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
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United States General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-285875 Leter

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.
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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.
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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.
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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-income6

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.
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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 MediState 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 Programb 1999 2000

Delaware Delaware Prescription Assistance Program (DPAP) 1999 2000

Massachusetts Pharmacy Program Plusc 1999 2000

Michigan Elder Prescription Insurance Coverage (EPIC) 1999 Not yet operational

Nevada Senior citizen subsidy for prescription drug private insurance

policiesd

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
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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.
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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 program averaged 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

disabilitiesb Enrollment

Enrollment as a

share of Medicare

beneficiaries in

state (percentage)

Connecticut $14,500 (176) $17,500 65 Yes 29,969 6

Delawarec $16,480 (200) $22,120 65 Yes N/A N/A

Illinoisd $16,000 (194) $16,000 65 Yes 49,186 3

Maine $15,244e (185) $20,461e 62 Yes 25,000 12

Maryland $9,400 (114) $10,200 None Yes 33,185 5

Massachusettsf $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 1,200g .2

New Jersey $18,151 (220) $22,256 65 Yes 195,005 16

New York—Fee and

Deductible Plansh $18,500 (225) $24,400 65 No 113,000 4

Pennsylvania—PACE $14,000 (170) $17,200 65 No 217,103i 10

Pennsylvania—

PACENET $16,000 (194) $19,200 65 No 18,655i .9

Rhode Islandj $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

Expandedk $18,540 (225) $24,885 65 Yes N/A N/A

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

10Formularies 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.
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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

conditionsa Maintenance drugs only

Connecticutb

Delawarec

Maine (supplemental)

Massachusetts

Michigand

Minnesota

New Jersey

New York

Pennsylvania

Vermont (VHAP)

Wyoming

Illinois

Maine (basic)

Rhode Island

Maryland

Vermont (VScript)
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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

Delawarea None None $5b 25%b

Illinois $40 or $80 $15 or $25/mo. None 20%c

Maine None None $2d 20%d

Maryland None None $5 None

Massachusetts $15 None $3/$10e None

Michigan None None $0.25 None

Minnesota None $35/mo. None None

New Jersey None None $5 None

New York (Fee Plan) $8-$280f None $3-$23g None

New York (Deductible

Plan) None $468-$638f $3-$23g None

Pennsylvania (PACE) None None $6 None

Pennsylvania (PACENET) None $500 $8/$15e None

Rhode Island None None None 40%

Vermont (VHAP) None None $1-$2h None

Vermont (VScript) i None None $1-$2h None

Vermont (VScript

Expanded)i None None None 50%

Wyoming None None $25 None
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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.
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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.

11The 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.

12The Section 1115 Medicaid waiver program allows states to restructure their Medicaid

programs and implement new approaches to administering benefits.
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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

13All 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.
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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.

14For 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.
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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

Delawarea 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 $175,000b 13

New Jersey $285,000,000 $37,000,000 13

New Yorkc $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

Expandedd N/A $240,000 N/A

Wyoming $576,527 N/A N/A
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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 and Awareness

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.
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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 parta 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.
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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

15States 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

Pérez, 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

Scope and Methodology AAppeennxdedixIis

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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