Skip to main content
U.S. flag

An official website of the United States government

Dot gov

The .gov means it’s official.
Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.


The site is secure.
The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

Prescription Drug Coverage, Spending, Utilization, and Prices

Publication Date

Prescription drugs play an ever-increasing role in modern medicine. New medications are improving health outcomes and quality of life, replacing surgery and other invasive treatments, and quickening recovery for patients who receive these treatments. As important as prescription drugs are, not everyone has access to them. The newest drugs are often the most expensive, and millions of Americans - especially elderly and disabled Medicare beneficiaries - have inadequate or no insurance coverage for drugs. Nearly a third of all Medicare beneficiaries have no financial protection for the costs of drugs, if they can obtain them at all. Many additional beneficiaries find themselves moving in and out of the protection provided by insurance over the course of a year.

Medicare has generally excluded coverage of outpatient prescription drugs, as was common in private health plans when the program was enacted in 1965. Since then drug coverage has become a standard feature of private insurance, and it has become clear that the omission of outpatient drug coverage represents a crucial gap in protection for the most vulnerable Medicare beneficiaries. As part of a broader plan to modernize Medicare, President Clinton has proposed a new, voluntary Medicare drug benefit that would offer all beneficiaries access to affordable, high-quality prescription drug coverage while maintaining the fiscal integrity of the program. In Congress, there has also been growing bipartisan interest in finding ways of extending drug coverage.

As policymakers consider options to ensure that every American can have access to innovative drug treatments, there is an urgent need for comprehensive and reliable information on drug coverage, drug spending, and drug prices. On October 25, 1999, the President directed the Secretary of Health and Human Services to study prescription drug costs and trends for Medicare beneficiaries. He asked that the study investigate:

  • price differences for the most commonly used drugs for people with and without coverage;
  • drug spending by people of various ages, as a percentage of income and of total health spending; and
  • trends in drug expenditures by people of different ages, as a percentage of income and of total health spending.

This report is the Department's response to that request. It represents the work of individuals and agencies throughout the Department, including the Agency for Healthcare Research and Quality (AHRQ), the Food and Drug Administration (FDA), the Health Care Financing Administration (HCFA(now known as CMS)), and the Office of the Assistant Secretary for Planning and Evaluation (ASPE).

Chapter 1: Prescription Drug Coverage

While today, over 85 percent of Medicare beneficiaries use at least one prescription drug annually, beneficiaries must obtain drug coverage through a supplemental policy, by enrollment in a Medicare+Choice plan which includes coverage for prescription drugs, or through Medicaid. The result has been a patchwork of coverage that is not dependable, affordable, or accessible to all beneficiaries. Chapter 1 uses survey data to examine the sources of drug coverage for both the Medicare and non-Medicare population, describes the economic and demographic characteristics of those who have drug coverage and those who do not, and analyzes current trends in drug coverage. Analysis of data on the duration of coverage for the Medicare population is also presented. Differences in coverage rates by alternative measures of health status are explored. Lastly, trends in drug coverage for the Medicare and non-Medicare population are analyzed.

Key findings include:

  • Only 53 percent of Medicare beneficiaries had drug coverage for the entire year of 1996, although 69 percent had coverage for at least one month during the year.
  • Most sources of drug coverage are potentially unstable. Almost 48 percent of beneficiaries with drug coverage through Medigap and 29 percent who were covered through Medicare HMOs had drug coverage for only part of the year. Additionally, while employer-sponsored retiree coverage, the most prevalent single source of drug benefits, covered 32 percent of Medicare beneficiaries in 1996, 14 percent of those beneficiaries had only part year coverage from their former employers.
  • Drug benefits are becoming less generous. There is considerable evidence that cost sharing for prescription drugs is increasing and that overall caps on coverage are both becoming more common and are being set at lower levels. For example, Medicare+Choice plans generally have reduced drug benefits and increased enrollee out-of-pocket costs in 2000. Eighty-six percent of plans have annual dollar limits on drugs, including 70 percent of plans with annual caps of $1000 or less, and 32 percent with caps of $500 or less per enrollee - levels that are up from 35 percent and 19 percent in 1998.
  • Drug coverage is likely to decline as fewer employers offer health benefits to future retirees. For example, one employer survey recorded a drop from 40 percent in 1993 to 28 percent in 1999 in the number of large firms offering health benefits to Medicare eligible retirees. Additionally, employers have tightened eligibility rules and increased cost-shifting to retirees. Of those employers that still offer medical coverage, the survey found that 40 percent are requiring Medicare-eligible retirees to pay the full cost of their benefits, compared to 28 percent in 1995.
  • Beneficiaries with incomes between 100 percent and 150 percent of poverty (that is, individuals age 65 or older with incomes between $7,527 and $11,287 in 1996) have the lowest rate of coverage. Although coverage varies by income, nearly one-fourth of beneficiaries with incomes over 400 percent of poverty lack coverage.
  • Beneficiaries are less likely to have coverage if they are very old or live outside of a metropolitan area. About 37 percent of beneficiaries age 85 and above lacked coverage at any time during 1996 compared to 28 percent of beneficiaries age 65 through 69. About 43 percent of beneficiaries living in rural areas lacked drug coverage, compared to 27 percent of beneficiaries living in urban areas.
  • Coverage rates vary little by self-reported health status, but are considerably higher for those with five or more chronic conditions. But by all measures, at least one-fourth of those in any category of health status lack coverage.
  • Nearly one in four in the non-Medicare population never had any coverage for drugs in 1996. About 80 percent of those with full-year coverage got that coverage through employers.

Chapter 2: Effects of Prescription Drug Coverage on Spending and Utilization

Insurance coverage for prescription drugs makes a major difference in the amount of drugs people obtain, in how much they spend on drugs out of pocket, and in how much is spent in total on their behalf. People with coverage not only fill more prescriptions than those 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. Coverage increases prescription drug utilization, 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.

Chapter 2 presents detailed comparisons of utilization and spending (including out-of-pocket spending) for Medicare beneficiaries and the total population with and without drug coverage. It also examines some of the possible reasons for those differences and considers the consequences of being without coverage. Finally, it summarizes 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.
  • 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 filled by people with 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.
  • 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. 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.

Chapter 3: Prescription Drug Prices

In today's market for prescription drugs, most insurers obtain significant discounts on behalf of their insured beneficiaries. Individuals without coverage thus face not only the burden of paying for the entire cost of the drugs they need out of pocket, but they may also face higher prices for a given drug than do insurers and other large purchasers. Sorting out the differences in prices paid by those with and without coverage is not simple. The process by which prescription drug prices are determined is highly complex, involving numerous interactions and arrangements among manufacturers, wholesalers, retailers, insurers, pharmacy benefit managers (PBMs), and consumers.

In order to explain the complexity of this market, Chapter 3 begins with a description of the distribution channels for prescription drugs and how prices are established for different purchasers. It then offers an empirical analysis of whether prices paid for drugs at the retail level differ between cash customers and those with insurance coverage, using data from two sources: the Medical Expenditure Panel Survey (MEPS) and a widely used private sector data source on drug prices, IMS Health. A key limitation on the analysis of drug prices in this study, however, is our inability to incorporate the effect of rebates provided by manufacturers to insurers and PBMs. Given the greater market leverage of third party payers relative to individual consumers, it might be expected that cash customers will pay more than insurers for the same drugs at the retail pharmacy. Results from both sources, despite the absence of rebate data, support this hypothesis.

Key findings include:

  • At the retail pharmacy level:

Individuals without drug coverage pay a higher price at the retail pharmacy than the total price paid on behalf of those with drug coverage (based on analysis of MEPS data that do not include rebates but look across all drug purchases holding drug type, form, strength, and quantity constant). The differences generally held up when examining the Medicare and non-Medicare populations.

Cash customers (including those without coverage and those with indemnity coverage) pay more for a given drug than those with third party payments at the point of sale (based on IMS Health data for over 90 percent of the most commonly prescribed drugs). In 1999, excluding the effect of rebates, the typical cash customer paid nearly 15 percent more than the customer with third party coverage. For a quarter of the most common drugs, the price difference between cash and third parties was even higher - over 20 percent. For the most commonly prescribed drugs, the price difference between cash customers and those with third party coverage grew substantially larger between 1996 and 1999.

The pattern of differences in the price paid by cash customers and those with third party payments is different for generic and brand name drugs (based on both MEPS and IMS Health data). Percentage differences in the price paid are often smaller for brand name drugs, but absolute differences may be larger because average prices for brand name drugs are considerably higher.

  • Data on manufacturer rebates, if available, would reduce the total amount paid by the insurer or PBM on behalf of insured customers, increasing the difference in the total net price. Data on rebate arrangements, however, are confidential and unavailable to this study. In some instances, the amount of the rebate may be significantly more than the price differences observed at the retail pharmacy level. In other cases, the rebates may add only modestly to the observed differences.
  • Various sources produce estimates of rebates ranging from 2 percent to 35 percent of drug sales prices. These rebates are not reflected in retail prices, but are instead paid directly to insurers and other organizations that manage drug benefits after they have already reimbursed the pharmacy.

This study presents a detailed examination of multiple factors relating to coverage, utilization, and spending for prescription drugs, particularly by the Medicare population. It also raises a variety of issues that are ripe for further investigation. Suggestive relationships between demographic factors, insurance status, and prescription drug use were revealed. However, we were unable to examine the more complex interrelationships among these factors. Future multivariate analyses will allow us to come to a more nuanced understanding of these relationships. Future research should explore what can be learned from using more sophisticated definitions of drug coverage status and severity of illness than were available for this study. In addition, if more data were available on elements of manufacturer pricing, such as rebates, further research could probe more fully the differences in prices paid by different customers. Finally, ongoing analyses will allow us to continue to use the most recent data - rapid change in the pharmaceutical market requires that analyses be refreshed and updated on a continuing basis. Some possible avenues for future research are explored at the conclusion of this report.