Biden admin to spend billions to blunt spike in Medicare drug premiums

One of President Joe Biden’s signature domestic achievements is set to cause a significant spike in Medicare premiums for millions of Americans just ahead of the November election. Now, his administration is preparing to dole out billions of dollars to private insurance companies to blunt the impact of the increase.

The jump in premiums is a consequence of efforts to reduce what older Americans pay for prescription drugs, part of the 2022 Inflation Reduction Act. Insurance companies are on the hook for what patients used to pay and are raising drug plan premiums to make up the difference.

The new premiums will be released in mid-to-late September and could open up the Harris-Walz campaign to a spate of negative headlines. Vice President Kamala Harris has repeatedly touted the Biden administration’s efforts to lower Medicare costs and weaved the idea through her remarks on growing the “care economy.” A drastic uptick in health insurance premiums a few weeks before the election could muddy that message and give Republicans an easy line of attack, especially as inflation remains a critical presidential campaign issue.

But efforts to alleviate the increase — by giving health insurers an extra $15 per member a month — have Republicans accusing the administration of attempting to buy a reprieve for a reliable voting bloc. Though the Centers for Medicare and Medicaid Services has the authority to test changes to Medicare payments and reimbursements, and noted it has done similar projects in the past, Republicans argue that this latest effort has no clear statutory basis or credible research goals.

“It's using the federal treasury for political advantage,” said Sen. Bill Cassidy (R-La.). “This is a way for the executive branch to implement a policy which has very positive political ramifications for them, but with very sketchy legal standing.”

Top Republicans in Congress have asked the Government Accountability Office to investigate the program, saying, “the integrity of the Medicare program and the taxpayer dollars that finance its benefits demand more than partisan aspirations to justify extra-statutory, eleventh-hour policy changes.”

"Consideration of these types of programmatic changes should fall within the purview of the legislative branch," Senate Finance Committee ranking member Mike Crapo (R-Idaho), House Ways and Means Committee Chair Jason Smith (R-Mo.) and U.S. House Energy and Commerce Committee Chair Cathy McMorris Rodgers (R-Wash.) recently wrote to the GAO.

The White House did not respond to a request for comment.

Under the administration plan, the Centers for Medicare and Medicaid Services would give participating Medicare prescription drug plans the $15 subsidy and restrict how much insurers can raise premium rates year over year. The deadline for insurance plans to say whether they will participate has passed and CMS said it is assessing the responses.

The agency estimated the first year of the three-year project will cost about $5 billion if all standalone plan sponsors participate.

“The effort would set a nasty and costly precedent, whereby any administration of either party could cut premiums by executive fiat with zero accountability or recourse,” said a Senate Republican aide granted anonymity to discuss the GOP’s thinking. “There's no reason to believe this won't become the norm for any and every election year moving forward.”

Senate Finance Committee Chair Ron Wyden (D-Ore.) defended the move, saying it could help stabilize the Medicare Part D prescription drug program market.

“The Biden-Harris administration is taking additional steps that I fully support to keep premiums stable as insurance companies learn how to be competitive in this market,” Wyden said.

The nonpartisan congressional scorekeeper Congressional Budget Office estimated that the drug pricing negotiation provisions in the IRA will reduce Medicare spending by $98.5 billion over 10 years.

A spokesperson for CMS said the agency has done these types of projects, also known as demonstrations, when “there have been significant changes introduced into the [Medicare] program.”

When the prescription drug benefit was introduced roughly two decades ago under former President George W. Bush, CMS implemented demonstrations in 2006 and 2007 to prop up the nascent market.

How we got here

President Joe Biden’s IRA placed a $2,000 cap on out-of-pocket drug costs for older Americans, allowed beneficiaries to spread their annual drug costs over monthly installments and shouldered insurers with more responsibility to cover drug costs after a beneficiary spends a large amount.

But the law did not anticipate just how much health insurance premiums would increase.

This year, the average monthly premium for the roughly 22 million people with Medicare Part D standalone drug plans is $43 a month, up about 5 percent from 2023, though some people pay considerably more, according to the think tank KFF . But that figure is expected to rise significantly based on the average bids insurance plans submitted to CMS in June to cover Part D benefits.

Final plan premiums will be released in mid-to-late September ahead of open enrollment that starts Oct. 15.

Why CMS is stepping in

The demonstration program could run for up to three years. It caps total premium year-over-year increases to $35 a month and allows the government to better mitigate potential plan losses.

“The Treasury is going to borrow more money to do this,” Cassidy said. “I don't see them as being particularly hyper aware of the potential cost of all this. I don't think it matters to them, but it should matter to us as taxpayers.”

Past demonstrations have drawn the ire of lawmakers. Rep. Darrell Issa (R-Calif.) and then-Rep. James Lankford (R-Okla.) wrote the HHS in 2012, blasting an $8.3 billion demonstration that boosted quality bonus payments to Medicare Advantage plans, the privately run program for Medicare benefits.

Lawmakers speculated that demonstration was an effort by the Obama administration to avoid potential cuts to Medicare Advantage in the runup to the presidential election that year.

Protecting traditional Medicare

The Part D market has two types of plans. One is a standalone plan that only offers drug coverage, and the other is coverage included in a privately run Medicare Advantage plan that covers other health services.

Medicare Advantage plans can absorb higher costs better than a standalone option, according to a 2023 analysis from the consulting firm Avalere Health.

Since a Medicare Advantage plan offers a wide array of both medical and drug benefits, it can spread out the cost impact. Standalone plans do not have such flexibility, and the law is causing some to exit the market.

Mutual of Omaha, one of the biggest standalone plans, announced in April it is pulling out of the market because of the “adverse impact of the Inflation Reduction Act.” The company did not return a request for comment.

A growing number of older Americans are opting for Medicare Advantage plans with Part D coverage because insurers can use rebates to lower premiums. In 2024, those with MA plans paid an average monthly premium of $9.

Tricia Neuman, senior vice president of KFF and executive director of its Medicare policy program, said that if CMS did not implement the demonstration project, the anticipated increase in premiums for standalone Part D plans could accelerate a shift from traditional Medicare to Medicare Advantage plans.

“It’s possible that the [demonstration] will blunt incentives for people to switch from traditional Medicare to Medicare Advantage,” Neuman said.