Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Section 2. Prescription Drug Costs for Medicare Beneficiaries

04/01/2000

Spending on outpatient prescription drugs by non-institutionalized Medicare beneficiaries reached $25.1 billion in 19961, the latest year for which accurate statistics are available (Poisal, et al, forthcoming). Four years earlier in 1992, beneficiaries spent $16.2 billion (Laschober and Olin, 1996). Not only does this represent a substantial growth in spending (55 percent), but the rate of increase is also rising, from approximately 9 percent annually between 1992 and 1994 to over 14 percent annually between 1994 and 1996 (Laschober, 1997; Olin and Liu, 1998; Poisal, et al., forthcoming). In per capita terms, the growth rate over this period (44 percent) was somewhat lower (rising from $468 to $674), reflecting the fact that the size of the Medicare population has also continued to grow.

More current data are available on prescription drug costs for beneficiaries enrolled in Medicare HMOs. According to industry surveys, the average per member per month (PMPM) expenditure on prescription drugs rose from $37.53 in 1995 to $52.50 in 1998, a 40 percent increase in just three years (CibaGeneva, 1996; Novartis, 1999). The increase would have been even steeper had HMOs not raised patient copays by more than 25 percent over the same period (CibaGeneva, 1996; Novartis, 1999).

The issue of rising drug costs is at the core of the national debate over whether a prescription drug benefit should be added to Medicare coverage. On the one hand, rising costs are cited as a main reason why Medicare should cover drugs. Despite the fact that drug coverage of Medicare beneficiaries expanded during the first half of the 1990s (see section 2.3); the burden of out-of-pocket drug spending has also grown (see section 2.5). On the other hand, the growth in drug spending will make any meaningful Medicare drug benefit expensive to finance. From either perspective, there is a clear need to answer the question: What factors explain drug spending by Medicare beneficiaries?

The answers lie at both the individual level and the market level. The literature on individual determinants of drug spending by Medicare beneficiaries identifies seven factors: (1) health status, (2) functional impairment, (3) age, (4) gender, (5) race, (6) income, and (7) insurance coverage. Health status is an obvious factor. Beneficiaries reporting excellent health spent an average of $363 on prescription medicines in 1996 compared to $1,107 for persons reporting poor health (Poisal, et al., forthcoming). For beneficiaries with no functional impairment, drug spending per person was $582 versus $1,000 for persons with one or more functional impairments (Poisal, et al., forthcoming). Other highlights from the latest report of Medicare beneficiary drug spending (Poisal, et al., forthcoming) include the following:

  • Gender: drug spending by females is higher than for males
  • Race: whites spend more than blacks
  • Disability: disabled beneficiaries under age 65 spend almost double the amount of aged beneficiaries
  • Income: Beneficiaries with annual incomes below the poverty line have the highest per capita spending on prescription drugs, closely followed by those with incomes between 150 and 200 percent of the poverty line.
  • Insurance Status: More than three-quarters (79%) of total 1996 prescription drug expenditures by Medicare beneficiaries were spent by persons with drug coverage. The average per capita drug spending by beneficiaries with coverage was $769 and without coverage was $463.

The finding that spending levels differ by socio-demographic status and insurance coverage are not unexpected, but simple descriptive comparisons may mask the true determinants of drug spending behavior. In one of the very few multivariate studies of prescription spending by aged Medicare beneficiaries, Lillard, et al. (1999) find that private health insurance, urban residence, and ill health are positive predictors of drug spending, while age and education level are negative predictors, when other factors are equal. Some factors that appear to be strong correlates of drug spending in descriptive comparisons lack predictive power in a multivariate framework, including gender, income, wealth, and Medicaid coverage.

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