Putting a Premium on Taxpayer Dollars – And A Lot of Taxpayer Dollars Into Premiums

Last Friday, the Centers for Medicare and Medicaid Services (CMS) released the 2025 annual premiums for Part D and Medicare Advantage (MA) plans. The topline average premiums for both programs went down. For Part D, this was a natural consequence of the billions of dollars in subsidies the Biden administration has thrown at insurers. There are also signs of deterioration in the program as standalone Part D plan offerings decreased significantly, likely a result of the Inflation Reduction Act. MA’s premium reductions came despite several expected headwinds, but the program has some key features that allow it to adapt to cost increases. Below, we’ll cover the changes, their likely causes, and what policymakers can do better.

Part D

Part D’s Premium Update

CMS projects that standalone Part D premiums for 2025 will fall from $41.63 in 2024 to $40.00 next year. The drop isn’t all that surprising: First, the IRA’s Part D changes included a “premium stabilization” mechanism that limits increases in the base beneficiary premium (an amount calculated by CMS that influences plan-specific premiums) to only 6 percent starting in 2024. Second, and more importantly, the extralegal Part D demonstration concocted by CMS back in July – whereby the agency dumped more than $5 billion into insurer pockets to paper over the negative effects of the IRA’s Part D changes – is working as intended to keep seniors’ premiums down (but government costs up, see Figure 1).

IRA Background

First, a quick recap on the key changes the IRA made to Part D that led to the demonstration. In 2024, enrollees who hit the catastrophic coverage phase no longer paid copays or coinsurance on drugs, increasing plans’ liability. Starting in 2025, the IRA caps out-of-pocket costs for Part D beneficiaries at $2,000 a year (down from $3,250) and required plans to cover significantly more (60 percent in total) of the beneficiary’s cost in the catastrophic phase (see Figure 2). The bottom line: Plans had to cover more costs. After the August 2022 passage of the IRA, insurers knew these cost increases were coming. They reacted by raising the 2024 bids by 85 percent and the 2025 bids by a further 180 percent – which in turn caused direct federal subsidies to skyrocket over the last two years. This spike in bids surprised even the Congressional Budget Office, who now say that their spending estimates for the Part D redesign undershot the cost by $10 to $20 billion. In short, the Part D redesign in the partisan IRA is costing plans – and therefore the federal government – more money, with only a marginal benefit to seniors; less than 3 percent of all Medicare beneficiaries face out-of-pocket costs greater than $2,000.

A Devious Demonstration

The revelation of much higher Part D bids in July previewed a potentially massive premium increase. In spite of the IRA’s cap on base beneficiary premiums, there was no real mechanism to keep down the actual premiums enrollees pay. At least, not for those interested in following Congressional intent or being good stewards of one of the nation’s most important entitlement programs. The Biden administration had no such compunctions. Instead, they invented a three-year “demonstration” program that will spend $5 billion in the first year alone to reduce the base beneficiary premium, cap individual premium increases to $35 a year, and make a change to complex risk corridor payments (basically caps on both profits and losses for insurers) to essentially bail out any insurer losses at higher levels than before. CMS claims that 99 percent of beneficiaries are in standalone Part D plans that are participating in the demonstration. Beyond the free taxpayer money, the high participation rate may be because many of the plans not participating just pulled out of Part D all together – the program went from 689 standalone plans participating this year to 534 next year. Even with the subsidies, it seems numerous plans determined the costs from the IRA changes were still too high, with the result being fewer choices for seniors.

Medicare Advantage

MA’s Premium Update

CMS also released 2025 premiums for MA plans. The majority of Medicare enrollees are in MA – a projected 35.7 million in 2025, up from 32.8 million in 2024. The vast majority of these (about 30.3 million in 2024) are in MA prescription drug (MA-PD) plans that integrate coverage for Parts A, B, and D. Average MA premiums have generally been on a downward trend for years. They will continue this in 2025, declining from $18.23 in 2024 to $17.00.

This decline flies in the face of a few headwinds for MA plans. The biggest is the increased costs of drug coverage MA-PD plans, which CMS excluded from the new demonstration. The Biden administration has also targeted a number of other policies towards MA. Next year will mark an unusual second consecutive year of payment cuts to plans (-0.16 percent after a -1.12 percent cut in 2024). The administration has also ramped up regulations in other areas – for example, requiring quicker turnaround for prior authorization requests and restricting plans’ marketing activities.

Room to Breathe

On the other hand, MA-PD plans have more flexibility to absorb higher drug costs by cross-subsidizing their lines of business: Plans receive payments to provide Part A and Part B services, which they can use to cover additional costs from Part D benefits. Standalone drug plans have no such flexibility, which is why industry observers have predicted that the IRA’s Part D redesign will shift even more enrollees into MA-PD plans. As noted above, standalone plans declined by roughly 22 percent, while the number of MA-PDs declined only 6.5 percent, from 3,915 to 3,677. This coincides with the way that some insurers seem to be steering their enrollees away from standalone drug plans towards MA-PD plans, a practice that is likely to continue in the coming years.

Average premiums don’t capture everything about a market. Insurers may respond to increased costs in several ways to stay competitive – including, as noted above, by shifting their focus from some markets towards others. Recent reports about plan cutbacks and market exits raised fears about problems on the horizon, but lower premiums, higher enrollment, and even higher rebates suggest that MA’s rapid growth over the past decade is continuing apace.

We Can Do Better

We have better options to contain expenses and improve the quality of Medicare other than just pumping insurance companies full of more taxpayer dollars. For Part D, Congress should revisit the IRA’s redesign and could look to the original bipartisan Part D redesign plan. As for MA, Paragon has introduced a strong  package of targeted MA policy recommendations, which will improve quality and reduce spending by:

1. Scaling back benchmarks in counties where they are inflated and where access to MA coverage is not a problem;
2. Eliminating distortionary bonuses that encourage plans to focus on flawed star ratings rather than accountability to enrollees; and
3. Adapting risk adjustment to address the worst offenders of diagnostic upcoding.

Paragon’s proposal also includes policies to correct MA payment calculations, reform Medigap coverage, promote choice for new beneficiaries, and expand benefit flexibility to further improve the program. The resiliency of MA over the past few years has demonstrated that it is possible to achieve reasonable savings without compromising access to coverage choices for seniors.