DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
Center for Medicaid and State Operations 
 
SMDL #06-001 
 
Dear State Medicaid Directors and State Pharmacy Assistance Program Directors:  
 
Thank you for working with us over the past 2 years on the implementation of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which has 
resulted in the successful transition from Medicaid prescription drug coverage to 
Medicare prescription drug coverage for an overwhelming majority of dual eligible 
beneficiaries.  Your work on behalf of dual eligible beneficiaries and on behalf of all 
Medicare beneficiaries is greatly appreciated.   
 
The Centers for Medicare & Medicaid Services (CMS) has taken numerous actions to 
ensure that individuals eligible for both Medicare and full Medicaid benefits (dual 
eligible beneficiaries) continue to receive needed medications as they make the 
transition from Medicaid coverage of their drugs to coverage under the new Medicare 
prescription drug benefit.  CMS is committed to working with States to make the 
transition as seamless as possible for all dual eligible beneficiaries.  In addition, CMS is 
committed to working with States to ensure that low-income Medicare beneficiaries who 
have enrolled in a Part D plan and have been determined eligible for a low-income 
subsidy receive the benefits to which they are entitled. 
 
The CMS is making available a new Medicare demonstration project under the authority 
of section 402 of the Social Security Amendments of 1967, as amended.  Our goal is to 
ensure that the Medicare and Medicaid programs can respond expeditiously to the needs 
of the dual eligible beneficiaries and beneficiaries who have enrolled in a Part D plan and 
have been determined to be eligible for the low-income subsidy.  This demonstration 
would allow States that have assisted their dual eligible and low-income subsidy entitled 
populations in obtaining and accessing Medicare Part D coverage to be reimbursed for 
their efforts. 
 
In particular, the demonstration permits Medicare payment to be made to States for 
amounts they have paid for a dual eligibles Part D drugs, or a low-income subsidy 
entitled Part D plan enrollees Part D drugs, to the extent that those costs are not 
otherwise recoverable from a Part D plan and are not required Medicare cost sharing on 
the part of the beneficiary.  In addition to providing Medicare funds to reimburse 
amounts paid by States for Part D drugs, the demonstration would also provide payments 
for certain administrative costs incurred by States.  CMS will establish a staff team to 
provide expedited review of applications of States applying for this demonstration.  
  Page 2State Medicaid Directors   
  State Pharmacy Assistance Program Directors 
 
Key features of the demonstration will include: 
 
(cid:127) State Reimbursement: States that meet the conditions of the demonstration will 
have their drug benefit costs reimbursed through:  (1) CMS payment 
reconciliation with the prescription drug plans; and (2) CMS payment of any net 
drug cost differential after drug plan reconciliation within the State (this does not 
include Medicare-required cost sharing amounts).  In addition, CMS will provide 
funding for administrative costs incurred by States directly related to making 
payments for dual eligibles for Part D drugs and for activities directly related to 
facilitating enrollment and/or obtaining benefits for dual eligibles in a Part D plan, 
or for obtaining benefits for low-income subsidy entitled beneficiaries who have 
enrolled in a Part D plan.  
 
(cid:127) Payer of Last Resort: States should require pharmacists to primarily bill the 
Medicare Part D plan or use the Medicare point-of-sale billing option, before 
relying on State payment.  States will provide input to CMS and the plans on 
ways to enhance plan and program performance for the States dual eligible 
beneficiaries and pharmacists, in order to reduce State billing. 
 
(cid:127) Timely Data Sharing: States that participate should submit timely paid claims 
data to CMS in a specified format in order to calculate payment due from the 
appropriate Part D plan for reimbursement for the drugs provided to dual eligibles 
and low-income subsidy entitled beneficiaries between January 1, 2006, and 
February 15, 2006.  The State should submit other itemized files of claims and 
administrative costs as required for any costs for which it is seeking 
reimbursement, in addition to beneficiary identification information, in order to 
facilitate reconciliation and beneficiary transition to Part D plans.  States will 
maintain all necessary supporting documentation for all claims submitted in a 
readily reviewable format and make it available for review as necessary.  States 
will also work with CMS to provide valid data on any set of beneficiaries who 
may not have been properly included in the States previous dual eligible files. 
 
(cid:127) Claims Identification: States will separate claims under the demonstration from 
claims the States would have otherwise paid through a separate State program.  In 
some States, the State has elected to pay all cost sharing, for example, on behalf 
of some beneficiaries who would otherwise have paid a copayment.  This 
demonstrataion will not reimburse States for those costs.  Claims for non-Part D 
drugs will not be included in this process.  This demonstration does not include 
reimbursement for any non-Part D drugs or administrative costs associated with 
providing or obtaining non-Part D drugs. 
 
(cid:127) Eligible Costs: The demonstration will reimburse the State for Part D drugs 
dispensed to dual eligible beneficiaries and low-income subsidy entitled 
beneficiaries between January 1, 2006, and February 15, 2006, and for associated 
administrative costs.    Page 3State Medicaid Directors   
  State Pharmacy Assistance Program Directors 
 
Attached is a template that States may use to apply for this section 402 demonstration.  In 
completing the template, States should provide contact information in order that CMS 
can contact key State officials to discuss demonstration proposals.  The electronic version 
of the template will be available on the CMS Web site at http://www.cms.hhs.gov.
Any questions related to this initiative or the template should be addressed to 
Ms. Christine Hinds, Health Insurance Specialist, Medicare Plan Policy Group at 
(410) 786-4578.  Applications should be addressed to: 
 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard 
  Mail Stop C1-26-16 
  Baltimore, MD  21244-1850 
E-mail:  Christine.Hinds@cms.hhs.gov 
 
We appreciate the efforts States have made during this transition period in ensuring that 
dual eligibles and other low-income subsidy entitled beneficiaries receive the prescription 
medications they need.  Toward that end, CMS will work expeditiously with States in 
processing demonstration applications in order to ensure that Americas most vulnerable 
populations continue to receive the care they need. 
 
Sincerely,  
 
Dennis G. Smith  
Director  
 
Enclosure  
 
cc:   CMS Regional Administrators  
 
CMS Associate Regional Administrators    
for Medicaid and State Operations  
 
HHS Regional Directors 
 
Christie Raniszewski Herrera 
Director, Health and Human Task Force 
American Legislative Exchange Council 
 
Martha Roherty  
Director, Health Policy Unit  
American Public Human Services Association  
  Page 4State Medicaid Directors 
  State Pharmacy Assistance Program Directors 
 
Jacalyn Bryan Carden  
Director of Policy and Programs  
Association of State and Territorial Health Officials  
 
Lynne Flynn  
Director for Health Policy  
Council of State Governments  
 
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures  
 
Matt Salo  
Director of Health Legislation  
National Governors Association