CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
A
S T U D Y
SEPTEMBER 2010
Effects of Using
Generic Drugs on
Medicare’s
Prescription Drug
Spending
CBO
Pub. No. 4043
A
S T U D Y
CBO
Effects of Using Generic Drugs on
Medicare’s Prescription Drug Spending
September 2010
The Congress of the United States O Congressional Budget Office
Preface
Medicare’s outpatient prescription drug benefit for senior citizens and people with
disabilities, known as Part D, began in 2006. Part D uses private plans to provide coverage for
prescription drugs to enrollees. The federal government does not mandate the amounts that
plans pay for prescription drugs; instead, plans directly negotiate payment rates with pharma-
cies and rebates from drug manufacturers while competing with each other for enrollees. Such
competition provides incentives for plans to control their costs. One important way in which
plans seek to control costs is by encouraging the use of generic drugs. Plans can encourage
enrollees to switch from brand-name drugs to their less expensive generic equivalents, a
practice known as generic substitution. Plans can also encourage enrollees to switch from
a brand-name drug to the generic form of a different drug that is in the same therapeutic class,
one form of a practice known as therapeutic substitution.
This Congressional Budget Office (CBO) study uses data on Medicare Part D prescription
drug insurance claims from the Centers for Medicare and Medicaid Services (CMS) to assess
how successful plans have been in encouraging the use of generic drugs and the potential for
savings from the additional use of such drugs. The study was prepared at the request of the
Chairman and Ranking Member of the House Budget Committee. In keeping with CBO’s
mandate to provide objective, nonpartisan analysis, this study makes no recommendations.
The study was written by Julie Somers of CBO’s Microeconomic Studies Division under the
supervision of Joseph Kile and David Moore. Anna Cook of CBO’s Health and Huma