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The Impact of the Medicare DrugBenefit on Health Care Spendingby Older Households
Dean Baker and Ben Zipperer
December 2008
Center for Economic and Policy Research
1611 Connecticut Avenue, NW, Suite 400Washington, D.C. 20009202-293-5380
www.cepr.net
The Impact of the Medicare Drug Benefit on Health Care Spending by Older Households
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Contents
Introduction........................................................................................................................................................1
Spending on Prescription Drugs and Insurance by Older Households....................................................1
Conclusion..........................................................................................................................................................4
Appendix.............................................................................................................................................................4
About the Authors
Dean Baker is Co-Director and Ben Zipperer is a Research Associate at the Center for Economicand Policy Research, located in Washington, DC.
The Impact of the Medicare Drug Benefit on Health Care Spending by Older Households
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Introduction
One of the stated goals of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) was to reduce the burden that the cost of prescription drugs was placing on seniorcitizens. Prescription drugs were a large and rapidly growing share of expenditures for olderhouseholds. Since most drugs were not covered under Medicare, seniors who were above theincome thresholds for Medicaid were forced to bear most of the burden for prescription drugsthemselves. The centerpiece of the 2003 MMA was the creation of a Medicare prescription drug benefit that would partially cover the cost of prescription drugs for seniors above the income threshold forMedicaid. The benefit also provided far more substantial subsidies for moderate-income seniors whose income still placed them above the Medicaid thresholds. This paper examines the extent to which the Medicare drug benefit reduced the burden of healthcare costs for seniors in 2006, the first year in which it was in effect. It uses data from the Bureau of Labor Statistics Consumer Expenditure Survey (CEX) to compare the change in health carespending by older households from 2004 to 2006.
Spending on Prescription Drugs and Insurance by OlderHouseholds
While the goal of the Medicare prescription drug benefit was to reduce the burden that prescriptiondrug spending placed on older households, there is no easy way to get a direct measure of thisburden. Many seniors did pay directly for drug purchases out of pocket, however, most had at leastpartial coverage, either through insurance provided by former employers or supplemental insurancethey purchased themselves. As a result, direct spending on prescription drugs would only be aportion of what these households actually paid for their drugs.In order to get around this problem, our analysis combines spending on insurance with prescriptiondrug spending. This has the advantage of making spending on prescription drugs effectively take theform of insurance premiums. However, it also makes the measure more imprecise. The Congressional Budget Office estimated that average spending on prescription drugs notcovered by Medicare was $2,439 per Medicare beneficiary in 2003. Assuming an 8.4 percent increasefor 2004, uncovered spending would have been about $2,640.
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This spending includes paymentsfrom all non-Medicare sources, including Medicaid and other state programs, employer-basedinsurance, and the Veterans Administration. Sources other than out-of-pocket spending orindividually purchased policies accounted for 57 percent of non-Medicare purchases (CBO 2002,Figure 2), which implies that out-of-pocket spending or spending by individually purchasedinsurance policies would be equal to approximately $1,140 in 2004.
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Congressional Budget Office, 2002. “Issues in Designing a Medicare Drug Benefit,” Washington, DC: CongressionalBudget Office, available athttp://www.cbo.gov/ftpdocs/39xx/doc3960/10-30-PrescriptionDrug.pdf
, Table 1. The8.4 percent figure is taken from the Centers for Medicare and Medicaid Services, National Health Expenditures by Source of Funds and Type of Expenditure, 2001-2006 (Table 4) available athttp://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf .
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