Lower Costs Of Medicare Drug Coverage To Help States Save $700 Million In 2006

February 9, 2006, The states will send more than $700 million less to the federal government in 2006 because lower drug costs and strong competition have reduced the price tag for Medicare’s new drug coverage, HHS Secretary Mike Leavitt announced today.

“This is good news for every state. The competitive marketplace is working to help federal and state governments, and most of all, Medicare beneficiaries, drive down costs,” Secretary Leavitt said.

“With strong competition in the Medicare drug benefit, we are seeing aggressive negotiation, greater use of generic drugs and other effective steps to slow down drug cost growth,” said Centers for Medicare & Medicaid Services (CMS) Administrator Mark B. McClellan, M.D., Ph.D.

The Medicare Modernization Act requires the federal government to pay prescription drug costs for people in Medicaid who had previously been covered, in part, by the states. States are required to pay back to the
federal government a phased down contribution, sometimes known as a “clawback” of some of the money they are saving. During congressional debate in 2003, governors and advocates for senior citizens supported moving the “dual eligible” beneficiaries from Medicaid to Medicare.

Overall, states can save money because of Medicare’s drug coverage, not only because the federal government now pays for drug coverage for people in Medicaid and Medicare, but also because state governments can get subsidies for their retired employees. States only pay a portion of the costs in the “clawback.”

Last week, CMS announced that the net cost to the federal government for the drug coverage in 2006 is expected to be $30.5 billion down from a previously
estimated $38.1 billion. The actual or “net” costs to the federal government, accounting for Medicaid savings, are also significantly lower over 10 years, dropping from last year’s estimated $737 billion to $678 billion. For the 10-year period from 2006-2015, the “total” Medicare drug benefit cost, without accounting for Medicaid savings, is now estimated to
be about $130 billion less -- $797 billion compared to an estimated $926 billion last year. State “clawback” payments are now projected to be 25 percent less over this period.

As of last month, about 24 million Medicare beneficiaries now have drug coverage, with about 3.6 million self-enrolled in the new “stand-alone” prescription drug plans and around 300,000 new enrollees in Medicare Advantage plans with drug coverage.

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U.S. Department of Health & Human Services

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