Spending Patterns for Prescription Drugs Under Medicare Part D

December 1, 2011

The centerpiece of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act) was the creation of Medicare Part D, a subsidized pharmaceutical benefit that went into effect in 2006. That additional coverage constituted the most substantial expansion of the Medicare program since its inception in 1965. In 2010, the federal government spent $62 billion on Part D, representing 12 percent of total federal spending for Medicare that year.

Under Medicare Part D, all enrollees receive a subsidy for prescription drug insurance. For enrollees with sufficiently low income and assets, an additional low-income subsidy (LIS) is available (enrollees who receive the LIS benefit are referred to here as LIS enrollees). Today CBO published an issue brief that reviews patterns of Medicare Part D utilization and spending among LIS and non-LIS enrollees in 2008—the most recent year for which data were available when CBO undertook this analysis.

Average Expenditures Higher for LIS Beneficiaries

  • In 2008, LIS beneficiaries constituted 40 percent of Part D enrollment but accounted for 55 percent of total Part D spending.
  • At $3,600, average per-capita expenditures were twice as high for LIS beneficiaries as for non-LIS beneficiaries ($1,800). (Total spending on Part D drugs equals the sum of spending by all payers combined, including plan sponsors, beneficiaries, the federal government, and third-party payers; in this brief, it is measured on a per-beneficiary basis.)

LIS Beneficiaries More Likely to Fall Into Higher-Spending Categories

  • Although higher spending among both LIS and non-LIS enrollees was driven by beneficiaries who filled more prescriptions and who filled more-expensive prescriptions, LIS beneficiaries were more likely to fall into the higher-spending ranges.
  • Only 24 percent of non-LIS beneficiaries exceeded $2,500 in total spending, but 44 percent of LIS beneficiaries reached that spending level.
  • Similarly, only 6 percent of non-LIS beneficiaries exceeded $5,000 in total spending, whereas 23 percent of LIS beneficiaries reached that spending level.

Higher Spending Reflected LIS Population's Poorer Health Status and More Generous Coverage Through the LIS Benefit

  • LIS beneficiaries tend to be sicker and have a higher prevalence of chronic conditions and comorbidities (additional diseases and conditions) than non-LIS beneficiaries. 
  • The federal government paid for approximately 95 percent of spending for LIS beneficiaries, by covering nearly all of LIS beneficiaries' premiums for the basic benefit and by subsidizing most of LIS beneficiaries' out-of-pocket spending. (In fact, 75 percent of federal spending on Part D is for LIS beneficiaries.)
  • The federal government covered roughly 40 percent of spending for non-LIS beneficiaries through premium subsidies. Beneficiaries covered most of the remainder through premiums and out-of-pocket spending.

Out-Of-Pocket Spending Lower and More Uniform for LIS Beneficiaries Across Spending Levels

  • The out-of-pocket share of spending for LIS beneficiaries was much lower than that of non-LIS beneficiaries and was mostly flat across total spending levels. Many LIS beneficiaries pay the same amount out of pocket for all brand-name drugs, regardless of the drugs’ prices or whether the drugs have preferred status within their drug plans.
  • Among non-LIS beneficiaries, out-of-pocket spending as a share of total spending varied greatly across spending levels. For example, beneficiaries with low total spending paid a large share out of pocket because most of their spending occurred under the deductible. But beneficiaries who surpassed the coverage gap or "doughnut hole"—the phase of spending in which the beneficiary has been responsible for nearly all of the expenditures—paid for a smaller share of their total spending, although their total amount of spending was substantial. In particular, for non-LIS beneficiaries whose total spending was sufficiently high to move them through the doughnut hole and into the catastrophic phase of the benefit, average out-of-pocket spending in 2008 was roughly $4,000.

Last Year's Major Health Care Legislation Will Impact Non-LIS Enrollees

Various provisions of the Patient Protection and Affordable Care Act and the Reconciliation Act have a sizable impact on the Part D benefit for non-LIS enrollees. Those laws change the Part D program in two main ways. First, the prescription drug benefit gradually becomes much more generous over the next decade, primarily by reducing beneficiaries' payments in the doughnut hole. Second, income-based premiums (which are also used in Medicare Part B) have been introduced in Part D for individuals with income above $85,000 and couples with income above $170,000, beginning in 2011.

This brief was prepared by Tamara Hayford of CBO's Health and Human Resources Division.