The Clawback: A Scary Movie for States

On January 1, 2006, states will be required to help finance the new Medicare drug benefit, and they’re not happy about it.

Many states are openly rejecting this new Medicare law; Texas and New Hampshire have vowed to not pay until a court decides if the new rules are constitutional. And the National Governor’s Association is at odds with the Bush administration over whether or not the state payments, which many call "clawback payments," are fair.

Medicare and Medicaid beneficiaries have the most to lose from the policy fight, and states come in at a close second, having already-tight budgets and overflowing health care programs.

What are clawback payments?

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requires states to make monthly payments to the federal government for prescription drug coverage under the new Medicare Part D. This is the first time that states have financed Medicare in any significant way since the Medicare and Medicaid programs were first enacted in 1965.

While Medicaid is a joint state and federal program, Medicare has always been federally-funded, and states believe that it should remain that way. The clawback payments set a new precedent - one that will cost states an estimated $48 billion in the first five years, according to the Congressional Budget Office.

Implications for states

Since MMA requires the federal government to absorb the cost of prescription drugs for people on both Medicare and Medicaid - called dual eligibles - the states should save money, theoretically. But states say the clawback payments force them to pay that money back, and then some.

The 2006 clawback payments amount to 90 percent of what states would have spent on dual eligibles if MMA had never been enacted. But the formula is derived from 2003 cost averages, even though many states have cut drug costs since then. These states could lose money.

States that refuse to pay will be penalized - the federal government will withhold the amount owed from states’ Medicaid programs, plus interest.

The clawback payments, which were not approved by either the House or the Senate but added later to the final conference report by a small group of legislators, link federal budget policy to states’ fiscal responsibilities.

Implications for Medicare and Medicaid beneficiaries

States that save money may expand their Medicaid programs. Likewise, states that lose money are likely to cut "optional" services or "optional" beneficiaries, even though optional services can include rehabilitation, home health care, dental and vision care, and, in a strange twist, prescription drugs. Optional beneficiaries who are dropped from Medicare will join the ranks of millions of uninsured Americans.

The upshot is that Medicare prescription benefits could cause states to lose money and tighten Medicaid eligibility requirements, causing many people who rely on Medicaid to become uninsured.

Are Medicare prescription drug benefits worth greater numbers of uninsured Americans? Would you be willing to pay more taxes to support the new prescription drug benefit and maintain Medicaid? In your list of priorities, what is the value of healthcare?

What do you think?

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Posted on: 7/12/2005