Heritage Foundation Leadership for America

Medicaid Restrictions vs. Private Negotiations

(Addendum to testimony of Edmund F. Haislmaier, Research Fellow in Health Policy Studies, Domestic Policy, The Heritage Foundation.)

New data indicate that there is already evidence that the competitive private market in Medicare Part D is significantly reducing total program costs below the levels achieved by a system of government mandated price discounts. Therefore, introducing into the program some new mechanism of government negotiation might actually result in an increase in total program costs, and not the widely assumed further reduction.

The data are recent, substantial, downward revisions by both CMS and CBO to their estimates for state government payments to Medicare Part D.

The legislation establishing the Medicare Part D Program provided that "dual-eligibles"–those low-income Medicare beneficiaries who are also covered by Medicaid–would no longer receive their drug coverage through Medicaid but would instead be covered by Medicare Part D like other seniors.

Under Medicaid, the cost of drug coverage for dual-eligibles was funded out of a combination of state and federal money, while in Medicare Part D the Federal government is the only payer. Thus, the legislative drafters realized that, absent an offsetting provision, such a transfer of responsibility would result in states receiving a budget windfall.

To offset that effect, Congress included in the legislation a provision requiring states to make payments to the federal government equal to the estimated cost states would have incurred had they continued to provide their dual-eligibles with drug coverage under Medicaid. The law provided for the state payments, or "claw-back," to initially be based on historical Medicaid data, and then, from 2006 onward, indexed to the growth in average per-capita Part D costs.

Now that actual program costs are available, and those actual costs have come in much lower than the original estimates, CMS and CBO have made substantial downward revisions to their projections for state payments to Part D.

Medicaid employs a government mandated price discount system of best price or a 15 percent rebate off of the average manufacturer price. In contrast, Part D relies on a system of competing private plans each trying to negotiate better deals with manufacturers.

These changes in estimates indicate that the system of competing private plans is producing better results than an already existing system of government mandated price discounts.

Chart 1--Revisions to CBO Estimates of State Payments to Part D (click to view larger version)

Chart 2--Revisions to CMS Estimates of State Payments to Part D (click to view larger version)