State Pharmacy Programs: Assistance Designed to Target Coverage and
Stretch Budgets (Letter Report, 09/06/2000, GAO/HEHS-00-162).

Pursuant to a congressional request, GAO provided information on
state-administered pharmaceutical assistance programs, focusing on: (1)
characteristics of state programs designed to provide prescription drug
access to eligible populations; and (2) the administrative and policy
issues that states have encountered in operating drug assistance
programs.

GAO noted that: (1) in 1999, 14 states were operating independent,
state-funded and administered programs that provided more than 760,000
elderly and other low-income persons with access to prescription drugs;
(2) most programs are funded with the state's general revenues, but some
receive earmarked funds; (3) all state pharmacy programs provide
benefits for low-income elderly state residents, but specific
eligibility rules differ; (4) the programs vary in the number of people
enrolled and their size relative to the number of Medicare beneficiaries
in the state; (5) states attempt to provide access to drugs and manage
program costs through coverage restrictions such as dollar caps on
benefits, deductibles, copayments, and limits on the types of drugs
covered; (6) among state programs, copayments and coinsurance are more
common than benefit caps and deductibles, but the amount of cost sharing
varies widely across programs; (7) all state programs obtain rebates
from drug manufacturers to offset part of their expenditures--most state
programs receive manufacturers' rebates that are calculated on terms
similar to rebates under the Medicaid program; (8) to provide a pharmacy
assistance benefit to a low-income and largely elderly population, while
remaining within the program budget, states have taken a variety of
approaches to administering their programs; (9) these include developing
adequate systems to administer benefits and coordinating payment with
and recovering payment from other insurers; (10) states have also
attempted to encourage enrollment by mitigating the perceived stigma
attached to assistance programs, which could inhibit enrollment, and by
providing information to eligible persons so that they are aware of the
program and know how to apply; (11) three program administrators said
that drug assistance programs were intentionally administered apart from
Medicaid programs to avoid the perceived stigma attached to Medicaid;
(12) however, several states administer aspects of their programs
through and employ the policies of the agency administering Medicaid;
(13) administering programs using Medicaid systems allows states to
avoid duplicating program functions, such as eligibility determination
and claims processing and adjudication; and (14) nevertheless, some
states have encountered administrative challenges in developing adequate
eligibility determination and claims processing systems and in
recovering payments from insurers when program enrollees have other drug
coverage.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-00-162
     TITLE:  State Pharmacy Programs: Assistance Designed to Target
	     Coverage and Stretch Budgets
      DATE:  09/06/2000
   SUBJECT:  Pharmaceutical industry
	     Health care programs
	     Health care cost control
	     Drugs
	     State programs
	     Elderly persons
IDENTIFIER:  Medicare Program
	     Medicaid Program
	     New Jersey
	     New York
	     Pennsylvania
	     Connecticut
	     Delaware
	     Illinois
	     Maine
	     Maryland
	     Massachusetts
	     Michigan
	     Rhode Island
	     Vermont
	     Wyoming

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GAO/HEHS-00-162

GAO United States General Accounting Office

Report to Congressional Requesters

September 2000 STATE PHARMACY PROGRAMS

Assistance Designed to Target Coverage and Stretch Budgets

GAO/ HEHS- 00- 162

Page 1 GAO/ HEHS- 00- 162 State Pharmacy Programs

Contents Letter 3 Appendixes Appendix I: Scope and Methodology 26 Tables
Table 1: State Pharmacy Assistance Programs, Years Enacted and

Operational 7 Table 2: Eligibility Requirements for State Pharmacy
Assistance Programs,

1999 9 Table 3: Drug Coverage Rules for State Pharmacy Assistance Programs,

1999 12 Table 4: Cost- Sharing Requirements for State Pharmacy Assistance

Programs, 1999 13 Table 5: Funding Sources for State Pharmacy Assistance
Programs 16 Table 6: Expenditures and Rebates for State Pharmacy Assistance

Programs, 1999 18 Table 7: Administrative Information on State Pharmacy
Assistance

Programs 21

Page 2 GAO/ HEHS- 00- 162 State Pharmacy Programs

Page 3 GAO/ HEHS- 00- 162 State Pharmacy Programs United States General
Accounting Office

Washington, D. C. 20548 Page 3 GAO/ HEHS- 00- 162 State Pharmacy Programs

Health, Education, and Human Services Division

B- 285875 Letter

September 6, 2000 The Honorable Thomas J. Bliley, Jr. Chairman, Committee on
Commerce House of Representatives

The Honorable Michael Bilirakis Chairman, Subcommittee on Health

and Environment Committee on Commerce House of Representatives

The Medicare program, with few exceptions, does not pay for outpatient
prescription drugs, which have become an increasingly important part of
health care. Over two- thirds of Medicare beneficiaries had some other
source of outpatient prescription drug coverage in 1996, 1 but for some of
these beneficiaries, insurance pays only a fraction of their drug costs. The
other one- third of Medicare beneficiaries must pay for their prescription
medications entirely out of pocket because they do not have access to
coverage, cannot afford to purchase coverage, or choose not to purchase
coverage. Medicare beneficiaries, in particular, may be vulnerable to high
prescription drug costs because of their disproportionate use of
prescription medication. To fill the insurance gaps for some low- income
elderly residents, several states have enacted independent, state- funded
programs to provide prescription drug coverage.

Over the past year, extending prescription drug coverage to Medicare
beneficiaries has been the topic of several congressional hearings and the
objective of many legislative proposals. 2 At the same time, a number of
states have implemented, considered implementing, or altered existing drug
assistance programs for the elderly and others with low incomes. Examining
the design and administration of these state programs provides useful
information about how states provide drug benefits to targeted

1 J. A. Poisal and G. S. Chulis, “Medicare Beneficiaries and Drug
Coverage,” Health Affairs (Mar./ Apr. 2000), p. 250. 2 On June 28,
2000, the House of Representatives passed H. R. 4680, which would provide
subsidies for Medicare beneficiaries to purchase private insurance plans to
cover prescription drugs.

B- 285875 Page 4 GAO/ HEHS- 00- 162 State Pharmacy Programs

populations. You asked us to examine state- administered pharmaceutical
assistance programs and to describe (1) the characteristics of state
programs designed to provide prescription drug access to eligible
populations and (2) the administrative and policy issues that states have
encountered in operating drug assistance programs.

To respond to these questions, we examined state programs that provide
prescription drug benefits. We obtained information on the policies, design
features, and operations of each from interviews with state program
officials. We also reviewed relevant laws, regulations, and program
literature and interviewed senior citizen advocates in some states. We
conducted our study from November 1999 to August 2000 in accordance with
generally accepted government auditing standards; however, we did not
independently verify all data obtained from state program administrators.
App. I provides a more detailed discussion of our study methodology.

Results in Brief In 1999, 14 states were operating independent, state-
funded and administered programs that provided more than 760,000 elderly and
other

low- income persons with access to prescription drugs. 3 Most programs are
funded with the state's general revenues, but some receive earmarked funds.
All state pharmacy programs provide benefits for low- income elderly state
residents, but specific eligibility rules differ. The programs vary in the
number of people enrolled and their size relative to the number of Medicare
beneficiaries in the state. States attempt to provide access to drugs and
manage program costs through coverage restrictions such as dollar caps on
benefits, deductibles, copayments, and limits on the types of drugs covered.
Among state programs, copayments and coinsurance are more common than
benefit caps and deductibles, but the amount of cost sharing varies widely
across programs. All state programs obtain rebates from drug manufacturers
to offset part of their expenditures; most state programs receive
manufacturers' rebates that are calculated on terms similar to rebates under
the Medicaid program.

To provide a pharmacy assistance benefit to a low- income and largely
elderly population, while remaining within the program budget, states have
taken a variety of approaches to administering their programs. These

3 Three states- New York, Pennsylvania, and Vermont- had more than one
pharmacy program, bringing the total number of operational programs to 18.

B- 285875 Page 5 GAO/ HEHS- 00- 162 State Pharmacy Programs

include developing adequate systems to administer benefits and coordinating
payment with and recovering payment from other insurers. States have also
attempted to encourage enrollment by mitigating the perceived stigma
attached to assistance programs, which could inhibit enrollment, and by
providing information to eligible persons so that they are aware of the
program and know how to apply. Three program administrators said that drug
assistance programs were intentionally administered apart from Medicaid
programs to avoid the perceived stigma attached to Medicaid. However,
several states administer aspects of their programs through and employ the
policies of the agency administering Medicaid. Administering programs using
Medicaid systems allows states to avoid duplicating program functions, such
as eligibility determination and claims processing and adjudication.
Nevertheless, some states have encountered administrative challenges in
developing adequate eligibility determination and claims processing systems
and in recovering payments from insurers when program enrollees have other
drug coverage.

Background Medicare is the primary source of health care coverage for most
U. S. residents who are 65 or older, yet, with few exceptions, it does not
cover

outpatient prescription drugs. Most Medicare beneficiaries with prescription
drug benefits receive coverage from employer- sponsored retirement plans,
Medicare managed care plans, Medicare supplemental policies (Medigap), or
Medicaid. 4 The protection such coverage provides varies across insurance
type and can be expensive. Standard Medigap plans that cover prescription
drugs have a $250 deductible, 5 require 50 percent coinsurance, and have
limits of $1250 or $3000 on annual covered drug expenses. Recent evidence
shows that premiums are rising for employersponsored plans, Medicare managed
care plans, and Medigap policies. In addition, some employer- sponsored
health plans and Medicare managed care plans are imposing greater cost-
sharing requirements and more restrictive coverage limits for drugs under
their plans.

Medicaid is a health insurance entitlement program funded jointly by federal
and state governments for certain low- income populations, including about
12 percent of Medicare beneficiaries. Medicare

4 Poisal and Chulis, “Medicare Beneficiaries and Drug Coverage,”
p. 252. 5 A deductible is the amount a program enrollee must pay before the
program pays some amount for covered services.

B- 285875 Page 6 GAO/ HEHS- 00- 162 State Pharmacy Programs

beneficiaries who qualify for full Medicaid benefits receive prescription
drug coverage through their state's Medicaid program. Some Medicare
beneficiaries qualify for limited Medicaid assistance with Medicare premiums
and cost sharing. States are not required to provide prescription drug
coverage to Medicare beneficiaries who qualify for limited Medicaid
benefits.

State Programs Differ, but Eligibility, Benefit Design, and Manufacturer
Rebates Influence Program Spending in All States

In 1999, 14 states were operating state- funded pharmacy assistance programs
that provided more than 760, 000 enrollees- mostly low- income seniors and
persons with disabilities in some states- with financial assistance to
purchase prescription drugs. Several other states have also recently passed
legislation to add such programs. Sources of program funding and budget
levels vary across states. Most states have chosen to concentrate their
limited budgets by targeting drug programs to lowincome seniors and persons
with disabilities who do not qualify for Medicaid drug coverage, although
eligibility rules vary across states. All states received manufacturer
rebates on drugs to defray their programs' spending. Programs also extend
their budgets by requiring recipients to contribute to the purchase price of
their prescriptions; however, the amount of cost sharing varies across
programs.

Pharmacy Assistance Programs Began in 1975; Additional States Have Added
Programs

The first state pharmacy assistance programs were enacted in Maine and New
Jersey in 1975 to provide prescription drug coverage to low- income 6
Medicare beneficiaries (see table 1). In the 1980s, eight more states-
Connecticut, Illinois, Michigan, New York, Pennsylvania, Rhode Island,
Vermont, and Wyoming- added prescription drug benefit programs. Eleven
states enacted programs from 1996 to 2000. In 1999 alone, seven state
legislatures expanded or added programs. New state programs in Florida,
Indiana, Kansas, Michigan, Nevada, and South Carolina are not yet fully
operational. Most programs were operational within 1 year after enactment.
As of June 2000, four states have two or more programs that share some
features but differ as to eligibility criteria, covered drugs, or cost-
sharing requirements.

6 “Low- income” is often defined as an individual or family
income below some percentage of the federal poverty level (FPL), a standard
that is used to establish financial eligibility for some federal programs.
Some state drug assistance programs use FPL guidelines, and other states use
different methods to define program eligibility. The 1999 FPL for an
individual in the 48 contiguous states and District of Columbia was $8, 240.

B- 285875 Page 7 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 1: State Pharmacy Assistance Programs, Years Enacted and Operational

a According to Michigan officials, the EPIC program will replace MEPPS. b
The California program, which became operational February 1, 2000, allows
Medicare beneficiaries in California to purchase drugs at pharmacies for the
same price paid by the California Medicaid (MediCal) program. A pharmacy
must participate in this program as a condition of participation in the Medi

State Program Year enacted Year operational

New Jersey Pharmaceutical Assistance to the Aged and Disabled (PAAD) 1975
1975 Maine Maine Low- Cost Drug Card Program for the Elderly or

Disabled 1975 1975 Maryland Maryland Pharmacy Assistance Program 1978 1979
Pennsylvania Pharmaceutical Assistance Contract for the Elderly (PACE) 1983
1984 Connecticut Connecticut Pharmaceutical Assistance Contract to the

Elderly and Disabled Program (ConnPACE) 1985 1986 Illinois Circuit Breaker
Pharmaceutical Assistance Program 1985 1985 Rhode Island Rhode Island
Pharmaceutical Assistance to the Elderly

(RIPAE) 1985 1985 New York Elderly Pharmaceutical Insurance Coverage Program
(EPIC) 1986 1987 Michigan Michigan Emergency Pharmaceutical Program for
Seniors

(MEPPS) a 1988 1990 Wyoming Minimum Medical Program 1988 Operational, but
year

not provided by program official

Vermont VScript 1989 1989 Massachusetts Senior Pharmacy Program 1996 1997
Pennsylvania Pharmaceutical Assistance Contract for the Elderly,
NeedsEnhancement Tier (PACENET) 1996 1996

Vermont Vermont Health Access Program (VHAP Pharmacy) 1996 1996 Minnesota
Senior Drug Program 1997 1999 California California Drug Discount Program b
1999 2000 Delaware Delaware Prescription Assistance Program (DPAP) 1999 2000
Massachusetts Pharmacy Program Plus c 1999 2000 Michigan Elder Prescription
Insurance Coverage (EPIC) 1999 Not yet operational Nevada Senior citizen
subsidy for prescription drug private insurance

policies d 1999 Not yet operational North Carolina Prescription Drug
Assistance Program 1999 2000 Vermont VScript Expanded 1999 2000 Florida
Pharmaceutical Expense Assistance Program 2000 Not yet operational Indiana
Indiana Prescription Drug Fund 2000 Not yet operational Kansas Senior
Pharmacy Assistance Program 2000 Not yet operational South Carolina Seniors'
Prescription Drug Program 2000 Not yet operational

B- 285875 Page 8 GAO/ HEHS- 00- 162 State Pharmacy Programs

Cal program. Because this program does not provide drug coverage, but rather
allows Medicare beneficiaries to purchase drugs at Medicaid prices, it is
not discussed further in this report. c The Massachusetts Pharmacy Program
Plus, authorized for only 1 year, is intended to cover residents

who are 65 or older or disabled, with incomes not more than 500 percent of
the federal poverty level, who spent at least 10 percent of their gross
monthly income on prescription drugs in 3 of the 6 months prior to
application, and who are projected to have prescription drug expenses
exceeding 5 percent of their gross monthly income as long as they are
eligible under the program. d Nevada will provide a subsidy up to $480 per
year to Medicare beneficiaries to purchase insurance for

prescription drugs. Sources: State programs, National Conference of State
Legislatures, and http:// www. ncsl. org/ programs/ health/ drugaid. htm
(downloaded 06/ 23/ 00).

Eligibility Limits and Benefit Design Target Program Assistance

States use age, income, and other criteria to target and control the size of
their drug assistance programs (see table 2). All but three programs
required enrollees who are not disabled to be at least 65. 7 Almost two-
thirds of the programs had eligibility criteria that allow some people with
disabilities to be eligible for assistance. 8 In 1999, the income limits
varied from 100 percent of the federal poverty level (FPL) to 225 percent.
In addition to income restrictions, Michigan required an enrollee's monthly
prescription drug expenditures to exceed 8 percent of their monthly income
if the person is married or 10 percent if the person is single or widowed.
Recognizing that strict income limits may exclude some individuals who need
assistance, the Maine and Delaware programs make exceptions to their income
limits for people with drug expenditures exceeding 40 percent of their
income. Three states also had asset limits. All states restricted
eligibility to state residents but had variable minimum residency
requirements. Most states allowed people with other drug coverage to enroll
in the program, but specific rules varied.

7 Programs in Maryland and Wyoming had no minimum age requirements. Maine
requires participants to be at least age 62. 8 The definition of
“disabled,” for the purpose of program eligibility, varied
across states, as did age requirements for people with disabilities. For
example, in Illinois, a resident with a disability must be older than 16 to
be eligible for the state's pharmacy program, while in Maine, a resident
with a disability must be at least 19 years old. A few states defined
persons receiving or eligible for Social Security disability insurance
benefits as disabled for the purposes of their pharmacy programs, while
other states used state- developed criteria.

B- 285875 Page 9 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 2: Eligibility Requirements for State Pharmacy Assistance Programs,
1999

Notes: N/ A= Not available. Medicare beneficiary counts were as of 1998, the
latest year for which state- level data were available. a Seven states
define income eligibility levels as a percentage of FPL. One state program
allows for

adjustment of income thresholds based on changes in the cost of living. Four
states adjust income based on the Social Security cost- of- living
adjustment. Two states do not index income requirements for inflation. b Age
eligibility requirements for persons with disabilities vary across states.

c The Delaware program was not operational until January 2000; therefore,
enrollment is not included, and eligibility requirements are for 2000. d
During the fiscal year 2001 state appropriations process, Illinois expanded
eligibility to individuals with

annual incomes up to $21, 218; this change is effective in 2001. e The
listed income limits for Maine were effective in September 1999.

f During the fiscal year 2001 state appropriations process, Massachusetts
enacted a new catastrophic program with no upper income limit and sliding
scale payments for those over 188 percent of FPL; this program is effective
in 2001. g The Minnesota programaveraged 1200 enrollees per month in 1999.

State Individual

income limit (percentage of

1999 FPL) a Married or

household income limit Age

requirement Coverage for

persons with disabilities b Enrollment

Enrollment as a share of Medicare

beneficiaries in state (percentage)

Connecticut $14, 500 (176) $17, 500 65 Yes 29,969 6 Delaware c $16,480 (200)
$22, 120 65 Yes N/ A N/ A Illinois d $16,000 (194) $16, 000 65 Yes 49,186 3
Maine $15,244 e (185) $20,461 e 62 Yes 25,000 12 Maryland $9, 400 (114) $10,
200 None Yes 33,185 5 Massachusetts f $12,360 (150) N/ A 65 Yes 27,492 3
Michigan $12,360 (150) $16, 596 65 No 12,968 .9 Minnesota $9,660 (117) $13,
020 65 No 1,200 g .2 New Jersey $18, 151 (220) $22, 256 65 Yes 195,005 16
New York- Fee and Deductible Plans h $18,500 (225) $24, 400 65 No 113,000 4

Pennsylvania- PACE $14,000 (170) $17, 200 65 No 217,103 i 10 Pennsylvania-
PACENET $16, 000 (194) $19, 200 65 No 18,655 i .9

Rhode Island j $15,538 (189) $19, 449 65 No 29,776 18 Vermont- VHAP $12, 360
(150) $16, 590 65 Yes 7, 303 8 Vermont- VScript $14,420 (175) $19, 355 65
Yes 2, 125 2 Vermont- VScript Expanded k $18,540 (225) $24, 885 65 Yes N/ A
N/ A

Wyoming $8,240 (100) $11, 060 None Yes 491 l .8

B- 285875 Page 10 GAO/ HEHS- 00- 162 State Pharmacy Programs

h During the fiscal year 2001 state appropriations process, NewYork expanded
eligibility to individuals with annual incomes up to $35,000; this change is
effective in 2001. i The enrollment figures for PACE and PACENET are for the
last day of the last reporting quarter of

1999. j During the fiscal year 2001 state appropriations process, Rhode
Island expanded eligibility to

individuals with annual incomes up to $34,999. The program will pay 60
percent of drug costs for those with incomes up to $15, 932; 30 percent of
drug costs for those with incomes up to $19, 999, and 15 percent of drug
costs for those with incomes up to $34, 999; these changes are effective in
2001. k The VScript Expanded program was not operational until January 2000;
therefore, enrollment is not

included, and eligibility requirements are for 2000. l The Wyoming program
averaged 491 enrollees per month in 1999.

Sources: State programs, National Conference of State Legislatures, http://
www. ncsl. org/ programs/ health/ drugaid. htm (downloaded 01/ 26/ 2000 and
04/ 04/ 2000), http:// aspe. hhs. gov/ poverty/ 99fedreg. htm (downloaded
06/ 27/ 00), and http:// www. hcfa. gov /stats/ en798all. htm (downloaded
06/ 27/ 00).

Just as states varied in their eligibility criteria, the size of state
programs also varied. The New Jersey, New York, and Pennsylvania programs
enrolled the most people overall and accounted for 71 percent of all
assistance program enrollees in 1999. However, the Rhode Island program
enrolled the largest percentage of Medicare beneficiaries in the state.

To ensure that enrollees do not lose coverage as their incomes increase
because of cost- of- living adjustments to Social Security income, most
states have some mechanism to increase the qualifying income threshold each
year. Four states raise their income requirements based on the annual Social
Security cost- of- living adjustment. Seven states set qualifying income
levels as a percentage of the federal poverty level. 9 The lack of costof-
living adjustments in income thresholds in two states could result in fewer
eligible people each year. For example, the income thresholds for
Pennsylvania's PACE and PACENET have become lower in real dollars each year,
which, according to a program official, has made some people lose their
eligibility as their Social Security income increased. The income levels for
these programs were last adjusted by the state legislature in 1996.

The eligibility requirements of some programs have been modified over time
to allow more people to qualify. For example, Maine recently changed its
income threshold from 131 percent to 185 percent of FPL. The Massachusetts
program began with an income threshold of 133 percent of FPL. The threshold
was changed to 150 percent and is currently at 188 percent of FPL.
Pennsylvania andVermont added an additional coverage

9 The federal poverty level is updated annually using the increase in the
Consumer Price Index for All Urban Consumers.

B- 285875 Page 11 GAO/ HEHS- 00- 162 State Pharmacy Programs

tier to allow individuals with higher incomes to qualify for programs that
require higher cost sharing. Vermont also established limits on the types of
drugs that are covered. Programs in Connecticut and Massachusetts changed
their eligibility rules to extend coverage to people with disabilities after
the programs were enacted.

In addition to targeting coverage to individuals who meet income
requirements, some states restrict coverage to specific types of drugs, such
as maintenance drugs or drugs to treat specific conditions (see table 3).
State programs generally do not use formularies to limit coverage to
particular products within a therapeutic class, 10 a practice that is common
in private insurance. Several program officials told us that formularies are
not an appealing benefit design feature for their programs because
formularies can restrict access to specific products and can be difficult to
administer.

10 Formularies are lists of prescription drugs, grouped by therapeutic
class, that a health plan or insurer prefers and may encourage physicians to
prescribe and beneficiaries to use. A particular product may be included on
the formulary because of its medical value or because a favorable price was
negotiated with the manufacturer.

B- 285875 Page 12 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 3: Drug Coverage Rules for State Pharmacy Assistance Programs, 1999

Notes: Except for Illinois and Michigan, states generally do not cover drugs
for which they do not get manufacturer rebates. a Conditions are defined by
the states.

b Connecticut recently eliminated coverage for antihistamines,
decongestants, and smoking cessation products. c Information for the
Delaware program is for 2000.

d Michigan limits coverage to 3 months per year. Source: State programs.

Cost Sharing Structured to Balance Program Spending and Beneficiary Access

Beneficiary cost- sharing requirements vary among programs (see table 4).
Like private insurance plans, state programs commonly require program
participants to share in the cost of the prescription at the pharmacy
through copayments or coinsurance. However, unlike many private plans, state
pharmacy assistance programs rarely use deductibles; most state programs
provide first- dollar coverage to program enrollees. Annual limits are also
less common among state programs. A few states have reduced enrollment fees,
but over time, some have increased the copayments and coinsurance that
enrollees pay each time they purchase drugs.

All prescription drugs Drugs for specific conditions a Maintenance drugs
only

Connecticut b Delaware c Maine (supplemental) Massachusetts Michigan d
Minnesota New Jersey New York Pennsylvania Vermont (VHAP) Wyoming

Illinois Maine (basic) Rhode Island

Maryland Vermont (VScript)

B- 285875 Page 13 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 4: Cost- Sharing Requirements for State Pharmacy Assistance Programs,
1999

a Information for the Delaware program is for 2000. b Program enrollee pays
the greater of the $5 copayment or 25 percent coinsurance. c After the
program enrollee meets the monthly deductible, the program covers all costs
up to $800 annually. After that, the individual pays 20 percent of each
prescription's retail cost, and the state pays 80 percent. d Program
enrollee pays the greater of the $2 copayment or 20 percent coinsurance.

e The first amount is for generic drugs; the second is for brand name drugs.
f The amount of the fee or deductible is determined on a sliding scale based
on income. g The plan has five levels of copayments, which require enrollees
to pay a higher amount for higher priced drugs. h Program enrollee pays $1
if the prescription costs less than $30 and $2 if the prescription costs $30
or

more. i Information for the VScript and VScript Expanded program is for
2000.

Source: State programs.

With one exception, the programs impose copayments or coinsurance that
require enrollees to share in the drug's cost each time they purchase a

State Annual fee Deductible Copayments Coinsurance

Connecticut $25 None $12 None Delaware a None None $5 b 25% b Illinois $40
or $80 $15 or $25/ mo. None 20% c Maine None None $2 d 20% d Maryland None
None $5 None Massachusetts $15 None $3/$ 10 e None Michigan None None $0.25
None Minnesota None $35/ mo. None None New Jersey None None $5 None New York
(Fee Plan) $8-$ 280 f None $3-$ 23 g None New York (Deductible Plan) None
$468-$ 638 f $3-$ 23 g None

Pennsylvania (PACE) None None $6 None Pennsylvania (PACENET) None $500 $8/$
15 e None Rhode Island None None None 40% Vermont (VHAP) None None $1-$ 2 h
None Vermont (VScript) i None None $1-$ 2 h None Vermont (VScript Expanded)
i None None None 50%

Wyoming None None $25 None

B- 285875 Page 14 GAO/ HEHS- 00- 162 State Pharmacy Programs

prescription. In addition to lowering public outlays, copayments and
coinsurance can influence enrollees to use less expensive drugs. To
encourage program beneficiaries to choose less expensive products, the Maine
program changed its cost- sharing policy from a flat copayment to a
coinsurance amount equal to 20 percent of the drug's price. A Maine program
official estimated that the program realized a 10 percent savings after
switching from copayments to coinsurance. Three programs imposed coinsurance
that required enrollees to pay a fixed percentage of the cost of a drug,
giving enrollees a stronger incentive to use less expensive drugs than a
fixed dollar amount would have. Six programs varied the amount through a
tiered copayment structure with higher amounts for more expensive drugs or
for brand name products. Two programs required enrollees to pay the greater
of a coinsurance or a flat copayment. Six programs used a flat copayment
structure, which required enrollees to pay the same amount for each
prescription, regardless of cost.

Some states have altered the prescription copayment amounts that program
enrollees are required to pay. Connecticut, Maryland, and Wyoming have
increased their copayments since the programs' enactment. Wyoming raised its
copayment from $1 to $25 per prescription in 1997. In 1992, the Illinois
program eliminated the copayment and replaced its $800 annual benefit cap
with a 20 percent coinsurance that takes effect once the program pays $800
in benefits for an enrollee in a year.

A few programs impose annual enrollment fees, but because such fees, like
premiums, require an enrollee to pay up front to access the assistance
programs, some program officials believe that such fees impose a barrier to
program enrollment. A Minnesota official said that enrollment fees in
Minnesota were viewed as restricting participation in the program. As a
result, the original $120 enrollment fee was eliminated and the monthly
deductible was increased by $10. In NewYork, the impetus behind imposing
annual enrollment fees when the program began was concern over potentially
high enrollment. However, New York has subsequently lowered its fees to
provide easier access to program coverage. The Connecticut program
administrator said the state raised its annual fee from a one- time $15 fee
to a $25 annual payment, which resulted in enrollment dropping by half.

B- 285875 Page 15 GAO/ HEHS- 00- 162 State Pharmacy Programs

Annual benefit limits and deductibles, which are common in private health
insurance plans, are not used often in state programs, perhaps because these
programs are designed to provide coverage to needy populations. Only
Massachusetts and Delaware place an absolute limit on the total amount of
drug costs the program will cover annually for an individual. 11 Although
they do not have dollar caps, Wyoming will cover a maximum of three
prescriptions per month, and Michigan permits people to receive assistance
for only 3 months out of the year. Only four programs have deductibles. New
York's deductible plan and Pennsylvania's PACENET program have annual
deductibles, and the Illinois and Minnesota programs have monthly
deductibles.

Most Programs Are Funded by the State's General Revenues and Benefit From
Manufacturers' Rebates

Two- thirds of state pharmacy assistance programs derived some or all of
their funding from legislative appropriations from general revenues, while
nine programs were funded at least in part by other dedicated revenue
sources (see table 5). Vermont is the only state that receives partial
federal funding for its programs. According to a Vermont official, partial
funding for enrollees up to 175 percent of the federal poverty level came
from the federal government through the state's Medicaid waiver. 12 Most
state pharmacy programs operate on budgets appropriated by the states. One
program reported having a waiting list for assistance, but most program
officials said that program budgets had been adequate to cover program
spending. One program official noted that in the few years that the program
has underestimated program spending, the legislature has provided
supplemental funding. Drug expenditures made up well over 90 percent of the
total expenditures for most states' drug assistance programs.

11 The annual limit for the Delaware program is $2,500 per person. The
annual limit for Massachusetts is $1, 250 per person. In Illinois, before
reaching $800 in annual spending, the enrollees must pay a monthly
deductible. Once an enrollee reaches $800 in spending for the year, the
individual must pay the monthly deductible plus 20 percent of the cost of
any prescription.

12 The Section 1115 Medicaid waiver program allows states to restructure
their Medicaid programs and implement new approaches to administering
benefits.

B- 285875 Page 16 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 5: Funding Sources for State Pharmacy Assistance Programs

Source: State programs.

State programs, like Medicaid, offset drug spending through manufacturers'
rebates. Most state programs receive manufacturers' rebates that are
calculated using terms similar to the Medicaid rebate agreement established
by the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990). 13 The
rebates, which in many states are mandated by statelegislatures, are
generally provided by manufacturers in exchange for coverage of their
products and for not subjecting coverage to prior authorization
requirements. Like Medicaid, some state programs receive additional rebates
if the price of a drug increased more than the consumer

State Funding Source

Connecticut General revenue Delaware Tobacco settlement Illinois General
revenue Maine General revenue Maryland General revenue Massachusetts General
revenue and cigarette tax Michigan Construction tax New Jersey General
revenue and casino revenue New York (Fee and Deductible plans) General
revenue Pennsylvania (PACE and PACENET) Lottery Rhode Island General revenue
Vermont (VHAP and VScript) Cigarette tax and federal funding Vermont
(VScript Expanded) Cigarette tax Wyoming General revenue

13 All states offer prescription drug coverage through their Medicaid
programs and receive manufacturers' rebates on drugs paid for by the
program. OBRA 1990 required pharmaceutical manufacturers to enter into
rebate agreements with the Secretary of the Department of Health and Human
Services in exchange for state Medicaid programs covering all products of
manufacturers that have entered into rebate agreements. OBRA 1990 allows
states to exclude certain classes of drugs from coverage. In addition,
states may place some drugs on a 24- hour prior- authorization list to allow
program officials to review and approve or deny a request for certain
products.

B- 285875 Page 17 GAO/ HEHS- 00- 162 State Pharmacy Programs

price index, a measure of general inflation. 14 However, six states said
they did not get this additional rebate amount. The Illinois and Michigan
programs contract with pharmacy benefit management (PBM) companies to obtain
rebates from manufacturers. According to the PBM representative for the
Illinois program, the state receives 100 percent of the manufacturer rebates
on products with rebate agreements. A Michigan program official reported
that they receive 80 percent and that the PBM retains 20 percent of the
total rebate amount on products with rebate agreements.

States reported receiving rebates that ranged from 2 percent of the states'
net drug spending in Illinois and Michigan to 45 percent in Rhode Island
(see table 6). At least a portion of this variability can be attributed to
variations in cost sharing across states. For example, Connecticut requires
program participants to pay $12 per prescription, while the New Jersey
program requires participants to pay $5 per prescription. If both states
received the same rebate proportion before cost sharing is subtracted from
total drug spending, that proportion would be a lower proportion of net
spending in New Jersey than in Connecticut after cost sharing is considered.
The amount states are reimbursing pharmacies for drugs is another factor
that affects the share of net drug spending as a portion of rebates. State
programs generally pay pharmacies for drugs at the same rates as the
Medicaid program and also pay a dispensing fee similar to that paid by
Medicaid. As a result, states with lower payment rates would have rebates
that were a higher percentage of net drug spending.

14 For example, if the average manufacturer's price of a drug increased by
6.3 percent and the consumer price index increased 2.3 percent, then the
manufacturer must pay the program an additional rebate that equals the
product of the difference between the drug price increase and the consumer
price index, or 4 percent of the average manufacturer's price in this case,
and the total number of units dispensed to program participants in that
rebate period.

B- 285875 Page 18 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 6: Expenditures and Rebates for State Pharmacy Assistance Programs,
1999

Notes: N/ A= Not available from state program. Drug expenditures were
reported by states. Rebates and any copayments and coinsurance paid by the
program enrollee have been subtracted. a The Delaware program was not
operational until January 2000, so expenditures and rebates are not

included in the table. b Minnesota only submitted invoices for rebates for
drugs purchased through the program from July

through December 1999. The net drug expenditures reflect the program's net
drug expenditures from January through December 1999. c Data for New York
are for 1998; data for 1999 were not available.

d The VScript Expanded program was not operational until January 2000, so
expenditures and rebates are not included in the table. Source: State
programs.

State State drug expenditures

(excludes rebates and program enrollee cost

sharing) Rebates Rebates as a

percentage of net drug expenditures

Connecticut $23,774, 345 $8,068,948 34 Delaware a N/ A N/ A N/ A Illinois
$34,815, 790 $667,980 2 Maine $5,373, 028 $709,688 13 Maryland $32,100, 000
$5,200,000 16 Massachusetts $8,900, 000 $2,600,000 29 Michigan $5,297, 925
$92,125 2 Minnesota $1,400, 000 $175, 000 b 13 New Jersey $285,000, 000
$37,000,000 13 New York c $105,500, 000 $27,680,918 26 Pennsylvania- PACE
and PACENET $257,721, 453 $48,401,444 19

Rhode Island $4,090, 908 $1,824,332 45 Vermont- VHAP N/ A $1,580,000 N/ A
Vermont- VScript and VScript Expanded d N/ A $240,000 N/ A

Wyoming $576, 527 N/ A N/ A

B- 285875 Page 19 GAO/ HEHS- 00- 162 State Pharmacy Programs

Targeting Benefits and Operating Programs Raise Administrative Issues

To ensure that the intended recipients get drug benefits and to maximize the
effect of limited program resources, state pharmacy assistance programs
establish and execute a number of administrative policies. Some states
attempt to encourage program participation by mitigating the perceived
stigma associated with the programs and by creating awareness of the
programs through outreach. Some states link eligibility for and
administration of their pharmacy assistance programs to other state
assistance programs for seniors, such as rent or property tax assistance.
Several other states have used the systems of their Medicaid programs to
carry out some or all of the administrative functions of their pharmacy
assistance programs. They have thus avoided developing entirely new systems
and duplicating program functions, such as determining eligibility and
processing and paying claims. Nevertheless, some states have encountered
administrative challenges related to developing adequate systems and
recovering payments from insurers when program enrollees have other drug
coverage.

Programs Undertake Efforts to Facilitate Program Acceptance andAwareness

Many program administrators said they cannot precisely determine the extent
to which eligible persons are enrolled. They could, however, identify
factors that may contribute to eligible persons failing to enroll, including
the perceived stigma associated with programs for people with low incomes
and a lack of awareness of the program. The program officials who did not
believe that perceived stigma deterred participation represented programs
administered separately from Medicaid. One program official whose state
program is administered through Medicaid said that perceived stigma may
deter enrollment, especially among the elderly. Program administrators in
some states said that their legislature created drug assistance programs
that are administered separately from Medicaid to avoid any association with
such perceived stigma. An official in one state said that the drug
assistance program is regarded favorably by the public because it is
distinct from the Medicaid program.

Eligible people may also fail to enroll in programs because they are unaware
of them or their eligibility for program benefits. To encourage
participation, many states perform outreach and provide program information
to potentially eligible people. For example, some states share information
about programs and encourage program participation through print, radio, or
television advertisements. Programs also reported making applications and
program brochures available at a variety of locations such as area agencies
on aging and senior centers. Some programs provided

B- 285875 Page 20 GAO/ HEHS- 00- 162 State Pharmacy Programs

brochures to physicians and pharmacists to distribute to their patients,
sent information and applications along with tax booklets, or provided
brochures to legislators to distribute to constituents. Information and
applications for some programs were also available on the states' Web sites.
One state sends applications to state residents identified through state tax
returns as having incomes meeting qualifying criteria. Three administrators
said their programs target outreach to Medicare beneficiaries eligible for
limited Medicaid benefits. However, evidence shows that many people who are
eligible do not receive such benefits.

Several States Link Program Administration to Medicaid or Other Assistance
Programs; Others Are Separate

States vary in their reliance on existing programs and systems in
administering their pharmacy assistance programs (see table 7). In some
states, the programs are small relative to Medicaid programs and are
administered, at least in part, through the state agency that administers
Medicaid. In others, they are administered separately from Medicaid,
sometimes by an agency that also administers other programs for the elderly
such as rent or property tax relief or public transportation subsidies.
Officials at the three state programs with the largest budgets and greatest
number of enrollees- New Jersey, New York, and Pennsylvania- said that their
senior pharmacy assistance programs were intentionally distinct from the
Medicaid program and administered separately. Regardless of which agency
administers the program, many use contractors to execute program functions
such as eligibility determination and claims processing.

B- 285875 Page 21 GAO/ HEHS- 00- 162 State Pharmacy Programs

Table 7: Administrative Information on State Pharmacy Assistance Programs

a The Division of Medical Assistance administers the Medicaid program in
Massachusetts. Source: State programs.

Eligibility determinations are one major administrative task that the
programs perform. To apply for the programs, most states have a mail- in
application. Only Michigan and Rhode Island said they require an in- person
application interview. Most programs require enrollees to reapply yearly,
and many of them automatically send applications to current enrollees.
Program participants in Michigan and Wyoming, however, must reapply

State Department

administering drug assistance program Same department that

administers Medicaid? Same eligibility

determination system as Medicaid?

Same claims adjudication system as Medicaid?

Connecticut Department of Social Services Yes Yes Yes

Delaware Department of Health and Social Services Yes Yes Yes

Illinois Department of Revenue No No No

Maine Department of Human Services Yes No (Department of

Revenue determines eligibility)

No, but use same contractor as Medicaid

Maryland Department of Health and Mental Hygiene Yes No Yes

Massachusetts Executive Office of Elder Affairs and Division of Medical
Assistance

Yes, in part a No (Executive Office of Elder Affairs determines eligibility)

Yes Michigan Office of Services to

the Aging No No No Minnesota Department of Human

Services Yes Yes Yes New Jersey Department of Health

and Senior Services No No Yes New York Department of Health Same department,

separate administration No No Pennsylvania Department of Aging No No No
Rhode Island Department of Elderly

Affairs No No No Vermont Department of Social

Welfare, Office of Vermont Health Access

Same department, different office Yes Yes

Wyoming Department of Health Yes Yes Yes

B- 285875 Page 22 GAO/ HEHS- 00- 162 State Pharmacy Programs

monthly. Only Rhode Island's enrollees do not have to reapply once they are
initially enrolled in the program.

States request a variety of information from program applicants and some
require supporting documentation. Several programs verify information
provided on applications through other state programs, such as the state
department of revenue and Medicaid. Five states used the same eligibility
determination system for their assistance program that is used for the
Medicaid program. Nine states used an eligibility determination system for
the state program that was different from the one Medicaid used. In some
states, the agency uses a contractor to determine eligibility; in others,
eligibility is determined within the administering state agency.

Most programs use a contractor to process claims for their drug assistance
programs, and over half of the programs hired the same contractor to process
claims that the state Medicaid program used. Two states that did not use a
contractor for claims processing- Massachusetts and Minnesota- used the same
in- house systems that processed their Medicaid claims to process drug
assistance program claims. However, officials in two states said that their
drug assistance programs chose not to use the state's Medicaid claims
processing systems because the systems were inadequate for their
administrative needs. A few program administrators said that developing and
coordinating automated systems were challenging aspects of program
operation. A Connecticut program official told us that the most difficult
aspect of implementing the program was setting up systems for claims
processing and eligibility determination. Similarly, a Rhode Island program
official said that linking relevant computer systems was the most difficult
part of implementing the pharmacy program. Because the Rhode Island
Department of Elderly Affairs determined eligibility and a contractor
processed claims, the two systems had to be linked with one another and with
participating pharmacies so that pharmacies would know who was eligible and
what drugs were covered. Program officials in Maryland and Massachusetts
said that adding on to their existing Medicaid claims processing system made
the program easier to administer. However, two program officials said
changing their Medicaid information systems to permit claims processing for
both the Medicaid and the pharmacy benefit programs was difficult.

B- 285875 Page 23 GAO/ HEHS- 00- 162 State Pharmacy Programs

Recovering and Coordinating Payments Proves Challenging for Some Programs

Recognizing that some people in need of assistance may have other limited
drug coverage, all but three states permit people with other prescription
drug coverage to enroll in their programs. 15 According to one program
administrator, coordinating benefits and recovering payment is important
because the state program is increasingly being used to supplement coverage
that has become inadequate due to the combination of high drug costs and
benefit design features in private insurance such as caps, deductibles, high
copayments, limited formularies, and coverage of generic drugs only. Some
administrators said that in trying to avoid making payments when a person
has other drug coverage, they have encountered the additional difficulty of
recovering payments from third- party payers. For example, the authorizing
legislation for the Pennsylvania PACE programs designates the state pharmacy
program as the payer of last resort in cases where a program enrollee has
other drug coverage. According to a Pennsylvania official, that program
recently settled a long dispute with several Medicare managed care plans
regarding the recovery of drug payments that the PACE program made on behalf
of individuals with drug coverage through their Medicare managed care plan.
According to the PACE program official, the program is in the process of
implementing a system, with the cooperation of the Medicare managed care
plans, that will block PACE payment of drug claims at the point- of- sale
when the person has Medicare managed care plan coverage for the drug.

The New York program has attempted to develop cooperative relationships with
other insurers so that EPIC can be reimbursed for any benefits it pays when
program enrollees have other coverage. While one insurer has performed an
enrollment match with EPIC to identify dually enrolled seniors, EPIC has not
been able to achieve an agreement to recover the benefits it has paid.
Another insurer, according to a program official, has refused to enter into
a formal agreement to implement a jointly defined policy to coordinate
payment. In contrast, the Rhode Island pharmacy program was able to reduce
program spending because of coordination with other payers. According to a
Rhode Island official, records of the program were matched with Medicare
managed care plan records to

15 States excluded people from coverage if they received full Medicaid
benefits. Several programs performed a match with Medicaid files to
determine whether an applicant was receiving Medicaid benefits. Some
programs tried to identify and notify applicants who might be eligible for
Medicaid, but some program administrators said they could not definitively
determine Medicaid eligibility because they did not collect all the
information necessary to make that determination.

B- 285875 Page 24 GAO/ HEHS- 00- 162 State Pharmacy Programs

ensure that program participants use any other plan coverage they might have
before using the state program's coverage.

Conclusions State drug programs provide important assistance with the
purchase of prescription drugs to a small number of elderly low- income and
other

qualified individuals- more than 760,000 in 1999. Perhaps because some of
these programs operate on budgets that are small relative to Medicaid,
several states have added to or borrowed from their Medicaid programs to
administer their drug programs for low- income seniors. Other states-
including New Jersey, New York, and Pennsylvania, which together cover
almost three- quarters of all state pharmacy assistance program enrollees-
administer their programs separately from state Medicaid programs. It is
unknown whether states' decisions to administer their programs independently
or through Medicaid or other state programs would be affected if more states
added programs or existing programs expanded. The effect of adding more or
larger state programs on states' abilities to defray spending with
manufacturers' rebates also remains unknown.

External Review We obtained comments on the draft report from a senior
policy specialist on state pharmacy assistance programs at the National
Conference of State

Legislatures. The reviewer provided technical comments, which we
incorporated where appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this letter. At that point, we will send copies to interested
congressional committees; Members; the Honorable Donna E. Shalala, Secretary
of Health and Human Services; the Honorable Nancy- Ann Min DeParle,
Administrator of the Health Care Financing Administration; and other
interested parties. If you or your staffs have any questions about this
report, please call me at (202) 512- 7114 or John Hansen at (202) 512- 7105.

Page 25 GAO/ HEHS- 00- 162 State Pharmacy Programs

Major contributors to this report are Lara Carreon, Kathryn Linehan, Myrna
Pï¿½rez, and Tricia Spellman.

Laura A. Dummit Associate Director, Health Financing

and Public Health Issues

Page 26 GAO/ HEHS- 00- 162 State Pharmacy Programs

Appendix I

Appendi xes Scope and Methodology Appendi x I

To identify the states with prescription drug assistance programs, we used
two published sources of information about state programs. For more recently
enacted programs, we reviewed information from the National Conference of
State Legislatures (NCSL) and interviewed a NCSL researcher who tracks state
pharmacy assistance program legislation. Information on state pharmacy
assistance programs, including their benefit structure, funding, and
administrative characteristics, was obtained from program literature and
published research. Additionally, we reviewed some annual program reports
and relevant state laws and regulations that apply to the programs. Program
administrators or other program staff were interviewed about their
assistance programs. To verify data and collect missing information, we
followed up with the program administrators. A reviewer at the National
Conference of State Legislatures provided technical and other comments on
this report, which we incorporated where appropriate.

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