“Changing Budget Forecast for Medicare Part D: AEI”
TL/DR –
Medicare part D, which covers outpatient prescription drugs, is undergoing policy interventions that were meant to lower prices but have resulted in a significant net increase in federal costs. The Congressional Budget Office also underestimated part D spending, leading to a projected part D spending of $2.3 trillion over the period 2023 to 2032, $0.6 trillion higher than earlier projections. Added to this, the Biden and Trump administrations’ Medicare demonstrations that liberalized benefits with little prospect of offsetting savings have further increased budgetary pressure.
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Medicare Part D Experiences Significant Cost Increase Amid Policy Changes
Multiple policy interventions intended to reduce the financial impact of outpatient prescription drugs under Medicare Part D have inadvertently led to an increase in federal costs. Despite being primarily designed to reduce the prices charged by manufacturers, the policy changes have resulted in a considerable increase in federal spending for Part D.
The Rise in Projected Spending
Comparisons between the projected part D spending from the 2023 Medicare trustees report and the estimates from the 2026 release paint a clear picture of the increase. The 2026 report suggests a cumulative Part D spending of $2.3 trillion from 2023 to 2032, which is $0.6 trillion more than what was projected in the 2023 report. The current projection for part D spending in 2032 now stands at $99 billion, which is a 48% increase compared to estimates from three years prior.
Underestimation of Part D Spending
The Congressional Budget Office (CBO) also fell short in accurately assessing the spending for part D following the passage of the Inflation Reduction Act (IRA). The CBO admitted to raising the projected part D spending from 2026 to 2035 by $0.6 trillion, compared to its forecast in January 2025. Overall, the CBO increased its baseline estimates by $1.0 trillion for the same period. The discrepancy led three Republican chairmen of key House committees to ask the CBO to explain its calculations.
Long-Term Financial Implications
If the trend of increased spending continues, the long-term financial implications for Medicare prescription drug coverage could be substantial. According to the 2026 trustees report, the Medicare actuaries estimated the present value of part D costs in excess of premiums and other receipts over the next 75 years at $11.5 trillion, which is equivalent to 0.6% of future GDP. In 2023, the estimated shortfall was $7.6 trillion, or 0.4% of GDP.
Policy Adjustments and Implications
Under the original part D law, the beneficiaries were expected to pay 25.5% of the total cost, with the government covering the remainder. To protect against large increases resulting from the law’s complex program adjustments, the IRA capped the annual growth of the base beneficiary premium at 6.0%. This cap could shift more of the cost burden onto taxpayers. However, the IRA also established a new floor for the base premium at 20.0% of total costs starting in 2030. As this deadline nears, Congress may face increasing pressure to find a solution to prevent a significant yearly increase in out-of-pocket costs for beneficiaries.
Medicare Demonstrations and Budget Pressure
Both the Biden and Trump administrations have contributed to the budgetary pressure through Medicare demonstrations that expanded benefits without any clear prospects of offsetting savings. In 2024, Biden officials approved a temporary relief program to mitigate potential premium shocks between 2025 and 2027. The Trump administration later adjusted the demonstration to offer less support to Prescription Drug Plans (PDPs) in 2026.
The Trump administration also recently approved time-limited Medicare coverage for GLP-1 products for weight control, for a monthly beneficiary copayment of $50. This “Bridge” demonstration may lead to political pressure to provide broad and permanent Medicare access to GLP-1 therapies, despite the lack of Congressional approval.
Both administrations used section 402 of the Social Security Act Amendments of 1967 for their demonstrations, which does not require budget neutrality. Although this section is intended for research experiments, it does not appear as though these policies were designed with that purpose in mind.
Pattern of Cost Increase in Entitlement Programs
The recent surge in part D costs under Medicare follows a familiar pattern. Major entitlement expansions are often marketed as budget-neutral at worst, assuming that other changes will offset the costs of more generous program benefits. However, after implementation, the benefits often prove costlier than anticipated, while measures to reduce future spending underperform. The Inflation Reduction Act and the Trump demonstration’s benefit cliffs in 2027 and 2029 present potential opportunities for this pattern to continue, leading to further increased costs.
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