Market forces and politicians are undermining Part D
For the past few years, seniors may have noticed that their Part D retail drug benefits have gotten skimpier even as cost-sharing has been capped for some. Overall, most recipients are seeing more costs not less. This relates in part to a move by the former Biden administration supposedly to lighten the load. When politically motivated administration officials and lawmakers get involved, the public and taxpayers usually get the shaft.
The Medicare Part D program has always been something of a paradox: a privately administered benefit built on deliberately thin margins, sustained not by profitability alone but by a carefully engineered system of federal subsidies and risk-sharing. Created under the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in 2003, Part D was designed to attract plan participation while protecting both beneficiaries and insurers from extreme financial volatility. For much of its history, that balance held. Today, however, the program is under mounting financial strain, and the erosion is increasingly visible, particularly within the standalone prescription drug plan (PDP) market.
It is important to understand that Part D retail drug benefits are delivered in two ways: through Medicare Advantage-Part D plans (MA-PDs), where Part D benefits are attached and integrated, as well as the standalone PDPs. In the latter, the benefit is free-standing and accompanies separate Medicare fee-for-service (FFS) medical coverage or an MA-Part C only benefit.
To understand the current moment, it is important to revisit the program’s original financial architecture. Part D was never intended to generate significant underwriting margins. As noted, instead it relied on a combination of direct subsidies, risk adjustment, reinsurance, and risk corridors to stabilize plan performance. These mechanisms allowed plans to operate with relatively predictable, if modest, returns while competing on premiums and formularies. The federal government, in turn, absorbed a substantial portion of high-cost risk. Alas, the benefit design did little to truly innovate on the drug front.
This structure is now shifting in fundamental ways and is at risk. A number of things are contributing to the changes:
The continued escalation in drug spending, driven disproportionately by specialty therapies and novel expensive drug entries, is overwhelming both plans and the government. While overall Part D enrollment has grown to nearly 57 million beneficiaries in 2026, the distribution of spending has become increasingly skewed toward a small subset of high-cost patients. Specialty drugs — often used to treat cancer, autoimmune conditions, and rare diseases — can cost tens or even hundreds of thousands of dollars annually. As a result, the catastrophic phase of the benefit now accounts for a growing share of total program spending, intensifying financial exposure for plans. While reforming biosimilar and generic introductions could help, the trend will only grow.
MA is attractive to seniors given the ability to offer enhanced benefits. That Part D drug benefits can be subsidized by the MA rate structure makes MA even more attractive. The interaction of these dynamics creates a feedback loop that further weakens the PDP market. As MA enrollment grows, PDPs are left with a comparatively riskier population, often including beneficiaries with higher drug utilization or those seeking the lowest possible premiums.
Layered into all this are the sweeping changes introduced by the Inflation Reduction Act (IRA), that politically motivated piece of legislation I mentioned earlier. In an effort to boost Democrats’ prospects in 2022 and 2024, the IRA included substantial changes to the Part D drug program which attempted to reduce out-of-pocket costs for seniors. These principally occurred in 2024 and 2025. Among the main changes are the elimination of the coverage gap, elimination of catastrophic cost-sharing, and an annual out-of-pocket cost cap of $2,000. On their face they represent a significant improvement in affordability—reducing out-of-pocket costs for millions of beneficiaries, in some cases by hundreds of dollars per year. But the politicians forgot to tell us – or deliberately hid from the public – the fact that much of this was underfunded and a shift of financial responsibility toward plan sponsors, including plans taking on a larger share of costs in the catastrophic phase.
There was a 180% jump in Medicare Part D plans’ 2025 bid amounts and the main reason was the IRA’s benefit redesign. The Congressional Budget office (CBO) now projects $600 billion more in Part D costs over the next decade than previously estimated, again largely due to the IRA redesign. Total subsidies per PDP enrollee were relatively constant between 2016 and 2023, at about $100. In 2024, total subsidies per enrollee jumped to over $134. In 2025, that went to about $186. In 2026, that went to about $244.
The result of all this is that rising taxpayer obligations – more than double since 2023. Plans have less predictability and greater risk. Faced with a gap between revenue, plans had to essentially “pay for” the IRA changes by eliminating MA and PDP plan choice demonstrably, increasing cost-sharing and deductibles, and reducing benefit generosity. Yes, a minority get more protection, but most are now paying more. The law was so poorly designed that the Biden administration had to create an extra-legal $7-billion-per-year premium stabilization program in Part D to avoid a steeper rise in premiums just before the 2024 election.
The Trump administration reluctantly has continued the program, not really knowing how to unravel the damage. So, impacts will be even more dramatic if and when the premium stabilization is removed. But the program simply hides the fact that the program is distressed. While MA plans have been able to shift revenue from Part C to soften the plan and beneficiary impact, the PDP program is on a financial precipice. The $2,000 cost-sharing cap also creates another oddity. Because costs are capped, savvy consumers have moved to ultra-low premium plans because they know their costs are limited anyway.
President Trump’s efforts to lower brand drug prices could help over time. But showing how ugly the financial position of Part D is right now, the Centers for Medicare and Medicaid Services (CMS) just paused efforts to extend GLP-1 weight-loss drugs to those who are obese but do not have other underlying disease states. The move has great promise to lower costs throughout healthcare in the future, but too few plans could take a risk on the short-term costs given what is happening in the program. Instead, the federal government will pay for the full cost of these drugs from July 1, 2026 through December 31, 2027.
The path forward for Part D will likely require a recalibration of the program’s core design. Without adjustments to risk-sharing mechanisms, subsidy structures, or market incentives, the pressures currently facing Part D — especially in the PDP segment — are unlikely to abate. What began as a carefully balanced partnership between government and private plans is evolving into something far less stable, raising important questions about the long-term sustainability of one of Medicare’s most important benefits.
#drugs #partd #medicare #medicareadvantage #pdp
— Marc S. Ryan
