Attorney General Greg Stumbo Announces Medicare Part D Clawback Suit Filed in U.S. Supreme Court

FRANKFORT, KY (March 3, 2006) – Attorney General Greg Stumbo announced today that Kentucky filed suit in the United States Supreme Court to challenge the constitutionality of the “Clawback” provision of the new federal Medicare Part D prescription drug plan.

This so-called Clawback could saddle Kentucky taxpayers with payments to the federal government totaling more than $360 million over the next five years, for a net loss approaching $20 million. Attorney General Stumbo filed this lawsuit because the Clawback:

• Imposes an unconstitutional tax on the Commonwealth of Kentucky;
• Commandeers the Kentucky General Assembly and forces it to involuntarily fund the federal Medicare program; and
• Deprives Kentucky citizens of the fundamental right to decide, through their elected representatives, how their state tax dollars are spent.

The bipartisan, multistate lawsuit also includes Texas, Maine, Missouri and New Jersey, and ten other states that have filed an amicus brief.

“The Clawback violates our system of dual sovereignty and is an unconstitutional tax on the Commonwealth of Kentucky,” Stumbo said. “The federal prescription drug plan was touted as a measure to help seniors and save the states money. Instead, it’s failing our most vulnerable elderly and disabled citizens and it’s failing the taxpayers of Kentucky,” Stumbo continued. While the plan’s many flaws in helping seniors get necessary medications has been nationally reported, the extra financial burden on Kentucky taxpayers is less well-known.

In January of this year, the federal Medicare Part D prescription drug benefit began providing prescription drug coverage, including approximately 90,000 senior and disabled Kentuckians who are eligible for both federal Medicare and Kentucky Medicaid benefits. Although the initial estimate for the 10-year cost of Medicare Part D was approximately $400 billion, recent news reports have suggested that the drug benefit's 10-year cost would be closer to $1.2 trillion. As the law currently reads, Kentucky and the other states are required to help pay for this federal benefit by making monthly “Clawback” payments to the federal government. Kentucky’s initial Clawback payment was calculated at over $87 million.

General Stumbo was the first Attorney General in the nation to announce his intention to challenge the constitutionality of the Clawback in court. Stumbo appointed Special Attorneys Jennifer Black Hans and David Johnstone to draft the United States Supreme Court filing. After other states announced their plans to join Kentucky and Texas to challenge the Clawback, the Bush Administration announced that it had revised the Clawback formula. “We are pleased that the announcement of my decision to file this lawsuit led to a $7 million reduction in our Clawback payment for 2006, which Kentucky Medicaid has pledged to use for the benefit of seniors,” said Stumbo. “This is not found money, but rather another manipulation to the tax the federal government is trying to impose. We will continue applying pressure on the Bush Administration with this lawsuit. We owe it to Kentucky’s seniors and taxpayers to not let this unconstitutional tax stand.”

WHAT IS THE CLAWBACK?

• The Clawback is a provision inserted by Congress into the Medicare Modernization Act of 2003 (“the MMA”) in the final hours before passage to shift a portion of the estimated $400+ billion cost of the Part D drug benefit to the states. The Clawback was not in either the versions of the bill passed by the House and Senate.
• The Clawback will constitute the single largest flow of funds from the States to the federal government in the history of the United States. In its third calculation of the Clawback, CMS estimates a state-federal transfer of over $6.6 billion dollars in 2006 alone.
• The Clawback payment is determined by a formula that is wholly dependent on projections issued by the federal Centers for Medicare and Medicaid Services which has changed its calculation of the Clawback payment for Kentucky three (3) times since October, 2005. Indeed, the first Clawback payment was to have been made on February 25, 2006 and Kentucky has still not received written confirmation from CMS of the exact amount of the clawback payment.
• Kentucky has aggressively pursued methods of lowering drug costs in its Medicaid Pharmacy Program, by encouraging the use of generic drugs, etc. The MMA does not contain any similar cost limitations, thereby putting the Kentucky Medicaid program at the mercy of the large pharmaceutical companies.

SUMMARY OF THE LAWSUIT

• The Clawback is an unconstitutional tax on the States because it requires the Kentucky General Assembly to spend state tax dollars to fund a federal program in violation of the longstanding doctrine of intergovernmental tax immunity.
• The Clawback is Congress’ unconstitutional attempt to commandeer the appropriations powers and processes of State Legislatures to fund a federal program. Congress is trying to take credit for “solving” the problem of prescription drug costs without having to ask its constituents to pay for its solution with higher taxes. Without the funds to pay for the prescription drug plan, Congress is shifting part of the burden to the States.
• The citizens of each state are guaranteed a republican form of government, ensuring that each State is a sovereign entity that is responsible for and accountable to its citizens. The Clawback interferes with the States’ budgetary process and its ability to govern.
• The Clawback is a command that the States pay the federal government a certain amount of funds, not a condition for the receipt of federal funds. If the States do not pay, then the federal government automatically offsets the amount owed against federal Medicaid funds and charges the States interest.
• The United States Supreme Court should exercise its original jurisdiction because the lawsuit raises issues of great constitutional magnitude and there is no adequate alternative forum for a timely and final resolution of this dispute.
• Kentucky Medicaid expects over a 600 million dollar deficit in fiscal year 2006. If the federal prescription drug coverage were to continue for dual eligibles without the Clawback, Kentucky could expect to save over $35 million in SFY 2006 and over $350 million in the next five (5) years.
• If forced to pay the Clawback, Kentucky will suffer a net loss of $18.5 million in the next five (5) years.
• Kentucky Medicaid must also confront whether it will continue to pay for prescription drugs not covered by the federal plan, including life-saving drugs for those suffering from hemophilia, HIV/AIDS and Parkinson’s disease. This could cost the state an additional $5.5 million in SFY 2006 alone.
• It is my duty as Attorney General to protect the treasury from unlawful demands for expenditures.

HOW DOES THIS AFFECT U.S. CITIZENS?

• The Veteran’s administration actually has an existing government-managed, federal prescription drug plan that implements cost savings and drug price controls, which Congress chose not to use as the model for a broader prescription drug plan. Veterans and other medical consumer groups have protested the lack of consumer protections in Part D.
• Seniors and disabled citizens enrolling in the plan have confronted a confusing program and poor federal implementation, leading to a bipartisan effort in Congress to reexamine the program. (A Kaiser Family Foundation/Harvard poll found that 61% of seniors still do not understand the federal prescription drug program and only 20% plan to enroll.)
• The federal prescription drug program includes dozens of different private plans and benefit options with no oversight by Medicare to negotiate drug prices, which results in profit maximization for pharmaceutical companies and a loss for seniors, disabled persons and taxpayers.
• Taxpayers should also be concerned because the costs for the federal drug program are staggering. The initial estimate for the 10-year cost was approximately $400 billion. Recent news reports have suggested that the drug benefit's 10-year cost would be close to $1.2 trillion. (Last March, Medicare's chief actuary, Richard S. Foster, said that Bus Administration officials threatened to fire him if he told Congress what the real cost of the drug program was).