Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services

Previously, when estimating the budgetary effects of legislation regarding prescription drugs, CBO found insufficient evidence of an “offsetting” effect of prescription drug use on spending for medical services. Recently, CBO reviewed dozens of newer studies and determined a body of research now demonstrates a link between changes in prescription drug use and changes in the use of and spending for medical services. This report provides background information about that relationship; reviews the literature on the size of the offsetting effect for the Medicare population; and describes how CBO synthesized the recent research. The report also provides an example of how CBO’s change in methodology will affect its cost estimates for proposals that would change prescription drug use by Medicare beneficiaries.

What Is CBO’s Current Estimate of the Effects of Prescription Drug Use on Medicare’s Spending for Health Care Services?

Prescription drugs affect people’s health and their need for medical services. For example, overuse or inappropriate use of prescription drugs may raise the risk of adverse reactions, triggering a need for medical treatment. But most often, pharmaceuticals have the effect of improving or maintaining an individual’s health. Taking an antibiotic may prevent a more severe infection, and adhering to a drug regimen for a chronic condition such as diabetes or high blood pressure may prevent complications. In either of those circumstances, taking the medication may avert hospital admissions and thus reduce the use of medical services.

After reviewing recent research, the CBO estimates that a 1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent. That estimate, which applies only to policies that directly affect the quantity of prescriptions filled, represents a change in the agency’s estimating methodology.

Previously, CBO had found insufficient evidence of an offsetting effect of prescription drug use on spending for medical services. Thus, for example, CBO’s cost estimate for the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (which established Medicare’s Part D prescription drug benefit) did not include an offset, nor did its estimates of the cost of the Affordable Care Act (which includes provisions closing the Part D coverage gap).

What Will Be CBO’s Approach to Future Cost Estimates?

In estimating the budgetary impact of future legislation or proposals that would directly affect prescription drug use in the Medicare program, CBO will apply an offsetting effect on medical spending. The agency will first estimate a proposal’s direct effect on prescription drug costs; then, the agency will estimate the effect on the number of prescriptions filled and any resulting offsetting effect on spending for medical services.

For example, a policy that increased prescription drug copayments for certain Medicare beneficiaries might save $4 billion in federal drug costs in a given year but reduce the number of prescriptions filled that year by 1 percent. That reduction in use would result in a one-fifth of 1 percent increase in the affected population’s total spending for medical services. If that total spending would otherwise be $250 billion in that year, then those costs would increase by $0.5 billion. The net effect of the policy, combining the savings on drug costs and the costs of increased use of medical services, would be a savings for the federal government of $3.5 billion in that year.