Order Code RS21837
May 6, 2004
CRS Report for Congress
Received through the CRS Web
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), enacted in December 2003, will have a significant effect on
Medicaid beneficiaries who also have Medicare coverage (i.e., “dual eligibles”) and on
state Medicaid programs. This report highlights several provisions affecting dual
eligible beneficiaries and state Medicaid programs and describes some of the areas
where significant questions remain. 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, made several major changes to
Medicare including (1) adding a voluntary outpatient prescription drug benefit effective
January 1, 2006; (2) offering Medicare beneficiaries during 2004 and 2005 discounted
prescription drugs through an endorsed discount card; and (3) modifying various
Medicare payment rates.1 This report focuses on the provisions in MMA which add a
prescription drug benefit under a new Medicare Part D starting in 2006. The report
discusses the effect of the new benefit on beneficiaries who are dually eligible for both
Medicaid and Medicare and on state Medicaid programs.
1 For additional information, see CRS Report RL31966, Overview of the Medicare Prescription
Drug, Improvement, And Modernization Act of 2003, by Jennifer O’Sullivan, Hinda Chaikind,
Sibyl Tilson, Jennifer Boulanger and Paulette Morgan and CRS Report RL32283, Medicare
Endorsed Prescription Drug Discount Card Program, by Jennifer O’Sullivan.
Congressional Research Service ˜ The Library of Congress

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Implications for Medicare/Medicaid Dual Eligibles
The term “dual eligibles” refers to individuals who qualify for both Medicare
benefits and those Medicaid benefits offered in their state. Sometimes these individuals
are referred to as “full benefit duals.”2 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 is covered by Medicare. For those Medicaid
benefits not available under Medicare (e.g., many long-term care services), Medicaid
covers the entire cost unless there is another third-party payer. While these rules will still
apply for most Medicare and Medicaid services, MMA will significantly change the
interaction of Medicare and Medicaid for coverage of prescription drugs.3
Changes to Eligibility for Dual Eligibles’ Prescription Drug
Coverage
Currently Medicaid covers several services for dual eligibles not covered by
Medicare including, at state option, prescription drugs. As of November 2002, all 50
states and the District of Columbia covered prescription drugs for at least some Medicaid
beneficiaries.
Starting in 2006, dual eligible individuals will no longer be eligible for the state’s
prescription drug benefit provided under the Medicaid state plan.4 To receive coverage
of prescription drugs, dual eligibles must enroll in the Medicare Part D benefit. This
benefit will be offered through drug plans that have received approval from the Secretary
of Health and Human Services (HHS).
It is unclear if the requirement for dual eligibles to enroll in Medicare Part D will
also apply to those who receive prescription drugs through a Section 1115 Medicaid
waiver.5 Several states (e.g., Arizona) provide a substantial portion of their Medicaid
program under the auspices of a Section 1115 waiver. Other states have specifically
developed Section 1115 waivers to expand drug coverage to low-income seniors. Policy
guidance on this issue is needed prior to implementing the new Medicare benefit.
Another issue is how MMA will affect 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
2 Some groups (including the Centers for Medicare and Medicaid Services) include in the
definition of “dual eligibles” those low-income Medicare beneficiaries for whom Medicaid only
covers some Medicare cost-sharing. For example, states are required to cover Qualified
Medicare Beneficiaries (QMBs), and Specified Low Income Medicare Beneficiaries (SLMBs).
3 See CRS Report RL32277, How Medicaid Works: Program Basics, by E. Herz, et al., and
[http://www.cms.hhs.gov/medicare/] for more information on the Medicaid and Medicare
programs.
4 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.
5 Section 1115 of the Social Security Act allows the federal government to waive certain sections
of Medicaid law for research and/or demonstration purposes. The waiver must be budget neutral
over a five-year period.

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standard. Some currently medically needy dual eligibles may no longer qualify for
Medicaid if their prescription drugs are paid for by Medicare and are no longer out-of-
pocket medical expenses. 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.
Changes to the Scope of Prescription Drug Coverage for Dual
Eligibles
Medicaid currently covers a broad range of prescription drugs. States may create
lists of preferred drugs or require prior approval for non-preferred drugs, but statutory
requirements insure that Medicaid covers a comprehensive list of drugs.6 Most states
limit coverage of prescription drugs through the quantity of the prescription (e.g., 30-day
supply), the number of refills, or the number of prescriptions within a given time period.
MMA defines covered drugs as the same specific types of drugs as those covered in
Medicaid. Drug plans are permitted to establish a formulary as long as it includes drugs
within each therapeutic category and class of covered Part D drugs. A drug plan does not
have to cover all drugs within a category or class. MMA requests the United States
Pharmacopeia to develop (in consultation with others) a list of therapeutic categories and
classes that may be used by drug plans.
If a state wishes to cover other drugs in a therapeutic class or category included under
MMA, the state may not use federal Medicaid funding to do so. This differs from other
benefits covered by both Medicaid and Medicare in which Medicaid can supplement
Medicare coverage.
From the individual’s perspective, it is likely that the scope of benefits will change;
the extent of this change and the process for beneficiaries are unknown. Unlike the
Medicaid program, MMA does not appear to limit the number of prescriptions an
individual can receive or require prior authorization for particular drugs, but an individual
may have access to only those drugs on a drug plan’s formulary. For example, a drug plan
formulary may cover a cholesterol drug that differs from the one an individual is currently
using; he or she may have to change prescriptions. MMA does give individuals limited
grievance and appeal rights to access a particular drug not covered by the formulary.7 Key
factors influencing the degree of change for dual eligibles are the definition of therapeutic
classes and categories and the standards for drug plan formularies.
Changes to Premiums and Cost-sharing for Prescription Drugs
Currently, most dual eligibles do not have a premium to enroll in Medicaid, but they
may have nominal co-payment requirements for the services they use. To enroll in the
Medicare drug benefit, most persons will have to pay drug plans a premium for coverage
6 For additional information see CRS Report RL30726, Prescription Drug Coverage Under
Medicaid, by Jean Hearne.
7 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.

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and cost-sharing amounts when they use benefits. MMA, however, establishes special
rules for dual eligible individuals. All dual eligibles will 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. If a dual eligible chooses a drug plan with a higher
premium than the amount of the subsidy, he or she will be 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
For dual eligibles who do not reside in an institution, the amount that they pay for
prescription drugs may change. Currently, state Medicaid programs are permitted to
impose nominal cost-sharing on non-institutionalized Medicaid beneficiaries. In 2003,
38 states imposed cost-sharing charges for Medicaid beneficiaries who received
prescription drugs. Generally, cost-sharing ranged from $.50 per prescription to $3.00.
Under MMA, the prescription drug benefit permits drug plans to 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 will be adjusted annually based on the Consumer Price Index (CPI). For other
dual eligibles, their co-payments will be $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
will be 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 increased in subsequent years by the increase in
Medicare per capita drug spending.
It appears that non-institutionalized dual eligibles may pay more per prescription
under the Medicare Part D benefit than they currently do 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
Currently under Medicaid, dual eligibles receive prescription drug benefits as part
of a package of Medicaid services, and the same prescription drug coverage rules apply
to all Medicaid beneficiaries. Under the Medicare drug benefit, drug plans may offer
different formularies and have different premiums or co-payments. Dual eligible
beneficiaries will have to choose the type of drug plan they want to enroll in. If a dual
eligible does not choose a plan, MMA permits the Secretary of HHS to automatically
enroll an individual in a drug plan in their area. The process to identify dual eligible
individuals and enroll those who do not enroll themselves is still under development.
8 Medicaid beneficiaries residing in institutions are required to contribute most of their income
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.

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Changes for Dual Eligibles Residing in Institutions
Nursing facilities and intermediate care facilities for individuals with mental
retardation are required to provide Medicaid residents including dual eligibles
pharmaceutical services to meet the needs of each resident. In doing so, facilities
generally contract with a pharmacy that supplies prescriptions drugs for those residents.
Dual eligible individuals who reside in institutions will also be required to enroll in the
Medicare Part D benefits. MMA requires drug plans to provide “convenient access” to
prescription drugs for individuals residing in institutions.10 It is unclear at this time how
this will be implemented: Will there be requirements for drug plans to contract with the
pharmacies that have existing contracts with institutions in their area? What flexibility
will drug plans have to meet the “convenient access” requirement? And, how will dual
eligible individuals residing in institutions experience this change in coverage?
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 FY2001 federal
and state drug rebate agreements reduced Medicaid drug expenditures by 19%.11
The effect of MMA on overall drug prices is unknown. Several areas remain
unclear:
! Fifty-four percent of Medicaid expenditures for outpatient prescription
drugs are spent on dual eligibles. With the majority of Medicaid drug
expenditures moving to the Medicare program, will the ability of the
federal and state Medicaid officials to negotiate rebates with
pharmaceutical companies diminish?
! What degree of success will drug plans have in negotiating low drug
prices with pharmaceutical manufacturers?
! What will be the effect of MMA confidentiality provisions stipulating
that prices negotiated by drug plans cannot be considered in the rate
Medicaid pays?
Revision of Payment Rates
Some states bundle prescription drug costs with other Medicaid payments, such as
payments to managed care organizations and nursing facilities. States will need to adjust
these rates to take into consideration the removal of prescription drug expenditures. This
10 Section 1860D-4(b)(1)(C)(iv) of the Social Security Act as added by P.L. 108-173.
11 CRS analysis of Centers for Medicare and Medicaid Services’ data, Form 64, FY2001.

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bundled payment also has implications for calculating the amount of money states return
to the federal government as discussed below.
Administration of Low-Income Subsidy
Under MMA, the state Medicaid agency is required to administer some components
of the new drug benefit. States are required to determine eligibility for the low-income
subsidy of the new drug benefit for all Medicare beneficiaries not just dual eligibles. This
will require both administrative capacity and changes to the state’s eligibility
determination system. The federal government will fund 50% of the cost of administering
the low-income subsidy. The state is required to fund the remaining 50% of the cost.
While screening individuals for Part D cost-sharing assistance, states must also at
the same time screen individuals for assistance with Medicare Part A and Part B cost-
sharing. More people may become eligible for cost sharing assistance for Medicare Part
A and Part B 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 assistance with
other Medicare cost-sharing and receiving full Medicaid benefits.
Medicaid Financing: The Clawback Formula
States are responsible for partially funding the new Medicare drug 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 spending on prescription drugs 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 will shift some of the spending on prescription
drugs for dual eligibles from the states to the federal government as the factor is 90% for
2006 and gradually declines to 75% for years after 2014.
There are three key issues with the clawback formula: (1) FY2003 expenditures
adjusted for inflation may not accurately reflect a state’s spending for FY2005 because
of changes to the Medicaid drug benefit that some states have made to address budget
shortfalls. (2) If Medicaid prescription drug expenditures are bundled with other types
of services, as is often the case with managed care, policymakers may have difficulty
separating out prescription drug expenditures from other service expenditures. This will
be important for establishing the state’s FY2003 baseline expenditures. (3) Federal data
on dual eligibles have some substantial limitations and are not always consistently
reported by states. The clawback amount relies on an accurate count of dual eligibles by
state. The federal government may have to work with states over the next two years to
improve the accuracy of the data.

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