ECONOMIC AND BUDGET ISSUE BRIEF

Spending Patterns for Prescription Drugs Under 

Medicare Part D

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 2006.1

 That additional coverage—which provides 

outpatient prescription drug insurance to seniors and 

to people under age 65 with certain disabilities—

constituted the most substantial expansion of the Medicare program since its inception in 1965. In 2010, the 

federal government spent $62.0 billion on Part D, representing 12 percent of total federal spending for Medicare 

that year.2

Under Medicare Part D, all enrollees receive a subsidy for 

prescription drug insurance; an additional low-income 

subsidy (LIS) is available to enrollees with sufficiently low 

income and assets.3

 (In this issue brief, Part D enrollees 

who receive the LIS benefit are referred to as LIS enrollees; all others are referred to as non-LIS enrollees.) 

Enrollees in Part D choose a prescription drug insurance 

plan from a number of competing private plan sponsors. 

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.4

 In 

2008—the most recent year for which data were available 

when the Congressional Budget Office (CBO) undertook 

this analysis—average spending for non-LIS enrollees was 

$1,800.5 The amount of spending varied widely across 

enrollees in that category: for 7 percent, no spending 

occurred, whereas for 6 percent, the amount was at least 

$5,000. Enrollees who spent more tended to fill more 

prescriptions and more-expensive prescriptions. The 

federal government covered roughly 40 percent of nonLIS spending through premium subsidies, and beneficiaries covered most of the remainder through premium 

payments and out-of-pocket spending.

Average spending for LIS enrollees in 2008 was $3,600, 

double the spending for non-LIS enrollees. A slightly 

larger share of LIS enrollees (9 percent) had no Part D 

spending, but a much greater share (23 percent) had 

spending of at least $5,000. As with the non-LIS population, higher spending among LIS enrollees was driven by 

beneficiaries who filled more prescriptions and who filled 

more-expensive prescriptions. The higher spending 

among LIS beneficiaries most likely reflected that group’s 

generally poorer health status and the more generous coverage available through the low-income subsidy. Because 

of that additional subsidy, the federal government covered 95 percent of LIS spending in 2008.

This issue brief reviews patterns of Medicare Part D 

utilization and spending among the non-LIS and LIS 

populations. Other important topics relating to Part D, 

such as the provision of public benefits by sponsors of 

private plans and competition among those sponsors, are 

beyond the scope of this analysis.

CBO A series of issue summaries from

the Congressional Budget Office

DECEMBER 2011

1. Title I of Public Law 108-173, 117 Stat. 2066, 2071–2176.

2. Department of Health and Human Services, Centers for Medicare 

and Medicaid Services, Office of the Actuary, 2011 Annual Report 

of the Boards of Trustees of the Federal Hospital Insurance and 

Federal Supplementary Medical Insurance Trust Funds (May 2011).

3. In addition, the Medicare Modernization Act created a subsidy for 

firms that offer outpatient prescription drug coverage for their 

retirees. The population that receives assistance through the retiree 

drug subsidy is excluded from this analysis.

4. That spending takes various forms: Plan sponsors’ payments are 

financed by enrollees’ premium payments and federal premium 

subsidies. Beneficiaries’ out-of-pocket spending (beyond the 

premium payments to plan sponsors) consists of deductibles, 

coinsurance, and copayments. The federal government’s spending 

(beyond the premium subsidies paid to plan sponsors) consists of 

cost-sharing subsidies. Third-party payers are entities other than a 

beneficiary (first party) or insurance plans (second party) that 

finance pharmaceutical spending.

5. Unless otherwise specified, all statistics stem from CBO’s analysis 

of Part D claims data for calendar year 2008 and associated data 

files that describe beneficiary characteristics (such as demographic 

information).
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

The Medicare Part D Program

Before the creation of Part D, Medicare provided very 

limited coverage for the costs of outpatient prescription 

drugs.6

 As a result, the three-quarters of Medicare beneficiaries who had such coverage in the late 1990s obtained 

it from other sources; the remainder paid directly for 

all of their prescription drugs.7

 The patchwork of drug 

insurance options available at that time included public 

programs (such as Medicaid) and private insurance 

plans (such as employment-based plans for retirees and 

medigap plans that supplement Medicare). Whereas 

the poorest Medicare beneficiaries were often eligible for 

coverage under Medicaid, those with higher income were 

more likely to have employment-based plans or to purchase medigap policies. The “near poor”—those with 

incomes ranging from 100 percent to 200 percent of the 

federal poverty level—were disproportionately uninsured. 

Anyone enrolled in traditional fee-for-service (FFS) 

Medicare (Parts A and B) or in Medicare Advantage 

(Part C) is eligible for prescription drug coverage under 

Part D. (Part A covers hospital insurance, and Part B 

covers physician visits and other outpatient services; those 

benefits are administered by the Centers for Medicare 

and Medicaid Services, or CMS. Part C combines the 

benefits provided under Parts A and B and is administered by private companies that contract with CMS.) The 

Medicare Part D benefit is similar to some parts of Medicare but different from others. As with Medicare Part B, 

people who enroll in Part D receive substantial federal 

subsidies, and people who do not enroll in Part D upon 

eligibility face higher premiums if they sign up late. 

Those features of the program provide a strong incentive 

for people to enroll upon becoming eligible.8

 Part D 

differs from FFS Medicare in that beneficiaries choose a 

drug plan from among a number of competing private 

plans. In that respect, Part D is similar to Medicare 

Advantage (known as Medicare+Choice before the Medicare Modernization Act was passed in 2003), under 

which enrollees choose among available private health 

plans for their Medicare benefits.

In the first six months after the program was implemented, 22.5 million Medicare beneficiaries, or 

53 percent of the Medicare population, signed up for 

the Part D benefit.9

 Many of those enrollees may have 

previously had prescription drug coverage through 

another source: By CBO’s estimates, in 1999, 16 percent 

of Medicare enrollees had prescription drug insurance 

through Medicaid and 14 percent had coverage through 

Medicare+Choice plans. CMS estimated that 10 percent 

of Medicare beneficiaries (approximately 4.4 million people) had no prescription drug coverage six months after 

Part D was implemented.10 The share of Medicare beneficiaries without prescription drug coverage remained 

10 percent in 2010, although enrollment in Part D had 

reached 27.7 million beneficiaries, representing 60 percent of total Medicare enrollment.11

On average, beneficiaries receive a federal subsidy of 

about three-quarters of the costs of the basic Part D benefit, and their own premium payments cover the remaining one-quarter of costs. LIS beneficiaries—about 

40 percent of Part D enrollment—receive additional 

federal assistance that is based on their financial status. 

That additional benefit, which is determined on the basis 

of a sliding scale of income and assets, ranges from a partial subsidy of the beneficiary’s Part D premium and outof-pocket expenses to a full subsidy that covers the entire 

premium and all of the beneficiary’s out-of-pocket 

expenses. 

Non-LIS Beneficiaries

Beneficiaries who enroll in the Part D benefit but do not 

receive the additional low-income subsidy represent 

about 60 percent of all Part D beneficiaries and about 

25 percent of all federal spending on Part D. Non-LIS 

beneficiaries account for a much smaller share of federal 

spending because they spend less, on average, than do LIS 

beneficiaries, and because they generally cover a larger 

share of that spending through their own premiums and 

6. Medicare Part B provided limited coverage of self-administered 

drugs, generally for the treatment of cancer and posttransplant 

immunosuppression.

7. Congressional Budget Office, Issues in Designing a Prescription 

Drug Benefit for Medicare (October 2002). 

8. People who are eligible for Medicare but have another source of 

creditable coverage for pharmaceuticals, such as employmentbased coverage, are exempt from the late-enrollment penalty. In 

2008, CMS defined “creditable coverage” as benefits that covered 

at least 60 percent of an enrollee’s drug costs, on average, and that 

satisfied certain access and minimum benefit requirements.

9. Kaiser Family Foundation, “Medicare: The Medicare Prescription 

Drug Benefit,” Kaiser Family Foundation Fact Sheet (November 

2006).

10. Ibid. 

11. Kaiser Family Foundation, “Medicare: The Medicare Prescription 

Drug Benefit,” Kaiser Family Foundation Fact Sheet (October 

2010).
3 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 1.

Out-of-Pocket Spending as a Function of Total Spending Under the 

Standard Part D Benefit, 2008

(Out-of-pocket spending, in dollars)

Source: Congressional Budget Office.

Note: “Total spending” refers to drug spending per beneficiary by all payers combined, including plan sponsors, beneficiaries, the federal 

government, and third-party payers. “Out-of-pocket spending” refers to payments made solely by beneficiaries.

out-of-pocket payments. The share of drug spending 

paid by non-LIS beneficiaries varies considerably across 

enrollees, however, depending on their total drug expenditures and the plans in which they enroll.

Part D Insurance Plans and the Standard Benefit

In general, Medicare Part D beneficiaries are entitled to a 

basic benefit plan—known as a defined standard plan. 

That plan consists of three phases of coverage:

B The initial coverage phase, which encompasses two 

narrower phases of spending:

• The deductible, which is a fixed dollar amount the 

beneficiary must pay before the insurer begins to 

pay for covered pharmaceuticals.

• Expenses the beneficiary incurs after the deductible 

has been paid and before the initial coverage limit 

(ICL) has been met. Beneficiaries are responsible 

for 25 percent of expenditures in this range.

B The coverage gap, which includes spending between 

the ICL and the out-of-pocket threshold. This phase of 

spending is also known as the doughnut hole because, 

until very recently, the beneficiary was responsible for 

all spending in that range. The recent health care legislation changed cost sharing in this coverage phase; its 

implications will be discussed below.

B The catastrophic phase, which refers to spending 

above the out-of-pocket threshold. Once the threshold 

has been met, beneficiaries are responsible for 5 percent of further drug spending.

Thus, the beneficiary’s out-of-pocket spending depends 

on total spending for that beneficiary in a complicated 

way (see Figure 1). The Medicare Modernization Act set 

the initial Part D benefit parameters and directed CMS to 

index them to the growth in program spending. In 2008, 

the deductible was $275, the ICL was $2,510, and the 

out-of-pocket threshold was $4,050. For those parameter 

values, total spending at the out-of-pocket threshold was 

$5,726.25. The minimum out-of-pocket cost in the catastrophic phase was $2.25 for a 30-day supply of a generic 

drug or preferred multisource brand drug (a brand-name 

drug with generic competitors that is listed on a preferred 

tier of a plan’s formulary) and $5.60 for any other brandname drug.12 Provisions of the Patient Protection and 

Affordable Care Act (PPACA, Public Law 111-148), as 

amended by the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act, Public Law 

111-152), changed some of the parameters of the Part D 

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

0

1,000

2,000

3,000

4,000

5,000

Deductible Initial 

Coverage Limit

Out-of-Pocket

Threshold

Initial Coverage Phase Doughnut Hole Catastrophic Phase

Total Spending (Dollars)

12. In 2011, the deductible is $310, the initial coverage limit is 

$2,840, and the out-of-pocket threshold is $4,550. The minimum 

out-of-pocket costs in the catastrophic phase are $2.50 for a 

30-day supply of a generic or preferred multisource brand prescription and $6.30 for a brand-name prescription.
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

benefit, primarily those affecting the doughnut hole. 

Those changes and their expected effect on Part D drug 

use will be described below.

Part D insurance plans vary along two primary dimensions: benefit design and integration with other Medicare 

services. In 2008, fewer than 10 percent of non-LIS beneficiaries were enrolled in defined standard plans with the 

benefit design described above. One-third were enrolled 

in “actuarially equivalent” plans that were projected to 

cover the same percentage of drug expenditures. Many of 

those plans stipulated that, after beneficiaries had met the 

deductible, their out-of-pocket spending take the form of 

copayments (fixed-dollar amounts that depend on where 

the drug is placed on a plan’s formulary) rather than 

coinsurance (a fixed percentage of the drug’s price). Some 

of those plans offered a smaller deductible that was offset 

by higher cost sharing before the ICL was reached. The 

other 60 percent of non-LIS beneficiaries were enrolled 

in “enhanced” plans for which they paid a premium surcharge for supplemental benefits. Those additional benefits include some combination of the following: a reduced 

deductible, reduced cost sharing during the initial coverage phase, and coverage in the doughnut hole. 

The degree to which stand-alone drug plans and Medicare Advantage (MA) drug plans are integrated with other 

Medicare services differs. Stand-alone plans are offered 

independently of any other insurance plan or service, 

whereas MA drug plans are part of broader MA plans that 

include medical—that is, physicians’ and hospital—

services. In general, beneficiaries cannot choose Medicare 

Advantage for medical services and a stand-alone plan for 

pharmaceutical services, nor can they choose FFS Medicare for medical services and Medicare Advantage for 

pharmaceutical services.13 Furthermore, beneficiaries who 

choose to enroll in MA plans for both medical and pharmaceutical services cannot choose different plan sponsors 

for the two services. MA plans differ from stand-alone 

plans in an important way: The linkage between insuring 

medical and pharmaceutical expenditures in MA plans 

creates an incentive for those plans to manage overall 

expenditures rather than manage drug expenditures 

alone. Thus, an MA plan might offer lower cost sharing 

for maintenance prescriptions than for other types of 

prescriptions, which could reduce hospital expenditures, 

whereas a stand-alone plan might offer similar levels of 

cost sharing for both maintenance and nonmaintenance 

prescriptions.14 Perhaps because of that difference, many 

MA plan sponsors encourage enrollment in enhanced 

plans by offering low premiums or by offering only an 

enhanced plan.15 In MA plans, the greater beneficiary 

expense for the enhanced plan is often offset by average 

medical service costs that are below a regional benchmark, and that difference is often applied to reducing the 

premiums for Parts B and D. It can also be used to 

increase plan generosity by covering additional services 

or reducing cost sharing.16

The premium for a Part D plan depends upon the cost 

of the chosen plan and the national average cost for all 

plans. In June of each year, plan sponsors submit bids 

to CMS that reflect the expected per-enrollee cost of 

providing benefits and anticipated administrative costs 

(including plan profits) for a representative set of beneficiaries in the following plan year. CMS calculates a 

base premium from the sponsors’ bids that is equal to 

25.5 percent of the estimated average cost of the basic 

benefit; in 2008, the base premium was $27.93 per 

month.17 The federal government subsidizes the remaining 74.5 percent. Plan premiums are calculated as the 

base premium plus the difference between that plan’s bid 

and the national average bid. (Plans that cost less than the 

national average have lower premiums than the base premium.) Enhanced plan bids are separated into basic and 

enhanced components because the federal government 

does not subsidize the enhanced portion of the benefit. 

Premiums for enhanced plans follow this same calculation for the basic portion of the bid, and the enhanced 

portion of the bid is added in total to the beneficiary 

share of the basic premium. In 2008, the average monthly 

premium for Part D beneficiaries was $24.85.18 A key 

reason that this average premium is below the base premium is the ability of MA plan sponsors to subsidize the 

premiums for their Part D plans. 

13. Some MA plans do not offer a corresponding prescription drug 

plan (referred to as an MA-PD); in those cases, enrollees may 

choose a stand-alone drug plan for their Part D benefit.

14. Maintenance drugs are prescribed for chronic conditions that 

require ongoing treatment. 

15. See Medicare Payment Advisory Commission (MedPAC), Report 

to the Congress: Medicare Payment Policy (March 2011), p. 323. 

16. See MedPAC, Medicare Advantage Program Payment System

(October 2010).

17. See MedPAC, Report to the Congress (March 2011), p. 332.

18. See MedPAC, Report to the Congress: Medicare Payment Policy

(March 2009), p. 290.
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING PATTERNS FOR PRESCRIPTION DRUGS UNDER MEDICARE PART D 5

Distribution of Spending Among 

Non-LIS Beneficiaries

In any given year, total spending on prescription drugs 

varies widely among beneficiaries. Total spending for over 

three-quarters of non-LIS beneficiaries was less than 

$2,510 in 2008—that is, they did not reach the doughnut hole (see Figure 2). Their total spending represented 

38 percent of spending for non-LIS beneficiaries that 

year. Nearly one-quarter of non-LIS beneficiaries ended 

the year in the doughnut hole; their total spending 

accounted for 45 percent of spending for all non-LIS 

beneficiaries. Three percent of beneficiaries exceeded 

$4,050 in out-of-pocket expenditures and thus entered 

the catastrophic phase; their total spending represented 

17 percent of all non-LIS spending. 

Another way to categorize spending for pharmaceuticals 

under Part D is by the phase of coverage at the time 

expenses are incurred. That categorization differs from 

the categorization by total spending because beneficiaries 

who end up in the doughnut hole or catastrophic phase 

by the end of the year will have spent some time in earlier 

coverage phases. As a result, those beneficiaries will have 

faced different levels of cost sharing during the year.

Figure 2.

Distribution of Part D Beneficiaries 

and Total Spending Across Coverage 

Phases, 2008

(Percent)

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by 

all payers combined, including plan sponsors, beneficiaries, 

the federal government, and third-party payers.

LIS = low-income subsidy.

Table 1.

Total Spending Across Coverage 

Phases, by LIS Status, 2008 

(Percent)

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by 

all payers combined, including plan sponsors, beneficiaries, 

the federal government, and third-party payers.

LIS = low-income subsidy.

Whereas some beneficiaries estimate their total expected 

drug spending for the year and make purchasing decisions accordingly, others make each purchasing decision 

individually and only complete the purchases that are 

considered worth the cost at the time. Beneficiaries with 

limited savings are more likely to fall in the second category, and their purchasing decisions may vary with the 

coverage phase. For example, while in the doughnut hole, 

they may attempt to stretch their supply of medication 

by splitting pills or by not adhering strictly to drug 

regimens.19

In 2008, 71 percent of total non-LIS spending occurred 

while beneficiaries were in the initial coverage phase (see 

Table 1). That amount included all spending for beneficiaries who did not reach the doughnut hole as well as 

spending in the initial coverage phase for those who did 

reach the doughnut hole. Beneficiaries paid out of pocket 

for an average of 29 percent of prescription drug spending in the initial coverage phase. That out-of-pocket percentage was greater than 25 percent because many beneficiaries were responsible for 100 percent of spending until 

they reached their deductible. 

Twenty-one percent of total non-LIS spending in 2008 

occurred while beneficiaries were in the doughnut hole. 

Of that spending, beneficiaries paid over 60 percent out 

of pocket. Supplemental coverage available through 

enhanced plans or offered by third-party payers (such 

as employment-based plans, which “wrap around” the 

Part D benefit by covering some of beneficiaries’ out-of0

20

40

60

80

100

120

Non-LIS

Beneficiaries

Non-LIS

Spending

LIS

Beneficiaries

LIS

Spending

In the Initial

Coverage Phase

In the Doughnut

Hole

In the

Catastrophic

59 Phase

28

13

3

21

77

17

45

38

18

25

56

Beneficiaries Who

Ended the Year:

19. MedPAC, Experiences Obtaining Drugs Under Part D: Focus 

Groups with Beneficiaries, Physicians, and Pharmacists, No. 08-4 

(prepared by National Opinion Research Center, May 2008).

Coverage Phase

Initial 71 44

Doughnut Hole 21 28

Catastrophic 8 28

Non-LIS LIS
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Table 2.

Utilization of the Part D Benefit and Average Prescription Prices, by 

Range of Total Spending, 2008

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by all payers combined, including plan sponsors, beneficiaries, the federal 

government, and third-party payers. Each range of spending includes amounts of spending from just above the lower end of the range 

to the upper end of the range.

LIS = low-income subsidy; n.a. = not applicable. 

a. Prescriptions with more than a 30-day supply are adjusted to equal the number and average price of a 30-day supply. Prescriptions with 

less than a 30-day supply are counted as a single prescription. 

b. Prescription prices include sales tax and dispensing fees paid to the pharmacy.

c. Generic drugs are identified using the Medicaid classification system.

pocket costs) paid for the rest of those expenditures. The 

remaining 8 percent of total non-LIS spending in 2008 

occurred in the catastrophic phase. Comparing that statistic with the share of spending attributable to those who 

entered the catastrophic phase (17 percent) reveals that 

spending in the catastrophic phase was nearly half of total 

spending for those beneficiaries—indicating its importance to that group. Beneficiaries paid out of pocket for 

an average of 5 percent of spending in that phase, which 

is equal to the share that they were responsible for under 

the standard benefit. 

Drivers of Higher Spending Among 

Non-LIS Beneficiaries 

Greater prescription drug spending is driven by two factors: the filling of a larger number of prescriptions and 

the filling of prescriptions for more-expensive drugs. 

Both factors played a role in higher total spending per 

non-LIS beneficiary in 2008, but the number of prescriptions seems to have been a greater driver of higher expenditures than was the average price of a prescription. For 

example, compared with non-LIS beneficiaries for whom 

total spending was between zero and $500, those with 

total spending between $4,500 and $5,500 filled nearly 

five times the number of prescriptions per month (see 

Table 2). The average prescription price in that category 

of spending was about three times more than the average 

price of a prescription filled by people with total spending 

between zero and $500. 

The average prescription price was substantially greater in 

the group with spending above $5,500 than in all other 

groups, probably because beneficiaries with the highest 

spending are, in general, more likely to suffer from 

Total 

Spending

(Dollars)

0 7.5 n.a. n.a. n.a.

0 to 500 23.1 1.5 22 83

500 to 1,500 27.4 3.2 36 70

1,500 to 2,500 18.3 4.4 49 62

2,500 to 3,500 11.8 5.2 57 58

3,500 to 4,500 4.9 6.2 63 56

4,500 to 5,500 2.6 7.0 70 54

5,500 or more 4.4 8.5 135 51

0 9.2 n.a. n.a. n.a.

0 to 500 15.9 1.4 24 83

500 to 1,500 17.8 3.3 40 72

1,500 to 2,500 13.2 4.5 50 65

2,500 to 3,500 10.2 5.5 59 62

3,500 to 4,500 7.7 6.4 67 59

4,500 to 5,500 5.8 7.1 74 57

5,500 or more 20.2 9.2 130 53

Beneficiaries

Percentage of 

Filled Per Montha

Prescriptions 

Number of 

(Dollars)a, b

Prescription Price 

Average

Share of Prescriptions 

Average Generic 

(Percent)c

Non-LIS Beneficiaries

LIS Beneficiaries
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING PATTERNS FOR PRESCRIPTION DRUGS UNDER MEDICARE PART D 7

chronic conditions (such as multiple sclerosis and rheumatoid arthritis) that require ongoing treatment with 

specialty drugs (such as biologics).20 Those types of drugs 

are typically very expensive.21 One study found that 

31 percent of beneficiaries without the low-income 

subsidy who used at least one specialty drug reached the 

out-of-pocket threshold.22 Given that only 3 percent of 

non-LIS beneficiaries reached the out-of-pocket threshold, that finding implies that those who used specialty 

drugs were at least 10 times as likely to reach the out-ofpocket threshold as those who did not use specialty 

drugs.

The relationship between spending and the use of generic 

drugs is also noteworthy. Generics, which often are much 

less expensive than their brand-name counterparts, made 

up a smaller share of prescriptions for beneficiaries with 

greater total drug expenditures. On average, the retail 

price of a generic drug is 25 percent of the retail price of a 

brand-name drug of the same chemical makeup.23 Thus, 

choosing brands over their generic counterparts could 

have played a role in higher spending. However, CBO 

recently found that the generic utilization rate among 

Part D beneficiaries was over 90 percent in 2007 when a 

generic option was available.24 That statistic suggests that 

while brand usage was sometimes a matter of preference, 

it often reflected the lack of availability of equivalent 

generics. Although there may be additional room for 

switching to a generic alternative within the same therapeutic class when no direct generic substitute is available, 

such switches might not always be clinically indicated. 

Newer brand-name drugs tend to be more expensive and 

are less likely to face generic competition, and that is 

especially true for specialty drugs.

The Federal Contribution to Part D Spending for 

Non-LIS Beneficiaries 

In 2008, the federal government paid for approximately 

40 percent of total Part D spending for non-LIS 

beneficiaries. Premiums are set so that the federal government pays for 74.5 percent of the basic benefit, which 

itself covered 53 percent of spending by non-LIS enrollees. Applying the federal government’s share of the basic 

benefit to that percentage provides a rough estimate of 

the federal share of non-LIS spending.25 Nearly 85 percent of federal spending for the basic benefit funded the 

initial coverage phase portion of the benefit; the remainder funded the catastrophic portion. 

Most of the remaining 60 percent of total Part D spending for non-LIS beneficiaries was paid by the beneficiaries 

through out-of-pocket spending and premium payments 

(which covered the beneficiary’s share of the basic benefit 

and any enhanced coverage). Less than 2 percent of 

spending was covered by third-party payers, such as state 

pharmaceutical assistance programs and workers’ compensation programs.

Implications of Recent Health Care Legislation for 

Non-LIS Beneficiaries

Various provisions of PPACA and the Reconciliation Act 

have a sizable impact on the Part D benefit for non-LIS 

enrollees.26 Those new 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. Starting in January 2011, manufacturers of brand-name drugs began covering 50 percent 

of the cost of such medications for beneficiaries in the 

doughnut hole.27 The standard Part D benefit will 

gradually fill in the rest of the doughnut hole for both 

brand-name and generic drugs so that, by 2020, beneficiaries’ cost sharing will be reduced to 25 percent of their 

drug spending between the initial coverage level and the 

out-of-pocket threshold.28 At that point, plans will be 

20. Biologics are derived from living organisms and generally are more 

complex and more expensive to produce than chemically based 

drugs.

21. CMS allows Part D plans to label drugs as specialty drugs if the 

monthly cost of those medications exceeds a set threshold. That 

threshold was $600 in 2008.

22. Government Accountability Office, Medicare Part D: Spending, 

Beneficiary Cost Sharing, and Cost-Containment Efforts for HighCost Drugs Eligible for a Specialty Tier, GAO-10-242 (January 29, 

2010).

23. Congressional Budget Office, Effects of Using Generic Drugs on 

Medicare’s Prescription Drug Spending (September 2010).

24. Ibid.

25. Because total spending is lower for non-LIS beneficiaries, that 

population accounts for a smaller share of total spending for the 

basic benefit than the LIS population. Since the 74.5 percent 

average is applied to total basic benefit spending, the federal government covers a slightly smaller share of basic benefit spending 

(69 percent) for the non-LIS population.

26. P.L. 111-148, 124 Stat. 119, and P.L. 111-152, 124 Stat. 1029, 

respectively.

27. Section 3301 of PPACA.

28. Section 1101 of the Reconciliation Act.
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

required to cover 75 percent of generic drug expenditures 

and 25 percent of brand-name drug expenditures 

incurred while beneficiaries are in the doughnut hole; 

another 50 percent of brand-name drug expenditures 

incurred in the doughnut hole will continue to be covered by manufacturers.29 The additional generosity of the 

Part D benefit will increase the cost of the benefit in two 

ways: plan payments will increase for drugs purchased in 

the doughnut hole, and beneficiary utilization will 

increase because of lower out-of-pocket costs for drugs 

purchased in the doughnut hole.30 Altogether, that additional generosity will raise beneficiaries’ premiums by 

about 10 percent in 2019 relative to what would have 

occurred otherwise.31

The drug benefit will also become more generous because 

the out-of-pocket threshold will increase more slowly 

than will the other benefit parameters from 2014 through 

2020, after which the threshold will return to what it 

would have been if its growth rate had not been slowed.32

That change will reduce the amount of money a beneficiary must spend before reaching the out-of-pocket 

threshold and entering the catastrophic phase. If the benefit parameters described in this section for the year 2020 

had been applied to drug purchases in 2008, beneficiaries 

who ended the year in the doughnut hole and catastrophic phase would have saved an average of $550 and 

$2,150 in out-of-pocket expenditures, respectively.33

The second change to the Part D program was to introduce income-based premiums (which are also used in 

Medicare Part B) for individuals with income above 

$85,000 and couples with a joint income above 

$170,000, beginning in 2011. The additional premium 

ranges from $12 per month for those whose income is 

just above the thresholds to nearly $70 per month for 

individuals with income exceeding $214,000 or couples 

with a joint income exceeding $428,000.34 Approximately 5 percent of beneficiaries will pay a higher premium because of this policy change. Some Part D beneficiaries may drop coverage, and future Medicare enrollees 

may forgo enrollment in Part D, because of the premium 

increase. However, because the premium remains heavily 

subsidized for most people, the income-based premium is 

unlikely to change enrollment decisions for most of the 

affected beneficiaries.

LIS Beneficiaries

In addition to the standard Part D benefit offered to all 

Medicare beneficiaries, the federal government provides 

an additional benefit—the low-income subsidy—to some 

beneficiaries. Eligibility for the low-income subsidy and 

the generosity of the subsidy depend on the beneficiary’s 

income and assets. The most generous LIS benefit covers 

all premium payments and out-of-pocket expenses for 

beneficiaries enrolled in both Medicare and Medicaid—

known as dual-eligibles—who reside in a long-term care 

facility. The least generous LIS benefit covers a small 

share of the Part D premium and subsidizes beneficiaries’ 

out-of-pocket spending so that they pay 15 percent of 

total costs until they reach the catastrophic phase. Once 

those beneficiaries enter the catastrophic phase, they pay 

5 percent of prescription costs, the same rate paid by 

enrollees without the low-income subsidy.35 That benefit 

level applies to beneficiaries with income between 

135 percent and 150 percent of the federal poverty level 

who are not enrolled in Medicaid and whose assets are 

below a given threshold.36 The generosity of the LIS 

29. Section 3301 of PPACA.

30. In addition, CBO expects that the various provisions of PPACA 

and the Reconciliation Act will push up the prices of certain prescription drugs and thereby make federal costs for the Part D 

benefit slightly higher. See Congressional Budget Office, letter to 

the Honorable Paul Ryan about the effects on prescription drug 

prices of certain provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation 

Act of 2010 (November 4, 2010). 

31. For more information, see Congressional Budget Office, “Comparison of Projected Medicare Part D Premiums Under Current 

Law and Under Reconciliation Legislation Combined with 

H.R. 3590 as Passed by the Senate” (March 19, 2010).

32. From 2014 to 2015, the growth rate of the out-of-pocket threshold will be 0.25 percentage points below the growth rate of Part D 

expenses. From 2016 to 2019, the out-of-pocket threshold will be 

indexed to the consumer price index for all urban consumers plus 

2 percentage points, which will most likely be lower than the 

growth of Part D expenses. See section 1101 of the Reconciliation 

Act.

33. This calculation does not account for any increase in prescription 

drug spending that would have resulted from reduced out-ofpocket spending.

34. Married beneficiaries who file separately reach this maximum 

additional payment when their individual income is greater than 

$129,000.

35. The cost-sharing subsidy counts as out-of-pocket spending; thus, 

LIS beneficiaries reach the out-of-pocket threshold at the same 

level of total spending as non-LIS beneficiaries in their same plan.

36. In 2008, the federal poverty level was $10,400 for a single person 

and $14,000 for a couple. The asset threshold was $11,990 for a 

single person and $23,970 for a couple.
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING PATTERNS FOR PRESCRIPTION DRUGS UNDER MEDICARE PART D 9

benefit ranges between those two benefit levels for the 

remaining LIS population, although most of the variation 

is in the degree of cost sharing: 98 percent of LIS 

beneficiaries received the full premium subsidy in 2008.37

Because of those additional subsidies, the differences 

among plan types experienced by the non-LIS population 

are greatly muted for the LIS population.

Whereas many LIS enrollees were automatically enrolled 

in the LIS program, others actively applied for LIS enrollment. Automatic enrollees include dual-eligibles and 

Medicare beneficiaries who are already enrolled in a 

Medicare Savings Program or in Social Security’s Supplemental Security Income program.38 Because these 

individuals have previously met certain state income and 

asset tests, CMS automatically enrolls them in a Part D 

plan with a premium below their region’s benchmark for 

the LIS program. (The benchmarks are based on averages 

of premiums for basic plans in the region, weighted by 

LIS enrollment per plan.) Other Medicare beneficiaries 

who apply for the LIS benefit must show that they meet 

the program’s income and asset tests.39 CMS randomly 

assigns those LIS beneficiaries to a benchmark Part D 

plan if they do not choose one. In 2008, 7.9 million 

beneficiaries were automatically enrolled in the LIS program, and 1.5 million were enrolled after applying.40

Beneficiaries for whom CMS chooses plans may switch 

plans if, for example, they prefer the formulary of covered 

drugs under another plan. However, if the chosen plan’s 

premium is greater than the LIS benchmark premium, 

the beneficiary is responsible for paying the difference. 

Evidence suggests that LIS beneficiaries are unlikely to 

opt out of the plans in which they have been enrolled by 

CMS.41 The LIS benefit does not pay for the additional 

premiums charged by enhanced plans. However, LIS 

benefits are more generous than enhanced benefits, 

making enrollment in enhanced plans less attractive to 

LIS beneficiaries. 

Distribution of Spending Among LIS Beneficiaries

LIS beneficiaries were more evenly distributed among the 

Part D coverage phases in 2008 than were non-LIS beneficiaries. Just over half of LIS beneficiaries did not reach 

the doughnut hole, and total spending for them was 

13 percent of spending for all LIS beneficiaries (see Figure 2 on page 5). One-quarter finished the year in the 

doughnut hole and accounted for 28 percent of all LIS 

spending. Nearly one-fifth reached the catastrophic phase 

and accounted for 59 percent of all LIS spending.

Spending by coverage phase at the time of expenditure 

was also more evenly distributed among LIS beneficiaries 

than among non-LIS beneficiaries (see Table 1 on 

page 5). Only 44 percent of total spending for LIS beneficiaries occurred in the initial coverage phase (in contrast 

with the 71 percent of total spending for non-LIS beneficiaries while in the same phase). Twenty-eight percent of 

total spending for LIS enrollees occurred in both the 

doughnut hole and the catastrophic phases (in contrast 

with the 21 percent and 8 percent shares, respectively, for 

non-LIS beneficiaries in the same phases). Because of the 

cost-sharing subsidies available to LIS enrollees, however, 

their out-of-pocket share of spending varied little as they 

moved between coverage phases.

Many LIS beneficiaries who surpassed the out-of-pocket 

threshold spent a substantial amount once they entered 

the catastrophic phase. As was the case with spending for 

non-LIS beneficiaries who reached the catastrophic 

phase, half of the spending for LIS beneficiaries who 

reached the catastrophic phase was beyond the out-ofpocket threshold.

Drivers of Higher Spending Among LIS Beneficiaries 

Like non-LIS enrollees, LIS enrollees with higher total 

spending on prescription drugs filled more prescriptions 

37. Department of Health and Human Services, 2011 Annual Report 

of the Boards of Trustees of the Federal Hospital Insurance and Federal 

Supplementary Medical Insurance Trust Funds.

38. Medicare Savings Programs are administered by Medicaid; they 

are designed to help Medicare beneficiaries who have limited 

income and few other resources pay for their premiums and cost 

sharing for Parts A and B of Medicare.

39. Kaiser Family Foundation, “Medicare: The Medicare Prescription 

Drug Benefit,” Kaiser Family Foundation Fact Sheet (February 

2008).

40. Ibid. 

41. Research has shown that LIS beneficiaries were unlikely to choose 

a new plan after CMS reassigned them to a new Part D plan 

because their previously assigned plan no longer held benchmark 

status. See Grecia Marrufo and others, Evaluation of the Medicare 

Demonstration to Transition Enrollment of Low Income Subsidy 

Beneficiaries (report submitted by Acumen, LLC, to the Centers 

for Medicare and Medicaid Services, June 2009).
10 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 3.

Out-of-Pocket Spending as a Share of Total Spending, by LIS Status, 2008

(Percent)

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by all payers combined, including plan sponsors, beneficiaries, the federal 

government, and third-party payers. “Out-of-pocket spending” refers to payments made solely by beneficiaries. Each range of 

spending includes amounts of spending from just above the lower end of the range to the upper end of the range.

The vertical lines indicate the spending range in which each labeled point in the benefit design occurs.

LIS = low-income subsidy.

and filled more-expensive prescriptions. The number of 

prescriptions and the average price per prescription were 

similar for both groups of beneficiaries within each range 

of spending (see Table 2 on page 6). However, LIS beneficiaries were more likely to fall into the higher-spending 

ranges. For instance, total spending was greater than 

$5,500 for 20 percent of LIS beneficiaries, whereas only 

4 percent of non-LIS beneficiaries had total spending 

greater than that amount. 

The Federal Contribution to Spending for 

LIS Beneficiaries

The federal government paid for approximately 95 percent of Part D prescription drug spending for LIS 

beneficiaries in 2008.42 That large share is attributable 

to two features of the Part D program: First, the federal 

government pays for nearly all of LIS beneficiaries’ premiums for the basic benefit, which covered 56 percent of 

spending for LIS enrollees in 2008. Second, the federal 

government subsidizes most of LIS beneficiaries’ out-ofpocket spending, which represented 40 percent of LIS 

expenditures. Overall, 43 percent of federal spending 

for LIS beneficiaries funded expenditures in the initial 

coverage phase, and the remaining federal spending was 

split between the doughnut hole and the catastrophic 

phase. 

Comparing Non-LIS and 

LIS Beneficiaries

Beneficiaries who receive the low-income subsidy in 

Medicare Part D differ in various ways from those who 

do not. To begin with, the relationship between total 

Part D spending and out-of-pocket spending is quite 

different for the two populations. Among non-LIS 

beneficiaries in 2008, out-of-pocket spending as a share 

of total spending varied greatly across spending levels 

(see Figure 3). Beneficiaries with low total spending 

paid a large share out of pocket because the deductible 

accounted for most of their spending. The out-of-pocket 

share was smaller for beneficiaries with greater total 

spending—up to the ICL—because the deductible 

represented a smaller share of total spending. The 

out-of-pocket share rose for beneficiaries for whom total 

spending exceeded the ICL because spending in the 

doughnut hole was largely out of pocket. Beneficiaries

0 to

500

500 to

1,000

1,000 to

1,500

1,500 to

2,000

2,000 to

2,500

2,500 to

3,000

3,000 to

3,500

3,500 to

4,000

4,000 to

4,500

4,500 to

5,000

5,000 to

5,500

5,500

0

10

20

30

40

50

60

Range of Total Spending (Dollars)

Deductible Initial Coverage Limit Out-of-Pocket Threshold

Non-LIS

Out-of-Pocket Share

LIS Out-of-Pocket Share

42. Because the Medicaid program paid for pharmaceutical 

expenditures for dual-eligibles before Part D was implemented, a 

provision of the Medicare Modernization Act requires states to 

reimburse the federal government for a portion of those expenditures. Those reimbursements are included in CBO’s estimates of 

federal Part D spending. 
ECONOMIC AND BUDGET ISSUE BRIEF

SPENDING PATTERNS FOR PRESCRIPTION DRUGS UNDER MEDICARE PART D 11

Figure 4.

Distribution of Part D Beneficiaries Across Ranges of Total Spending, by 

LIS Status, 2008

(Percent)

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by all payers combined, including plan sponsors, beneficiaries, the federal 

government, and third-party payers. Each range of spending includes amounts of spending from just above the lower end of the range 

to equal to the upper end of the range.

LIS = low-income subsidy.

who surpassed the out-of-pocket threshold paid for a 

smaller share of their total spending, although they spent 

a substantial amount to reach the catastrophic phase. In 

2008, average out-of-pocket spending among non-LIS 

beneficiaries who reached the catastrophic phase was 

$4,000.

LIS beneficiaries do not experience the same variation 

in their out-of-pocket share of spending. Their out-ofpocket share is much lower than that of non-LIS 

beneficiaries and mostly flat across total spending levels. 

Among LIS beneficiaries in 2008, there was a slight 

negative relationship between total spending and the 

out-of-pocket share of that spending. That pattern probably arose because LIS beneficiaries with higher expenditures were more likely to be enrolled in a more generous 

category of the LIS benefit, in which a greater share of 

out-of-pocket expenditures was subsidized.

Another significant difference between the two categories 

of enrollees lies in the distribution of beneficiaries across 

spending levels. LIS beneficiaries are much more likely 

than non-LIS beneficiaries to fall into higher-spending 

categories and less likely to fall into lower-spending categories (see Figure 4). For example, only 24 percent of 

non-LIS beneficiaries exceeded $2,500 in total spending 

in 2008, but 44 percent of LIS beneficiaries exceeded that 

spending level (see Table 3). Similarly, only 6 percent of 

non-LIS beneficiaries exceeded $5,000 in total spending, 

whereas 23 percent of LIS beneficiaries exceeded that 

amount. 

Yet another distinction between the two groups of 

enrollees is that LIS beneficiaries constituted 40 percent 

of Part D enrollment in 2008 but accounted for 55 percent of total prescription drug expenditures that year. 

At $3,600, the average per capita expenditures for those 

beneficiaries were twice as large as the expenditures for 

their counterparts ($1,800). That difference is probably 

partly attributable to the difference in generosity of the 

two benefits. The out-of-pocket share of spending is 

much lower for LIS beneficiaries than for non-LIS 

beneficiaries. In addition, many LIS beneficiaries pay 

the same amount out of pocket for all brand-name drugs, 

regardless of the drugs’ price or whether the drugs have 

preferred status. Moreover, MedPAC found that generic 

dispensing rates were lower for LIS beneficiaries for several therapeutic classes.43

0 0 to

500

500 to

1,000

1,000 to

1,500

1,500 to

2,000

2,000 to

2,500

2,500 to

3,000

3,000 to

3,500

3,500 to

4,000

4,000 to

4,500

4,500 to

5,000

5,000 to

5,500

5,500

0

5

10

15

20

25

Range of Total Spending (Dollars)

Beneficiaries

Non-LIS

LIS

43. Shinobu Suzuki, “MedPAC Analysis of Factors Affecting LIS Use 

of Prescription Drugs” (presented at the Centers for Medicare and 

Medicaid Services Part D Data Symposium, Baltimore, Md., 

March 18, 2010).
12 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Table 3.

Shares of Part D Beneficiaries and 

Spending in Two Higher Ranges of 

Total Spending, 2008

(Percent)

Source: Congressional Budget Office.

Notes: “Total spending” refers to drug spending per beneficiary by 

all payers combined, including plan sponsors, beneficiaries, 

the federal government, and third-party payers.

LIS = low-income subsidy.

Average spending in the two groups also differs in part 

because LIS beneficiaries tend to be sicker than non-LIS 

beneficiaries. That tendency is suggested by three types of 

statistics: the original reason for Medicare eligibility; risk 

scores; and the presence of chronic disease. CBO found 

that, in 2008, 85 percent of non-LIS beneficiaries became 

eligible for Medicare because they turned 65, and the 

remaining 15 percent became eligible before turning 65 

by successfully applying for the Social Security Disability 

Insurance (SSDI) program.44 By contrast, half of LIS 

beneficiaries became eligible for Medicare by qualifying 

44. Individuals with end-stage renal disease are also eligible for 

Medicare within three months of their first dialysis treatment.

45. Beneficiaries without the low-income subsidy had an average risk 

score of 1.025, and LIS beneficiaries had an average risk score of 

1.181. To reflect the fact that the risk adjustment methodology 

imperfectly predicts utilization for those populations, CMS further adjusts these risk scores for beneficiaries who have the LIS 

benefit or are institutionalized. See MedPAC, A Data Book: 

Health Care Spending and the Medicare Program (June 2010).

46. John Hsu and others, “Distributing $800 Billion: An Early 

Assessment of Medicare Part D Risk Adjustment,” Health 

Affairs, vol. 28, no. 1 (January 2009), pp. 215–225.

47. Judy Kasper, Molly O’Malley Watts, and Barbara Lyons, Chronic 

Disease and Co-Morbidity Among Dual Eligibles: Implications 

for Patterns of Medicaid and Medicare Service Use and Spending,

Kaiser Commission on Medicaid and the Uninsured, Issue Paper 

No. 8081 (July 2010).

for SSDI, suggesting that a larger share of that group had 

poorer health status.

Further, in calculating payments to Part D plans, CMS 

develops risk scores to ensure that plans are compensated 

for enrolling sicker beneficiaries. Those risk scores reflect 

differences in medical disabilities, previous diagnoses, 

and demographics, and they are designed to predict 

differences in expected drug utilization. In 2008, risk 

scores indicated that LIS beneficiaries would probably 

have 15 percent greater drug expenditures than non-LIS 

beneficiaries.45 Moreover, research has shown that the 

risk-adjustment methodology being used in 2008 

overpredicted costs for low-spending enrollees and underpredicted costs for high-spending enrollees, which has led 

CMS to update its risk-adjustment methodology more 

recently.46

Lastly, LIS beneficiaries have a higher prevalence of 

chronic conditions and comorbidities (additional diseases 

and conditions) than do non-LIS beneficiaries. One 

study on the prevalence of chronic conditions among 

dual-eligibles (two-thirds of the LIS population) found 

that 63 percent of dual-eligibles had multiple chronic 

physical conditions. By contrast, 53 percent of other 

Medicare beneficiaries fell into that category.47 More 

strikingly, 20 percent of dual-eligibles had multiple 

mental or cognitive conditions; only 5 percent of other 

Medicare beneficiaries did so. Some of those conditions, 

such as depression and schizophrenia, require very expensive drug regimens. Likewise, 38 percent of dual-eligibles 

had both a mental or cognitive condition and a chronic 

physical condition compared with 17 percent of other 

Medicare beneficiaries. Differences in the prevalence of 

chronic conditions among the two populations are strong 

indicators of differences in the need for medical and 

pharmaceutical services.

Non-LIS

Beneficiaries 24 6

Spending 62 28

LIS

Beneficiaries 44 23

Spending 87 66

Greater Than

$2,500

Greater Than

$5,000

This brief was prepared by Tamara Hayford of CBO’s 

Health and Human Resources Division. It and other 

CBO publications are available at the agency’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director