Medicare: Prescription Drug Expenditures, 1997

Order Code RS20612

Updated April 18, 2001

CRS Report for Congress

Received through the CRS Web

Medicare: Prescription Drug

Expenditures, 1997

Paulette C. Morgan

Analyst in Social Legislation

Domestic Social Policy Division

Summary

Medicare beneficiaries spent, on average, a total of $744 per person for prescription

drugs in 1997 (including beneficiaries’ out-of-pocket expenses and payments made by

any third party payers). Approximately 37% of beneficiaries had total prescription drug

expenditures of between $0 and $250. Approximately 25% of beneficiaries had total

prescription drug expenditures between $1 and $250, which represented 4% of overall

drug expenditures for beneficiaries. In contrast, 8% of beneficiaries with total drug

expenditures above $2,000 accounted for 33% of overall drug expenditures.

Beneficiaries’ out-of-pocket expense for prescription drugs in 1997 was $347, on

average, though about 60% of beneficiaries spent less than $250 out-of-pocket on

prescription drugs. Beneficiaries with no drug coverage spent, on average, $520 for

drugs, while those with drug coverage had total drug expenditures averaging $826 and

out-of-pocket expenditures averaging $284. Total and out-of-pocket costs of

prescription drugs vary by supplemental insurance coverage.

Background

Prescription drugs are an increasingly important part of medical treatment and

medical care costs. Prescription drug expenditures comprised approximately 9% of health

care spending in 1999.1 Drug costs are the fastest-growing component of overall health

care costs. The Congressional Budget Office predicts the annual growth in prescription

drug expenditures will be over 13% per year for each of the next 2 years.

Medicare does not cover most outpatient prescription drugs. However, about 73%

of Medicare beneficiaries had some form of public or private drug coverage at some point

during 1997. The analysis in this report provides information on Medicare beneficiaries

with drug coverage at any point in 1997. Some beneficiaries may not have coverage for

1

Health Care Financing Administration, Office of the Actuary.

Congressional Research Service ˜ The Library of Congress

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the entire year. For example, some studies have found that only 53% of beneficiaries have

prescription drug coverage for the entire year.2 Table 1 shows the proportion of Medicare

beneficiaries with outpatient prescription drug coverage by Medicare eligibility category3

and income to poverty guideline4 ratio in 1997. Almost 71% of beneficiaries with incomes

at or below the poverty guideline had prescription drug coverage. Medicaid covered

prescription drugs for at least 18% of those people. The proportion of beneficiaries with

drug coverage dropped to about 65% for individuals between 100% and 135% of poverty,

but was higher for beneficiaries with larger incomes.

Table 1. Drug Coverage by Eligibility Category and Income to

Poverty Ratio, 1997

(number in thousands)

With Drug Coverage

Number

Percent

All Medicare Beneficiaries

Income <=100% of Poverty

> 100% to <=135% of Poverty

> 135% to <=150% of Poverty

> 150% to <=200% of Poverty

> 200% to <=400% of Poverty

> 400% of Poverty

Total

Aged Beneficiaries

Income <=100% of Poverty

> 100% to <=135% of Poverty

> 135% to <=150% of Poverty

> 150% to <=200% of Poverty

> 200% to <=400% of Poverty

> 400% of Poverty

Total

Disabled/ESRD* Beneficiaries

Income <=100% of Poverty

> 100% to <=135% of Poverty

> 135% to <=150% of Poverty

> 150% to <=200% of Poverty

> 200% to <=400% of Poverty

> 400% of Poverty

Total

Without Drug Coverage

Number

Percent

4,168

3,224

1,207

3,880

9,697

4,532

26,708

70.8%

65.1%

66.4%

69.2%

77.4%

80.5%

73.3%

1,720

1,730

611

1,726

2,834

1,100

9,721

29.2%

34.9%

33.6%

33.8%

22.6%

19.5%

26.7%

3,071

2,600

1,070

3,459

8,955

4,214

23,369

70.0%

64.8%

66.0%

69.4%

76.7%

79.7%

73.1%

1,315

1,410

551

1,522

2,718

1,075

8,590

30.0%

35.2%

34.0%

30.6%

23.3%

20.3%

26.9%

1,097

624

–

421

742

–

3,339

73.1%

66.1%

–

67.3%

86.5%

–

74.7%

404

320

–

205

116

–

1,130

26.9%

33.9%

–

32.7%

13.5%

–

25.3%

Source: Table prepared by the Congressional Research Service based on analysis of data from the 1997 Medicare

Current Beneficiary Survey (MCBS) Cost and Use File. These estimates differ slightly from other published

2

Stuart, Bruce, et al. Prescription Drug Costs for Medicare Beneficiaries: Coverage and Health

Status Matter. The Commonwealth Fund, Issue Brief, January 2000.

3

Individuals become eligible for Medicare either because of age (65 years of age or older), or

because of a disability (including end stage renal disease).

4

The poverty guidelines are published by the Department of Health and Human Services and are

used primarily for program eligibility purposes. The poverty thresholds are different measures of

poverty updated by the Census Bureau and used primarily for statistical purposes. In addition, the

Medicare Current Beneficiary Survey contains income information on the beneficiary and spouse.

The Current Population Survey (CPS), in contrast, defines family more broadly and contains

detailed income data on all members in the family. As a result, the estimated number of Medicare

beneficiaries with incomes below poverty differ between the two surveys.

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estimates using the MCBS due to the inclusion or exclusion of beneficiaries who spent any part of 1997 in an

institution, and the use of poverty thresholds versus poverty guidelines.

Note: Income categories are based on beneficiary income as a percent of the Federal Poverty Guidelines. See footnote

4 for a discussion of poverty estimates using the MCBS. Drug coverage is defined as individuals with prescription

drug coverage at any time during 1997. This includes individuals who enter Medicare or change supplemental

insurance coverage during the year. A hyphen indicates that the sample size is too small to provide a reliable estimate.

* End stage renal disease.

Overall Total and Out-of-pocket Drug Expenditures.

Approximately $28 billion was spent on prescription drugs by Medicare beneficiaries

in 1997. The total drug expenditure for an individual includes both the beneficiary out-ofpocket expense and payments made by any third-party payers. The average per capita

total prescription drug expenditure for Medicare beneficiaries was $744 in 1997. Figure

1 shows two distributions: the

Figure 1. Medicare Beneficiaries and Total Drug distribution of Medicare

beneficiaries by categories of

Expenditures by Annual Expenditures per

per capita spending on drugs

Beneficiary, 1997

and the distribution of overall

drug expenditures for these

categories of beneficiaries.

About 12% of beneficiaries did

not purchase any prescription

drugs in 1997. Twenty-five

percent of beneficiaries had

drug expenditures of between

$1 and $249; their drug

expenditures represent 4% of

overall drug spending for the

Medicare population.

In

contrast, the 8% of beneficiaries

whose drug expenditures

exceeded $2,000 for the year

accounted for 33% of the total

drug spending for Medicare

beneficiaries.

Source: Figure created by the Congressional Research Service based on data from the

1997 Medicare Current Beneficiary Survey, Cost and Use File

In contrast to the $744 average total drug spending by Medicare beneficiaries,

average out-of-pocket prescription drug spending was $347 in 1997. Half of beneficiaries

spent $165 or less out-of-pocket. About 60% of beneficiaries spent less than $250 out-ofpocket in 1996.

Total and out-of-pocket drug expenditures for Medicare beneficiaries vary by several

factors including income and supplemental insurance coverage (with or without drug

coverage).5 Beneficiaries who do not have drug coverage generally pay the entire cost of

their prescription drugs. In 1997, beneficiaries without drug coverage spent, on average,

5

Poisal, et al., found expenditures also varied by age and gender; Steinburg, et al., found

expenditure varied by presence of a chronic disease. Health Affairs, March/April 2000.

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$520 for drugs, while those with drug coverage had total drug expenditures averaging

$826 and out-of-pocket expenditures averaging $284.

Table 2 shows Medicare beneficiaries’ average and median6 total prescription drug

expenditures by income to poverty guideline ratio and supplemental insurance. Total

prescription drug expenditures take into account the beneficiaries’ out-of-pocket expenses

as well as payments made by any third-party payers. The average total drug expenditure

of individuals with incomes at or below the federal poverty guidelines is just $50 less than

expenditures of individuals with incomes above 400% of poverty. For beneficiaries with

no supplemental insurance coverage (those with only Medicare), average total prescription

drug expenditures vary by income. Beneficiaries with incomes at or below 100% of the

federal poverty guideline who do not have supplemental insurance spend an average of

$329 for prescription drugs. Beneficiaries with incomes at or below 100% of the federal

poverty guideline who have full Medicaid benefits spend an average of $891 for

prescription drugs while beneficiaries with incomes between 100% and 135% of the

federal poverty guideline spend, on average, a total of $961 for prescription medication.

Average drug expenditures vary by supplemental insurance categories7. Beneficiaries

with either employer-based insurance or Medicaid have the largest average total drug

expenditures of all beneficiaries (employer-based: $849; Medicaid: $929). Generally,

Medicare beneficiaries entitled to full Medicaid protection have a drug benefit;

beneficiaries with employer-based coverage are more likely than beneficiaries with other

types of supplemental insurance to include a drug benefit, which may account for the

higher average total expenditure. Beneficiaries who do not have any type of supplemental

insurance coverage (Medicare only) have the lowest average total drug expenditures.

Table 3 shows average and median out-of-pocket prescription drug expenditures for

Medicare beneficiaries, by income to poverty guideline ratio and supplemental insurance.

The average out-of-pocket expenditures of all beneficiaries with incomes at or below

poverty was $247 in 1997. For beneficiaries with slightly higher incomes (between 100%

and 135% of the federal poverty guideline), the average out-of-pocket prescription drug

expenditure was 50% higher ($371). Patterns in average out-of-pocket prescription drug

expenditures by income differ depending on the supplemental insurance category.

Average out-of-pocket drug expenditures of Medicare beneficiaries vary by

supplemental insurance. Beneficiaries enrolled in Medicare managed care or in Medicaid

in 1997 had the lowest average out-of-pocket prescription drug costs. Individuals with

Medigap supplemental insurance paid more out-of-pocket, on average, than all other

beneficiaries. Medicare beneficiaries who did not have supplemental insurance paid the

entire cost of their drugs out-of-pocket.

6

Half of all beneficiaries spend more than the median value; half spend less. The median is a

measurement which is less reactive to extreme values in the data than is the average.

7

Supplemental insurance may or may not cover prescription drugs. For example, not all Medicare

managed care organizations or Medigap plans offer a prescription drug benefit. Individuals who

only have Medicare (and no supplemental insurance) do not have a drug benefit. Individuals with

Medicaid have a drug benefit; Qualified Medicare Beneficiaries and Specified Low-Income

Medicare Beneficiaries are not included in the Medicaid supplemental insurance category in this

analysis.

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Table 2. Average and Median Total Spending on Prescription Drugs

by Income to Poverty Ratio and Supplemental Insurance Coverage,

1997

Total

Medicare

Medicare Managed

Medicaid

*

Only

Care Employer Medigap

Income <=100% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$707

$405

$329

$86

11%

$512

$290

7%

$563

$437

7%

$653

$422

15%

$891

$567

18%

> 100% to <=135% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$741

$440

$419

$137

11%

$693

$399

13%

$921

$495

14%

$687

$448

23%

$961

$671

6%

> 135% to <=150% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$799

$430

–

–

–

–

$917

$530

32%

–

–

> 150% to <=200% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$724

$468

> 200% to <=400% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$759

$499

> 400% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$757

$428

Total

Average spending

Median spending

Percent with Supplemental Insurance

$744

$455

9%

13%

$940

$474

22%

$394

$143

8%

$601

$448

14%

$797

$491

24%

$702

$462

29%

–

–

–

–

$866

$589

34%

$687

$469

24%

–

–

2%

$590

$316

14%

$863

$523

35%

$697

$445

26%

–

–

2%

$527

$283

11%

$433

$142

6%

$593

$339

12%

$849

$524

25%

$704

$462

24%

$929

$607

4%

–

–

2%

1%

0%

0%

Source: Table prepared by the Congressional Research Service based on analysis of data from the 1997 Medicare

Current Beneficiary Survey Cost and Use File. These estimates differ slightly from other published estimates using

the MCBS due to the inclusion or exclusion of beneficiaries who spent any part of 1997 in an institution, and the use

of poverty thresholds versus poverty guidelines.

Note: Percentages do not sum across rows because some supplemental insurance categories are not included in the

table. Percentages in the table represent the proportion of all beneficiaries within the income to poverty guideline

ratio category who have a particular type of supplemental insurance. Income categories are based on beneficiary

income as a percent of the Federal Poverty Guidelines. See footnote 4 for a discussion of poverty estimates using the

MCBS. – Sample size too small to provide reliable estimate.

* Beneficiaries with full Medicaid benefits. Qualified Medicare Beneficiaries and Specified Low-Income Medicare

Beneficiaries (QMB and SLMB) are not included in the Medicaid supplemental insurance category in this analysis.

Beneficiaries enrolled in the QMB and SLMB programs spent, on average, $884 on prescription drugs in 1997.

Source and Limitations of the Data

These estimates are based on data from the 1997 Medicare Current Beneficiary

Survey(MCBS), a longitudinal panel survey of Medicare beneficiaries. Individuals in

Puerto Rico, and those living in facilities8 were not included in this analysis.

8

According to the MCBS, a facility may be any one of the following: hospital; nursing home;

retirement home; domiciliary or personal care facility; mental health facility; institution for the

(continued...)

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Table 3. Average and Median Out-of-Pocket Spending on

Prescription Drugs by Income to Poverty Ratio and Supplemental

Insurance Coverage, 1997

Total

Medicare

Medicare Managed

Only

Care

Employer Medigap Medicaid*

Income <=100% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$247

$75

$329

$86

11%

$177

$91

7%

$247

$142

7%

$486

$284

15%

$60

$14

18%

> 100% to <=135% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$371

$173

$419

$137

10%

$249

$130

13%

$393

$176

14%

$534

$312

23%

$106

$19

6%

> 135% to <=150% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$429

$198

$296

$149

22%

$702

$422

32%

–

–

9%

–

–

13%

> 150% to <=200% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$387

$205

$394

$143

8%

$225

$127

14%

$282

$166

24%

$575

$360

29%

–

–

> 200% to <=400% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$357

$181

$263

$154

34%

$579

$377

24%

–

–

2%

$190

$112

14%

> 400% of Poverty

Average spending

Median spending

Percent with Supplemental Insurance

$345

$167

$288

$144

35%

$552

$312

25%

–

–

2%

$167

$93

11%

Total

Average spending

Median spending

Percent with Supplemental Insurance

$347

$165

$433

$142

6%

$202

$114

12%

$282

$154

25%

$567

$355

24%

–

–

–

–

–

–

2%

1%

0%

0%

$80

$15

4%

Source: Table prepared by the Congressional Research Service based on analysis of data from the 1997 Medicare

Current Beneficiary Survey Cost and Use File by Social and Scientific Systems. These estimates differ slightly from

other published estimates produced using the MCBS due to the inclusion or exclusion of beneficiaries who had spent

any part of 1997 in an institution, and the use of poverty thresholds versus poverty guidelines.

Note: Percentages do not sum across rows because some supplemental insurance categories are not included in the

table. Percentages in the table represent the proportion of all beneficiaries within the income to poverty guideline

ratio category who have a particular type of supplemental insurance. Income categories are based on beneficiary

income as a percent of the Federal Poverty Guidelines. See footnote 4 for a discussion of poverty estimates using the

MCBS. – Sample size too small to provide reliable estimate.

* Beneficiaries with full Medicaid benefits. Qualified Medicare Beneficiaries and Specified Low-Income Medicare

Beneficiaries (QMB and SLMB) are not included in the Medicaid supplemental insurance category in this analysis.

Beneficiaries enrolled in the QMB and SLMB programs spent, on average, $190 out-of-pocket on prescription drugs

in 1997.

8

(...continued)

mentally retarded/developmentally disabled; mental health center; life care/continuing care facility;

assisted living facility; or rehabilitation facility.