INDIANAPOLIS | While the most costly provisions of federal health reform won't take effect until 2014, state officials determined Indiana's budget will pay a price starting this summer.

That's because the new health law takes money from prescription drug rebates currently paid to state Medicaid programs and redirects those funds to the federal government.

As a result, Indiana will lose $25 million during the 2011 budget year, which begins in July, and as much as $400 million during the next decade, said Anne W. Murphy, secretary of the Indiana Family and Social Services Administration.

"This is the first of many costs Hoosier taxpayers will feel as this federal legislation becomes effective," Murphy wrote in a letter sent Friday to Ryan Kitchell, director of the Indiana Office of Management and Budget.

Kitchell forwarded Murphy's letter to lawmakers on the State Budget Committee, including state Sen. Karen Tallian, D-Ogden Dunes, warning committee members there will more bad budget news to come.

"There is still a lot of work to do to evaluate the extra costs imposed on Indiana taxpayers, which will eventually be in the billions of dollars," Kitchell said.

According to Murphy, Indiana has done better than most states in negotiating favorable rebates from drug companies. This has "enabled Indiana to capture rebates well beyond the minimums established by the federal government," she said.

But now that the federal government will receive the rebates instead of states, Indiana will lose more money than other states, Murphy said.