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Prescription Drugs

Trends In The Costs, Coverage, And Use Of Prescription Drugs By Medicare Beneficiaries

Research Report

David Gross, AARP Public Policy Institute

July 2001


Table of Contents:

Prescription drugs have become a more important and more costly element of health care. Rising prescription drug costs, combined with the lack of an outpatient Medicare prescription drug benefit, have threatened access to vital pharmaceutical therapies for many Medicare beneficiaries. Access has been threatened even further by reductions in private prescription drug coverage and benefits. While many states have tried to provide some assistance with drug costs, these efforts may be limited and often do not reach many who are in need.

This Data Digest provides background data on five issues relating to prescription drug use and access among Medicare beneficiaries: (1) the rising cost of prescription drugs; (2) out-of-pocket prescription drug spending by Medicare beneficiaries; (3) prescription drug coverage among Medicare beneficiaries; (4) the effect of lack of coverage on medication use; and (5) limitations of state efforts to provide assistance with prescription drug costs.

Prescription Drug Costs Are Rising

  • Prescription drug spending is rising rapidly. Prescription drug spending per American rose at an average annual rate of 9.4 percent between 1990 and 1999. Between 2000 and 2010, prescription drug spending per American is expected to rise at an average annual rate of 11.2 percent.i

  • Price increases play a major role in prescription drug spending growth. An estimated 40 percent of the growth in U.S. prescription drug spending between 1995 and 1999 can be attributed to price increases for drugs that have been on the market since the mid-1990s. An estimated 20 percent is attributed to higher prices of newer drugs—those introduced since the mid-1990s—relative to older drugs that they are replacing. The remaining portion of cost increases can be attributed to increased prescribing of both newer and older drugs.ii

  • Drug price inflation exceeds the general inflation rate. Between 1995 and 2000, prescription drug prices rose at over 1.5 times the rate of general inflation.iii

Medicare Beneficiaries Have High Out-of-Pocket Drug Costs

  • Older Americans consume about one-third of all prescriptions dispensed in the U.S. Americans age 65 and older represent about 13 percent of the population, but account for 34 percent of all prescriptions dispensed in the United States. These prescriptions represent 42 percent of total outpatient prescription drug spending.iv

  • Prescription drugs are a large part of beneficiary out-of-pocket health care spending. Prescription drugs account for the single largest component of older Medicare beneficiaries' out-of-pocket spending on health care, after premium payments. Medicare beneficiaries spend more out-of-pocket on prescription drugs than on physician care, vision services, and medical supplies combined.v In 2000, all Medicare beneficiaries (including disabled beneficiaries under age 65) spent an average of $480 out-of-pocket for prescription drugs.vi
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Many Medicare Beneficiaries Lack Reliable Drug Coverage

  • Many beneficiaries lack prescription drug coverage. According to federal government estimates, about 30 percent of non-institutionalized Medicare beneficiaries (including disabled beneficiaries under age 65) lacked prescription drug coverage for all of 1998,vii and over 40 percent of non-institutionalized beneficiaries lacked coverage at some point in the year.viii Recent actuarial projections suggest that the share of beneficiaries without prescription drug coverage has increased to about one-third.ix

  • The number of employers offering retiree health coverage is declining. Many Medicare beneficiaries rely on retiree health coverage for prescription drug benefits. However, the share of employers offering supplemental health coverage to Medicare-eligible retirees fell from 35 percent in 1995 to 24 percent in 2000.x

  • Medicare+Choice plans are reducing their coverage of prescription drugs. Medicare+Choice plans have been a source of prescription drug coverage for many Medicare beneficiaries. However, only 67 percent of Medicare+Choice enrollees are estimated to have prescription drug coverage in 2001, compared to 84 percent of enrollees in 1999. In 2001, an estimated 26 percent of Medicare+Choice enrollees with drug coverage had an annual drug benefit cap of $500 or less, compared to an estimated 16 percent who had drug benefit caps exceeding $2,000 or had no benefit cap. By contrast, in 1999 only 10 percent of Medicare+Choice enrollees with drug coverage had a benefit cap of $500 or less, compared to nearly 26 percent who had caps exceeding $2,000 or had no cap.

  • Lack of drug coverage is not limited to low-income beneficiaries. About 42 percent of Medicare beneficiaries with no drug coverage in 2000 were estimated to have annual incomes above 250 percent of the federal poverty level ($20,900 for individuals and $28,100 for couples in 2000). Another 20 percent were estimated to have incomes between 175 percent and 250 percent of the poverty level ($14,600-$20,900 for individuals and $19,700-$28,100 for couples in 2000).xi

Lack of Coverage Threatens Beneficiaries' Access to Needed Medications

  • Beneficiaries without drug coverage fill fewer prescriptions but spend more for their medications. In 1998, Medicare beneficiaries who lacked drug coverage filled 31 percent fewer prescriptions than did beneficiaries with coverage. Total spending on prescription drugs for beneficiaries without drug coverage was 45 percent lower than the amount for beneficiaries with coverage; moreover, the population without drug coverage spent 40 percent more out-of-pocket on prescription drugs.xii

  • Beneficiaries with high blood pressure who lack coverage have lower use of essential drugs. In a 1995 survey, Medicare beneficiaries with hypertension (high blood pressure) who lacked drug coverage were found to be less likely to fill prescriptions for anti-hypertensive medications which, when used appropriately, reduce the risk of heart attack, heart failure, stroke, and kidney failure.xiii

Current State Programs Provide Some Help, but do not Meet the Needs of All Medicare Beneficiaries.

  • Not all states offer prescription drug coverage. Twenty states offer subsidized prescription drug coverage to some Medicare beneficiaries, and another three are developing coverage programs. However, these programs cover only a small proportion of the Medicare population. Of those states that do not have drug coverage programs, three offer Medicare beneficiaries the opportunity to obtain discounted prescription drug prices, and two additional states are working to implement such programs. Two states offer a tax credit for prescription drug purchases.xiv

  • State programs often offer coverage with limited benefits. Many of the programs that do help pay for prescription drugs for lower income residents do not fully address their need for assistance because of high cost-sharing requirements, deductibles, or benefit caps. In addition, some programs only provide coverage for certain classes of drugs.xv

  • State programs have strict eligibility requirements. Many of these programs are limited to beneficiaries age 65+ and/or low-income beneficiaries. As a result, they often do not reach disabled Medicare beneficiaries under age 65 or Medicare beneficiaries who have moderate incomes but lack drug coverage.xvi
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Footnotes

i AARP PPI analysis of National Health Expenditure (NHE) Projections, Table 11: Prescription Drug Expenditures Aggregate and per Capita Amounts, Percent Distribution Change by Source of Funds; Selected Calendar Years 1980-2010. Health Care Financing Administration, www.hcfa.gov/stats/NHE-Proj/proj2000/tables/t11.htm, accessed June 25, 2001.
ii Mark Merlis, Explaining the Growth in Prescription Drug Spending: A Review of Recent Studies, Institute for Health Policy Solutions, August 2000.
iii AARP Public Policy Institute analysis of Consumer Price Index data from www.bls.gov, February 1, 2001.
iv Families USA, Cost Overdose: Growth in Drug Spending for the Elderly, 1992-2010. (Washington, DC. Families USA), July 2000, p. 2.
v David Gross and Normandy Brangan, Out-of-Pocket Spending on Health Care by Medicare Beneficiaries Age 65 and Older: 1999 Projections. AARP Public Policy Institute publication IB#41. (Washington, DC. AARP), December 1999.
vi AARP Public Policy Institute analysis using the Medicare Benefits Model, Version 4.10.
vii John A. Poisal and Lauren Murray, “Growing Differences Between Medicare Beneficiaries With and Without Drug Coverage,” Health Affairs, March/April 2001, pp. 74-85.
viii Bruce Stuart, Medicare Drug Coverage and Medicare Reform: A Fresh Look at Issues and Options. Presented at Medicare Drug Coverage and Medicare Reform Roundtable Discussion, Washington, DC. June 28, 2001.
ix American Academy of Actuaries, Providing Prescription Drugs to Seniors: A Patchwork of Coverage. (Washington, DC. American Academy of Actuaries), Spring 2001.
x William M. Mercer, Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans 2000. (New York: William M. Mercer Companies LLC), p.44.
xi Normandy Brangan and Mary Jo Gibson, FYI-The Cost of Prescription Drugs: Who Needs Help? AARP Public Policy Institute (Washington, DC. AARP), October 2000.
xii AARP Public Policy Institute analysis of John A. Poisal and Lauren Murray, “Growing Differences Between Medicare Beneficiaries With and Without Drug Coverage,” Health Affairs, March/April 2001, pp. 74-85.
xiii Jan Blustein, “Drug Coverage and Drug Purchases by Medicare Beneficiaries with Hypertension,” Health Affairs 19:2 (March/April 2000), pp. 219-230.
xiv David Gross, State Pharmacy Assistance Programs 2001: An Array of Approaches. AARP Public Policy Institute Issue Brief (forthcoming).
xv Ibid.
xvi Ibid.


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Written by David Gross, AARP Public Policy Institute
July 2001
©2001 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

Pub ID: DD63