CHAPTER 2

EFFECTS OF PRESCRIPTION DRUG COVERAGE ON SPENDING AND UTILIZATION

Insurance coverage that includes coverage of prescription drugs plays a critical role in assuring access to needed medications. People with coverage not only fill more prescriptions than people without coverage; they are likely to have access to a broader array of therapies, including more costly therapies. People without drug coverage face greater financial burdens and may sometimes be unable to follow the courses of treatment ordered by their physicians. There are even some indications that physicians themselves may recommend different therapies to people with and without coverage.

As will be seen, the effects of prescription drug coverage persist across different age groups, income levels, and health statuses. Coverage increases prescription drug utilization, changes the mix of different drugs received, and reduces financial burdens for all population groups. However, access to drug coverage is most important for the elderly, simply because they require more medications, including a higher prevalence of long-term maintenance drugs for chronic conditions.

This chapter will first present detailed comparisons of utilization and spending for Medicare beneficiaries and the total population with and without drug coverage. Second, it will examine some of the possible reasons for those differences and will consider the consequences of being without coverage. Finally, it will summarize trends in utilization and spending and some of the factors that influence these changes.

Key findings include:

• Medicare beneficiaries with coverage fill nearly one-third more prescriptions than those without coverage.
• Although total drug spending for beneficiaries with coverage is nearly two-thirds higher, those without coverage pay nearly twice as much out of pocket ($463 versus $253).
• On average, beneficiaries with coverage pay out of pocket for about one-third of their total spending on drugs. However, the share of spending paid out of pocket varies by source of coverage, from 58 percent for those with Medigap coverage to 20 percent for those with Medicaid.
• Differences in utilization and spending between Medicare beneficiaries with and without drug coverage generally hold up across different income levels, ages, health status, and other categories.
• Drug insurance makes an especially large difference in dollar terms for those in the poorest health. Among beneficiaries with five or more chronic conditions, those with coverage had much higher total spending ($1,402 versus $944) and much lower out-of-pocket spending ($412 versus $944) than beneficiaries without coverage.
• Among people who are not Medicare beneficiaries, similar differences in utilization and spending exist between prescription drug users with and without coverage. Those with coverage for drugs fill two-thirds more prescriptions but spend a third less out of pocket than those without coverage.
• About a third of Medicare beneficiaries accounted for three-fourths of beneficiaries’ total drug spending in 1996. Only 13 percent had no spending at all. Spending on prescription drugs in the non-Medicare population is even less evenly distributed.
• Self-selection does not explain the difference in spending between Medicare beneficiaries with and without drug coverage. Even among beneficiaries with the same poor health status, more prescriptions are written for people with coverage, and people without coverage are less likely to fill prescriptions.
• Prescription drugs take up about one sixth of all health spending by the elderly. Out of pocket spending for prescription drugs is a larger proportion of health spending for the elderly than for younger people. Prescription drug spending also accounts for a larger share of spending by people with low incomes than it does for people with higher incomes.
• The burden of prescription drug costs creates access problems for some beneficiaries. High spenders with incomes below the poverty line spend more than one-fourth of their income on drugs. Among Medicare beneficiaries, 10 percent of those with only Medicare coverage report not being able to afford a needed drug, compared to 2 percent of those with a non-Medicaid supplement.
• Drug spending has grown more quickly than other health spending throughout the 1990’s. Price increases, higher utilization, and the use of newer, more expensive drugs all play a part in increasing drug spending.

COMPARISONS OF UTILIZATION AND SPENDING

This section will present, for Medicare beneficiaries and for the non-Medicare population, comparisons of utilization by covered and noncovered people grouped by various demographic and health characteristics. Unless otherwise noted, all results reported in this chapter are statistically significant at the 0.05 level, based on a two-tailed test. See the Introduction of this report for details.

The comparisons here are limited to simple descriptive tables, primarily focusing on the ratio between people with and without drug coverage. It is important to note that these descriptive comparisons, which look at one factor at a time, may not isolate the key determinants of drug spending. Multivariate analysis would be needed to establish which factors are most important in explaining differences between the covered and noncovered populations.

Most of the estimates provided in this chapter are drawn from Medicare Current Beneficiary Survey (MCBS) and Medical Expenditure Panel Survey (MEPS) data on prescription drugs. It should be noted that over-the-counter drugs are not included here. Drugs that are available both over-the-counter and in prescription strength are included if the drug was obtained in prescription strength.

MCBS and MEPS use different methods to gather data on utilization and spending. However, both find the same patterns in utilization and spending for people with and without coverage. Their estimates of the magnitude of the gaps between the covered and uncovered are sometimes different, though rarely contradictory. A detailed summary of the survey methods and of the differences in results is provided in appendix B.

Overall differences

Table 2-1, drawn from 1996 MCBS data, compares drug utilization and spending for Medicare beneficiaries with and without drug coverage. As in the previous chapter, beneficiaries are included in the covered category if they had drug coverage at any point during the year. The next section of this chapter will explore the differences in spending and utilization depending on the duration of their coverage.

Table 2-1. Utilization and Spending for Prescription Drugs By Medicare Beneficiaries with and without Drug Coverage, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

The table shows that:

• Beneficiaries who have prescription drug coverage fill nearly one-third more prescriptions than those who do not have coverage, and total drug spending for beneficiaries with coverage is nearly two-thirds higher.
• The cost of prescriptions filled by beneficiaries with coverage is higher on average than the cost of prescriptions filled by beneficiaries without coverage. This is not because the price of any specific medication is higher for people with coverage. Instead, the difference seems to come from the fact that people with drug coverage receive a different mix of drugs than noncovered people receive, or different size prescriptions. The next chapter will show that for a given prescription, prices are generallyThe cost of prescriptions filled by beneficiaries with coverage is higher on average than the
• Beneficiaries with coverage pay out of pocket for 33 percent of their total spending on prescription drugs; those without coverage, of course, pay 100 percent. For each prescription they fill, beneficiaries without coverage pay on average more than twice as much out of pocket as those who have coverage. Overall, their annual out-of-pocket costs are nearly twice as high -- $200 more -- even though they use fewer medications (see Figure 2-1).

Figure 2-1. Out-of-pocket and Insurer Spending on Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

• Beneficiaries with coverage are more likely to fill at least one prescription. The differences between those with and without coverage persist even when looking only at beneficiaries who fill prescriptions (see Figure 2-2).

Figure 2-2. Medicare Beneficiaries Who Filled a Prescription and Number of Prescriptions Filled, by Coverage Status, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996

Table 2-2 presents similar information for the non-Medicare population.¹ The differences in utilization and total spending are much greater. This is because a very large number of non-Medicare individuals without coverage — nearly two-thirds — receive no prescription drugs at all. In contrast, only 13 percent of Medicare beneficiaries fill no prescription during the year.² If one considers only users of prescription drugs, the patterns are more similar to those shown in table 2-1. Those who have coverage receive more, and more costly, prescriptions.³ Those without coverage pay over twice as much out-of-pocket for each prescription they fill (see Figure 2-3).

Table 2-2. Utilization and Spending for Prescription Drugs By Non-Medicare Individuals with and without Drug Coverage, 1996

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

Figure 2-3. Out-of-pocket and Insurer Spending on Prescription Drugs by Non-Medicare Beneficiaries with and without Drug Coverage, 1996

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

It should be emphasized that, throughout this chapter, “out-of-pocket costs” include only the net costs to an individual, after any insurance payments, for any prescriptions received. Premiums paid for insurance coverage are not included. This analysis excludes premiums because it is difficult with survey data to separate drug premiums from overall insurance premiums. In fact, in many cases, calculating truly separate drug premiums would be impossible even with complete information. In many benefit packages, prescription drugs are considered a key piece, and the interactions with other benefits make it difficult to separate the incremental cost of a drug benefit from the package as a whole.⁴ Moreover, the insurance that these premiums buy has a value in and of itself, even if there is no drug utilization.

Duration of coverage

Table 2-3, drawn from an independent analysis of MCBS data by Bruce Stuart et al. for the Commonwealth Fund, shows differences in utilization and spending for Medicare beneficiaries who had drug coverage throughout 1996, during part of the year, or at no time during the year. It has been observed for other types of medical coverage that people with part-year coverage use more services during their covered period than people with full-year coverage use during a similar period; in effect, they are using their coverage to deal with previously unattended problems. However, this sort of catch-up effect does not appear to be applicable for prescription drugs. While someone can postpone elective surgery, for example, people who do not obtain needed medications during a period without coverage cannot make up for this when they obtain coverage.

Instead, it seems likely that people who have coverage for only part of a year will act like noncovered people during their period without coverage and like other covered people during their period with coverage. In fact, beneficiaries even with 7 to 9 months of coverage spend only 12 percent ($58) more than beneficiaries who are uncovered all year. Table 2-3 and Figure 2-4 show that the more substantial increase in utilization occurs when a beneficiary has drug coverage for at least 10 months.

Table 2-3. Average Prescriptions, Total Spending, and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries, by Months of Coverage, 1996

*The total equals 95% because duration of insurance coverage could not be determined for 4.7% of beneficiaries (had claims paid but did not report coverage.

Source: Bruce Stuart tabulations of MCBS, 1996, for noninstitutionalized beneficiaries enrolled in Medicare for the entire year.

Figure 2-4. Out-of-pocket and Insurer Spending on Prescription Drugs by Medicare Beneficiaries, by Duration of Drug Coverage, 1996

Note: 4.7% of beneficiaries had drug coverage for an unknown number of months (had claims paid but did not report coverage).

Source: Bruce Stuart tabulations of MCBS, 1996 for noninstitutionalized beneficiaries enrolled in Medicare for the entire year.

Much of the MCBS data presented elsewhere in this report, and all the MEPS data, treat individuals as having drug coverage if they have coverage at any time during the year. Because people with part-year coverage have lower utilization and spending than those with full-year coverage, their inclusion lowers the averages for the covered group. As a result, the real differences between people who do and do not have coverage at a given point in time are understated throughout this report.

Source of Coverage

Table 2-4 and Figure 2-5 show that utilization and spending by Medicare beneficiaries varies according to their primary source of supplemental coverage.⁵ The gaps between beneficiaries with and without drug coverage also vary.

Table 2-4. Average Number of Prescriptions, Total Spending, and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Primary Source of Supplemental Coverage, 1996

* Sample size is too small to produce a reliable estimate.

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Among beneficiaries with drug coverage, both total spending and the proportion that beneficiaries pay out-of-pocket vary by type of insurance. Beneficiaries who have individually purchased (mostly Medigap) insurance pay a higher proportion of their drug costs than any other covered group and have relatively low total spending compared to other coverage groups. Beneficiaries enrolled in Medicaid who have drug coverage have the highest utilization and spending and the lowest out-of-pocket costs of any covered group.⁶

Figure 2-5. Out-of-pocket and Insurer Spending on Prescription Drugs by Medicare Beneficiaries, by Type of Drug Coverage, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

With few exceptions, Medicare beneficiaries with drug coverage had more prescriptions, higher spending, and lower out-of-pocket costs than those without drug coverage as a whole and within each coverage group.⁷

• The spending differences between Medicaid beneficiaries with and without drug coverage are dramatic. Beneficiaries who have Medicaid with drug coverage get nearly twice as many prescriptions and spend over twice as much on drugs as beneficiaries who receive Medicaid assistance only with cost sharing or premiums. Very low-income people who lack drug coverage may be least likely to be able to purchase needed medications on their own.
• Beneficiaries with employer-sponsored supplemental insurance show the smallest utilization difference between those with and without a drug benefit; the difference in the number of prescriptions per person is not statistically significant. The difference in total spending is much larger, because prescriptions received by those with a drug benefit were 39 percent more costly than those received by retirees without a drug benefit. Despite their higher total spending, those with drug coverage had out-of-pockeBeneficiaries with employer-sponsored supplemental insurance show the smallest u
• The utilization difference for people with individually purchased coverage with and without a drug benefit is also quite small. In contrast to those with employer-sponsored insurance, however, those with drug coverage spend nearly as much out of pocket (almost 80 percent as much) as those without it. This is partly due to the deductible and cost-sharing requirements imposed by standard Medigap plans. On average, beneficiaries with a drug benefit and Medigap pay 58 percent of their costs out of pocket.

There are also notable differences among beneficiaries without drug coverage based on whether they had other supplemental coverage. With the exception of beneficiaries in HMOs, people with no drug coverage but some supplemental coverage had higher spending than people who had only Medicare coverage. One possible explanation is that people with no supplement are healthier than people who choose to obtain some form of supplemental coverage. Another possible factor is that beneficiaries without a supplement were less likely to see a physician, and hence less likely to receive a prescription. The issues of self-selection, moral hazard, and lack of access will be considered further below.

Income

Table 2-5 and Figure 2-6 show average prescription drug spending and average out-of-pocket spending for Medicare beneficiaries by income.⁸ Average spending for people with coverage is consistently higher than for people without coverage across income groups.⁹ It might be expected that spending differences would diminish steadily with higher income, because higher-income people without coverage are better able to pay for drugs on their own. The difference in average spending for covered and noncovered beneficiaries in poverty is indeed greater than for other income groups. However, among the higher income groups, there is no significant difference in the size of the spending gap between covered and noncovered beneficiaries. This suggests that insurance coverage for prescription drugs matters, irrespective of income.

Table 2-5. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Family Income as a Percent of Poverty, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Figure 2-6. Out-of-pocket and Insurer Spending on Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Income, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Among covered beneficiaries, those below the poverty threshold pay the smallest share of their own costs out of pocket. Poor beneficiaries are more likely to have drug coverage through Medicaid, which imposes only nominal copayments. Still, even with drug coverage, beneficiaries in poverty paid 25 percent of their own costs. This may be partly because people are counted as covered if they have coverage for any part of the year. The out-of-pocket costs might have been incurred by part-year eligibles during a period without coverage. Another possible factor is the fact that some state Medicaid programs limit the number of prescriptions beneficiaries may receive in a given period.

Table 2-6 shows spending by income for the non-Medicare population. Again, it is helpful to look at people who used any prescription drugs, rather than at the total population. Among users, patterns for the non-Medicare population are similar to those shown in Table 2-5 for the Medicare population as a whole. In all income ranges, there is a difference between spending by those with coverage and those without.¹⁰ Like Medicare beneficiaries, covered non-Medicare beneficiaries pay the smallest share of their own costs – just over a fourth – when they are in poverty. However, actual out-of-pocket spending for drug users in this group is only $76 on average, as opposed to $200 for covered Medicare beneficiaries in poverty.

Table 2-6. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Non-Medicare Individuals with and without Drug Coverage, by Family Income as a Percent of Poverty, 1996

Note: The totals include persons with negative family income.

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

Health status and other health indicators

Not surprisingly, as health status worsens, beneficiaries use more drugs. However, Table 2-7 and Figure 2-7 show that while utilization rises, a gap remains between beneficiaries with and without coverage. Within each health status category, beneficiaries with coverage are more likely to fill at least one prescription, and fill more prescriptions when they do use drugs. Beneficiaries without coverage who are in fair or poor health are as likely to fill no prescriptions as covered beneficiaries in very good health.

Table 2-7. Medicare Beneficiaries Filling at Least One Prescription and Number of Prescriptions Filled, by Drug Coverage and Self-Reported Health Status, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Figure 2-7. Percentage of Medicare Beneficiaries with and without Drug Coverage Filling at Least One Prescription, by Health Status, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Table 2-8 and Figure 2-8 show that spending follows the utilization pattern: as Medicare beneficiaries report poorer health, their spending on prescription drugs increases. Again, within each health status category, beneficiaries with drug coverage have higher spending than the noncovered. Spending for beneficiaries in poor health who had drug coverage was $590 more than for those who lacked coverage; for beneficiaries with fair health, the difference was $480. Beneficiaries spent nearly twice as much out of pocket as those who had coverage unless they were in excellent health.

Table 2-8. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Self-Reported Health Status, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Figure 2-8. Out-of-pocket and Insurer Spending for Medicare Beneficiaries with and without Drug Coverage, by Health Status, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Table 2-9 shows that the same patterns are reinforced when beneficiaries are split according to the duration of their drug coverage. Beneficiaries who always had drug coverage had nearly twice the spending of beneficiaries who never had drug coverage at any time during the year, regardless of health status. Those in fair or poor health who were covered for only part of the year had total spending slightly closer to those who never had coverage.

Table 2-9. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries by Duration of Drug Coverage and Self-Reported Health Status, 1996

Source: Bruce Stuart, Dennis Shea, and Becky Briesacher, “Prescription Drug Costs for Medicare Beneficiaries: Coverage and Health Status Matter,” New York, Commonwealth Fund Issue Brief, January 2000.

That spending and utilization differences persist across different health statuses suggests that the overall difference in spending for covered and noncovered people cannot simply be attributed to different levels of need for prescription drugs between those with and without drug coverage. However, self-reported health status is not necessarily a good indicator of relative need for drugs or other health services. Table 2-10 uses three other indicators to compare spending by covered and noncovered Medicare beneficiaries: number of chronic conditions, number of functional limitations, and use of inpatient services during the year.

Table 2-10. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Other Indicators of Health Status, 1996

¹ Beneficiaries who need assistance with one or more instrumental activities of daily living, such as meal preparation or managing money.

²Beneficiaries who need assistance with activities of daily living, such as bathing, dressing, toileting, or eating.

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

On all three measures, the pattern is the same as for self-reported health status. Beneficiaries who report more chronic conditions, worse functional status, or a hospital stay during the year spend more on drugs whether or not they have coverage. In each category, beneficiaries with drug coverage spend much more than uncovered beneficiaries in the same category; at the same time, their out-of-pocket spending is much lower.

Because spending rises so dramatically with worsening health status, the dollar gaps between the covered and the noncovered rise with poorer health. For example, among beneficiaries with five or more chronic conditions, those with coverage had average total spending $457 higher than that for beneficiaries without coverage, while the difference for beneficiaries with no chronic conditions was only $74. Out of pocket spending for uncovered beneficiaries with five or more chronic conditions was $532 higher than for those with coverage. Drug insurance clearly makes an important difference for people with severe health problems.

Table 2-11 provides MEPS data for the total population (including people with and without Medicare) by self-reported health status. The figures include only people who used any prescription drugs. Again, spending rises with poorer health status for both the covered and the noncovered population,¹¹ and the dollar difference in spending is greatest for those in poor health.¹²

Table 2-11. Average Number of Prescriptions and Average Total Spending for Prescription Drugs by Prescription Drug Users with and without Drug Coverage, by Self-Reported Health Status, 1996

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

Age

Table 2-12 and Figure 2-9 show data on spending for prescription drugs by age. There is a notable difference between elderly and non-elderly Medicare beneficiaries. Non-elderly Medicare beneficiaries qualify for the program on the basis of disability or end stage renal disease, and thus may be more likely to need prescription drugs. The spending gap between covered and noncovered beneficiaries is largest for nonelderly beneficiaries, particularly those under 45. Nonelderly beneficiaries with drug coverage spend much more than elderly beneficiaries with drug coverage; beneficiaries under 45 without coverage spend much less than elderly noncovered beneficiaries.

Table 2-12. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Age, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Figure 2-9. Out-of-pocket and Insurer Spending for Medicare Beneficiaries with and without Drug Coverage, by Age, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Among elderly beneficiaries, spending by those with coverage rises with age, except that it drops slightly for those aged 80 and older.¹³ This may be because the sickest among the oldest beneficiaries are likely to be in institutions and are therefore omitted from the data. A similar, but slightly less clear, pattern is present for the elderly without coverage. The gap between those with and without coverage persists, but does not seem to follow any pattern as beneficiaries age.

Race

Table 2-13 shows spending by covered and noncovered beneficiaries by race. Among Medicare beneficiaries, average spending by people with coverage is slightly higher for whites than for blacks or people of other races, but the difference in spending for the covered and the noncovered is slightly greater for nonwhites. However, these differences are not statistically significant. Multivariate analysis would be needed to determine the extent to which any spending differences by race are associated with other factors, such as income, health status, or source of coverage.

Table 2-13. Average Total Spending and Out-of-pocket Spending for Prescription Drugs by Medicare Beneficiaries with and without Drug Coverage, by Race/Ethnicity, 1996

Note: “Other” includes Asian, Hispanic, and North American Native.

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

DISTRIBUTION OF SPENDING

Table 2-14 and Figure 2-10 show the distribution of spending by beneficiaries with and without drug coverage in 1996. Only 4 percent of Medicare beneficiaries accounted for almost a quarter of all beneficiaries’ drug spending in 1996, and the top third of beneficiaries spent three-fourths of the total spent on drugs. The distribution of spending is different for covered beneficiaries compared to those without coverage. Compared to beneficiaries with coverage, those without coverage were almost twice as likely to spend nothing, and about half as likely to spend over $1,000.

Table 2-14. Distribution of Medicare Beneficiaries with and without Drug Coverage by Amount of Prescription Drug Spending, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Figure 2-10. Distribution of Medicare Beneficiaries and Prescription Drug Expenditures by Amount of Spending, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Tables 2-15 through 2-17 provide a fuller picture of the characteristics of the subset of Medicare beneficiaries with the highest spending. They compare the 20 percent of the population with the highest spending (those with annual expenditures over $1,066) with the total population. The top 20 percent group is referred to as the “highest drug spenders” in these tables. Overall, 24 percent of covered beneficiaries fell into this group, and 12 percent of noncovered beneficiaries. Of the high spenders, 82 percent had drug coverage, compared to 69 percent of all beneficiaries.

The data show that, in general, the differences explored in this report between Medicare beneficiaries with and without drug coverage do not appear to be driven by high spenders. In other words, the gaps in spending and utilization between Medicare beneficiaries with and without drug coverage do not appear to result because of unique characteristics of those with higher spending. Differences in source of supplemental coverage for high spenders with and without drug coverage mirror the differences seen between all beneficiaries with and without drug coverage, as shown in Table 2-15. Overall, the highest spenders are more likely to have employer based insurance or Medicaid, and less likely to have individually purchased insurance or be in a risk HMO.

Table 2-15. Medicare Beneficiaries with and without Drug Coverage, as Share of Total Population and Share of the Highest Drug Spenders, by Primary Source of Supplemental Coverage, 1996

*Less than 1 percent; sample is too small to produce a stable estimate.

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

For the demographic characteristics shown in Table 2-16, the highest spenders do not differ very much from the general Medicare population. Across the total population with and without drug coverage, high spenders’ income distribution is similar; so is their age distribution, except that high spenders are slightly more likely to be nonelderly. Their distribution by race, sex, and metropolitan residence is also comparable. Within both the covered and the non-covered categories, the highest spenders are also similar to the general population of Medicare beneficiaries, except that people without coverage who are below poverty are less likely to be high spenders. This suggests that beneficiaries in all income and socioeconomic groups are at risk of having high drug spending, but that both health status and drug coverage can influence that spending.

In contrast, as might be expected, the highest spenders tend to have poorer health than other Medicare beneficiaries, as measured by each of the indicators used. Table 2-17 shows that these beneficiaries are more likely to report poorer health status, multiple chronic conditions, and more functional limitations, and they are more likely to have had an inpatient admission. This is true for beneficiaries with and without coverage.

Table 2-16. Medicare Beneficiaries with and without Drug Coverage, as Share of Total Population and Share of the Highest Drug Spenders, by Selected Demographic Characteristics, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

Table 2-17. Medicare Beneficiaries Reporting Selected Measures of Health Status, as Share of Total Population and Share of the Highest Drug Spenders, by Drug Coverage, 1996

Source: Information and Methods Group, Office of Strategic Planning, Health Care Financing Administration(now known as Centers for Medicare and Medicaid Services(CMS)): Medicare Current Beneficiary Survey Cost and Use File, 1996.

The distribution of drug spending is even more concentrated for the non-Medicare population. Table 2-18 shows the distribution for the non-Medicare population in three coverage groups: coverage other than Medicaid, Medicaid, and no coverage. The highest spenders account for much of the spending in each category. Among individuals with Medicaid or with other drug coverage, the top 5 percent account for over half of total spending. The top 5 percent of individuals without drug coverage account for almost three-quarters of total spending for people without drug coverage. People with Medicaid are somewhat more likely than people with other coverage to have had no drug spending during the year, while people without coverage are much more likely to have had no drug spending.

Table 2-18. Distribution of Non-Medicare Individuals with and without Drug Coverage by Amount of Prescription Drug Spending, 1996

Note: The total includes persons with negative family income. Percents may not add to 100 because of rounding.

Source: Center for Cost and Financing Studies, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey Household Component, 1996.

EXPLAINING UTILIZATION AND SPENDING DIFFERENCES

There are a number of reasons why people with prescription drug coverage might have higher utilization and spending than people without coverage:

• People who anticipate large drug expenditures might be more likely to seek drug coverage than people who do not expect to spend much on drugs. This phenomenon is known as adverse selection or self-selection.
• More prescriptions, or prescriptions for more costly drugs, might be written for people with coverage. This could be because physicians consider a patient’s coverage when deciding on appropriate treatment. People with coverage may also be more likely to request drug therapies, especially more costly therapies. Higher demand by the consumer in these situations is also known as moral hazard.
• People without coverage may be less likely to fill the prescriptions they receive, or they may make a prescription last longer by not taking the recommended dosage. Those who have no health insurance at all (a large share of the nonelderly without drug coverage) may never visit a physician to obtain a prescription in the first place. These problems will be referred to here as lack of access.

All of these factors probably play a part in the observed utilization and expenditure differences. They are notoriously difficult to disentangle, both for drugs and for medical care in general. Distinguishing between self-selection, moral hazard, and lack of access requires information about the relative quantity of drugs actually needed by people with and without coverage. This would require a much higher level of clinical detail than is available in the data used for this report. Some factors will be presented here to highlight fruitful areas for further analysis, not necessarily to resolve the issues. The emphasis will be on the Medicare population.

Adverse Selection

People without Medicare may decide whether or not to obtain health insurance, and anticipated need is certainly a factor in this choice. However, most non-Medicare individuals do not make a separate decision about whether to obtain coverage specifically for prescription drugs. The vast majority who have insurance are covered through employer plans or Medicaid programs and automatically receive whatever level of drug coverage their insurance provides. The primary exceptions are people whose employers offer cafeteria plans where drugs are an option, and people who have a choice of benefit packages when they seek out individual policies.

The story is similar for those Medicare beneficiaries who have employer-based coverage or Medicaid: they often do not control whether or not drugs are a part of their benefit package. However, a larger proportion of Medicare beneficiaries do not have access to these two sources of coverage. These beneficiaries must decide whether to obtain coverage to supplement their Medicare benefits, and whether that supplemental coverage should include drugs. It would be reasonable to expect that this decision would be influenced by the amount of health and drug spending that the beneficiary expects to incur. However, as Chapter 1 discussed, Medigap rules may make coverage more difficult to obtain for those in poor health. It is also likely that many Medicare beneficiaries who choose to buy supplemental coverage that includes drug coverage do so because they want to insure against the possibility of having high costs, not because they already know that their costs will be high.

Research to date has not focused specifically on the question of adverse selection into prescription coverage by Medicare beneficiaries. There is, however, a substantial body of research on selection into Medicare supplemental policies independent of drug coverage. Recent studies of Medicare HMO enrollment find strong evidence of favorable rather than adverse selection – that is, that enrollees in Medicare HMOs are actually healthier than average.¹⁴ Indications of adverse selection in the Medigap market have been found by some researchers but not others.¹⁵ Most researchers assume that there is no selection into retiree plans given the nature of plan sponsorship, but one recent work finds evidence of adverse selection in this market.¹⁶ These thoroughly mixed findings do little to clarify the issue of possible adverse selection into prescription drug coverage.

As Chapter 1 showed (see Tables 1-8 through 1-11), Medicare beneficiaries are slightly more likely to have coverage if they report poorer health status or more chronic conditions, but many of the differences are not statistically significant. Further analysis is needed to explore whether there is evidence of adverse selection when controlling for other factors.

Given the small differences in health status between beneficiaries with and without coverage, the spending differences between the covered and noncovered cannot be explained by assuming that sick people obtain coverage and healthy people forgo it. Furthermore, data presented earlier in this chapter in Tables 2-7 through 2-11 indicate poor health does not appear to explain the significant differences in utilization and spending among the covered and uncovered.¹⁷ This suggests that other factors, such as higher demand by those with coverage and lack of access by those without coverage, are also at work.

Moral Hazard and Barriers to Access

The RAND Health Insurance Experiment of the late 1970’s and early 1980’s found that even in the absence of adverse selection, insurance can lead to higher rates of use.¹⁸ In the experiment, higher cost-sharing deterred people from obtaining both necessary and unnecessary care.¹⁹ Several studies focusing on drug use by Medicare beneficiaries reach the same basic conclusion — drug coverage increases the probability of drug use. The empirical estimates of insurance effects produced by the studies vary within a relatively narrow range. The addition of drug coverage is estimated to increase the probability of any prescription being filled by between 4 and 16 percent, depending on population subgroup and generosity of dr