Medicare Pharmaceuticals

Increased prescription drug use reduces spending on medical services

Increased use of prescription drugs could either increase or decrease spending on medical services.  On the one hand, increased use of pharmaceuticals could decrease hospitalizations and ER visits if pharmaceuticals are able to help patients control chronic conditions and prevent the onset of incidents requiring acute care.  On the other hand, increased use of pharmaceuticals could increase cost if more pharmaceuticals use leads to additional complications (e.g., drug-drug interactions).

Previously, CBO estimated that increased pharmaceutical use would have no cost offsets in other settings (e.g., inpatient, emergency room).  As detailed in a presentation at AcademyHealth, a November 2012 CBO paper, however, marks a significant change in course.

 The Congressional Budget Office (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…represents a change in the agency’s estimating methodology, which until now has not incorporated such an effect.

What evidence caused CBO to adjust their perspective?  CBO examined 3 types of studies.

  • Estimates of the impact of pharmaceutical policies on a broad population outside of Medicare.  The authors of the one study in this category found substantial fraction of the reduction in spending on prescription drugs stemming from increases in employees’ cost sharing was offset by increases in spending on medical services.
  • Estimates of the impact of pharmaceutical policies on Medicare beneficiaries before Medicare Part D was implemented. The four studies in this category found  that lower spending on prescription drugs among those with less generous coverage was partially offset by higher costs for their medical services.
  • Comparisons of medical expenditures by Medicare beneficiaries before the Medicare Part D benefit was implemented with medical expenditures after the benefit was implemented.  The authors found three studies in this area.  One of the studies (Zhang et al. 2009) found that people with the most generous coverage before Part D existed used medical services more after its implementation, but the other two studies found that people who received more generous prescription drug coverage through the implementation of Part D had fewer hospitalizations and used fewer medical services as a result.

Thus, in future budgetary impact models, CBO will assume that any increases in aggregate pharmaceutical use (i.e., increases in utilization of pharmaceuticals rather than increases in total expenditures) will result in offsetting declines in Medicare medical service spending.


  • Congressional Budget Office (CBO). Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services. November 2012.
  • Dana P. Goldman, Geoffrey F. Joyce, and Yuhui Zheng, “Prescription Drug Cost Sharing: Associations with Medication and Medical Utilizations and Spending and Health,” Journal of the American Medical Association, vol. 298, no. 1 (2007), pp. 61–69.
  • Martin Gaynor, Jian Li, and William B. Vogt, “Substitution, Spending Offsets, and Prescription Drug Benefit Design,” Forum for Health Economics and Policy, vol. 10, no. 2 (2007), pp. 1–31.
  • Baoping Shang and Dana P. Goldman, Prescription Drug Coverage and Elderly Medicare Spending, Working Paper No. w13358  (Cambridge, Mass.: National Bureau of Economic Research, September 2007).
  • Bruce C. Stuart, Jalpa A. Doshi, and Joseph V. Terza, “Assessing the Impact of Drug Use on Hospital Costs,” Health Services Research, vol. 44, no. 1 (2009), pp. 128–144.
  • John Hsu and others, “Unintended Consequences of Caps on Medicare Drug Benefits,” New England Journal of Medicine, vol. 354, no. 22 (2006), pp. 2349–2359.
  • Amitabh Chandra, Jonathan Gruber, and Robin McKnight, “Patient Cost Sharing and Hospitalization Offsets in the Elderly,” American Economic Review, vol. 100, no. 1 (2010), pp. 193–213.
  • Christopher C. Afendulis and others, “The Impact of Medicare Part D on Hospitalization Rates,” Health Services Research, vol. 46, no. 4 (2011). pp. 1022–1038.
  • J. Michael McWilliams, Alan M. Zaslavsky, and Haiden A. Huskamp, “Implementation of Medicare Part D and Nondrug Medical Spending for Elderly Adults with Limited Prior Drug
  • Coverage,” Journal of the American Medical Association, vol. 306, no. 4 (2011), pp. 402–409.
  • Yuting Zhang and others, “The Effect of Medicare Part D on Drug and Medical Spending,” New England Journal of Medicine, vol. 361, no. 1 (2009). pp. 52–61.

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