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THE DISASTROUS IMPLEMENTATION of the new federal...

February 06, 2006

THE DISASTROUS IMPLEMENTATION of the new federal prescription drug benefit has cost the states hundreds of millions of dollars, as they have had to foot the bill for millions of low-income seniors and the disabled who have been left without coverage. But as the states and the federal government argue over

reimbursement terms, a far larger battle looms over the troubled new program.

On Wednesday, Atty. Gen. Bill Lockyer announced that California and four other states -- Kentucky, Missouri, New Jersey and Texas -- will file a lawsuit later this month against the federal government to block payments that Washington is demanding from states to fund the new drug plan. Gov. Arnold Schwarzenegger has endorsed the move.

The disagreement stems from one of the most controversial aspects of the 2003 law that authorized the new federal benefit, a provision evocatively called the "clawback."

Until this year, those eligible for both Medicaid and Medicare received prescriptions under Medicaid, whose costs are split between the states and the federal government. Since Jan. 1, however, Medicare -- solely a federal program -- has covered the drug costs of the low-income elderly and disabled. But when the federal government changed the Medicare program, it also changed the way it pays for it: States must send a monthly check to Washington for roughly the amount they would have had to pay if they were still splitting the cost of Medicaid. This amount is the clawback.

At stake? According to the Congressional Budget Office, it could amount to $48 billion over the next five years.

The clawback has been controversial since the moment it was introduced, and many states argue that it is unconstitutional. The federal government, they say, cannot simply confiscate state revenue. Several state officials also say errors in the way the feds are calculating the payments mean that their bills are even higher than they would have been under the old system.

Ultimately, the courts will decide the issue. Right now, states are searching for any legal theory they can think of to get out of paying, and a few are vowing not to send the first clawback payments that are due later this month. The federal government, for its part, has said it may simply reduce the amount of money it sends the states for other entitlement programs.

No matter the outcome, this mess illustrates how poorly the new Medicare law was written. The very idea of the clawback came not out of principle but desperation: The costs of the Medicare bill were getting too high, and Congress needed to find a way to make it seem less expensive. So it shifted a few dozen billion dollars to the states. Like a lot of other provisions in the Medicare law, it looked good on paper but has been found lacking in reality.

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