States could lose some Medicaid funds in health overhaul

Kaiser Health NewsApril 20, 2010 

WASHINGTON — 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 law that's intended to raise $38 billion over 10 years by requiring drug makers to offer bigger discounts to Medicaid, the joint federal-state health insurance program for the poor. The rebates will continue to be divided between the states and the federal government, but under the new law, Washington will get a bigger share beginning this year.

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

Under the old policy, states sent Washington a share of the rebates equal to the share of Medicaid funding the federal government paid them.

The new law says that the federal government will get 100 percent of the rebate funding that's "attributable" to the increase from 15.1 to 23.1 percent rebates. If the state's rebate level is above 23.1 percent, that portion of the discount again will be shared between the state and federal government.

All but three states — Arizona, Massachusetts and New Mexico — stand to lose money because of the change, in many cases millions of dollars a year, according to a state-by-state examination of 2009 Medicaid spending records by Kaiser Health News.

Those 47 states and the District of Columbia had negotiated average rebates from drug makers that are bigger than required, and in many cases far surpass the new 23.1 percent requirement. Based on 2009 Medicaid data, states received average rebates of 38.5 percent, and Georgia's rebates average about 50 percent.

Whereas those states have been dividing their rebate revenue with the federal government, under the new law they'll have to hand over all of an 8-percentage point chunk of it.

California stands to lose $50 million next year because of the changes, said 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, the secretary of the Indiana Family and Social Services Administration, circulated a memo forecasting losses of $400 million over 10 years because the federal government plans to "confiscate" a portion of the state's rebates. A representative said the estimate was based on the agency's reading of the law and that it, too, was awaiting guidance.

State 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.

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.

For some states, the rebate losses may be offset by another part of the law that would require drug makers 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'll see overall losses in the rebate programs.

Industry analysts have suggested that the wording of the legislation may give the agency that oversees Medicaid some leeway in how it administers the changing rebates 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."

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

The analysis compared the 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.

Drug makers didn't return calls seeking comment, and state officials were reluctant to discuss the 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 there are lower rebates for generics and other classes of drugs.

Some state lawmakers already are calling on federal officials to back away from the proposal.

"Some things may need to be changed," said Sharon Treat, a Maine Democratic 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 doesn't use managed care for any of its Medicaid enrollees and wouldn't benefit from the provision that offers discounts for those 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 more states to use managed care plans for drug coverage, and that's raising concerns among some pharmaceutical makers because it could lead to a reduction in drug spending.

Arizona is one of the states that will see a major benefit. It runs its entire Medicaid program through managed care plans, so it didn't benefit from the federally required rebates. Because of the change, the program probably will gain significant new funding.


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