The Medicare prescription drug benefit is in the news because the Biden administration released the first round of pricing cuts for individual therapies as required by the Inflation Reduction Act (IRA), which Congress approved in 2022. A less-noticed effect of the same law—large and immediate jumps in premiums for some beneficiaries—has mostly gone unmentioned by the national media (with some exceptions). The causes of the premium spikes, and also the administration’s planned work-around, deserve additional explanation and scrutiny.
The IRA made the most significant changes to the structure and operation of the Medicare drug benefit since Congress approved the Medicare Modernization Act of 2003. The law’s new price ceilings for the first ten covered therapies were announced this week. They will go into effect in January 2026.
The law included other consequential changes are already being felt by some Medicare beneficiaries. In particular, starting in 2025, the IRA required the private insurance plans administering the drug benefit to pay for 60 percent of the costs above a new $2,000 per year limit on out-of-pocket expenses for the participating beneficiaries. In 2023, the plans paid just 15 percent of the costs above the then-applicable catastrophic threshold of $7,400. The lower out-of-pocket threshold reduces the cost burden for beneficiaries with chronic conditions and high drug costs, but at the expense of requiring many others to pay higher premiums.
That is not to suggest the redesigned benefit is ill-conceived. It may offer better incentives for the participating plans by exposing them to more of the costs for high-priced products. Over time, the plans may exert more downward pressure on pricing to avoid being exposed to these costs. But in the short term, the switch is leading to spikes in bids by the plans as they worry about losses from high-cost enrollees.
The architects of the IRA anticipated this might occur and therefore included a provision that limited the increase in what is known as the base beneficiary premium to no more than six percent annually from 2024 to 2029. The effect of this change is to force the government to provide more upfront subsidization of premiums during this period, offset partly by lower subsidization of costs above a specified threshold.
However, even with the IRA’s additional premium support, some of the participating plans have submitted bids which would lead to large premium increases for their enrollees. The problem is centered among stand-alone prescription drug plans, or PDPs, which are the coverage options used by the beneficiaries who have elected to stay in the traditional fee-for-service program. For Medicare Advantage (MA) enrollees, their drug benefit premiums are less volatile because their plans have more flexibility to use non-drug resources to prevent premium spikes. The PDPs are more constrained.
In July, the Centers for Medicare and Medicaid Services (CMS) released the initial results from submitted bids for 2025, which were startling. Overall, the average bid in 2025 was $179.45, up from $64.28 in 2024. While most of the added costs would be covered by government subsidization, some high-bidding PDPs would be forced to charge their enrollees substantially higher premiums in 2025 without additional changes in program rules. CMS officials also may be concerned that high PDP premiums will drive even more enrollment into MA plans offering zero-premium drug coverage. Given the recent focus by the administration on curtailing MA, that would be an ironic secondary effect of IRA implementation.
To minimize the disruption in the PDP market, CMS combined its initial 2025 bid result release with the announcement of a new PDP-only demonstration program aimed at limiting premium increases among for 2025 through 2027. The scheme essentially offers the PDPs an additional $15 per month per enrollee plus more generous re-insurance for high-cost enrollees. The exact cost of the demonstration has not been provided by CMS, but it is most likely in the billions of dollars annually.
The swift announcement and implementation of this demonstration (plans have just a few weeks to signal interest) is a clear indication that this is not a run-of-the-mill experiment. The statutory authority cited, section 402 of amendments to the Social Security Act approved in 1968, is supposed to be used to test paying non-covered providers when doing so might make sense for cost-effective overall care for Medicare beneficiaries. It was never intended as an open-ended authority to fix the unanticipated side effects of laws passed by Congress.
This episode reinforces the impression that some federal agencies have too much real or imagined authority to spend resources out of the Treasury without a clear and direct appropriation by Congress. It is also a reason that a push to rein in these agencies is gathering force.
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