Medicare provides health care coverage to 

persons 65 and older and to persons under 

65 with permanent disabilities. For persons 

over 65, Medicare is the predominant payment source for health care expenditures.1

When established in 1965, Medicare covered 

hospital and physician charges but excluded 

prescription drugs. This exclusion later became a problem because of the development 

of prescription-drug treatments for conditions 

common to the Medicare population.  The 

Medicare Modernization Act of 2003, which 

established Medicare Part D, was enacted to 

close this coverage gap.  

Since January 2006, Part D has provided subsidized access to prescription-drug insurance 

coverage on a voluntary basis, with premium 

and cost-sharing subsidies for low-income 

enrollees. The extent to which closing this 

Medicare coverage gap has increased the 

financial security of the elderly and disabled 

has implications for current and future beneficiaries. Because of the large number of people 

born between 1946 and 1964, commonly 

referred to as the Baby Boom generation, 

Medicare enrollment is expected to increase 

to 63.9 million in 2020 and to 80.8 million in 

2030. As the average age of Medicare beneficiaries increases, beneficiaries likely will use 

more health care services, resulting in greater 

out-of-pocket costs and Medicare program 

expenses.2

Consumer Expenditure Survey (CE) data from 

the 2005 through 2009 Interview Surveys 

were used to examine out-of-pocket health 

care spending by Medicare households before 

and after the 2006 implementation of Medicare Prescription Drug Coverage (Part D). 

Results show that:

• For Medicare households, the nominal

amount spent on prescription drugs and

the share of the health care budget accounted for by prescription drugs were

lower after the implementation of Medicare

Part D.

• Health care component shares changed

between 2005 and 2009. The proportion

spent on prescription drugs declined, while

the proportion spent on health insurance

increased over the period. However, the

combined share of the health care budget represented by these items was little

changed over the period.

• Among covered households, the average

Part D premiums paid for stand-alone prescription drug plans substantially increased

between 2006 and 2009.

Current Price Topics

Part D Prescription Drug

Coverage and Health Care

Spending by Seniors

on Medicare

1

Consumer Expenditure Survey, 2009

U.S. Bureau of Labor Statistics August 2011 Volume 2, Number 8
2

For each year examined, the study sample 

consisted of those consumer units (CUs)3 with 

a reference person4 65 and older5 in which all 

members were on Medicare. To facilitate comparison, CUs with some members on Medicare 

and other members not on Medicare were 

excluded. 

Detailed findings

In 2009, there were 17.5 million Medicare 

households with a reference person 65 and 

older, compared with 15.5 million in 2005.  

Households with a reference person age 65-74 

made up 45.1 percent of the sample, compared with 54.9 percent for households with a 

reference person 75 years and older.  In 2005, 

these proportions were virtually the same—

45.2 percent and 54.8 percent, respectively.  

Health care expenditures increased from 

$4,087 in 2005 to $4,853 in 2009 for all Medicare households, with similar spending patterns for the age groups, 65-74 and 75-andolder.  The budget share accounted for by 

health care ranged from a low of 14.2 percent 

in 2007 to a high of 15.5 percent in 2009 for 

the group as a whole.  In all years, health care 

accounted for a greater share of the total budget for the 75-and-older group. (See table 1.) 

 C U R R E N T P R I C E T O P I C S

Table 1. Average annual health care expenditures and shares of health care expenditures 

for Medicare households 65 and older, by age of reference person, Consumer

Expenditure Interview Survey, 2005–2009

Item 2005 2006 2007 2008 2009

All Medicare households

Number of consumer units (CUs),

in millions 15.5 13.8 15.2 17.4 17.5

CU size 1.4 1.4 1.4 1.4 1.4

Total expenditures $27,925 $29,013 $30,867 $31,310 $31,230

 Total health care 4,087 4,323 4,380 4,487 4,853

 Share of total expenditures (percent) 14.6 14.9 14.2 14.3 15.5

 Health insurance $2,384 $2,718 $2,898 $2,990 $3,209

 Medical services 735 676 676 718 830

 Prescription drugs 848 770 679 650 680

 Medical supplies 120 159 127 130 134

 Shares of total health care (percent)

 Health insurance 58.3 62.9 66.2 66.6 66.1

 Medical services 18.0 15.6 15.4 16.0 17.1

 Prescription drugs 20.7 17.8 15.5 14.5 14.0

 Medical supplies 2.9 3.7 2.9 2.9 2.8
3

 C U R R E N T P R I C E T O P I C S

Table 1. Average annual health care expenditures and shares of health care expenditures 

for Medicare households 65 and older, by age of reference person, Consumer

Expenditure Interview Survey, 2005–2009—Continued

Item 2005 2006 2007 2008 2009

Medicare households,

ages 65–74 years

Number of consumer units (CUs),

in millions 7.0 6.1 6.7 7.7 7.9

CU size 1.5 1.5 1.5 1.5 1.5

Total expenditures $31,802 $31,433 $33,582 $34,621 $35,165

 Total health care 4,060 4,426 4,538 4,711 4,875

 Share of total expenditures (percent) 12.8 14.1 13.5 13.6 13.9

 Health insurance $2,413 $2,804 $2,973 $3,121 $3,261

 Medical services 676 712 678 752 793

 Prescription drugs 856 748 734 700 678

 Medical supplies 115 161 154 137 143

 Shares of total health care (percent)

 Health insurance 59.4 63.3 65.5 66.3 66.9

 Medical services 16.7 16.1 14.9 16.0 16.3

 Prescription drugs 21.1 16.9 16.2 14.9 13.9

 Medical supplies 2.8 3.6 3.4 2.9 2.9

Medicare households,

ages 75 and older

Number of consumer units 

(CUs), in millions 8.5 7.6 8.5 9.6 9.6

CU size 1.3 1.4 1.4 1.4 1.4

Total expenditures $24,728 $27,065 $28,722 $28,644 $27,965

 Total health care 4,108 4,240 4,254 4,308 4,835

 Share of total expenditures 

 (percent)

16.6 15.7 14.8 15.0 17.3

 Health insurance $2,360 $2,648 $2,839 $2,884 $3,165

 Medical services 783 647 675 691 861

 Prescription drugs 840 787 636 609 682

 Medical supplies 125 158 105 123 126

 Shares of total health care 

 (percent)

 Health insurance 57.4 62.5 66.7 66.9 65.5

 Medical services 19.1 15.3 15.9 16.0 17.8

 Prescription drugs 20.5 18.6 14.9 14.1 14.1

 Medical supplies 3.0 3.7 2.5 2.9 2.6
over 72 percent of all Medicare enrollees were 

in Part D plans. This consisted of about 38 

percent of enrollees in stand-alone prescription drug plans, about 20 percent in Medicare 

Advantage prescription drug plans, and about 

15 percent with retiree drug-subsidy coverage. Of the remaining Medicare enrollees, 18 

percent had other drug coverage and around 

10 percent had no drug coverage.6

Since the second quarter of 2006, the Consumer Expenditure Interview Survey has 

asked respondents whether they—or any 

other household members—are enrolled in 

a Medicare Part D Prescription Drug Plan and 

the monthly premium payment for this coverage. It should be noted that this question 

elicits information about stand-alone preHealth care component shares changed 

between 2005 and 2009. For all Medicare 

households, the proportion of out-of-pocket 

health care spending represented by prescription drugs declined from 20.7 percent in 2005 

to 14.0 percent in 2009, while health insurance premiums went from 58.3 percent of 

out-of-pocket health care spending in 2005 to 

66.6 percent in 2008, ending at 66.1 percent 

in 2009. (See chart 1.) The proportion of the 

health care budget represented by medical 

services and by medical supplies showed no 

consistent pattern.

Part D coverage

Data from the Centers for Medicare and Medicaid Services indicate that in 2009, slightly 

4

 C U R R E N T P R I C E T R E N D S

0

10

20

30

40

50

60

70

80

2005 2006 2007 2008 2009

Health insurance Prescription drugs

SOURCE: U.S. Bureau of Labor Statistics

Percent

Chart 1. Average health insurance and prescription drug shares of total 

health care spending by Medicare households, 2005–2009
scription drug plans only. This is because the 

cost of prescription drug coverage is included 

in the overall premiums paid by Medicare 

Advantage enrollees and by Medicare enrollees with retiree drug-subsidy coverage. All 

respondents, however, provide information 

about out-of-pocket spending on prescription 

drugs.

The proportion of Medicare households having one or more members with a Medicare 

Part D stand-alone plan jumped from 12 percent in 2006 to 37.4 percent in 2009; similar 

patterns were found for the two subgroups 

(reference person 65–74 and reference person 

75 years and older). Among enrolled households, the average annual premium paid 

went from $348 in 2006 to $648 in 2009, with 

similar increases for the two age groups. (See 

table 2.) 

Research by the Kaiser Family Foundation 

has found that between 2006 and 2009, the 

weighted average individual premium for 

stand-alone prescription drug plans increased 

35 percent, from $25.93 to $35.09 per month.7

Conclusion

Among Medicare households, the combined 

share of the health care budget represented 

by prescription drugs and health insurance 

premiums changed little between 2005 and 

2009.  The reason was that the decline in the 

share of the health care budget accounted 

for by prescription drugs was offset by an 

increase in the share accounted for by healthinsurance premiums. Between 2006 and 2009, 

the proportion of Medicare households with 

at least one member with Part D stand-alone 

coverage increased substantially. Among 

5

 C U R R E N T P R I C E T R E N D S

Table 2. Percent of Medicare households 65 years and older enrolled in Medicare Part D 

stand-alone plans and annual premiums paid, by age of reference person,

Consumer Expenditure Interview Survey, 2006–2009

Item 2006* 2007 2008 2009

One or more members enrolled in

Medicare Part D (percent)

All Medicare households 12.0 15.6 36.5 37.4

65–74 years 12.3 16.4 33.9 37.0

75 years and older 12.0 14.8 37.9 37.5

Average annual Part D premium

per enrolled household

All Medicare households $348 $535 $610 $648

65–74 years 352 546 625 657

75 years and older 344 526 600 641

*2006 data are annualized 
covered households, Part D premiums steadily 

increased over the period.8

As CE data from 2010 and beyond become 

available, these data can be used to assess the 

impact of provisions in the Affordable Care 

Act (ACA) of 2010 that will affect the outof-pocket health care expenses of Medicare 

beneficiaries. Two provisions, effective January 1, 2011, are designed to achieve Medicare 

Program cost savings by increasing premiums 

for beneficiaries at higher income levels.9 

 C U R R E N T P R I C E T R E N D S

6

The ACA also contains provisions designed 

to make drug coverage more affordable for 

Medicare Part D enrollees. One such provision 

is the $250 rebate to those enrollees who had 

out-of-pocket spending in the Part D coverage gap in 2010.10

Questions? Please contact Ann C. Foster by 

phone, (202) 691-5174 or by email, foster.

ann@bls.gov or Craig J. Kreisler by phone,

(202) 691-5123 or by email, kreisler.craig@

bls.gov. 

Notes

1 In 2008, Medicare covered 60 percent of the health care costs of the civilian noninstitutionalized population 65 and over, compared 

with 6.5 percent for those under 65. In contrast, private insurance covered 15.2 percent of seniors’ health care costs, compared with 

54.6 percent for those under 65. For more information, see David Kashihara and Kelly Carper, “National Health Care Expenses in 

the U.S. Civilian Noninstitutionalized Population, 2008,” Statistical Brief no. 301, U.S. Department of Health and Human Services, 

Agency for health care Research and Quality, December 2010, available online at http://www.meps.ahrq.gov/mepsweb/data_files/

publications/st301/stat301.pdf. 

2For more information, see 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary Medical Insurance Trust Funds, Centers for Medicare and Medicaid Services, Baltimore, MD, May 13, 2011, available 

online at http://www.cms.gov/ReportsTrustFund/downloads/tr2011.pdf. 

3

 A consumer unit is defined as (1) all members of a particular household who are related by blood, marriage, adoption, or other legal

arrangement, such as foster children; (2) a financially independent person living alone, sharing a housing unit with others, or living

as a roomer in a private home, lodging house or permanently in a hotel or motel; or (3) two or more persons living together who pool

their incomes to make joint expenditures. For more information, see BLS Handbook of Methods, Chapter 16, “Consumer Expenditures and Income” available online at http://www.bls.gov/opub/hom/pdf/homch16.pdf. Although consumer unit is the proper technical term for the purposes of the Consumer Expenditure Surveys, it is often used interchangeably with “household” for convenience. 

Because household is more familiar to most people, it is used in this article instead of “consumer unit.” 

4

 The reference person is the first household member mentioned by the respondent when asked to “Start with the name of the person

or one of the persons who owns or rents the home.”

5Expenses by Medicare households with a reference person under 65 have been examined in other studies using the same CE database. For more information, see Ann C. Foster and Craig J. Kreisler, “Health Care Spending by Medicare Households: Part D 

Prescription Drug Coverage and Beyond,” paper presented at the Population Association of America 2011 Annual Meeting, April 2, 

2011, available online at http://paa2011.princeton.edu/sessionViewer.aspx?SessionId=416&wwparam=1302186623.
7

 C U R R E N T P R I C E T R E N D S

Notes—Continued

6Stand-alone prescription drug plans offered by insurance companies and other private companies approved by Medicare, add prescription drug coverage to traditional Medicare. Medicare Advantage plans provide Part A (Hospital Insurance) and Part B (Medical

Insurance) benefits found in the traditional fee-for-service Medicare program, as well as other benefits such as prescription drug,

vision, and hearing. The retiree drug subsidy is an option where Medicare subsidizes a portion of the drug expenses of qualifying 

employer-sponsored retiree health plans. Other drug coverage includes Department of Veterans Affairs coverage, retiree plans without retiree drug subsidies, employer plans for active workers, and coverage for federal workers and members of the military. For more 

information, see 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary 

Medical Insurance Trust Funds. In comparison, a nationwide survey of noninstutionalized Medicare beneficiaries found that in 2003,

27 percent of beneficiaries age 65 and older had no prescription drug coverage. For more information, see Dana Gelb Safran et al.,

“Prescription Drug Coverage And Seniors: Findings From A 2003 National Survey,” Health Affairs, Web Exclusive (April 19, 2005):

W5-160, available online at http://www.kff.org/medicare/med041905pkg.cfm. 

7

 For more information, see Patricia Neuman and Juliette Cubanski, “Medicare Part D Update — Lessons Learned and Unfinished

Business,” The New England Journal of Medicine, Volume 361, Number 4, July 23, 2009, pp. 406-414, available online at http:

www.nejm.org/doi/full/10.1056/NEJMhpr0809949.

8An important question that CE data cannot address is whether implementation of Medicare Part D has resulted in an improved 

quality of care and better health outcomes by increasing the use of needed medications and reduction in preventable and costly medical events. Some studies have shown an increase in medication use attributable to Part D coverage and some decline in the rates of 

cost-related noncompliance. However, other studies have found a decline in medication adherence after Part D enrollees reach their 

policy’s coverage gap (after which they are responsible for 100 percent of prescription costs). For more information about these studies, see “Medicare Part D Update — Lessons Learned and Unfinished Business,” Ibid.

9

 The first provision increases the number of beneficiaries subject to the income-related premium under Medicare Part B (Medical

Insurance) by eliminating the index on income thresholds established under prior law. The second provision imposes a new incomerelated premium, with no index for inflation, on beneficiaries enrolled in Medicare Part D. For more information, see “IncomeRelating Medicare Part B and Part D Premiums: How Many Medicare Beneficiaries Will Be Affected?” (Issue Brief) Washington,

DC: Kaiser Family Foundation, December 2010, available online at http://www.kff.org/medicare/8126.cfm. 

10 For information about other Affordable Care Act (ACA) provisions designed to make prescription drug coverage more affordable

for Part D enrollees, see Janet Lundy “Prescription Drug Trends,” (Fact Sheet) Washington, DC: Kaiser Family Foundation, May

2010, available online at http://www.kff.org/rxdrugs/upload/3057-08.pdf.