NCPA - National Center for Policy Analysis

Spending on Drugs

November 27, 2003

The Medicare prescription drug benefit would shift expenses from Medicaid to Medicare, but overall coverage for Medicaid patients probably would be unaffected, say researchers Andrew J. Rettnemaier and Zijun Wang.

In a study prepared for the National Center for Policy Analysis, the researchers found that if overall coverage rates and levels remained the same after reform, neither Medicaid beneficiaries nor private plan participants would have an incentive to change their spending. Seniors not currently covered who bought into the new program would have an incentive to increase their spending, given that the direct cost to them would fall.

The amount by which spending would increase depends on the proportion of the uninsured that purchased the insurance and their subsequent demand. Assuming they changed their consumption behavior to resemble that of seniors who have private coverage:

  • Total spending on prescription drugs would rise 5 percent to 7 percent, assuming 75 to 100 percent, respectively, of those who do not currently have prescription drug coverage purchased the new coverage.
  • The CBO projects total spending on seniors' drugs of roughly $1.8 trillion over the 2004-2013 period; if a prescription drug benefit were in place over that period, drug spending would likely increase by $90 billion to $126 billion.

The researchers conclude that the 30 percent of Medicare beneficiaries who do not have prescription drug coverage would increase their spending if a drug benefit were added. Their spending would rise approximately 28 percent. Most of Medicare's spending on prescription drugs would shift costs from Medicaid to Medicare and from seniors and third-party payers to taxpayers.

Source: Andrew J. Rettenmaier and Zijun Wang, "Medicare Prescription Drug Benefit: What Difference Would It Make?" Brief Analysis No. 463, November 18, 2003, National Center for Policy Analysis.


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