A new Congressional Budget Office (CBO) analysis of Medicare drug pricing data and policy changes raises further questions about the promised fiscal benefits of the Inflation Reduction Act (IRA), which Congress approved in 2022. Combined with updated estimates for other IRA spending programs (on alternative energy development and tax credits for electric vehicles), it is possible that the entirety of the law’s projected deficit reduction will never occur.

At the time Congress approved the Inflation Reduction Act, CBO estimated it would reduce projected budget deficits by $238 billion over the period 2022 to 2031. This promised fiscal benefit was touted as an important reason it deserved approval. About $160 billion in 10-year savings was associated with the law’s new pricing limits and other modifications to Medicare’s coverage of prescription drugs. Another large contributor—$180 billion in additional tax collection—was assigned to better tax enforcement from higher IRS funding (the net savings was about $100 billion).

CBO’s updated review of Medicare’s costs for drug coverage takes into account two newly available pieces of information.

First, in July, insurance plans offering drug coverage submitted their bids for the 2025 plan year, and they are well above what CBO had forecast. Through a series of amendments, the IRA made the insurance benefit provided to the beneficiaries more valuable, particularly by imposing a new annual out-of-pocket limit of $2000 starting in 2025. Further, the plans will be required to pay for 60 percent of the costs above the new catastrophic limit.

CBO’s original assessment of the net effect of these changes on federal Medicare spending was optimistic. Based on the bids from participating plans, the combined federal costs from subsidizing the premiums for drug coverage and from paying for reinsurance costs associated with patients requiring unusually expensive drugs are now expected to be 26 percent above CBO’s forecast. The added federal cost in 2025 alone is expected to be between $10 and $20 billion.

Second, the Centers for Medicare and Medicaid Services (CMS) is implementing a new, three-year demonstration program to further insulate Medicare beneficiaries from the higher costs of the redesigned benefit. In particular, the agency is moving forward with higher premium subsidies for stand-alone prescription drug plans (PDPs). CBO estimates the first year of the demonstration, in 2025, will increase Medicare spending by $5 billion, which also will push up federal net interest expenses by $2 billion over a decade (due to $5 billion more in borrowed funds).

Putting the data together, it is clear that higher baseline spending on Medicare part D, plus the added spending from the demonstration program, threatens to eliminate whatever might be left of the deficit reduction from the original IRA. Assuming the higher spending CBO cited for 2025 turns out to be $15 billion, and that this higher spending carries forward in the baseline through 2031, the total cost would be $105 billion. Further, if the new CMS demonstration is maintained through 2031 (which the PDPs are certain to press for), the total cost would go up by an additional $35 billion. The combined tab of $140 billion from the higher baseline and the new demonstration would eliminate nearly 60 percent of the total deficit reduction promised from the IRA.

The other 40 percent was already at risk too. Based on data from the Joint Committee on Taxation and CBO, the Committee for a Responsible Federal Budget estimates the costs associated with the IRA’s various tax subsidies could be $400 billion above the original projections.

Further, an additional $127 billion in IRA savings is tied to preventing the implementation of a Trump-era rule restricting the business practices of the pharmaceutical benefit management (PBM) companies. But this is a rule the Biden administration was never going to leave in place anyway. By allowing Congress to block it rather than withdrawing it unilaterally, the administration created the context for assigning budgetary savings to blocking a policy that was not going to be pursued even without new legislation prohibiting it.

The IRA was a slimmed-down version of President Biden’s original Build Back Better (BBB) proposal, which the House approved but the Senate blocked owing to its high costs and unpopular tax hikes. Proponents of the IRA suggested it would turn out to be a more fiscally responsible alternative plan.

While the IRA is certain to be less expensive than BBB, the record so far does not point to substantial fiscal benefits, which is not terribly surprising. It is common for laws to cost more than expected at enactment due to the tendency to underestimate the intensity of the pressures pushing for expanded federal financial support while simultaneously overestimating the ability of program administrators to secure savings from reluctant parties.

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