Feds Weighing $8.5 Million Cost to S.C. Medicaid

The NerveWhether South Carolina will pay the highest Medicaid prescription drug rates in the country is now up to the federal government.

About $8.5 million in tax dollars hangs in the balance – money that would boost pharmacy profits and exert greater strain on an already overextended health care program for low-income people.

It is a hot story that has generated a lot of interest on The Nerve and is getting hotter.

Will there be political fallout – or a fall guy?

Those are but two of many questions amid the intrigue.

First, a little background.

Medicaid provides health care services to the disadvantaged. The program is means tested according to income. The federal government and states fund Medicaid based on a matching formula, generally 70 percent/30 percent, respectively.

The Centers for Medicare & Medicaid Services (CMS) administers the program at the federal level. The S.C. Department of Health and Human Services (HHS) oversees Medicaid at the state level.

In the Palmetto State, Medicaid rolls have jumped by more than 90,000 since the recession began at the end of 2007, according to HHS spokesman Jeff Stensland.

But state funding has not kept up with the enrollment growth, contributing to a potential financial meltdown at Health and Human Services.

The federal government’s decision on the state’s Medicaid prescription rates could exacerbate that fiscal stress.

Acting under a requirement in a state budget proviso, Health and Human Services recently submitted a proposal to the Centers for Medicare & Medicaid Services to change the formula HHS uses to pay for brand-name drugs through Medicaid.

The new reimbursement method would result in South Carolina paying more for those Medicaid prescriptions than any other state, according to Stensland.

Adam Fein, a Philadelphia-based expert and consultant on the pharmaceutical industry who writes the DrugChannels.net blog, agrees.

But CMS must sign off on the new formula.

Lee Millman, CMS regional spokeswoman in Atlanta, did not answer e-mailed questions from The Nervebefore the deadline to post this report.

In South Carolina, the formula change would essentially eliminate cost savings Medicaid began yielding after a federal class-action lawsuit was settled in March 2009. The case centered on inflated national pricing benchmarks for Medicaid drugs.

The Nerve first reported on this issue in an exclusive story published Aug. 31.

S.C. Rep. Tracy Edge, R-Horry, proposed the change to the reimbursement equation during this year’s session of the General Assembly.

The South Carolina Pharmacy Association and the South Carolina Association of Chain Drug Stores lobbied for the new formula during the session. State Ethics Commission records show that the two pharmaceutical industry groups paid lobbyists a combined $69,500 in attempting to influence lawmakers this year.

The formula change was drafted into a state budget proviso that sets the reimbursement rate for Medicaid prescriptions.

The recalculation originated in the House Ways and Means Committee, which drafts the House version of the state budget. Edge sits on the committee and chairs its Health, Human Services and Medicaid Subcommittee, which wields frontline regulatory power over the health care industry in South Carolina.

From the beginning of 2008 through June of this year, the health care sector accounted for about 27 percent of the campaign contributions Edge reported to the Ethics Commission – more than $50,000 of nearly $200,000.

In a phone interview with The Nerve on Tuesday, Edge said he proposed the new formula because the national pricing standard is being eliminated as a result of the lawsuit settlement.

If the state did not come up with an alternative, Edge said, “They (CMS) would have wound up stepping in and setting it for us.”

He said it was not done “to give anybody a rate increase” or “a profit.”

The health care subcommittee chairman also said that neither he nor his colleagues on the panel were told about the fiscal impact of the formula change. “They never gave us that figure,” Edge said of the Health and Human Services agency. “They never gave us any figure.”

“If somebody would have told us it was $10 million, the proviso would have never gotten past first base,” Edge added.

He said it was not a case of the subcommittee or committee approving something without regard to how it could impact the budget. “Because we do look and we’re very cognizant.”

Rather, Edge said, HHS was responsible for alerting lawmakers to the matter “because they’re the only ones who can do it.”

In the absence of such a notification, he said, the proviso change was thought to be budget neutral.

Asked to respond to Edge’s points, Stensland says agencies frequently are unaware of legislative proposals that could impact them. “We don’t always know what’s being introduced when,” he says.

And Stensland says HHS does its best to keep legislators informed. “When we’re asked to provide information about budgetary impacts, we do our best to provide that in a very timely manner.”

After The Nerve’s initial report, readers posted comments about the story questioning whether a fiscal impact statement on the formula change had been prepared, and, if so, whether it had been presented to lawmakers.

Well, there was one. But whether legislators saw it, and when, remains in dispute.

The estimate says the formula change would cost about $8.2 million. Of that, $2 million would come out of the state’s general fund; the rest would come from the federal treasury.

The projection was compiled by the Office of State Budget, a division of the S.C. Budget and Control Board.

The fiscal impact statement is dated Feb. 23. However, Budget and Control Board spokesman Mike Sponhour says he was told that the estimate was not finalized until after the Ways and Means Committee finished its work on the budget.

Stensland says Health and Human Services was not asked to produce a revenue impact assessment until Feb. 22. “We submitted it the day after we received the request,” he says.

At the time of The Nerve’s first report, HHS had provided only a projected range of what the formula change would cost – $8 million to $10 million.

Now, HHS has arrived at a more precise figure that nearly matches the Office of State Budget’s.

Health and Human Services “estimates this action will increase total annual expenditures by approximately $8,500,000,” says a public notice HHS issued as part of the department’s proposal to the feds.

Will CMS go along with it?

“I don’t know,” says Fein, the pharmaceutical industry expert in Philadelphia.

He says the federal agency often gives states latitude to set their Medicaid reimbursement rates.

But CMS has a new chief administrator, recently appointed Dr. Donald Berwick, who is focused on curtailing health care costs, Fein says. “This could be a test case for how CMS interacts with states on pharmacy,” he says of the proposed South Carolina formula change.

U.S. District Judge Patti Saris of Massachusetts presided over the federal class-action lawsuit concerning inflated national pricing standards for Medicaid prescriptions.

In a written order approving the settlement of the case, Saris said pharmacies “were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits.

“None of the pharmacies protested the windfalls they received when prices were unilaterally inflated by five percent. Further, the pharmacies seem to have survived prior to the start of this fraudulent scheme, making it seem likely that they will survive after it has been undone.”

The National Association of Chain Drug Stores criticized the settlement.

The association’s president and chief executive officer, Steve Anderson, said it will “unduly and inappropriately penalize pharmacies as well as patients if pharmacies are forced to close or alter their business practices,” according to an April 2009 dispatch in Chain Drug Review, a pharmaceutical industry publication.

Reach Ward at (803) 254-4411 or eric@thenerve.org.