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 February 10, the Congressional Budget Office (CBO) released its Budget and Economic Outlook for 2026 through 2036. There is not much in the way of good news aside from the projected savings from the health policy reforms in the One Big Beautiful Bill. CBO projects that federal deficits and debt will grow to record levels, and federal health entitlement spending will continue its unsustainable path. Of particular concern is the unexpected rise in Medicare Part D premiums and spending—a direct result of misguided policies in the Inflation Reduction Act (IRA).
Part D’s Ballooning Costs
The biggest health policy takeaway: CBO raised its projection of Medicare outlays from last year by seven percent, or $1 trillion, over the next decade. Of that increase, $600 billion comes from CBO concluding the Medicare Part D provisions of the IRA were much more expensive than originally forecasted in 2024 (see Figure 1). CBO now attributes much of the additional cost to the Part D changes in the Inflation Reduction Act (IRA), which increased plan liability and federal subsidies while reducing choice for enrollees and market competition. The IRA’s Part D changes have pushed one of the most market-oriented public programs of the 21st century into a spiral of fewer plan options, higher premiums, and escalating taxpayer costs. For comparison, the original Medicare Part D legislation was initially estimated to cost around $550 billion over its first eight years (2006 to 2013) but ended up costing $400 billion, 27.3 percent less than expected.
Setting Part D Premiums
Every year, CMS announces what premiums will be for stand-alone prescription drug plans in the Part D program. Premiums are determined after CMS calculates a “base beneficiary premium” using a statutory formula. This base beneficiary premium is not what enrollees pay but is a starting point that plans must use to calculate how much they will need to charge enrollees in premiums. Each plan then submits a “bid,” which is in essence the price at which a plan will cover an enrollee. These bids are effectively averaged together by CMS to produce the National Average Monthly Bid Amount (NAMBA). CMS then compares the base beneficiary premium to the NAMBA to help determine the “direct subsidy” for each plan, which is essentially the per-enrollee subsidy the plan will receive upfront. The total subsidy includes both this direct subsidy and a back-end subsidy known as “reinsurance.” Based in part on plan bids’ assumptions regarding projected membership, CMS also publishes the “average monthly premium” for the next year, which is what enrollees can expect, on average, to pay personally in premiums for their Part D plan.
How the IRA Distorted Part D
The problems stem from the changes that the IRA made to Part D starting in 2024. That year, the IRA instituted a cap on premium base rate (known as the “base beneficiary premium,” see text box) increases, set at 6 percent annually through 2029. The IRA also eliminated cost sharing in 2024 for enrollees who hit the coverage gap phase (the so-called “donut hole,” which the ACA had functionally eliminated) where the enrollee then had to spend around $3,000 out-of-pocket before reaching the catastrophic phase of coverage (see Figure 2).
In an attempt to eliminate the “donut hole,” the IRA reduced Part D from four phases of coverage to three and eliminated enrollee cost-sharing after hitting a true out-of-pocket (TrOOP) maximum of “$2,000” (more on that number later as the actual TrOOP is much lower) in total out-of-pocket spending (see Figures 2 and 3) beginning in 2025 (the cap is indexed increasing it to $2100 in 2026). As we’ve covered before, free is never free. As plans assumed greater liability, their bids rose sharply. But because the IRA capped growth in the base beneficiary premium at 6 percent annually, the difference between that starting point and each plan’s actual bid had to be made up through higher federal direct subsidies — shifting the cost from enrollees to taxpayers.
The Fallout of the IRA’s Failure
Both the 2024 changes and the 2025 changes caused premiums and subsidies (see Figure 4) to spike, as explained in a Paragon piece from October:
Total subsidies per PDP enrollee were relatively constant between 2016 and 2023, ranging from $98.62 to $103.14. Then, in 2024, total subsidies [per enrollee] jumped 30.1 percent to $134.16. In 2025, total subsidies [per enrollee] increased another 38.5 percent to $185.75, and in 2026 total subsidies [per enrollee] leaped 31.2 percent to $243.78.
As explored below, these increases are the result of provisions in the IRA causing the average monthly plan bid [see text box] to increase 589 percent from $34.71 in 2023 to $239.27 in 2026. The IRA’s Part D redesign keeps the starting point used to calculate a portion of beneficiaries’ premiums artificially low, rising only 19.1 percent—from $32.74 to $38.99—in the same time period, which means beneficiaries’ actual premiums and subsidies must rise to cover the difference.
Not only did premiums spike, but stand-alone Part D plan offerings have also significantly declined. To quote our last piece:
The average enrollee has only 11 PDPs to choose from in 2026, compared to 21 in 2024 and 30 in 2021. Overall, the total number of PDPs decreased from 709 in 2024 to 360 in 2026. The reduction in plans is occurring at the same time that major insurers are eliminating commissions for brokers who enroll individuals in their plans, meaning seniors will have less choice in plans and less help in selecting those plans.
Increased subsidies and decreased plan options are the natural results of raising plan liability and lowering the enrollee’s out-of-pocket maximum to $2,000 while holding down increases to base beneficiary premiums to only 6 percent. The $2,000 maximum is well below the original bipartisan Part D reform’s limit of $3,100. A higher level of cost-sharing would prevent taxpayers and other seniors from having to pay significantly more to subsidize a small minority of enrollees while still limiting the payments for high-spend seniors. As former CBO Director Doug Holtz-Eakin has noted, less than three percent of Medicare enrollees in 2021-2022 had more than $2,000 in out-of-pocket costs.
A Taxpayer Bailout of the IRA
On top of the IRA’s failed Part D redesign, the Biden administration further compounded the problem in two ways. First, the administration interpreted the definition of an enrollee’s TrOOP cost to include any cost-sharing the plan voluntarily took on as part of supplemental benefits used to attract enrollees (e.g., covering copays or coinsurance for certain drugs). Thus, enrollees were able to reach the cap without personally spending the full statutory amount. Benedic Ippolito of the American Enterprise Institute estimates that this means that the actual out-of-pocket spending cap was much lower than $2,000; Ippolito posits that some enrollees could reach the out-of-pocket cap after spending only $470.
Second, the Biden administration created a three-year demonstration program for Part D in July of 2024 in response to initial bids from plans that came in much higher than they expected. We’ve previously written on this nakedly political demonstration, which artificially reduced monthly base beneficiary premiums by $15, capped year-over-year monthly premium increases at $35, and created a complex risk-sharing mechanism that shifted much of plans’ losses onto taxpayers, insulating insurers from the full consequence of their bids. The demonstration cost $5 billion in the first year alone. The $35 cap on premium increases did not prevent insurers from raising premiums more than $35; it just ensured that taxpayers would fully subsidize any increase above $35. Put another way: Insurers got a boost to premium revenues without having to worry about enrollees picking a cheaper plan, because the taxpayers were covering most of the increase. Importantly, the Trump administration began a phase-down of the demonstration this year, reducing the inflationary effects and taking steps to protect taxpayers.
It is notable that following the creation of the demonstration program, there has been an increase in $0 premium plans offered by stand-alone prescription drug plans (PDPs). Traditionally, $0 premium plans for non-low-income-subsidy (NLIS) enrollees were generally only available in Medicare Advantage – Part D (MAPD) plans. In 2026, there are 68 $0 premium plans compared to 43 in 2025. The analysis firm Milliman posits that some of this increase may be due to changes in the Part D risk model that are favorable to low-income enrollees, but it is also likely that the demonstration program allowed for PDPs to have taxpayers subsidize the entire premium.
MedPAC Confirms that the IRA is To Blame
The result of Biden-era policy changes: the once successful Part D program is a complete mess. A program that effectively used choice and competition to increase access to prescription drugs for seniors is now shedding plans with soaring costs, having already required one politically-motivated bailout right before the 2024 election. The IRA’s reforms have objectively failed. The Medicare Payment Advisory Commission (MedPAC) put it bluntly: 82 percent of the growth in plan bids in 2025 came from the shifts in financing put in place by the IRA. While MedPAC attributes 72 percent of the 2026 bid increase to higher drug spending compared to only 28 percent attributable to the IRA’s changes, it acknowledges that much of that higher drug spending was due to the lower TrOOP threshold—which increased utilization—meaning that the IRA’s design indirectly drove the increased drug spending.
MedPAC claims enrollees are spending less on premiums than they otherwise would be without the IRA but provided no indication of how premiums would have jumped in the absence of the IRA if drug spending would have been lower and enrollee cost sharing would have been higher, not to mention the fact that subsidies, compounded by the moral hazard of the demonstration, allow insurers to inflate premiums even higher. According to MedPAC, the IRA has increased taxpayers’ share of basic benefit costs to 87 percent. The Biden administration’s political bailout of the IRA’s failures in July of 2024 would not have been “necessary” without the IRA’s failures in the first place.
Righting the Ship
More government spending, higher premiums, less choice, and more costs for taxpayers: these are the entirely predictable consequences of the IRA. In order to reverse the damage to Part D caused by the IRA, as a first step, CMS should reverse the Biden administration’s interpretation of the TrOOP definition so that enrollees have to actually spend $2,000. Congress should also gradually phase in a $3,100 out-of-pocket maximum and ensure an appropriate index that maintains roughly the same percentage of enrollees with more than the annual out-of-pocket maximum level of spending. With these changes the vast majority of seniors will see lower premiums while still being protected from excessive out-of-pocket costs. Without these changes, the failed policies of the IRA will continue to erode competition, raise Part D premiums and taxpayer costs, and lead to the evaporation of even more standalone plans.
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