The Medicare Modernization Act requires the federal government to pay prescription drug costs for people in Medicaid who had previously been covered, in part, by the states. States are required to pay back to the federal government a phased down contribution, sometimes known as a "clawback" of some of the money they are saving. During congressional debate in 2003, governors and advocates for senior citizens supported moving the "dual eligible" beneficiaries from Medicaid to Medicare.

Overall, states can save money because of Medicare's drug coverage, not only because the federal government now pays for drug coverage for people in Medicaid and Medicare, but also because state governments can get subsidies for their retired employees. States only pay a portion of the costs in the "clawback."

Last week, CMS announced that the net cost to the federal government for the drug coverage in 2006 is expected to be $30.5 billion down from a previously estimated $38.1 billion. The actual or "net" costs to the federal government, accounting for Medicaid savings, are also significantly lower over 10 years, dropping from last year's estimated $737 billion to $678 billion. For the 10-year period from 2006-2015, the "total" Medicare drug benefit cost, without accounting for Medicaid savings, is now estimated to be about $130 billion less -- $797 billion compared to an estimated $926 billion last year. State "clawback" payments are now projected to be 25 percent less over this period.

As of last month, about 24 million Medicare beneficiaries now have drug coverage, with about 3.6 million self-enrolled in the new "stand-alone" prescription drug plans and around 300,000 new enrollees in Medicare Advantage plans with drug coverage.