BACKGROUND: Little information exists about the consequences of limits on prescription-drug benefits for Medicare beneficiaries. METHODS: We compared the clinical and economic outcomes in 2003 among 157,275 Medicare+Choice beneficiaries whose annual drug benefits were capped at 1,000 dollars and 41,904 beneficiaries whose drug benefits were unlimited because of employer supplements. RESULTS: After adjusting for individual characteristics, we found that subjects whose benefits were capped had pharmacy costs for drugs applicable to the cap that were lower by 31 percent than subjects whose benefits were not capped (95 percent confidence interval, 29 to 33 percent) but had total medical costs that were only 1 percent lower (95 percent confidence interval, -4 to 6 percent). Subjects whose benefits were capped had higher relative rates of visits to the emergency department (relative rate, 1.09 [95 percent confidence interval, 1.04 to 1.14]), nonelective hospitalizations (relative rate, 1.13 [1.05 to 1.21]), and death (relative rate, 1.22 [1.07 to 1.38]; difference, 0.68 per 100 person-years [0.30 to 1.07]). Among subjects who used drugs for hypertension, hyperlipidemia, or diabetes in 2002, those whose benefits were capped were more likely to be nonadherent to long-term drug therapy in 2003; the respective odds ratios were 1.30 (95 percent confidence interval, 1.23 to 1.38), 1.27 (1.19 to 1.34), and 1.33 (1.18 to 1.48) for subjects using drugs for hypertension, hyperlipidemia, and diabetes. In each subgroup, the physiological outcomes were worse for subjects whose drug benefits were capped than for those whose benefits were not capped; the odds ratios were 1.05 (95 percent confidence interval, 1.00 to 1.09), 1.13 (1.03 to 1.25), and 1.23 (1.03 to 1.46), respectively, for subjects with a systolic blood pressure of 140 mm Hg or more, a serum low-density-lipoprotein cholesterol level of 130 mg per deciliter or more, and a glycated hemoglobin level of 8 percent or more. CONCLUSIONS: A cap on drug benefits was associated with lower drug consumption and unfavorable clinical outcomes. In patients with chronic disease, the cap was associated with poorer adherence to drug therapy and poorer control of blood pressure, lipid levels, and glucose levels. The savings in drug costs from the cap were offset by increases in the costs of hospitalization and emergency department care.