OBJECTIVE: To investigate the cost of asthma care for enrollees in the Medicare program and the effect of voluntary outpatient prescription drug coverage on Medicare covered asthma expenditures. METHODS: Data were drawn from the 2001 Medicare Current Beneficiary Survey, a nationally representative sample of the Medicare population, which includes data on health care expenditures and individual characteristics such as health status. Sample size was 13,998, including 1,310 persons with asthma. We used regression analysis to examine differences in expenditures between those with and without asthma, controlling for other chronic illnesses, self-rated health, age, gender, activity of daily living limitations, supplemental insurance coverage and region. We also examined whether prescription drug coverage modified the difference in expenditures among enrollees with asthma. RESULTS: Medicare beneficiaries with asthma had higher mean Part A expenditures ($4412 versus $2744), longer average hospital stays (3.53 days versus 1.82), and higher Part B expenditures ($3688 versus $2547) than those without asthma. In regression analysis, asthma increased mean Part A expenditures by $850 and Part B expenditures by $551. Outpatient prescription drug coverage decreased Part B spending on persons with asthma by $446, but increased Part B spending by $243 for those without asthma. Prescription drug coverage had no effect on either Part A expenditures or the number of days spent in the hospital for either those with or those without asthma. CONCLUSIONS: Asthma increases expenditures in the Medicare program, but the increase is moderated by outpatient prescription drug coverage. This suggests that spending increases associated with the new Medicare prescription drug benefit may be mitigated by reductions in spending on chronic illnesses such as asthma. As the new drug benefit is designed, attention should be focused on the identification of medications that reduce overall Medicare spending to insure that they are covered by drug plans.