Medicare Draws Ire for Plan to Hold Down Drug Premium Increases

A Biden administration plan to contain likely premium hikes for Medicare prescription drug coverage next year is raising policy questions, drawing partisan attacks, and could prompt a legal challenge.

The Medicare Part D Premium Stabilization Demonstration “will shift financial liability away from large health insurers and onto American taxpayers,” Republican lawmakers said in a letter this week seeking Congressional Budget Office review of the proposal. The conservative American Action Forum estimates the demonstration would pay drug plans $7.2 billion, making it “not so much a demonstration as it is a bailout.”

The program is designed to address likely premium increases in 2025 due to higher plan costs stemming from a more generous and restructured Part D drug benefit. Provisions of the Democrats’ 2022 Inflation Reduction Act that take effect next year will lower out-of-pocket costs for Part D enrollees, but increase plans’ financial liability.

These provisions include a new $2,000 cap on out-of-pocket spending, greater cost-sharing by drug plans and drug manufacturers when beneficiary costs exceed $2,000, and an option for enrollees to extend payments over an entire year.

The demonstration would lower the base beneficiary premium in stand-alone Part D plans by $15, and hold total Part D premium increases to $35 between 2024 and 2025, according to an agency fact sheet. It would also increase government risk sharing for potential plan losses.

The Centers for Medicare & Medicaid Services estimates the program will cost about $5 billion if all plan sponsors participate. That’s about 3% of the $162 billion total Part D spending expected in 2025, the agency said in a statement.

While the administration says the revamped benefit will provide the most comprehensive coverage in Part D program history, the proposed demonstration caught many by surprise because the CMS didn’t indicate in previous guidance that it was being considered, said Kylie Stengel, an associate principal at the consulting firm Avalere.

“What is maybe a little bit unprecedented is the timing of this announcement,” Stengel said. “It’s after plans had already submitted their bids to CMS” and were preparing for the expected benefit structure. “So CMS is doing this after-the-fact, which I think is maybe drawing a little scrutiny from Congress.”

Legal Authority Questioned

The CMS says the Section 402 demonstration will “test whether additional policy changes stabilize year-over-year” premium changes for participating plans, leading to “more predictable options” for enrollees “during the initial implementation of the IRA benefit improvements, creating more gradual enrollment changes,” the CMS said in a press release.

The agency has used demonstrations before when transitioning to major policy changes in the Medicare program. After the Part D benefit was established in 2006, the CMS implemented Section 402 demonstrations to test ways to limit Part D premium fluctuations and to stabilize premium subsidies for low-income enrollees. Both demonstrations resulted in higher premium subsidies for drug plans, the agency said.

“This demonstration will enable individuals to make enrollment decisions that are best suited to their prescription drug needs and test whether additional premium stabilization and more protection from potential losses improves the efficiency and economy of the Part D program,” a CMS spokesman said in an email.

But some have questioned the legal authority of HHS under the Social Security Act to implement the program.

That authority “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,” said a recent analysis by James Capretta, senior fellow at the American Enterprise Institute. Republicans have asked the Government Accounting Office to review similar concerns about the demonstration.

Even if the GAO should recommend that the demonstration be canceled, the CMS is not compelled to do so, said Tom Kornfield, founder and CEO of MAST Health Policy Solutions.

“The GAO doesn’t have the authority to determine what CMS can or cannot do,” said Kornfield, whose firm specializes in Medicare Advantage and Part D policy. “I don’t see CMS as likely to do anything different based on a GAO report.”

The demonstration has also raised eyebrows because it could diffuse what could be a thorny political issue for Democrats: a wave of seniors fuming about higher Medicare premiums weeks before the November 2024 elections. Premiums for 2025 Part D plans will be released in September, followed by open enrollment from Oct. 15 to Dec. 7.

The preliminary national average bid amount for Part D coverage jumped from $64.28 in 2024 to $179.45 for 2025. But that doesn’t mean Part D premiums will increase by a similar amount, the CMS said previously.

“A significant portion” of the increase “represents funds moving from reinsurance payments to upfront payments in the form of the government subsidy to plans,” a CMS fact sheet said. The increase was “in line with expectations due to the redesign of the program that encourages better cost management of the Part D benefit.”

“Americans are paying too much for prescriptions—the IRA exacerbated the problem, and now the executive branch is attempting to patch things up ahead of November,” said a statement on Tuesday from Sen. Charles Grassley (R-Iowa,) the Senate Budget Committee’s ranking Republican.

Impact on Stand-Alone Drug Plans

The demonstration would only include stand-alone plans used by beneficiaries in traditional Medicare because those plans’ 2025 coverage bids showed the greatest “variation,” or increases. Beneficiaries enrolled in private Medicare Advantage plans get their prescription drug coverage through MA drug plans. The nation’s largest insurers sponsor both stand-alone and MA prescription drug plans.

America’s Health Insurance Plans, the industry’s leading trade group, wasn’t consulted about the demonstration in advance and hasn’t taken a position on the proposal, said James Swann, AHIP’s director of communications. In an email statement, Swann said AHIP remains focused on “strengthening and protecting both Medicare Advantage and Part D programs.”

“Due to the past two years of MA payment cuts, combined with significant changes affecting Part D, it is critical to ensure premium stability and continuity in benefits for the 33 million seniors and people with disabilities who actively choose MA for their Medicare coverage,” Swann’s email said.

The Medicare Advantage drug plans will likely have lower premiums next year, on average, than stand-alone drug plans, according to KFF. This follows a trend over previous years in which MA drug plan enrollment has increased, while stand-alone plan enrollment has decreased. The MA plans can use rebates they receive to buy down or eliminate drug plan premiums for enrollees.

Without the demonstration, stand-alone Part D premiums “will likely remain less competitive than MAPD premiums,” said an analysis by Anna Kaltenboeck of ATI Advisory. But the demonstration “has the potential to reduce the recent appeal of MAPD plans by effectively giving standalone plans the same ability to buy down Part D premiums,” Kaltenboeck said, adding it’s “also possible that MAPD plans will take rapid legal action to prevent the rule from going into effect.”

But Kornfield said the likelihood of legal action has likely diminished as plans prepare for the upcoming open enrollment season.