agreements. In FY2004, federal
and state drug rebate agreements reduced Medicaid drug expenditures by 24%.¹³
MMA’s effect on overall drug prices is unknown. Previously, Medicaid was
spending a significant share of its prescription drug expenditures for dual eligibles. With
the decrease in Medicaid drug expenditures, will state and federal Medicaid officials’
ability to negotiate rebates with pharmaceutical companies also diminish? In addition,
to enhance its negotiating ability, will states increasingly join other states in pooled
purchasing arrangements?

¹¹ K. Freking, Senators Seek to Reimburse States for Unplanned Drug Expenses, Associated
Press Writer, Jan. 18, 2006. S. Lueck, Medicare Drug Plan Sign-Up Surges, The Wall Street
Journal, Jan. 17, 2006. R. Pear, Rolls Growing for Drug Plan as Problems Continue, The New
York Times, Jan. 18, 2006. C. Connelly, HHS Works to Fix Drug Plan Woes; Widespread
Difficulties with New Medicare Benefit Reported, Jan. 18, 2006.
¹² Section 1860D-4(b)(1)(C)(iv) of the Social Security Act as added by P.L. 108-173.
¹³ CRS analysis of Centers for Medicare and Medicaid Services’ data, Form 64, FY2003.

Administration of Low-Income Subsidy
Under MMA, state Medicaid agencies and the Social Security Administration (SSA)
are determining eligibility for the low-income subsidy of the drug benefit for all Medicare
beneficiaries not just dual eligibles. SSA has established an application and eligibility
process that most states are also using. States were also required by MMA to develop
their own application.
While screening individuals for the low-income subsidy, states must also screen
individuals for assistance with Medicare Part A and Part B cost-sharing. As a result, more
people may become eligible for this Medicare cost-sharing assistance because they want
to take advantage of the drug benefit assistance. States may also screen the individual for
Medicaid eligibility. These efforts may increase Medicaid expenditures by increasing the
number of enrollees receiving Medicare cost-sharing assistance and receiving full
Medicaid benefits.
Coordination of Services for Dual Eligibles
States have also requested gaining access to the Part D drug utilization data by dual
eligibles for the purpose of managing and coordinating care. For example, a state may be
implementing a care management program for individuals with chronic illness in which
information about prescription drug utilization may be an important component for
managing that care. Given the requirements of MMA, it is unclear whether CMS has the
authority to give state Medicaid agencies utilization data or can require the PDPs to share
the data with states.
Medicaid Financing: The Clawback Formula
States are also responsible for partially funding the new Part D benefit under a
provision called the “clawback.” The funding level for each state is a function of the
number of persons eligible for both Medicaid and the Medicare drug benefit (the “dual
eligibles”); state prescription drug expenditures for dual eligibles in FY2003; the state
share of Medicaid funding; inflation (for prescription drugs); and a statutorily determined
annual factor. Over time the annual factor is reduced from 90% for 2006 and gradually
declines to 75% for years after 2014. In its final regulation, CMS provided detailed
information on the data sources to be used to calculate state clawback payments. States
continue to have concerns about the clawback formula (e.g., FY2003 data does not reflect
more recent state efforts to reduce spending).
Finally, it is unclear how or if states will modify their state Medicaid programs in
response to MMA (e.g., to lower the “clawback”payment by reducing eligibility for dual
eligibles, or to cover drugs not included in the Part D benefit.) This will be addressed in
future updates as information becomes available.