Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
On July 30, the Centers for Medicare and Medicaid Services (CMS) released preliminary data from insurer bids on the costs of their plans for Medicare Part D, and added a new, three-year “premium stabilization” demonstration for stand-alone prescription drug plans (PDPs) in Part D (but not Medicare Advantage prescription drug plans). This “premium stabilization” represents a massive bailout to insurers to paper over the increased costs of the Inflation Reduction Act (IRA). The IRA’s redesign of Part D has caused insurer bids to nearly triple. Below, I’ll explain how the changes to Part D in the IRA caused insurer bids to spike and how the Biden administration is using billions of taxpayer dollars to cynically bail out insurers to buy down seniors’ premiums just months before an election.
The IRA included major changes to the Part D program, including a cap on total out-of-pocket costs at $2,000 per year starting in 2025 (see Figures 1 and 2 for a comparison of the old and new Part D designs). As a result of the Part D redesign, there are now three phases for coverage: A deductible phase in which the beneficiary is responsible for 100 percent of the costs until the deductible is reached; an individual coverage phase in which the plan is responsible for 75 percent of the cost and the beneficiary is responsible for 25 percent; and a catastrophic phase after the beneficiary hits $2,000 in out-of-pocket costs. Once the catastrophic phase kicks in, 60 percent of costs are covered by the plan, 20 percent by Medicare for brand-name drugs and biologics (40 percent for generic drugs), and 20 percent by the manufacturer of the brand-name drug or biologic. Additionally, the IRA built in direct increases in federal subsidies to Part D premiums to cap growth in the base beneficiary premium at 6 percent annually. The base beneficiary premium is calculated by CMS and is not the actual premium beneficiaries pay but is used by insurers to calculate plan premiums.
The bottom line: The IRA’s provisions significantly increase insurers’ financial liabilities. What do insurers do when the costs of their plans go up? They raise premiums, of course. We don’t know yet what premiums will be in Part D but, we do know they will jump because the average bid submitted by plans for stand-alone PDPs has skyrocketed from $64.28 in 2024 to $179.45 in 2025 – and roughly 25 percent of the increase will be borne by beneficiaries and 75 percent borne by taxpayers.
The government’s average direct subsidy for stand-alone PDPs will now shoot up from $29.58 in 2024 to $142.67 in 2025. CMS claims that a large increase in the premium subsidy was expected – which is true – and that this isn’t so much an increase in government subsidies as it is moving money that would previously have been spent by Medicare on the catastrophic care phase in the form of government reinsurance payments. However, the Congressional Budget Office estimated in 2023 that the IRA’s changes to Part D’s structure will increase the federal deficit overall, mainly due to increased federal subsidies, premium stabilization efforts, and increased drug utilization by beneficiaries – all of which are in large part caused by the $2,000 cap. This could have been avoided with a higher out-of-pocket cap. The original bipartisan Part D redesign had a cost cap of $3,100, which would have limited both premium increases and taxpayers’ liability. It’s worth noting that former CBO director Doug Holtz-Eakin estimates that less than three percent of Medicare beneficiaries were facing out-of-pocket costs greater than $2,000. So instead under the partisan IRA, Part D premiums have been driven much higher
Fearing the premium increases that the IRA redesign will impose on Part D plans, CMS has now launched a new voluntary, nationwide demonstration program that is neither a demonstration nor voluntary. Unlike this massive subsidization scheme, demonstrations are supposed to be limited in nature and test alternative features of program design. As a result of the IRA changes, insurers that don’t participate are expected to either be uncompetitive from a price perspective or face significant losses – hardly a choice for insurers.
Due to what CMS calls “variation” in insurer bid amounts (and what we here at Paragon call “massive increases in costs due to poor policy choices”), CMS is doing three things to reduce liability for insurers and beneficiaries and foist costs onto taxpayers:
Together, these three components represent a massive transfer of taxpayer resources to insurers to compensate them by tamping down increases in Part D premiums.
The risk corridor changes are the most technically complex component of the demonstration. Risk corridors in Part D are essentially caps on both profits and losses for plans. When a plan’s revenue rises a certain percentage above the expected target (reflected by the plan’s bid), the government takes a specified percentage of the profit. Similarly, when revenue is a certain percentage below the expected target, the government will cover some of the losses. Figure 3 demonstrates how the current and new risk corridor designs compare when it comes to costs as a percentage of the bid:
Let’s call this what it is: An election-year bailout of insurers to avoid politically damaging premium increases in a vital program for seniors. This isn’t Congressionally approved and isn’t funded. This is unilateral action taken by the Biden administration at the last minute to avoid ugly headlines about massive Part D premium increases. CMS has yet to release any cost estimates, but some back-of-the-envelope math puts the cost over three years well in excess of $10 billion for a demonstration.
For comparison, a previous abuse of this demonstration authority occurred during the Obama Administration, when one demonstration cost an estimated $8.3 billion over three years. That demonstration was more expensive than the previous 85 demonstrations combined and was constructed to offset cuts that the Affordable Care Act made to Medicare Advantage plans before the 2012 election. It was even denounced as illegal by the Government Accountability Office. This new insurer bailout using demonstration authority will likely blow that one out of the water
How will CMS get the money for this without Congressional approval? Medicare funding is classified as mandatory spending, meaning its funding is essentially an open faucet that doesn’t need Congressional authorization. Demonstrations are supposed to be budget neutral and done with the input of experts – small experiments that help us test out ways to make Medicare better and more sustainable, not cover up bad policy at taxpayer expense. The Biden administration championed poor policy two years ago and now wants taxpayers to bail them and insurance companies out in an election year. So far, the only thing they’re demonstrating is how to whitewash failed policy by pillaging taxpayer dollars.
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