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States' Suit Challenges Medicare Drug Plan

February 2, 2006

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California Attorney General Bill Lockyer says several states are preparing to sue to challenge the new federal prescription drug plan that has left many seniors without needed medication and could end up saddling state taxpayers with a net loss of more than $750 million over the next three years.

"This program may be profitable for drug companies, but it has been a disaster for seniors, and it threatens to be a nightmare for the state's taxpayers," said Lockyer. "We believe the federal law is unconstitutional. We are going to challenge it to ensure the state does not have to pay the federal government for a program that has more flaws than prescriptions."

Lockyer's office will represent California and Governor Arnold Schwarzenegger's administration in the lawsuit. California likely will be one plaintiff in a multi-state complaint that will be filed this month with the U.S. Supreme Court.

The Governor and Legislature already have taken action to provide $150 million from the state's coffers to buy prescription drugs for eligible seniors who could not obtain their medicine under Part D of the federal Medicare Modernization Act (MMA), which took effect January 1, 2006.

The MMA, however, has a provision that could end up costing the state even more money. This so-called "clawback" provision will be targeted in the multi-state legal challenge.

Under Part D, the federal government provides prescription drugs – through private-sector health plans – to approximately 1.1 million California seniors eligible to receive benefits under both Medicare (100 percent federally funded) and Medi-Cal (shared state-state federal funding).

Theoretically, the federal plan is supposed to save California hundreds of millions of dollars it now spends to provide prescription drugs to seniors under the Medi-Cal program. But the clawback provision will eliminate most of those savings and actually end up costing California money, at least in the program's first few years.

The clawback provision requires states to pay back to the federal government most of their estimated savings. Because of the formula used by the federal government to determine each state's reimbursement requirement, California will not reap any savings in the first two years, but instead will incur net costs.

The clawback provision will force California to pay the federal government $500 million in fiscal year (FY) 2005-06 and $1.3 billion in FY 2006-07, according to the state Department of Health Services (DHS).

Because the federal government's clawback formula overstates how much California will save under Part D, the DHS estimates the state will incur a net cost of $72 million in FY 2005-06 and $59 million in FY 2006-07. The nonpartisan Legislative Analyst's Office in March 2005 estimated the MMA, because of the clawback provision and other factors, will cost California $758 million through FY 2008-09.

The states' legal challenge will argue the clawback provision is unconstitutional because it impermissibly: infringes on states' legislative power by requiring them to pay for a federal program; imposes a tax on states; infringes on state sovereignty; and imposes an invalid condition on the receipt of federal funds.

In petitioning the U.S. Supreme Court to exercise original jurisdiction, the states will ask the justices to take an unusual action. The states argue, however, that the case warrants extraordinary action because it presents important issues of federalism and because the clawback provision threatens the states with substantial fiscal harm.

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