Illinois takes aim at prescription drug waivers in an effort to save state’s taxpayers money

For years, the hard-to-prove conventional wisdom has been that money spent on wellness, preventive services, and medications ultimately benefits the health care system by reducing the cost of expensive hospitalizations, nursing home care, and other high-end treatments.

The state of Illinois has received approval from the Centers for Medicare & Medicaid Services (CMS) to test that theory by giving senior citizens a comprehensive prescription drug benefit to be paid for through Medicaid savings.

The waiver allows Illinois to extend comprehensive prescription drug coverage to seniors with income up to 200% of the poverty line using federal Medicaid matching funds. The coverage replaces a significant portion of a state-funded pharmacy program that helped some 50,000 seniors pay for prescription drugs needed to treat selected conditions in fiscal year 2001.

Gov. George Ryan says the new program should be seen as a national model for providing assistance for all prescription medications to low-income senior citizens. The waiver program is modeled on the state’s Circuit Breaker/Pharmaceutical Assistance program administered by the Department of Revenue. Once enrolled, individuals would remain eligible for 12 months and have cost-sharing responsibilities. The Circuit Breaker program will continue to serve those who earn between 200% and 250% of the poverty level and disabled citizens.

Participants will pay a nominal copay averaging $3 per prescription. When an individual’s pharmaceutical costs exceed $1,750, the new program will pay 80% of the cost of additional prescriptions, with participants paying the other 20%. Included will be a full range of drugs such as antibiotics, gastrointestinal, anti-anxiety, antihistamine, and antidepressant therapies. The program also will make diabetic testing supplies, hypodermic syringes, ostomy supplies, and selected over-the-counter medications available to eligible seniors.

Andy Kane, rate development and analysis chief for the Department of Public Aid, tells State Health Watch the waiver request was developed because "we believe that this approach will be good for the population we are trying to serve. Nationally, pharmaceutical coverage for seniors is a very big issue. Our program with a limited formulary is growing extensively, and we wanted to expand it."

While a lot of attention has been paid to the notion of expanding pharmaceutical coverage for seniors at a time when most states are struggling with the burden of drug costs in their Medicaid program, equally interesting is the fundamental change that Illinois is promoting in the financing of its Medicaid program.

To pay for the new prescription drug program, Illinois has proposed dropping the federal government guarantee that it will match, as needed, the amount the state spends on its elderly Medicaid population. Rather, this demonstration project establishes an upper limit or cap on the amount the federal government will match of Illinois’ spending on its elderly Medicaid population over the next five years.

The cap is based on the amount the state anticipated it would need to cover its elderly Medicaid population without the new demonstration project. Illinois is betting that it can pay for the cost of the elderly Medicaid population and the new prescription drug program out of the capped amount of federal funding.

According to Washington, DC-based Kaiser Commission on Medicaid and the Uninsured analysis of the waiver, the state’s theory is that its demonstration project will prevent a significant number of seniors from becoming sick and/or poor enough to qualify for full Medicaid coverage, and that the savings generated by diverting seniors from Medicaid eligibility will be enough to pay for the new prescription drug program.

While the Kaiser analysis raises some questions about the validity of the assumptions and the state’s ability to make it work, Mr. Kane says the state is very confident about what it is doing.

"People tend to think of Medicaid as having a set number of people who derive benefits. But we have a large inflow and outflow of people over the course of a year. They spend down their income to cover some out-of-pocket expenses and become eligible for Medicaid support for their health care bills. We think that when we provide this prescription drug benefit, we will have savings from people who would otherwise be applying for Medicaid through a spend-down. But that’s a relatively small savings. The big savings will come from allowing individuals to access the medical care they need and stay in community settings, being diverted from nursing facilities."

Mr. Kane says the Illinois Medicaid program currently pays for two-thirds of the people in nursing facilities in the state. "There are limited studies indicating that any type of drug benefit produces an outstanding rate of diversion from institutional care. We’ve projected what we think is a conservative rate of 5%. Given that every Medicaid person in a nursing home costs us $30,000 a year, we think there is opportunity to save a lot of money and also have better health outcomes for the individuals."

Illinois could be on the hook

Kaiser senior policy analyst Jocelyn Guyer says that if the state’s spending for the two programs exceeds the capped amount, it will have to pay for the extra costs on its own, without the benefit of federal matching funds, creating a potentially strong incentive for the state to do whatever is necessary to avoid hitting the cap.

Noting that it’s not possible at the outset to assess whether Illinois’ bet is a safe one, Ms. Guyer reports that, "If it appears that the state’s need for federal funds might outstrip what is available under the cap for any reason, it will face competing pressure to cut back prescription drug coverage for low-income seniors and/or to cut back comprehensive services for low-income elderly beneficiaries. This could occur if costs are higher than expected for the new prescription drug program or if the cost of serving elderly beneficiaries under Medicaid is higher than anticipated.

"Even if Illinois’ experiment succeeds, it is notable that Illinois’ demonstration project sets a precedent by replacing open-ended federal matching funds for a state’s elderly Medicaid population with an overall cap on federal funding in order to generate resources that can be spent on prescription drugs for a different group of seniors," she says.

The state projected that it would spent a total of $14.6 billion on its elderly Medicaid population from FY 2003 through FY 2007 without the new prescription drug program. The federal government would be expected to provide 50% of that amount through its match. To arrive at the $14.6 billion, state officials assumed that the number of elderly people on its Medicaid program would increase 5% a year, while the per-capita cost of serving them would increase by 5.5% a year.

Taken together, these assumptions result in an average annual rate of increase in spending on the state’s elderly Medicaid population of 10.8% a year. By comparison, according to Guyer, the Congressional Budget Office assumes that national spending on elderly Medicaid beneficiaries will increase at an average annual rate of 8.7% in the same five-year period.

Large numbers must be diverted

To make its waiver work, Illinois is assuming that its new prescription drug program will deter 7,500 elderly people from becoming sick and/or poor enough to qualify for Medicaid in the demonstration project’s first year. Those 7,500 people represent 5% of the 162,000 elderly individuals the state anticipates would have enrolled in Medicaid without the demonstration. By the fifth year of the project, the state assumes that 41,400 elderly people will be deterred from enrolling in Medicaid because of the prescription drug program. Those 41,400 represent 21% of the 197,000 individuals who would have enrolled in Medicaid in the absence of the drug program. As seen in the chart below, Illinois expects that the demonstration project will be budget neutral over its five-year life, as required by CMS, but not in the early years.

In the first, second, and third years, the state expects it will spend more on the prescription drug program and the elderly Medicaid population than is allowed under the cap. But by the fourth and fifth years, it expects to spend less than allowed.

Ms. Guyer says there are any number of reasons why Illinois could find that the cost of operating either the drug program or the Medicaid benefit for the elderly could exceed the budgeted amount it anticipated needing. For instance, the number of elderly individuals eligible for Medicaid or the cost of serving them could go up more rapidly than expected.

"If it appears that Illinois’ need for federal funds might exceed the amount available under the cap, the implications for elderly Medicaid beneficiaries could be significant," Guyer writes in her analysis.

"The state would likely need to choose between cutting spending on elderly Medicaid beneficiaries, cutting spending on its prescription drug program, or reaching the federal funding cap and paying for any unanticipated program costs entirely with state funds. Given that the prescription drug program provides a low-income population with a popular benefit and is expected eventually to serve nearly twice as many elderly people as Medicaid, it appears likely that the state may face particular pressure to reduce spending on elderly Medicaid beneficiaries," she continues.

"The state could do so by rolling back eligibility for optional elderly Medicaid beneficiaries, making it more difficult for eligible individuals to apply for and retain coverage, cutting provider reimbursement rates, eliminating selected benefits, increasing the cost-sharing obligations that these beneficiaries face, or taking other steps, such as increasing the efficiency with which it provides prescription drugs to elderly Medicaid beneficiaries that would reduce Medicaid expenditures," Guyer writes.

Ms. Guyer says it’s possible the federal government would decide not to enforce the cap if it looks like Illinois is running into trouble, but it would be risky for the state to rely on that as a fallback position.

Support from stakeholders

But Mr. Kane says state officials are going into the program with their eyes open and have support from key stakeholders.

"We’ve worked with [the American Association of Retired Persons] in developing the demonstration, and they’re very glad to see us doing it," he points out.

"They’re helping with outreach and being very supportive. I’m not aware of any challenges to the program design or structure. We honestly believe we can make this work and not jeopardize our programs or the people who depend on us," Mr. Kane adds.

[Contact Mr. Kane at (217) 785-0710 and Ms. Guyer at (202) 347-5270.]