The Impact on

States of the
Medicare Drug
Benefit
Information for
State Administrators

Prepared by
Linda Schofield, BSN, MPH
President, Schofield Consulting

Mary Kay Owens, RPh, CPh

President, Southeastern Consultants, Inc.

April 2005
Summary
The MMA has established an important new benefit for senior and disabled Medicare beneficiaries, thereby assuring their
access to a full array of medical services. States have numerous policy decisions to make in implementing the Part D drug
benefit, including several options to enhance the Part D program. These decisions must be made quickly in order to be ready
for the January 1st, 2006 implementation date. As the safety net provider for many vulnerable individuals, the state’s choices
on these matters are important to the future well-being of the elderly and disabled.

A brief summary of potential state actions and legislation includes:

Medicaid
• Cover non-Part D drugs, non-formulary drugs and/or copayments for dual eligibles.
• Incentivize or mandate pharmacies to waive copayments for dual eligibles that cannot pay.
• Establish a dedicated unit for education and assistance for dual eligibles related to plan selection, benefit use, and appeals.
• Re-evaluate existing and planned cost containment policies.
• Re-evaluate current DUR program structure and objectives.
• Re-evaluate disease and case management program structure and vendor contracts.
• Review current managed care program structure and benefit design.
• Review current and proposed LTC programs and alternative structures.

State Pharmaceutical Assistance Plans

• Become a bona fide SPAP within CMS rules or forfeit federal SPAP status.
• Mandate that SPAP enrollees apply for low-income subsidies and enroll in Part D plans, if eligible.
• Provide a mechanism to enroll eligible individuals in a Part D plan if they fail to do so voluntarily.
• Provide assistance to enrollees to apply for low-income subsidies.
• Revise current benefit design to become a wraparound or premium assistance program, or continue as a full benefit program.
• Use program savings to expand program benefits or eligibility.
• Designate the SPAP as the authorized representative for purposes of appeals.
• Amend program rules related to use of mail order drug services and out-of-network providers.

State Pharmacy Plus Demonstration Waiver Programs

• Review limitations of waiver’s current structure.
• Consider restructuring waiver program into an SPAP.
• Determine program design and consider offering wraparound benefits.
• Determine how to use savings to expand benefits.

Other
• Fund training and education for other affected agencies.
• Fund contingency drug supplies for high risk patients.
• Fund a program evaluation to inform future policy decisions.
• Decide how to structure retiree drug benefits to produce savings.

For more information, follow these links:

Centers for Medicare and Medicaid Services (CMS) at www.cms.hhs.gov/pdps or www.cms.hhs.gov/medicarereform
Kaiser Family Foundation at www.kff.org
Academy Health (for state coverage initiatives) at www.statecoverage.net/pdf/medicarepartd.pdf
The new drug benefit established by Part D of the Medicare
Modernization Act (MMA) assures that all older and disabled
persons have access to affordable prescription drug coverage
and will subsidize many low-income persons who previously
had no access to drug benefits through Medicaid or state
pharmaceutical assistance programs. It also will result in
significant changes in state programs that currently provide
drug benefits to other populations. While the major decisions
about the federal program’s design are now finalized and
codified, there are many important decisions that states will
make in the next few months regarding how state programs
will adapt to the new MMA benefit.
States will see both significant savings opportunities (especially
in their state pharmaceutical assistance plans [SPAPs] and
retiree benefits; possibly in Medicaid) as well as significant new
costs (especially in Medicaid) as a result of the Part D
program. The decisions states make can affect both.
Therefore, state legislators and administrators will need infor-
mation and analyses about all the options and decisions
before them.
However, the decisions made by state policy makers must not
only reflect budget considerations, but also recognize the lead
role that states have and always will have in providing a safety
net to the poorest, frailest, and most vulnerable of our citizens.
Related state policy decisions have the potential to influence
the perceived success of the Part D program implementation.
If states act to supplement and coordinate effectively with the
Part D program, they may prevent future demands upon safety
net services. Thus, the states have an essential role, comple-
menting the federal role, to address the access and
information needs of older and disabled persons who have
Part D benefits, but who also rely, and may continue to rely, on
various other state services.
Medicaid
The MMA makes its most sweeping impact on the Medicaid
program, carving out the coverage of drugs for dual eligibles
and transferring this responsibility to the Medicare program.
Federal matching funds will no longer be available for Medicaid
drug benefits provided to dual eligibles, except for drugs that
are not included in the list of Part D drugs. However, the
transfer of program responsibility is not a complete hand-off.
The states are still largely financially responsible for the cost of
drugs for dual eligibles, in the form of the “clawback.”
“Clawback” is the popular term for the mandatory payment
each state must make to the federal government toward the
1 April 2005
cost of Medicare drug coverage for the dual eligibles. The
states must also establish new processes and enhance their
infrastructure to accept and process applications for Part D
low-income subsidies. In the course of processing these appli-
cations, they must screen for eligibility for Medicare savings
programs available under Medicaid (QMB, SLMB, QDWI and
QI), thereby potentially discovering and enrolling significant new
numbers of dual Medicaid/Medicare beneficiaries at new
expense to the state. Additionally, states are assessing the
impact of MMA on Medicaid cost containment initiatives and
other programs such as disease management, drug utilization
review, Medicare subsidies, and managed care benefit
structures. While these requirements are finalized and will not
likely be changed, states do have a number of opportunities to
influence the effectiveness of the new Part D program and re-
evaluate future Medicaid policy and program design decisions.
Access: As safety net providers, states want to assure that dual
eligibles enjoy appropriate access to necessary medications
after their transfer to a prescription drug plan (PDP). Because
PDPs will have different formularies and prior authorization
requirements than the Medicaid programs, as well as higher
copays in some cases, some beneficiaries will face new barriers
in obtaining needed medications. Although Medicaid programs
cannot claim federal matching funds for coverage of copays or
for Part D drugs not available under a PDP’s formulary, the
states do have the option to use state funds to subsidize this
access. Indeed, some Medicaid programs are considering
enrolling their duals into their state pharmaceutical assistance
program (SPAP) as a vehicle for providing them such coverage.
In addition, states may continue coverage of non-part D drugs
(benzodiazepines, barbiturates, vitamins, over-the-counter
drugs, etc.) under Medicaid and may receive federal matching
funds for those costs.
The Centers for Medicare and Medicaid Services (CMS) has
also indicated that pharmacies may waive copayments for dual
eligibles at their own expense. Under federal Medicaid rules, in
states that have Medicaid drug copayments, the pharmacists
may not refuse to supply a prescription to a beneficiary who
cannot afford the copayment. States may want to work with
their state pharmacies to incentivize them to extend this same
protection to dual eligibles enrolled in Part D plans.
Alternatively, states may want to determine if they can extend
their current mandates for pharmacists to serve those dual
eligibles who cannot pay, even though the duals are covered
by Part D plans.
Education and Assistance: Although CMS will be
responsible for enrolling duals (voluntarily or randomly) into
PDPs, there are likely to be many individuals who do not
understand their benefits, who are enrolled in a plan not best
suited to their needs, or who in some way need further
assistance once they are initially enrolled. The final regulations
enable dual eligibles to switch plans as often as they like, but
many individuals may not recognize that they have this right, or
that they may be able to gain access to a drug that is not
covered by the PDP in which they initially enrolled.
Furthermore, they may not have the technical ability to
evaluate plan options against their personal needs in order to
determine best fit. Similarly, the federal regulations provide for
an exception and appeal process that enables enrollees to
pursue coverage of a denied drug. But the process will be
unfamiliar and the duals may need assistance to navigate their
way through it. If the state does not establish a dedicated
resource unit for providing such assistance, the duals will
inevitably contact their case workers, case managers, and
other state resource people in the Medicaid agency and
elsewhere. Therefore, states may want to fund an education
and assistance unit, especially during the early phase of tran-
sition to the new program in order to assure that beneficiary
needs are met to the best degree possible. They may also
want to coordinate their efforts with Area Agencies on Aging,
State Health Insurance assistance Programs (SHIPs), and
other non-profit organizations that provide outreach and infor-
mation services to older and disabled populations.
In addition to educating and assisting members, the Medicaid
agency and/or health department might also consider sending
information to or holding seminars for other providers who will
be affected by the Part D program. Nursing homes,
Intermediate Care Facilities for Persons with Mental
Retardation (ICFs-MR), and other residential treatment facilities
will be affected by provisions pertaining to long-term care
pharmacies and copayment exemptions for institutionalized
dual eligibles. These facilities can and should play a role in
assisting their clients to apply for subsidies, select PDPs, and
effectively use the Part D benefits to which they are entitled.
2 April 2005
Cost Containment Initiatives: States have implemented
many cost containment initiatives such as preferred drug lists
(PDLs), monthly prescription limits, and copayments for drugs.
It is important for states to realize that each of these cost
containment initiatives must be re-evaluated for policy modifi-
cations in light of the MMA Part D shift of prescription
coverage for dual eligibles out of the Medicaid program.
1. Preferred Drug Lists: Preferred Drug Lists (PDLs) are lists
of specific drugs that can be prescribed without prior
authorization based on the decision of a manufacturer to
offer state supplemental rebates for those products. The
savings from a PDL are dependent on:
a. The total volume of prescriptions (particularly in chronic
use drug classes) that are subject to therapeutic substi-
tution with higher supplemental rebate products, and
b. The state’s current federal medical assistance percentage
(FMAP) or “federal match.”
The shift of dual eligibles out of the Medicaid pharmacy
program significantly reduces the total volume of
prescriptions by at least 50 percent for most states and
more in states with a high percentage of dual prescription
users. The reduction of prescription volume reduces the PDL
savings by reducing the volume of prescriptions subject to
the supplemental rebate. The MMA shift also affects the
utilization mix of different drug classes, since the dual
eligibles tend to use more chronic use medications, which
contribute the greatest savings from a PDL. States with a
higher federal match rate must return that percentage of
savings to CMS, further reducing the state savings from PDL
supplemental rebates.
For these reasons, states will need to consider, post-MMA,
whether different drug classes should be included or
excluded from their PDLs and also how the shift in volume
and utilization mix will affect the PDL structure and policies.
States will also need to consider the return on investment of
continuing a PDL, based on the extensive administrative
costs and resources required to administer it. For states that
have not already implemented a PDL, it may not be cost
effective or generate enough savings to justify pursuing the
program.
2. Monthly Prescription Limits: States have implemented
monthly prescription limits based on current utilization data,
 which includes claims for both the Medicaid-only and the
dual population. The dual population is more likely to need
multiple drugs and specifically those drugs used to treat
chronic diseases. Once the dual eligibles transition to
Medicare, states will need to conduct a cost/benefit analysis
of limiting the number of prescriptions. The administrative
costs that result from manual reviews and prior authori-
zations for overrides above the limit may not be justified by
the savings from the monthly limit policy on the Medicaid-
only population.
3. Prescription Copayments: In recent years, states have
implemented or increased copayments for prescriptions to
generate savings to the drug program. The post-MMA
significant reduction in the volume of prescriptions will
reduce the effects of this cost containment strategy. In
addition, the population under federal law that is exempt
from copayments, i.e., pregnant women and children, will
represent a large proportion of the remaining Medicaid
population.
Drug Utilization Review Programs: States are required
under federal Medicaid law to conduct both prospective and
retrospective drug utilization review (DUR) programs to identify
the potential inappropriate use of medications. The transition of
all dual eligibles out of the Medicaid drug program will dramat-
ically reduce the volume of prescriptions identified by DUR
edits and subject to intervention. This volume reduction may
necessitate changes to the way resources are allocated and to
the primary objectives of DUR programs. States may find it
more cost efficient to conduct more detailed retrospective case
reviews, which integrate medical and pharmacy claims data in
order to identify statistical outliers. The detailed medical case
reviews could shift to a smaller, more targeted intervention
group of patients with chronic disease rather than conducting
large numbers of superficial drug claim reviews and sending
providers DUR generated form letters. It should be noted that
the dual eligibles are required to undergo traditional DUR, but
that function will be provided by the PDPs, not Medicaid. The
MMA calls for implementation of a new program for PDP
plans, defined as Medication Therapy Management Programs
(MTMPs). This program will require more intensive, targeted
medication therapy management of individual patients that
meet CMS’s defined criteria for high total drug costs and the
presence of multiple chronic diseases. States may want to use
a similar model for their modified DUR/medical case review
programs with the Medicaid-only population.
3 April 2005
Managed Care Benefit Structure: In response to the transition
of dual eligibles to Medicare Part D, many states are considering
changes to their managed care Medicaid program benefit
structures. States that originally allowed the managed care
organizations (MCOs) to include prescription drugs in their capi-
tation rates are concerned that the significant reduction in claim
volume for their fee-for-service (FFS) drug program will reduce
their base CMS rebates, as well as any PDL supplemental
rebates and savings. They are considering carving out the drug
benefit from the MCOs and moving it back into the FFS drug
program in order to increase total prescription volume. This will
serve to increase the state’s base CMS rebates because the
states obtain better rebates than the MCOs, and to increase PDL
supplemental rebates and savings because of the volume
increase which they believe offers better leverage when nego-
tiating manufacturer rebates. Other states have viewed the MMA
dual shift differently and propose expansion of managed care by
transferring all remaining non-dual eligibles into MCOs, eliminating
the FFS drug program completely. They believe this will reduce
the administrative costs of the Medicaid drug program and
simplify the delivery of services through the MCOs. To reduce
total program costs, several states propose allowing MCOs to
offer various levels of benefit packages that better fit the health
care needs of a younger, healthier post-MMA population.
Long-Term Care Costs and Benefit Structures: Medicaid
programs fund almost 50 percent of all long-term care (LTC)
costs nationally. This tremendous resource burden consumes
about 35 percent of most state Medicaid budgets and is
increasing each year. In recent years, states have sought to
restructure their long-term care programs by obtaining CMS
waivers for demonstration projects that allow patients to
remain in less costly home and community-based envi-
ronments, assisted living facilities (ALFs), and all inclusive care
programs such as PACE (Program of All-Inclusive Care for the
Elderly). The provisions of MMA Part D provide prescription
cost-sharing exemptions for institutionalized dual eligibles,
such as those residing in skilled nursing facilities and inter-
mediate care facilities. However, under MMA Part D, dual
eligibles that reside in home-based environments will be
subject to increased prescription cost-sharing above their
currently low or non-existent Medicaid cost-sharing
requirements. There is some concern among states that these
provisions will deincentivize patients from remaining in their
existing, alternative LTC environments and promote their
movement into traditional, more costly institutional care
facilities in order to obtain free medications. This could serve to
further increase the Medicaid budget.
Disease and Case Management Programs: Disease and
case management programs have been implemented and
expanded in many states during the past several years. There
are a few ways that the MMA will affect how states structure
these programs in the immediate future. States that have dual
eligibles enrolled in disease and case management programs
will need to reassess their participation in these programs and
whether changes should be made to existing vendor contracts.
States and their vendors currently have access to all drug claim
information enabling them to perform the detailed drug
utilization and medical care reviews vital to the success of
disease and case management activities. However, once the
dual eligibles shift to PDPs, there are no requirements that the
PDPs share drug utilization data with the states. This will create
a significant challenge for states and vendors performing
Medicaid disease and case management. Since many of the
physicians serving these patients with chronic disease are
Medicare enrolled providers (not affiliated with the Medicaid
program), there will be no opportunity for Medicaid to share the
dual eligibles’ drug utilization data with the multiple prescribing
physicians for those patients as part of the disease and case
management coordination efforts. States and vendors will have
to decide if this will severely impede their efforts and whether
they should exclude dual eligibles for those programs.
State Pharmacy
Assistance Programs
State Pharmacy Assistance Programs (SPAPs) enjoy special
treatment in the MMA and will reap savings as Medicare takes
on primary payor status for many members. SPAPs have
several options to consider in how they will coordinate with the
Part D program in the future:
SPAP Status: In order to be recognized as an SPAP under
the MMA, an SPAP:
• Must provide financial assistance for the purchase or
provision of supplemental benefits, i.e., benefits that wrap
around the Part D benefits,
• May not discriminate in the treatment of their enrollees
based upon which Part D plan they enroll in, and
• Must meet coordination of benefits requirements related to
the Part D plans as primary payors.
4 April 2005
In exchange for meeting these requirements, SPAP payments
of Part D deductibles and copayments are granted special
treatment: they count towards “true out-of-pocket costs”
(TrOOP). Note: SPAP payments for drugs not covered by the
PDP’s formulary or for drugs not covered by Part D of
Medicare do not count towards TrOOP and therefore do not
assist beneficiaries in reaching their catastrophic benefit level.
Likewise, payments made by most other third party payors do
not count towards TrOOP, however payments made by
relatives and bona fide charities, including patient assistance
programs supported by pharmaceutical manufacturers, will
count towards TrOOP.
Several states are considering whether the special treatment of
their payments is sufficient incentive to give up their desire to
auto-enroll all of their members into a preferred PDP, since
CMS has indicated that such action would constitute “discrimi-
nation” and cause them to lose their bona fide SPAP status.
Thus, the first option a state has is whether to continue its
SPAP program as a recognized or unofficial SPAP under CMS
rules. It should be noted that the decision to continue the
SPAP as such could have a negative impact on the SPAP’s
potential savings from the Part D program if the SPAP includes
enrollees who are above the low-income subsidy levels. The
loss of special status for SPAP payments as counting toward
TrOOP will result in the delay of a member reaching the out-of-
pocket threshold for catastrophic benefits. This delay in
reaching federal catastrophic benefits will leave the SPAP’s
responsible for continued higher copayments in an extended
“donut hole.” Furthermore, CMS has indicated that it will not
approve certain aspects of some of the specific proposals that
states have considered as non-qualified SPAPs.
Enrollment Options: If an SPAP elects to be a bona fide
SPAP under CMS rules, it may encourage or require its
enrollees to enroll in a PDP of their choice and, if they fail to
enroll voluntarily, the SPAP may randomly assign them to a
PDP or evaluate which plan is best for each individual and
enroll them accordingly. The SPAP may not, however, enroll
everyone who fails to choose their own PDP into a single
“preferred” PDP. This is considered a violation of the rule noted
in SPAP Status above regarding discrimination.
Because the SPAP will be paying for some or all of the
deductible, coinsurance, and “donut hole” that might apply to its
enrollees, as well as potentially any non-formulary drugs not
covered by the PDP, the SPAP has a financial interest in assisting
its enrollees in obtaining the most extensive PDP coverage
possible for the needs of each individual. Therefore, SPAPs may
want to consider developing a tool for matching individuals to
PDPs on the basis of their formularies and copayments, rather
than simply randomly assigning people to plans.
Note that, regardless of how the SPAP decides to assist
enrollees in signing up for a PDP, the state may want to pass
legislation changing the eligibility rules for the SPAP to require
SPAP enrollees who are eligible for Part D to enroll in Part D
plans and apply for low-income subsidies as a condition of
their SPAP enrollment. This will help to assure that the SPAP is
reaping all of the possible savings from the Part D program.
Eligibility Applications for Low-income Subsidies: It is in
the SPAP’s financial interest to get its enrollees promptly
signed up for Part D low-income subsidies. Although SPAPs
cannot make eligibility determinations, they can submit appli-
cations on behalf of their enrollees using the information they
already obtained during the eligibility process. The Part D
application also requires information about assets, so SPAPs
will need to gather that information from their enrollees. To
facilitate the application process, SPAPs will want to develop
Program Design: Each state can decide how it wants to
design its program in relation to the Part D program. They
have a variety of options, which all comport with federal
requirements and enable SPAP payments to count towards
TrOOP. Their options most simply are:
a. To continue as a full benefit plan and simply act as a
secondary payor. This means they need not change their
benefits and everyone enrolled in their program receives the
same or better benefits in total than they received before
Part D implementation. The SPAP simply deducts what the
PDP paid from what the SPAP would otherwise pay. If the
SPAP has an open formulary, it would pay when the PDP
denies coverage of a drug that is not on the PDP formulary.
The SPAP would also pay for “covered” drugs during the
donut hole and deductible periods, and might pay part of
the copayments due under the Part D plans, depending on
the relative copayment structures of each plan.
b. To provide only “supplemental” or “wraparound” coverage,
like a Medigap plan. This means they would pay only the
copayments and deductibles for PDP-covered drugs, and

an information technology solution to map their eligibility infor- would pay nothing for drugs denied by the PDPs.

mation to the application form required by the Social Security

c. To purchase wraparound coverage for SPAP enrollees from
Administration, allowing the forms to be completed in an
the PDPs and simply pay them an extra premium for
automated fashion.
covering copayments and deductibles, rather than
processing claims directly as an SPAP.

Medicare Part D Drug Plan Cost Sharing©

Beneficiary Income Coinsurance Copayment Premium Deductible Donut Hole

Group
Institutional Dual 0% $0 $0 $0 N/A
Patients
Full Duals with 0% $1/$3 $0 $0 N/A
Income up to (generic/brand) and
100% FPL $0 after $3,600
Income 0% $2/$5 $0 $0 N/A
100% up to 135% (generic/brand) and
FPL* $0 after $3,600
Income 15% $2/$5 $0 to 100% full $50 N/A
135% up to 150% Up to $3,600 (generic/brand) and premium (sliding
FPL* after $3,600 scale monthly
premiums)
“Standard Benefit” 25% $2/$5 $0 to $35/mo. $0 to $250 100% beneficiary
Income Greater (up to $2,250 drug (generic/brand) (full monthly payment
than 150% of FPL expenses) after $3,600 OOP premium) (between $2,250
Greater of 5% or Standard spending and $3,600)
Copayment
(after $3,600 OOP spending)

*Income up to $12,560 and assets < $6,000 for individual; income up to $16,862 and assets < $9,000 for couple (2004)
**Income between $12,569 and $13,965 and assets < $10,000 for individuals; income between $16,862 and $18,735 and assets < $20,000 for
couples (2004)
©2005 Southeastern Consultants, Inc.

5 April 2005
d. To subsidize any beneficiary premium due for those benefi- need to decide whether to change their SPAP rules to allow their
ciaries who do not qualify for full federal Part D low-income beneficiaries to obtain SPAP secondary coverage for out-of-
premium subsidies. This would assist all SPAP beneficiaries to state/out-of-network pharmacies and home infusion pharmacies.

State Pharmacy Plus

enroll in PDPs, but provide them no additional SPAP benefits.

Demonstration Waiver Programs

e. A combination of the above options, in which the SPAP
both subsidizes the PDP premium and also provides full or
Pharmacy Plus demonstrations are 1115 waivers that were
wraparound SPAP benefits.
designed for states to expand coverage for prescription drugs
under the Medicaid program using enhanced federal matching
Use of Savings: Because the SPAPs will have a significant
funds to seniors and individuals with disabilities who have
portion of their previous benefit costs offset by Part D plan
income exceeding that permitted for Medicaid eligibility.
benefit payments, there will be program savings. Each state will
need to decide how to use those savings. One state, for
Pharmacy Plus Status: CMS has approved four Pharmacy
example, is considering expanding their SPAP program eligibility.
Plus demonstration waivers in Florida, Illinois, South Carolina
and Wisconsin. The Florida Pharmacy Plus program covers
SPAP Authority to Appeal: If a state is planning to provide a
seniors between 88 and 120 percent of the federal poverty
full benefit and cover drugs that are denied by the PDP, then the
level (FPL). The remaining three states cover individuals up to
state will want authority to act as the “authorized representative”
200 percent FPL. These four states provide prescription
of the enrollee for purposes of appeal. Indeed, even if the SPAP
benefits to approximately 312,000 individuals, most of whom
only plans to cover wraparound benefits, the SPAP may want
are Medicare eligible. Two other states, Vermont and Maryland,
the authority to appeal for lower copayments on behalf of bene-
have low-income prescription benefit expansion programs that
ficiaries whose only medication options are in a high copayment
are not defined as pharmacy plus waiver programs but are
tier. The enrollees themselves may have no incentive to appeal if
somewhat similar in funding and benefit structure to the
they can still get their drug covered at the SPAP benefit level, so
pharmacy plus programs.
the SPAP needs to be able to take the lead in pursuing an
exception. States can either require each SPAP enrollee to sign
Structure Options: States have two options for their Pharmacy
a legal document designating the SPAP as their authorized
Plus waiver and similar expansion programs. They are:
representative, or they can pass legislation designating the
SPAP as such, with or without the enrollee’s signature.
a. States may continue to operate a Pharmacy Plus demon-
stration or expansion waiver program, but must
Mail Order Drug (MOD): Most SPAPs do not allow their
demonstrate that these programs will still be cost effective
enrollees to obtain benefits through a MOD facility, as they are
after January 1, 2006 by submitting a revised budget
usually licensed out-of-state and the SPAPs usually only cover
neutrality calculation for the demonstration.
in-state pharmacies. Furthermore, most SPAPs do not cover
three-month supplies typically provided by MOD facilities.
b. States can restructure their waiver programs into State
States will need to decide whether to change their SPAP rules
Pharmacy Assistance Programs (SPAPs).
to allow their beneficiaries to obtain SPAP secondary coverage
for MODs or extended supplies.
States that decide to continue their Pharmacy Plus waiver
programs must submit a revised budget neutrality calculation
Out-of-Network Benefits: Although most SPAPs have
to account for the reduction in Medicaid spending and less
virtually all in-state retail pharmacies in their networks, they
diversion of dual eligible beneficiaries into the Medicaid
typically do not cover out-of-state pharmacies or home
program due to the implementation of Part D program. CMS
infusion pharmacies. Many PDPs will cover a region that is
will review the revised budget neutrality calculation and
larger than the SPAP’s state, and indeed some PDPs will be
approve or disapprove the continuation of the demonstration
national in scope or will offer affiliated networks in other states
for the period when the prescription drug benefit is effective.
for “snow birds.” In addition, PDPs are required to cover home
States will find compliance with this requirement virtually
infusion pharmacies. Thus, the PDP networks will likely have
impossible to accomplish using reasonable assumptions.
pharmacies that are not in the SPAP network. Again, states will

6 April 2005
Under the final rule, Pharmacy Plus program costs, including
the state share of the program, cannot be counted towards
TrOOP because these programs do not qualify as SPAPs.
Due to the limitations listed above, it is recommended that
states restructure their waiver programs into SPAPs so they
can realize the maximum amount of savings available under
Part D. States that convert their waivers to SPAPs will be able
to enjoy all the benefits offered under MMA to SPAPs, such as
the ability to have payments count toward TrOOP for enrollees
so they reach catastrophic thresholds sooner.
Other State Agencies
Other state agencies that serve the aged and disabled will
inevitably feel the impact of the MMA in some fashion, as their
clients adapt to using their new benefits. At a minimum, case
managers and direct care workers in agencies such as the
departments of Mental Health, Mental Retardation, Aging, and
Health should be given some training about the new program and
about where beneficiaries can go for help with enrollment, plan
selection, premium subsidies, appeals, and benefit information.
In addition, programs serving high risk individuals such as
persons with AIDS or mental illness, should be particularly alert
during the transition phase for problems their clients may
encounter in gaining access to their medications, since those
medications may not be on the formularies of the new PDP in
which a dual eligible or other beneficiary may find him or
herself enrolled. Contingency planning may be appropriate to
prevent breaks in therapy, including plans to make available
short term supplies of certain medications while a patient
exercises appeal rights.
State psychiatric hospitals should revise their discharge
planning procedures to consider the availability of selected
medications on an outpatient basis from each patient’s Part D
plan. If a patient is being stabilized on a drug during an
inpatient stay, the medication should either be confirmed as
available for outpatient use or the hospital should complete the
exception request process before the patient is discharged.
Program Evaluation
Many states and advocacy groups will closely observe the
ability of PDPs, most of whom have never traditionally served
low-income populations, to ascertain their ability to sensitively
serve the needs of low-income individuals. However, without
documentation of patterns and trends, states may have little
7 April 2005
leverage in effectuating any necessary future policy
adjustments. States are in a unique position to collect data as
a collective consumer in a manner that any individual bene-
ficiary could not do. For example, SPAPs will receive the same
notices as CMS regarding formulary changes. Medicaid and
the SPAPs will have information about which PDPs their
clients enroll in and disenroll from. If either agency elects to
pay for non-formulary drugs or copayments, they will have
information about denials and cost sharing levels. If either
agency decides to assist beneficiaries to appeal or to appeal
on their behalf, they will have information about the turn-
around times and outcomes of exception requests and
appeals. And, of course, the Medicaid agency and
Department of Mental Health, for example, will have infor-
mation about use of non-drug benefits that they offer to Part
D enrollees. Given this access to information, states should
consider funding the ongoing evaluation of the impact of the
Part D program on state budgets and on beneficiaries’ access
to care. The following data elements would be useful to
monitor for purposes of future policy making:
• Number of claim denials for non-formulary drugs and other
reasons, and the outcomes (e.g., were exceptions
requested, were alternative drugs prescribed, did patients
simply fill no prescription?)
• Turn around times for exception decisions
• Frequency of enrollment changes to different PDPs
• Utilization trends in non-drug services that might indicate
failure to follow drug regimens, such as Medicare cross-over
claims for coverage of copayments, deductibles, or non-
Medicare services
• Frequency of PDP formulary deletions
• Number of enrollees in Medicare savings programs
State Retirees
Like all employers, the states will be able to pursue federal
subsidies for drug benefit costs for Part D eligible retirees who
are covered by the retiree plan in lieu of a Part D plan. In order
to collect these subsidies, states (or their health plan adminis-
trators) will need to certify that their plans are at least
actuarially equivalent to Part D benefits and will need to report
their benefit costs. The subsidy is equal to 28 percent of costs
 Definitions
per retiree between $250 and $5,000. In other words, states
can collect a per retiree subsidy of up to $1,330.

Employers, including states, may also pursue an alternative Part D Drug – Any prescription drug not categorically

approach to maintaining their retiree benefits but collecting excluded in 1927(k) of the MMA (i.e., benzodiazepines, barbi-

federal revenue: they may seek a waiver to become a PDP. As turates, drugs used for anorexia, etc.) or any prescription drug

a waivered PDP, they would provide their usual retiree benefits that is not covered under Part B.

as long as they are at least actuarially equivalent to Part D

benefits, and they could collect federal premium subsidies and Non-Part D Drug – Any prescription drug categorically

low-income subsidies like any other PDP. The waiver would excluded in 1927(k) of the MMA (i.e., benzodiazepines, barbi-

exempt them from certain other PDP requirements, such as turates, drugs used for anorexia, etc.) or drugs covered under

requirements related to the service area and enrollment of all Part B.

applicants other than their own retirees.

Covered Part D Drug – Any prescription drug that meets the

Of course, a state may also decide to drop its retiree benefits definition of a Part D drug and is also covered under a plan. A

entirely. Or states may require their retirees to enroll in Part D covered Part D drug is covered because: it is on the plan’s

plans, including Medicare Advantage plans, and provide them formulary or the beneficiary receives an exception or

only supplemental benefits, such as coverage during the donut successfully appeals non-coverage; the drug is determined to

hole. It is important to note, however, that such supplemental be medically necessary by the plan; and the drug is not

coverage will not count toward TrOOP and therefore will not otherwise excluded by the plan for some reason listed in

assist the retiree in reaching the catastrophic benefit threshold. section 1862(a) of the Act (i.e., drugs used for cosmetic
purposes, foot care, etc.).

States should conduct a fiscal analysis to determine which

option yields the greatest savings and make choices Non-covered Part D Drug – A drug that meets the definition

accordingly. of a Part D drug but for some reason the plan does not cover
it, perhaps because it is off-formulary, because the plan finds
the drug not reasonable and necessary, or because the plan
believes the drug is excluded under 1862(a).

True Out-of-Pocket (TrOOP) – Allowable incurred costs that

are payable by the beneficiary or by specified third parties on
their behalf (namely qualifying SPAPs; family, friends, or others;
and charities) within the limits of the standard benefit. Part D
catastrophic benefits become effective when TrOOP reaches
$3,600 (this value is specific to 2006 and increases annually
each subsequent year as per Sec. 1860D-2(b)(4)(B)(i)). When
TrOOP reaches $3,600, we say the beneficiary has reached
the “attachment point” or out-of-pocket threshold under the
standard benefit.

Low-income Cost-sharing Subsidy (LICS) – Medicare

payments to plans to subsidize the cost-sharing liability of
qualifying low-income beneficiaries, including plan premiums,
deductibles, coinsurances, and late enrollment penalties. The
statute divides these income-related subsidies into two cate-
gories: premium assistance and cost-sharing assistance.

8 April 2005
The National Pharmaceutical Council
1894 Preston White Drive
Reston, VA 20191-5433

703.620.6390

www.npcnow.org

1MPR0110405