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HHS 11
Increase Medicaid Patient Responsibility for Health Care Use


State law should be amended to direct the Texas Health and Human Services Commission (HHSC) to assess and collect Medicaid co-payments on prescription drugs for Medicaid recipients and to reduce reimbursements paid to pharmacists by the full amount of the co-payments.


Medicaid is a federal and state program that provides health care services for low-income Americans. The federal government pays about 60 cents of every Medicaid dollar spent in Texas, while the state pays the remainder. In 2002, Medicaid accounted for an estimated 67.1 percent or $12.6 billion of the state’s health care spending as reflected in the General Appropriations Act. This amount represented an increase of roughly $3.7 billion over fiscal 1998’s spending. A third of the entire Texas state budget is devoted to health care spending.[1]

Texas Medicaid recipients do not pay any of the costs of the medical services they receive. Most other health insurance plans and health maintenance organizations (HMOs), including state employee health insurance plans, require enrollees to pay a small share of the cost of the medical service. This cost sharing is called a co-payment.

Co-payments can help control the use of high-cost services and reduce unnecessary medical care. They also can promote a feeling of ownership on the part of consumers in their health care and make them aware of the cost of prescription drugs.[2]

An example of a successful Texas program that uses co-payments is the University Health System in San Antonio, which provides hospital and clinic services to families in Bexar County and South Texas as part of the Bexar County Hospital District. The system operates Carelink, a program of health care services and financial assistance for Bexar County residents who do not have health insurance and are not eligible for Medicaid or other health care programs. Families choose a primary care doctor who provides ongoing care. Carelink members contribute to the cost of their care by making a monthly payment and paying co-payments for prescription drugs. The amount of these monthly payments and co-payments is based on family income and the number of family members.

Currently, Carelink charges patients with incomes below 75 percent of poverty $10 for a 90-day supply of brand name drugs and $5 for the same amount of generic prescription drugs. Patients between 75 and 150 percent of poverty pay the same amounts, and patients with incomes between 150 and 200 percent of poverty pay $20 and $10, respectively.

George Hernandez, executive vice president and assistant administrator of University Health System, says that co-payments promote patient responsibility and pride. Co-payments have been an important source of revenue that helps support Carelink’s benefits. Carelink has charged co-payments since it started. “You ought to ask,” he said. “Sometimes patients want to pay. They have contributed something to their care.” He characterized Carelink’s co-payment system as “sensitive to the patient’s ability to pay.” He also reported no problems with the implementation of the co-payment system.[3]

Co-payments for Medicaid services

Sharing costs with Medicaid recipients is one way that states could reduce spiraling Medicaid costs. Federal Medicaid law allows states to charge some Medicaid recipients nominal co-payments. The law also defines how these co-payments may be implemented and who is exempt from them. Generally, children under 18, pregnant women (for pregnancy-related care) and nursing home residents are exempted from co-payments. Also exempt are services provided to institutionalized persons who contribute most of their income to their care. Some medical services are exempt from any Medicaid co-payment, including emergency services, family planning services and supplies and hospice services.[4]

Many states have used this co-payment authority and reported savings as a result. At least 33 states charge Medicaid co-payments for prescription drugs.[5]

In 48 states, pharmacy costs are among the top two or three contributors to Medicaid costs, and 36 states listed these costs as their most important budget factor in a survey by the Kaiser Commission on Medicaid and the Uninsured. These costs are being driven upward by increases in the number of prescriptions per enrollee and by inflation in the average cost of each prescription. Several states reported that their Medicaid budgets spend more for prescription drugs than for inpatient hospital care.[6] In fiscal 2001, the Texas Medicaid program spent $1.3 billion for prescription drugs.[7]

Texas Medicaid caps the number of prescription drugs that some Medicaid patients may receive per month. Some Medicaid recipients are limited to three prescriptions per month. Doctors may prescribe 90-day supplies of certain prescription drugs for Medicaid recipients, however. This allows recipients who use more than one medicine to exceed the three-per-month cap, since they can fill a 90-day supply every 30 days.

Medicaid recipients have the option of receiving either brand-name or less-costly generic prescription drugs. More than half of the prescription drugs Texas Medicaid purchases are brand-name drugs. These drugs cost Medicaid an average of $65.71 more per prescription than generic drugs. Every 1 percent reduction in the use of brand-name drugs would save Texas $1.8 million in state funds and $2.7 million in federal funds.[8]

In fiscal 2001, about 48 percent of Texas Medicaid’s prescription drug claims were for generic drugs, versus a national average of 55 percent.[9]

Co-payments in other states

A recent Comptroller’s office survey found that many states collect Medicaid co-payments for prescription drugs. Most range from 50 cents to $3 per prescription.[10] Under these states’ Medicaid programs, pharmacists are responsible for collecting the co-payments; the states then reduce their reimbursements to the pharmacists by the amount of the co-payment. Federal law requires pharmacists to make a reasonable attempt to collect co-payments, but they may not deny services to a Medicaid recipient for failing to make a co-payment.[11]

In an effort to increase the use of generic drugs, the North Carolina Division of Medical Assistance increased co-payments for brand-name drugs from $1 to $3 per prescription on October 1, 2001. Co-payments for generic prescriptions remained at $1 per prescription. Program officials estimated savings of approximately $3.2 million in state appropriations during fiscal 2002 and nearly $3.6 million during fiscal 2003.[12]

Other states considering pharmacy co-payments to contain Medicaid costs include Kansas, Nebraska, Kentucky, South Carolina and Tennessee. Kansas’ proposal for fiscal 2003 would increase the pharmacy co-payment from $2 to $3, while Nebraska proposed an increase in co-payments from $1 to $2. Tennessee’s proposal would establish a tiered pharmacy co-payment structure for generic and brand-name drugs.[13] For 2003, a 50-state survey by the Kaiser Commission on Medicaid and the Uninsured reported that 19 states are planning to initiate or increase Medicaid co-payments for prescription drugs.[14]

Co-payments at public hospitals

A recent survey by the National Association of Public Hospitals and Health Systems found that many public hospitals charge uninsured patients co-payments for both outpatient and inpatient medical services. Seventy-eight percent of these co-payment plans have been in place for at least five years. Ninety-eight percent of hospitals with co-payment policies charge them for outpatient services.

About 61 percent of these public hospitals with pharmacies charge co-payments for prescription drugs. These range from $2 to $10 per prescription; about a third of the pharmacies charge $5 to $7 per prescription.

Thirty percent of hospitals with cost-sharing plans instituted them because state or county indigent care programs required them to do so. Another 24 percent began to charge co-payments, and to ask patients to fill out financial forms, to help identify those eligible for Medicaid and other reduced-cost health care programs. Eighteen percent wanted to increase revenues, and 8 percent cited the value of shared responsibility with patients.[15]

HHSC co-payment proposal

The 2001 Texas Legislature directed the HHSC to implement a sliding scale for Medicaid co-payments and reduced Medicaid funding by $3 million in state funds and the appropriate amount of federal funds for fiscal 2002 and 2003 in anticipation of savings.[16]

On October 1, 2002, HHSC asked the U.S. Centers for Medicare and Medicaid Services for approval to implement co-payments in the Texas Medicaid program. The proposal would be effective December 1, 2002.[17]

If approved, the request would impose the following co-payments:

  • a $3 co-payment for non-emergency services provided in an emergency room;
  • a 50-cent co-payment for every generic prescription drug; and
  • a $3 co-payment for every brand name prescription drug.

The proposed co-payments would affect only adults who receive Temporary Assistance for Needy Families (TANF) and over-65 population, blind or disabled persons who qualify for Medicaid; it would exempt those who live in institutions and those who qualify for the Medically Needy program operated under Medicaid. About 600,000 Texans on Medicaid, or less than 20 percent of the Medicaid population, would be asked to pay these co-payments under HHSC’s proposal. Emergency rooms and pharmacists would collect the co-payments from Medicaid recipients. If Medicaid recipients cannot pay, they still must receive services.

Under the HHSC plan, co-payments for prescription drugs would be capped at $8 per recipient per month. Recipients would be required to tell pharmacists when they have reached their maximum payment for the month.

When collecting co-payments from pharmacists and hospitals, HHSC’s proposal would allow pharmacists to keep the co-payments; HHSC would reduce its reimbursement to the pharmacist for the price of the drug by an amount equal to half of the co-payment. For example, if a prescription brand name drug costs $80, the pharmacist would collect a $3 co-payment and the pharmacist’s $80 reimbursement would be reduced by half of the $3 co-payment, or $1.50, for a total of $78.50. When filling a prescription for a generic drug that costs $20, the pharmacist would collect a 50-cent co-payment and receive a reimbursement reduced by half of the co-payment, or 25 cents, for a total of $19.75.

Under HHSC’s plan, Medicaid would allow hospitals to retain the full amount of the co-payment for non-emergency visits to the emergency room. HHSC’s proposal would exempt institutionalized persons, Medically Needy program enrollees, children under the age of 19 and pregnant women, if their treatment is for conditions related to their pregnancies.

HHSC’s co-payment proposal may change after the writing of this paper. According to Jason Cooke, associate commissioner for Medicaid and Children’s Health Insurance program operations, “copay policy is still making its way through the rule-making process and consequently may change before final implementation. One of the things we have under review is the adjustment to pharmacy reimbursement.”[18]

While HHSC’s proposal is a step forward, it leaves room for improvement. Obviously, additional savings would result if HHSC reduces the pharmacists’ reimbursement by the full amount of the $3 dollar co-payment for brand-name drugs or the 50-cent co-payment for generic drugs (Exhibit 1). In this case, the pharmacist would collect the same $3 dollar co-payment for an $80 prescription drug, but the pharmacist’s reimbursement would total $77, not the $78.50 as under the HHSC plan. In the generic drug example, the pharmacist would collect the same 50 cents, but the reimbursement would total $19.50 instead of the $19.75 provided under HHSC’s proposal.

Exhibit 1
Medicaid Drug Co-payments,
HHSC vs. e-Texas Proposals

Medicaid Service Co-Pay HHSC Proposed Reduction of Reimbursement e-Texas Proposed Reduction of Reimbursement
Non-Emergency Services $3.00 $0 N/A
Generic Drugs $0.50 $0.25 $0.50
Brand Name Drugs $3.00 $1.50 $3.00
Source: Texas Comptroller of Public Accounts.

Deducting the entire amount of the co-payment from the pharmacists’ reimbursements would give them a greater incentive to dispense less-expensive generic drugs, since their own costs then would be considerably lower if they were unable to collect some co-payments.


State law should be amended to direct the Texas Health and Human Services Commission (HHSC) to assess and collect Medicaid co-payments on prescription drugs and to reduce pharmacists’ reimbursements for the price of the drugs by the full amount of the co-payments assessed.

This recommendation would modify HHSC’s proposal to the federal government. Requiring co-payments of 50 cents per generic drug and $3 for brand-name drugs would encourage Medicaid recipients, physicians and pharmacists to reduce brand name drug use in favor of generic drugs. HHSC, however, should reduce Medicaid reimbursements to pharmacists for both types of drugs by the full amount of the co-payment instead of only half the amount, to provide an even greater incentive for the use of generic equivalents.

In addition, HHSC should not cap the amount of monthly co-payments for Medicaid recipients, since a voluntary cap is inherently unenforceable. A single co-payment of 50 cents or $3 should cover an entire 90-day supply for Medicaid recipients who regularly use specific medications. With the current cap of three prescriptions each month, the total amount each recipient in the Medicaid fee-for-service program would pay for co-payments under the Comptroller’s recommendation would be $9 at most. Medicaid recipients enrolled in managed care organizations currently have no cap on the number of prescriptions they may receive each month. They would have a stronger incentive to switch to generic prescription drugs.

Fiscal Impact

The population that would be affected by co-payments represents less than 20 percent of Medicaid recipients, or about 600,000 Texas adults. The estimate assumes that Medicaid would deduct 100 percent of co-payments collected by pharmacists from pharmacy reimbursements. The administrative costs to change HHSC’s computer programs to account for these co-payments are included in this estimate. No other costs to the state from implementing co-payments are anticipated.[19]

This estimate of fiscal impact also assumes that 2 percent of brand-name prescriptions would be converted to generic equivalents, since pharmacists would have more incentive to move patients to generic drugs under the Comptroller’s proposal if they do not collect some co-payments, and also because Texas Medicaid has a lower average dispensing rate for generic drugs than most other state Medicaid programs.

The amounts shown below are adjusted for the $3 million reduction in appropriations required by the 2001 Texas Legislature.

If this recommendation is implemented, the total savings for the 2004-05 biennium are estimated at $22.9 million in general revenue and $34.3 million in federal funds.

If Health and Human Services Issue 8, concerning brand-name drugs for Medicaid recipients, is enacted, a total of $1.8 million would be subtracted from these estimated savings each year to adjust for a potential overlap of savings. About $700,000 of the annual amount to be subtracted would come from general revenue savings and $1.1 million would come from savings in federal funds.

Fiscal Year Savings to General Revenue Savings to Federal Funds (Cost) to General Revenue (Cost) to Federal Funds Net Savings to General Revenue Net Savings to Federal Funds
2004 $11,456,000 $17,192,000 ($34,000) ($34,000) $11,422,000 $17,158,000
2005 $11,456,000 $17,192,000 ($6,000) ($6,000) $11,450,000 $17,186,000
2006 $11,456,000 $17,192,000 ($6,000) ($6,000) $11,450,000 $17,186,000
2007 $11,456,000 $17,192,000 ($6,000) ($6,000) $11,450,000 $17,186,000
2008 $11,456,000 $17,192,000 ($6,000) ($6,000) $11,450,000 $17,186,000


[1]Texas Comptroller of Public Accounts, Health Care Spending in the Texas State Budget (Austin, Texas, August 2002), pp. 2-3.

[2]U.S. Department of Health and Human Services, Health Resources and Services Administration, CHIP, Health Insurance Premiums and Cost-Sharing: Lessons from the Literature, by Anne Markus, Sara Rosenbaum and Dylan Roby at the George Washington University Medical Center (Washington, D.C., 1998), pp. 8-14.

[3]Interview with George Hernandez, executive vice president and assistant administrator of University Health System, Austin, Texas, October 3, 2002.

[4]42 CFR §447.53 (a) (4), §447.54 (a) (3), §431.57 (b) (c).

[5]Texas Comptroller of Public Accounts, survey conducted by the Strategic Policy Initiatives Division, April 2002.

[6]Kaiser Commission on Medicaid and the Uninsured, Medicaid Budgets Under Stress: Survey Findings for State Fiscal Year 2000, 2001 and 2002, by Health Management Associates (Washington, D.C., October 2001), p. 16.

[7]Texas Health and Human Services Commission, Medicaid Vendor Drug Program, by Bob Harriss (Austin, Texas, March 19, 2002), p. 7.

[8]Interview with Ben Sherman, analyst, Texas Health and Human Services Commission, Austin, Texas, October 8, 2002.

[9]E-mail from Laura Gupta, Tucker Alan Inc., October 24, 2002.

[10]Texas Comptroller of Public Accounts, survey conducted by the Strategic Policy Initiatives Division, April, 2002.

[11]Social Security Act of 1935 as amended, §1916(d), Reg. 447.15.

[12]North Carolina Department of Health and Human Services, Division of Medical Assistance, Report to the Senate Appropriations Committee on Health and Human Services, The House Appropriations Subcommittee on Health and Human Services and the Fiscal Research Division on Medicaid Program Management (Raleigh, North Carolina, February 1, 2002), p. 10.

[13]National Association of State Budget Officers, National Governors Association, Medicaid and Other State Healthcare Issues: The Current Situation (Washington, D.C., May 2002), pp. 9-11.

[14]Kaiser Commission on Medicaid and the Uninsured, State Budgets Under Stress: How Are States Planning to Reduce the Growth in Medicaid Costs? (Menlo Park, California, July 30, 2002), p. 4.

[15]National Association of Public Hospitals and Health Systems, Cost-Sharing and the Uninsured: Trends at Safety Net Institutions, by Ingrid Singer (Washington, D.C., November 2000), pp. iii and 5.

[16]Tex. S.B. 1, 77th Leg., R.S. (2001).

[17]Letter from Linda Wertz, state Medicaid director, Texas Health and Human Services Commission, to Andrew Fredrickson, chief, Medicaid Operations and Financial Management, Centers for Medicare and Medicaid Services, October 1, 2002.

[18]E-mail from Jason Cooke, Associate Commissioner, Medicaid and Children’s Health Insurance Program Operations, October 24, 2002.

[19]E-mail from Jason Cooke, October 24, 2002.