SOTU Call to Action, Part D in Crisis, Key FDA Reforms, and More

It’s the day after the State of the Union, and I’ll be spending the day at Magic Kingdom with my youngest children. But like the rest of the Paragon team, I stayed up late last night to watch President Trump’s lengthy address to Congress and the nation.

I open today’s newsletter with our reaction to the president’s health policy comments. I then discuss four products Paragon generated over the past week: 1) a Prognosis on the Part D premium and spending explosion caused by misguided Biden-era policies; 2) important FDA reforms to streamline the regulatory process and reduce drug costs for Americans; 3) a Paragon Bill Spotlight on important Indiana legislation to implement key provisions of the One Big Beautiful Bill (OBBB); and 4) a comment letter in response to a Request for Information from the Department of Health and Human Services (HHS) on health care AI.

Health Policy in the State of the Union

Last night, President Trump criticized public policies that have put health insurance companies and their bureaucracies at the center of our health care system through massive subsidies that caused insurance stock prices to soar while health care grew less affordable. Too many government programs and policies simply take money away from working families to enrich the health care industrial complex.

In January, President Trump put forward The Great Healthcare Plan, which includes several key components. One of the main points of emphasis is empowering patients rather than insurance companies. Redirecting government subsidies toward funding people rather than routing dollars through insurers is the correct direction. One practical reform that Paragon developed would allow individuals to take their cost-sharing reduction subsidy as a Health Savings Account contribution rather than as a payment to insurers. That shift would empower consumers directly and reduce the extent to which government dollars simply flow through insurers.

The president also urged Congress to codify the important price transparency rules from his first term. As I discussed in a 2019 paper for the Galen Institute, transparency helps consumers shop, enables employers to implement smarter benefit designs like reference pricing, allows employers to monitor insurer performance, and exposes outrageously high prices to public scrutiny.

President Trump also addressed a real and longstanding problem in American health care: Americans pay far more for branded drugs than what patients in other wealthy countries pay. While this has meant earlier access to the latest therapies, it also means that U.S. patients shoulder a disproportionate share of global pharmaceutical research and development costs.

In his speech, President Trump promoted the Most Favored Nation (MFN) deals his administration has negotiated with 16 drug manufacturers. The president pointed out an American in the audience who benefited from markedly lower-priced medications available on TrumpRx.

The president called on Congress to codify his MFN policies. Applying MFN pricing to new drugs going forward would allow manufacturers to set launch prices in the U.S. while strengthening their leverage abroad—because any foreign price concessions would be matched in the U.S. Properly structured, this approach should reduce international pricing disparities while protecting innovation that leads to new cures and therapies.

While the nation and president are understandably focused on affordability, it’s crucial to recognize that drug prices are not the primary driver of high health care costs. The dominant source of high and rising health care costs is hospital pricing. Paragon will release forthcoming work examining how government policies protect inefficient hospitals, incentivize consolidation, and contribute to escalating prices.

The president also announced a War on Fraud, which will be led by Vice President Vance. There are hundreds of billions of dollars annually in waste, fraud, and abuse in federal health care programs. The Trump administration has already taken important steps to address enrollment fraud in Medicaid and Obamacare, but much more work needs to be done. The president’s emphasis on tackling fraud is a welcome change from the policies pursued during the Biden administration.

New Prognosis: The IRA’s Part D Redesign Is Raising Premiums and Federal Costs

A few years in, the Inflation Reduction Act—signed by President Biden in 2022—looks more like the Part D Inflation Act. As Jackson Hammond and Ryan Long detail in a new Paragon Prognosis, the law’s Medicare Part D redesign is driving higher premiums and significantly increasing federal spending.

The IRA’s headline feature is a new $2,000 annual cap on beneficiary out-of-pocket drug spending. While that cap lowers costs for some seniors with high drug expenses, it has proven extremely costly to taxpayers. The effective cap is far below $2,000 because beneficiaries can reach it with relatively little true out-of-pocket exposure if manufacturer discounts and other design features are interpreted—as the Biden administration did—as counting toward the threshold, as economist Ben Ippolito has shown. The redesign—and the Biden administration’s politically-timed bailout of insurers via a “demonstration” program—substantially increased premiums and exploded federal government spending.

As Figure 1 from the Prognosis shows, once the IRA’s Part D redesign was fully implemented in 2025, federal outlays accelerate, with CBO’s updated baseline projecting significantly higher Part D spending than it projected two years ago.

Figure 4 illustrates the mechanism behind that increase: while base beneficiary premiums have remained relatively stable, the federal subsidy portion of plan bids rises dramatically beginning in 2025, reflecting the IRA’s shift of liability to taxpayers and the resulting surge in government payments to plans.

Part D was long considered a well-designed government program that relied on competition and plan incentives to restrain costs. The IRA’s redesign weakens those incentives—raising federal spending, inflating subsidies, and obscuring the true cost of the new out-of-pocket cap.

FDA Reforms: Expanding OTC Access and Streamlining Drug Approval

As Ryan Long explains in a recent Prognosis, the FDA has taken important steps to modernize the process for prescription drugs to move over-the-counter—the Rx-to-OTC pathway—so that patients can access safe and effective drugs without the hassle of a prescription. Moving eligible therapies to OTC status is more convenient, reduces unnecessary physician visits, and lowers system-wide costs. For patients managing common, straightforward conditions, OTC availability empowers self-care and shifts treatment toward lower-cost channels without expanding government spending.

Separately, the FDA has announced that it will generally require only one well-controlled clinical trial—rather than multiple—to support approval of new drugs when scientifically appropriate. The long-standing multiple-trial default often duplicated costs and extended development timelines without meaningfully improving evidentiary rigor. Allowing a single robust study, supported by confirmatory or mechanistic evidence, can reduce development costs, shorten time to market, and encourage more innovation while maintaining safety and efficacy standards.

Together, these reforms reflect a more rational regulatory framework—one that improves access and affordability by aligning oversight with modern science and analytical tools rather than outdated process requirements.

Bill Spotlight: Indiana Senate Bill 1 to Implement OBBB’s Medicaid Reforms

Paragon’s Bill Spotlight is a new product that highlights legislative proposals that advance market-oriented health reforms and strengthen program integrity at the state and federal levels. The first installment of this series, authored by Niklas Kleinworth, examines Indiana Senate Bill 1, a comprehensive welfare reform package aimed at protecting taxpayers and improving the integrity of Medicaid and SNAP by effectively implementing key provisions contained in the One Big Beautiful Bill (OBBB).

The legislation would strengthen eligibility verification and implement OBBB’s work and community-engagement requirements—reforms that enhance fiscal discipline, reduce waste and fraud, and ensure state programs serve truly vulnerable residents. Indiana has been ahead of the curve on many of these reforms in recent years—including requiring cross-checks of federal databases for eligibility changes and cracking down on abuse of hospital presumptive eligibility. Senate Bill 1 builds on these reform efforts using the opportunities presented in the OBBB.

Paragon Submits RFI on AI and Health Care Affordability

Kev Coleman and I responded to a Request for Information from HHS on how our nation can accelerate AI adoption in clinical care. Our central message is that AI should be advanced not just as a clinical breakthrough, but as a tool to improve affordability and strengthen long-term fiscal sustainability. With national health expenditures exceeding $5 trillion and projected to outpace economic growth, AI’s potential to shift care from “detect and treat” to “predict and prevent” could materially reduce costs through earlier intervention, fraud detection, and administrative efficiency.

At the same time, we caution against regulatory overreach that could slow innovation and entrench incumbents by imposing burdens that emerging AI developers cannot reasonably meet. HHS and FDA should modernize oversight to reflect the realities of probabilistic and continuously learning systems while avoiding burdensome or duplicative requirements that slow development. A flexible, pro-innovation framework—paired with reimbursement policies that reward cost-reducing technologies—will allow AI to mature safely and benefit patients, while helping bend the health care cost curve.