Medicare Drugs Could Cost $500B More Than Expected

Just before Thanksgiving, a blog post by staff at the Congressional Budget Office (CBO) dropped a bombshell: Spending on Medicare prescription drug coverage has exploded. That means not just higher costs for taxpayers, but higher Part D premiums for the seniors who pay for a portion of their drug coverage.

CBO is still trying to discover why exactly Part D costs have suddenly grown much faster than expected. But, perhaps unsurprisingly, several of the possible explanations trace back to policies enacted by the Biden administration.

Half a Trillion in Higher Costs?

The budget office first noted the trend of Part D insurers’ bids coming in much higher than expected last year. In a letter last October, the budget gnomes said plan bids increased 42 percent from 2024 to 2025, 16 percentage points higher than the 26 percent hike they expected. CBO stated at the time that the “growth in plan costs will result in an increase in federal spending of $10 billion to $20 billion in calendar year 2025, compared with our earlier estimates.”

But CBO’s earlier estimate of $10-20 billion per year in higher spending is now dwarfed by its much larger estimates. For 2026, plan bids “anticipate a 35 percent increase in their annual per-enrollee costs” — seven times higher than CBO’s assumption of only a 5 percent rise next year. “If the insurers’ expected costs for plans remained at that higher level, spending by Medicare on the Part D program over the next decade would be about $500 billion more than CBO previously projected.”

Continued Bidenflation

A portion of the increases, particularly those from 2024 to 2025, were expected. Democrats’ so-called Inflation Reduction Act (IRA) restructured the Part D benefit and created a new, lower cap on beneficiaries’ out-of-pocket drug spending. That $2,000 limit on seniors’ cost-sharing took effect in January 2025; its effect in raising insurers’ costs explains why CBO originally projected a 26 percent increase in plan bid amounts last year.

But the budget office could not fully explain how plan bids rose well above the original 26 percent increase for 2025 and why bids rose an additional 35 percent for 2026. In publicly asking researchers for additional information on the causes of this spending spike, they offered four theories to explain the spending, three of which relate to Biden-era policies:

1. “CBO, CMS [the Centers for Medicare and Medicaid Services] and private insurers may have underestimated the cost to insurers of the reduced cost-sharing arrangements for beneficiaries with high spending on prescription drugs in 2025.” In other words, by making prescription drugs cheaper to buy, the IRA encouraged seniors to consume more of them. CBO cited a Milliman analysis from earlier this year that found 43 percent growth in specialty drug spending among non-low-income beneficiaries. (Low-income beneficiaries already had limited cost-sharing for prescription drugs before the IRA provisions took effect.) The Milliman analysis indicates that the IRA provisions making expensive brand-name drugs “cheaper” for seniors led to greater consumption and greater spending.
2. Insurers have built “higher profit margins and administrative costs into their plan bids.” CBO notes that the prescription drug market has traditionally remained competitive, putting pressure on insurer profits. “But recent instability in the market,” due in part to the uncertainty caused by the IRA changes, “may be leading to less competition and higher profit margins.” (CBO noted that uncertainty relating to President Trump’s tariff policies on pharmaceuticals may also have led insurers to “pad” their bids.)
3. CBO said that a bailout launched by the Biden administration last summer “may also be contributing to the higher costs reflected in plan bids.” It noted that “if insurers expect administrative actions to shield enrollees from the full impact of increased premiums, they may be less constrained in submitting bids with higher costs.” That applies to the Biden taxpayer-funded bailout, which the Trump administration is phasing out (but not entirely eliminating) for 2026.
4. Finally, CBO noted national prescription drug spending trends could be affecting the Part D program, citing a double-digit increase in drug spending during 2024, driven in part by rising spending on oncology and anti-obesity drugs (i.e., GLP-1s).

The Cost of ‘Free’ Care

Of the four factors leading to the jump in Medicare prescription drug plan bids, only the last has no relation to Biden-era policies. But even there, the Trump administration’s recent deal with Eli Lilly and Novo Nordisk to expand Medicare’s coverage of GLP-1s could lead to a further unexpected rise in Part D spending in 2026 and beyond.

All told, the CBO analysis reinforces how policies providing richer coverage — in this case for Medicare Part D, but in other cases as it relates to “free” premiums for health insurance on the Obamacare Exchanges — encourage additional spending, for which taxpayers end up bearing the added costs. It’s something for congressional Republicans to bear in mind as they consider an “affordability” agenda. Throwing more taxpayer money at a problem often just makes things worse.