Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Out-Of-pocket Drug Spending and Income

04/01/2000

This report has shown that, while people without drug coverage have lower total drug spending than those with coverage, they incur higher out-of-pocket costs. Tables 2-20 through 2-23 show this out-of-pocket spending as a share of income for covered and noncovered Medicare beneficiaries, in the total population and in the 20% with the highest spending. Among all beneficiaries, those without coverage spend over twice as much of their income for drugs as those with coverage (2.2 percent versus 1 percent of income). Among the highest spenders, the ratio is over three to one (8.1 percent versus 2.6 percent of income). Within the group of high spenders, some classes of beneficiaries without coverage are spending a significant proportion of income (frequently over 10 percent, and sometimes over 20 percent) on out-of-pocket payments for drugs.

Table 2-19 and Figure 2-11 show that at all income levels, beneficiaries with no drug coverage spend a larger proportion of their income on out-of-pocket prescription drug costs. Beneficiaries in the high spending group whose incomes are below the poverty threshold spend more than a quarter of their income on prescription drugs.

Table 2-19. Out-of-pocket Spending for Prescription Drugs as a Percent of Income, for all Medicare Beneficiaries and for the Highest Drug Spenders, by Income, 1996
Income All beneficiaries Highest drug spenders
Covered Not covered Covered Not covered
TOTAL 1.0% 2.2% 2.6% 8.1%
<Poverty 3.3% 5.8% 7.8% 27.8%
Poverty-135% 2.6% 4.6% 6.2% 16.5%
136-150% 2.1% 4.4% 6.3% 15.9%
151-175% 2.0% 3.1% 4.7% 12.4%
176-200% 1.5% 3.1% 3.7% 11.8%
201-300% 1.3% 2.2% 3.2% 7.7%
301-400% 0.8% 1.5% 2.1% 5.8%
>400% 0.4% 0.7% 1.0% 2.8%
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 2-11. Out-of-pocket Spending on Prescription Drugs as a Proportion of Income for Medicare Beneficiaries With and Without Drug Coverage, by Income Level, 1996

Figure 2-11. Out-of-pocket Spending on Prescription Drugs as a Proportion of Income for Medicare Beneficiaries With and Without Drug Coverage, by Income Level, 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 2-20 shows the relative income share by type of coverage. Shares of income devoted to out-of-pocket spending are quite close for beneficiaries with individually purchased coverage that does and does not include a drug benefit. This result is consistent with earlier results showing that Medigap coverage tends to offer the least protection against drug costs. High spenders with no supplemental insurance spend almost 12 percent of their income on prescription drugs; those who are enrolled in Medicaid but have no drug coverage spend 23 percent of their income on drugs.

Table 2-20. Out-of-pocket Spending for Prescription Drugs as a Percent of Income, for all Medicare Beneficiaries and for the Highest Drug Spenders, by Source of Supplemental Coverage, 1996
Source of supplemental coverage All beneficiaries Highest drug spenders
With drug coverage Without drug coverage With drug coverage Without drug coverage
         
Total 1.0% 2.2% 2.6% 8.1%
         
Risk HMO 0.8% * 2.1% *
Medicaid 2.2% 4.3% 5.5% 23.0%
Employer Sponsored 0.7% 1.7% 1.8% 6.2%
Individually Purchased 1.7% 2.2% 4.7% 7.8%
Other 1.7% 3.2% 3.8% *
FFS Medicare; no supplement   2.4%   11.6%

*Sample size too small for 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.

Table 2-21 shows out-of-pocket spending on prescription drugs as a proportion of income for different demographic groups. For Medicare beneficiaries as a whole, the relative income share for the covered and noncovered is fairly constant across these subgroups. Those without coverage almost always spend a higher percentage of their income on drugs. Among the highest spenders who have no drug coverage, certain demographic groups have extraordinarily high costs as a proportion of their income. The youngest and oldest beneficiaries in this group both spend more than 10 percent of their income on drugs. Non-white beneficiaries without coverage in the high spending group spend over 15 percent of their income on prescription drugs.

Table 2-21. Out-of-pocket Spending for Prescription Drugs as a Percent of Income, for all Medicare Beneficiaries and for the Highest Drug Spenders, by Selected Demographic Characteristics, 1996
  All beneficiaries Highest drug spenders
Covered Not covered Covered Not covered
         
TOTAL 1.0% 2.2% 2.6% 8.1%
         
Age        
0-44 2.0% 2.0% 4.2% 13.6%
45-64 2.0% 3.2% 3.7% 8.4%
65-69 0.7% 1.7% 2.2% 9.8%
70-74 0.8% 2.0% 2.1% 6.6%
75-79 1.1% 2.2% 2.5% 7.3%
80-84 1.3% 2.6% 2.7% 8.2%
85+ 1.3% 2.8% 3.5% 10.3%
         
Sex        
Male 0.8% 1.8% 2.1% 6.8%
Female 1.3% 2.5% 3.0% 9.3%
         
Race        
White 1.0% 2.1% 2.5% 7.7%
Black 1.4% 3.1% 4.1% 15.9%
Other 1.3% 2.3% 3.8% 15.4%
         
Metro status        
Metro 0.9% 2.0% 2.3% 7.7%
NonMetro 1.4% 2.5% 3.8% 8.8%
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 2-22 shows spending on drugs as a percent of income by various measures of health status. Uncovered high spenders who have the worst health or functional status or the most chronic conditions spend over a tenth of their income on prescription drugs.

Table 2-22. Out-of-pocket Spending for Prescription Drugs as a Percent of Income, for all Medicare Beneficiaries and for the Highest Drug Spenders, by Selected Indicators of Health Status, 1996
  All beneficiaries Top 20% by spending
Covered Not covered Covered Not covered
Health status        
Excellent 0.4% 0.9% 1.0% 7.4%
Very Good 0.7% 1.5% 1.9% 5.3%
Good 1.1% 2.6% 2.5% 7.4%
Fair 1.9% 3.7% 3.2% 9.8%
Poor 2.6% 3.9% 4.3% 12.5%
         
Functional status        
No Limitations 0.8% 1.9% 2.1% 7.7%
IADL Only 2.2% 3.7% 3.8% *
1 or 2 ADLs 1.9% 3.2% 3.7% 8.4%
3+ ADLs 2.3% 3.6% 4.3% 12.2%
         
Chronic conditions        
0 0.3% 0.7% 3.0% 8.1%
1-2 0.7% 1.6% 2.0% 6.9%
3-4 1.4% 2.8% 2.8% 7.8%
5+ 2.0% 4.7% 3.1% 11.0%
         
Inpatient stay        
No 0.9% 1.9% 3.0% 8.1%
Yes 1.7% 3.4% 2.3% 6.8%

*Cell 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.

Even some people with coverage are devoting a considerable share of their income to prescription drugs. MCBS estimates that 8 percent of beneficiaries with drug coverage have total spending of $2,000 per year or more. Table 2-23 shows the out-of-pocket costs that would be incurred by someone with $2,000 in spending under different types of drug coverage. Beneficiaries with Medigap plans would pay over half this cost out of pocket.

Table 2-23. Illustration of Out-of-pocket Costs under Different Coverage Sources for a Beneficiary with Total Spending of $2,000
Source of drug coverage Deductible Copay Over cap Total out-of-pocket Percent paid out-of-pocket
HMO ($7.50 copay, $1,500 cap)1 -- $412 $88 $500 25%
Medigap H/I/J ($250 deductible, $1,250 or $3,000 cap, 50% coinsurance) 2 $250 $875 -- $1,125 56%
Employer ($7.50 copay)1 -- $412 -- $412 21%
Medicaid ($2 copay)1 -- $110 -- $110 6%
Medicare FFS only -- -- -- $2,000 100%

1 For non-Medigap plans, typical cost-sharing rules are assumed; there are plans with higher and lower cost sharing. The $2,000 spending was divided by the average cost of prescriptions for Medicare beneficiaries with drug coverage ($36.37) to generate the number of prescriptions (55) used for the examples in this table. The cap on HMO payments applies to spending by the plan.

2 For Medigap plans, out-of-pocket spending in this table is calculated directly from the dollar amount of spending ($2,000). After the beneficiary has met the $250 deductible, Plans H and I will cover 50% of $2500 in total spending, for a total plan payment of $1250. Plan J will pay a total of $3000.

NOTE: This table does not attempt to account for premiums paid or the different purchasing power that $2000 might have under different discount arrangements negotiated by HMOs, employers, and Medicaid.

Table 2-24 shows data from MEPS on out-of-pocket spending as a proportion of income for non-Medicare beneficiaries. Overall, this group spends a lower share of their income on drugs than Medicare beneficiaries spend. Among all non-Medicare drug users, those with coverage spend about half as much of their income on prescription drugs as people without coverage. The difference between covered and noncovered users persists across all income levels.23

Table 2-24. Out-of-pocket Spending as a Percent of Income for Non-Medicare Individuals with and without Drug Coverage, by Income Quintile, 1996
Income quintile Total Population Users
Covered Noncovered Covered Noncovered
TOTAL 0.98% 0.93% 1.41% 2.72%
20% * * * *
40% 0.41% 0.28% 0.59% 0.84%
60% 0.23% 0.15% 0.33% 0.46%
80% 0.14% 0.08% 0.19% 0.29%
100% 0.08% 0.06% 0.11% 0.14%

* Estimates are not stable.

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

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