aged and disabled medicare enrollees will spend an estimated $ 310 per person for outpatient prescription drugs in 1987 . mean spending is expected to rise to $ 342 in 1988 and to $ 432 in 1991 under current - law assumptions ( that is , without considering the effects of proposed coverage of prescription drug spending by the medicare program or of any other proposed caps on out - of - pocket health expenditures ) . spending for prescription drugs has increased more than can be explained merely by price inflation . for example , aged users of prescription drugs spent an average of $ 96 in 1977 , according to the current medicare survey for that year ( grindstaff , hirsch , and silverman , 1981 ) . had the average changed by no more than the growth in the prescription drug component of the consumer price index ( cpi ) , that figure would reach $ 240 in 1987 . in fact , however , there is considerable evidence of trends for the aged population in the number of prescriptions per capita and in the  real  ( cpi - adjusted ) cost per prescription , both of which raise the rate of growth in spending for drugs . not only has the mean level of expenditure increased ( due to price and use changes ) ; the variance (  spread  ) has increased commensurately , although the overall shape of the distribution has remained the same . consequently , correct modeling of prescription drug spending must take into account trends in price , use , and distribution of that spending . the purpose of this article is to present current - law estimates of prescription drug spending by medicare enrollees . the derivation of use per capita and of cost per prescription is shown , as is the development of a distribution of that spending . the mean and distribution of expenditure are used to estimate a premium needed to cover the cost of that expenditure . the problem of estimating drug spending is compounded by the absence of recent surveys on the subject . subsequent to the last of the current medicare surveys in 1977 , the national medical care utilization and expenditure survey ( nmcues ) in 1980 and the consumer expenditure surveys of 1982 through 1984 measured health expenditures . other surveys addressed some facets of health spending or some facets of health care delivery . consequently , the estimates presented in this article are the product of a piecing together of information found in a variety of other surveys , rather than the results of a direct survey of drug spending . however , the results of the process are , by their nature , consistent with most other estimates of drug expenditure . medicare hospital insurance pays for almost all prescription drugs when they are furnished to beneficiaries confined to a hospital or skilled nursing facility , but these prescription drugs are not counted in this article . however , prescription drugs given by physicians to supplementary medical insurance beneficiaries who are outpatients or who are patients in nursing homes are counted . prescriptions include those filled or refilled by registered pharmacists in retail drug stores or hospital clinics and those dispensed in person or by telephone by physicians , with or without charge ( grindstaff , hirsch , and silverman , 1981 ) . the number of prescriptions per capita for medicare enrollees was estimated for each of six groups : aged institutionalized , four age cohorts of the noninstitutionalized aged population ( ages 65 - 69 , 70 - 74 , 75 - 79 , and 80 or over ) , and the ( nonaged ) disabled . prescription rates for the aged population are based on results from the current medicare survey ( cms ) , which provided annual estimates of spending in calendar years 1967 through 1977 . the cms covered a random sample of institutionalized and noninstitutionalized enrollees and elicited information on covered and noncovered medical goods and services consumed ( excluding inpatient care ) . the first step in estimating prescription rates was to establish a relationship between use by institutionalized and noninstitutionalized aged enrollees . published data for 1973 show that the institutionalized used twice as many prescriptions per capita on average as did the noninstitutionalized ( deacon , 1977 ) . in the absence of any published information to the contrary ( the institutionalized population has not been surveyed since termination of the cms in 1977 ) , that relationship was assumed to be constant over time . the second step in estimating prescription rates was to establish relative use among the noninstitutionalized population . because published cms data included only two age breaks , data from a report on the 1980 nmcues were used ( lavange and silverman , 1987 ) . it was assumed that relative use of drugs among the age cohorts of the noninstitutionalized population was invariate over time . the 1980 use rates were adapted to the 1973 noninstitutionalized total through use of population estimates and the assumption of relative invariance of use over time among cohorts . the third step in the estimation of use per capita for the aged was to establish figures for the 1967 - 77 period . because the cms had already generated estimates of aggregate prescriptions per capita , this step merely disaggregated that overall average into the various subgroups ( institutionalized , and noninstitutionalized aged 65 - 69 , 70 - 74 , 75 - 79 , and 80 years or over ) . once again , this was done by using population estimates and assuming the constance of relative use rates over time . the fourth step in estimating prescription rates was to extend the 1977 figures through 1980 , using data from the 1977 cms , the 1977 national medical care expenditure survey ( nmces ) , and the 1980 nmcues . nmces and nmcues both understated actual experience during their respective years , and it was necessary to inflate the estimates of prescription rates produced from them to conform to the results of the more representative cms figures . to do so , relationships among the three surveys were compared with independent estimates of outpatient prescription drug sales for the total population ( trapnell and genuardi , 1987 ) . as a result of the comparison , the fifth step in the process of estimating use per capita was to derive figures for 1980 - 85 . although there have been no surveys of the population concerning drug use since 1980 , the national ambulatory care survey ( namcs ) did survey office - based physicians in 1980 and again in 1985 to determine characteristics of drug use ( koch , 1982 , 1987 ) . the namcs figures are for drug  mentions ,  which cover drugs prescribed or provided during a physician office visit ( about 80 percent of which involve prescription drug use as defined in this article ) . drugs provided or prescribed during other contacts ( telephone , hospital visit , nursing home visit , etc . ) are excluded . growth in drug mentions , adjusted for population growth , was used to extend prescription rates after 1980 ; the 1.7 percent annual rate was slightly lower than a figure for the 1981 - 86 period established by similar estimates from the national diagnostic and therapeutic index . finally , prescription rates were carried forward from 1985 . in the absence of more recent data , the trend established between 1973 and 1985 was used to project prescription rates under current - law assumptions . the resulting time series , covering 1967 through 1991 , shows rapid growth in use per capita between 1967 and 1973 , and more moderate growth since that time ( figure 1 ) . rates for the disabled population were based on a tabulation of the 1977 nmces file . in that tabulation , prescription rates were calculated for aged medicare enrollees and for nonaged medicare enrollees ; the latter group was presumed to be disabled . disabled people were found to use about 30 percent more prescriptions than noninstitutionalized aged use , a factor that was assumed to hold constant over time . estimating cost per prescription for medicare enrollees was done using methods parallel to those used to estimate prescriptions per capita . during the first years of the analysis , cms data were available to estimate cost per prescription for the aged ( grindstaff , hirsch , and silverman , 1981 ) . estimates for five subgroups of the aged ( institutionalized , and noninstitutionalized aged 65 - 69 , 70 - 74 , 75 - 79 , and 80 years or over ) were controlled to the cms aggregate figure for years 1967 through 1977 using population , estimated prescription rates developed with the methodology described above , and relative cost per prescription for the subgroups . ( relative cost per prescription was held constant at factors determined by the 1973 cms study [ deacon , 1977 ] and nmcues data for the noninstitutional population [ lavange and silverman , 1987 ] . subsequent to 1977 , two methods were used to estimate cost per prescription . from 1977 through 1986 , data from the national prescription audit conducted by ims america were used to stand for the growth rate for cost per prescription for each of the aged subgroups . then cost per prescription was deflated by the prescription drug component of the consumer price index ( cpi - rx ) ( figure 2 ) . forecasted values of the cpi - rx through 1991 were combined with an extension of the observed trend in the deflated cost per prescription to arrive at a nominal ( current - dollar ) cost for the aged population . the disabled population was assumed to have the same cost per prescription as did the aged population . once prescriptions per capita and cost per prescription were estimated , it was a simple matter to weight each group 's expenditure by an enrollment count to arrive at an aggregate figure for expenditure per medicare enrollee ( table 1 ) . enrollment subsequent to 1985 was estimated : the number of disabled enrollees was held constant , while the proportion of the aged population enrolled in medicare parts a or b was assumed to increase from 97.5 percent in 1985 to 98.0 percent in 1991 . national health expenditure ( nhe ) estimates of drug spending are published by the health care financing administration ( hcfa ) for years 1965 through 1986 , with projections through the year 2000 ( lazenby , levit , and waldo , 1986 ; health care financing administration , 1987 ) . the published figures combine prescription drugs with nonprescription drugs and medical sundries and represent spending for the entire population . the nhe estimates of spending for drugs and sundries are based mainly on personal consumption expenditures ( pce ) for medical nondurables , published by the commerce department 's bureau of economic analysis ( bea ) as part of the gross national product ( gnp ) . pce levels are adjusted to remove estimated payments through medicaid and other transfer - type programs , and hcfa 's estimate of government spending is added to arrive at the nhe level . there are two reasons why the growth in the nhe figures for consumption of drugs and sundries is not a good proxy for that of medicare enrollees ' spending for prescription drugs . first , the growth of nhe for drugs and sundries understates that of prescription drug spending . this , in turn , stems from the composition of the nhe figure and from the technique by which the pce estimate ( on which it is based ) is calculated . nhe includes nonprescription drugs and drug sundries , consumption of which has grown more slowly than has consumption of prescription drugs . according to the census bureau 's quinquennial census of retail trade , prescription drug sales through drug stores and grocery stores grew at an annual rate of 12.8 percent between 1977 and 1982 ( the most recent period available ) , one - half a percent per year faster than growth of total retail sales of the broader  drugs , health aids , and beauty aids  ( u.s . in addition , the techniques used to extrapolate pce from the quinquennial census base tend to underestimate the growth of prescription drug spending . pce for drugs and sundries ( which , like nhe , includes more than just prescription drugs ) grew at an average annual rate of 9.3 percent between 1977 and 1982 , clearly less than the 12.8 percent growth or retail prescription drugs . consequently , the nhe figures for drugs and drug sundries understate the growth in spending for prescription drugs alone . a second reason why the nhe series can not serve as a proxy for growth in spending for drugs by the aged is that the aged population appears to have a different trend in consumption of drugs than does the rest of the population . data from the 1980 and 1985 namcs show a decline in drug mentions per capita for the total population and for the population under age 65 , while those for the aged population increased over the same period . from the standpoint of program expenditures , it is just as important to know the distribution of spending as it is to know the mean expenditure . the proportion of enrollees who spend more than a given amount per year and the amount spent by those enrollees are essential pieces of information in the calculation of program costs . the probability of a value x occurring is : where the arithmetic mean and variance of the distrubution are : a nonlinear least - squares fit of interval frequencies for each of the years 1967 through 1977 ( grindstaff , hirsch , and silverman , 1981 ) yields estimates of the two parameters of the gamma distribution . the values of b appear to be constant over time , and the average value of b from the 1967 - 77 regressions has been carried forward through time . values for a , the scale factor , have been determined by the value of b and the arithmetic mean ; in this way , the distribution for any given year will be centered on the average expenditure per enrollee . the gamma distribution is not defined when x = 0 , so that the distribution applies only to users of prescription drugs . evidence from cms , nmces , and nmcues suggest that the user rate has stabilized at about 78 percent since 1977 . knowledge of the mean and distribution of spending for prescription drugs allows one to calculate the current - law cost per enrollee of that spending over and above any given annual amount . to do first , one needs to know the proportion of users who exceed the annual spending limit . this is found by integrating the gamma function from the annual limit through infinity : where f(x ) is the gamma density function . the second piece of information needed is the proportion of expenditures over the given annual amount : third , one needs to know the proportion of enrollees who are users of prescription drugs . as explained earlier , it is assumed in this article that 78 percent of enrollees are users . these three pieces are then combined to determine the monthly cost per enrollee were expenditures over the deductible spread over all enrollees ( users or not ) . if m is the average expenditure per user and p is the proportion of enrollees who are users , then the monthly cost per enrollee of expenditures in excess of k dollars per year is : the data in table 2 show these monthly costs for a number of alternative deductibles . by their nature , the current - law estimates shown in table 2 do not measure the full cost of proposed medicare coverage of prescription drugs : they exclude administrative costs and changes in consumption that would occur due to enactment of the proposed coverage . based on a review of the literature , ginsburg and curtis ( 1978 ) suggested that a sensible range for the increase in demand caused by going from no insurance to full insurance coverage would be 50 to 150 percent . elasticities ( with physician services , for example ) is still debated , as is the extent to which prescription drugs complement or substitute for other medical goods and services . the price of a good or service historically has risen when third - party coverage is introduced , which could raise program costs . on the other hand , the net effect of all these factors , although important to the ultimate decision regarding proposed coverage of drug spending , is outside the scope of this article .
legislation proposed in the 100th congress and debated during the summer of 1987 would cover prescription drug spending by medicare enrollees after the enrollee had met a deductible . 
 however , at the time that the legislation was proposed , there were no comprehensive estimates of the extent of current expenditures for prescription drugs by that population , nor of the expected cost of the proposed coverage.in this article , the author estimates  current - law 
 drug spending by medicare enrollees . 
 a distribution around the average expenditure is developed , demonstrating the proportion of users that exceed any given annual expenditure and the proportion of total expenditures comprised by spending in excess of that  deductible .