Part D changes will raise premiums and destabilize the program
I have been all over this even before it was fashionable. After reading up on some analyses of the Part D cost-sharing changes in the Inflation Reduction Act (IRA), I declared that seniors and those with disabilities would see an October surprise in the form of increased costs going into the election as they chose 2025 Medicare Advantage (MA) or Part D benefits.
The Centers for Medicare and Medicaid Services (CMS) initially scoffed at my and others’ predictions, arguing the IRA anticipated this with a premium stabilization program. The problem: it applied just to the base benefit. We know that seniors have come to rely on enhanced Part D drug benefits from MA and standalone Part D (PDP) plans. And since the out-of-pocket (OOP) changes raised plan costs for both the base and enhanced benefits, recipients would have seen major premium increases and other changes.
Sure enough, when MA and Part D plans submitted bids for 2025, the data showed a huge increase in Part D costs to plans. In the case of the PDP program, premiums would skyrocket. CMS was surprised and immediately put together a second premium stabilization program to reduce the impacts.
There is little question in my mind that the program is extra-legal. It does not conform with the agency’s demonstration authority. CMS cited Section 402(a)(1)(A) of the Social Security Act as the authority for the demonstration. It said the Health and Human Services agency may create “experiments and demonstration projects” to determine whether certain Medicare payment changes would “increas[e] the efficiency and economy of health services.” Further, HHS can waive compliance with other Medicare payment requirements “insofar as [they] relate to reimbursement or payment on the basis of reasonable cost,” or “to reimbursement or payment only to such services or items as may be specified in the experiment.”
To me, the special premium stabilization program is not meant to encourage efficiency or economy of services. It also does not seem to meet the reasonable cost test or a reasonable interpretation of reimbursement or payment experimentation. Even if you argue CMS can technically do it, it does not meet the spirit of HHS’ demonstration authority, which has always had some very strict financial tests.
The executive branch does not have the authority to appropriate and deliberately overexpend dollars and that is what CMS did. The agency chose to increase costs unilaterally over three years, all in an effort to deflect criticism from the Democratic ticket in the presidential election. Still, both MA and PDP drug benefits were impacted. Premiums did increase. Cost-sharing rose. Benefits and formularies contracted. Plan choice and access shrunk.
As time goes on, more and more data are available showing the fallout of the Part D changes in the IRA. The Congressional Budget Office (CBO), CMS, the then-Biden administration, and Democratic lawmakers all touted the benefits but hid the financial landmines to the Part D program. MA plans had to integrate the unfunded Part D changes into a range of other bad rate and utilization news. But the overall size of the premium allowed the MA plans to mitigate impacts elsewhere. The biggest impact clearly was on PDPs, where premiums and margins are tiny and risks high.
So what do we now know about the Democrats’ misguided changes to Part D:
- The CBO said in an October memo that the CMS additional premium stabilization program will cost $5 billion in 2025 and $7 billion if you include interest over time. Given robust inflation in the drug world, the annual costs could increase in 2026 and 2027.
- Separately, CBO said in the same memo that the higher bid amounts for 2025 will mean an additional $10 to $20 billion in 2025 compared with earlier CBO estimates. It said the increase was due to the IRA Part D changes. But in a November appearance before the House Budget Committee, the CBO reversed itself and said the increase was due to other factors, including 2023 spending growth. As a former budget director, I am having a hard time understanding such a major mistake. The CBO admits, though, “…in the case of the redesign of Medicare’s Part D prescription drug benefit, costs occurring because of the 2022 reconciliation act and subsequent developments are difficult to separate from the effects of other changes. …” Consider this: We saw premium increases and other negative fallout in the PDPs in 2023 and 2024 as OOP changes began. And the bids showed something worse for 2025, when the biggest changes hit. So a lot goes into the major trends and increased risk in Part D, but there is little question the redesign contributes a great deal. Indeed, CBO’s big $10 to $20 billion range shows it realizes how off it was originally on IRA Part D costs and the ongoing uncertainty created by the changes. Given robust inflation in the drug world, the design changes will mean costs go up each year rather dramatically.
The Trump administration and the GOP Congress are in a difficult position. By any measure, the Part D changes in the IRA should be repealed or scaled back due to the increased costs and the instability they create. It was an election-year gimmick by Democrats, but it has driven costs in MA and even more so in PDPs. The truth is the changes could undermine the entire financial stability of the PDP program once the 3-year demonstration goes away. The PDP program is a poor business proposition to begin with. Massive drug inflation makes that worse. The Part D costs further compound the problem. Yet another fallout could be the further acceleration of movement from the traditional Medicare program to MA. This would shrink those enrolled in the PDP program and create adverse selection, driving more risk and costs.
Does Trump get rid of the IRA Part D changes entirely or at least scale them back? Does Congress challenge the authority of the demonstration despite the fact there is a Republican in the White House? Does Trump continue the stabilization program to shelter seniors and the disabled from huge premium spikes at least through 2027? Given bid cycles, changing the benefit for 2026 is a tall order. Keeping the demonstration would have to be decided in the next six months, but PDPs go into the bid season assuming its continues.
What is without question: The Democrats played politics. We learned four things:
- Government likes to mandate a range of things but hardly ever pays for it. They did so here and put the huge new financial risks and costs on MA and PDP plans.
- Public policy changes often have winners and losers. In this case, Democrats wanted to curry favor with a minority of people with very high drug costs but pass it off as a benefit to everyone. They ended up levying higher costs on everyone else – both in taxes and premiums.
- While those with high drug costs win with the $2,000 cap, the biggest winner is brand drug makers. The OOP cap helps them sell exorbitantly priced drugs. More and more people will hit the cap over time.
- When politicians propose something that sounds too good to be true, it usually is.
#medicare #partd #pdp #medicareadvantage #partd #congress #biden #trump #drugpricing
— Marc S. Ryan
