Prescription Drug Coverage Under Medicaid

Publication Date: February 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

Medicaid is a joint federal-state entitlement program that pays for services on behalf of certain groups of low-income persons. One of its most important benefits is prescription drug coverage. Beginning in January 2006, many of Medicaid's elderly and disabled beneficiaries began receiving their drug coverage under Medicare. Nonetheless, Medicaid drug coverage remains an important source of drugs for many low-income and disabled Medicaid beneficiaries and for Medicaid financing, an important source of funding in the nation's pharmaceutical markets.

Outpatient prescription drug coverage under Medicaid is an optional benefit. If states choose to cover prescription drugs, they must be provided to Medicaid enrollees who are categorically needy, that is, to individuals who qualify for Medicaid on the basis of being in certain groups. In addition, states have the option of choosing to provide prescription drug coverage to medically needy individuals, persons who are not poor by cash welfare standards, but who require help with medical expenses. Thirty-three states and the District of Columbia provide prescription drug coverage to all Medicaid beneficiaries.

Prescription drug benefits under Medicaid are very broad. States can create formularies, or lists of preferred benefits, but certain federal rules keep actual coverage very comprehensive. Even in Medicaid managed care organizations, which are not subject to those rules, current practice combined with a directive from the Center for Medicare and Medicaid Services (CMS) ensures that drugs made available to fee-for- service enrollees must also be available to managed care enrollees. There are only 10 categories of prescription drugs that states are allowed to exclude from coverage and one category for which federal Medicaid funds cannot be used.

Based on state financial reports for 2004, payments for Medicaid outpatient prescription drugs, net of federal rebates, were $30.4 billion, accounting for about 11% of payments for all Medicaid services. Since 1990, pharmaceutical manufacturers whose drugs are covered by state Medicaid programs are required to rebate a portion of states' payments for their products. States reported collecting a total of $8.8 billion in federal rebates on prescription drugs in 2004. On average, in 2003, the last year for which prescription drug spending by enrollee are available, per-person spending for Medicaid drugs was almost $1,120.1

Under the new Medicare Part D drug benefit rules, state Medicaid programs will continue to contribute to the cost of drugs offered to the dually eligible population under Medicare based on a specified formula. In addition, Medicaid administrations will be required to conduct eligibility determinations for individuals qualifying for low-income assistance for the new Medicare program.

The Deficit Reduction Act of 2005 made a number of changes to the program's rules primarily relating to the financing of drugs and the cost sharing amounts that states are able to require Medicaid beneficiaries to pay for these drugs.