New Evidence on the Growing Generosity (and Instability) of Medicare Drug Coverage

Recent changes to Medicare's prescription drug benefit were designed to make coverage more generous for beneficiaries while shifting more financial risk onto insurers. New evidence suggests those changes may have gone further than intended and are likely contributing to ongoing market instability.

The Inflation Reduction Act (IRA) introduced several changes to Medicare Part D. Most notably, it capped annual beneficiary out-of-pocket spending on drugs at $2,000 and reduced federal reinsurance for high-cost enrollees, replacing it with higher upfront payments to plans.

These changes were expected to increase plan liability, but the out-of-pocket cap appears to have done so more than many anticipated. As I've previously explained, the Biden Administration implemented the cap in a way that allows many beneficiaries to reach it well before spending $2,000. In short, many enrollees receive "credit" for spending they would have incurred if they enrolled in a less generous plan.

A recent Milliman white paper confirms that these reforms are dramatically altering the Part D landscape. They found that nearly 10% of Medicare beneficiaries had already reached their out-of-pocket cap by just June of 2025—nearly three times the share from the same point in 2023, before any of the IRA's key policy changes took effect. If monthly trends followed previous years, 20% or more of enrollees could have reached the out-of-pocket cap by December of 2025.

Note: Figure reproduced from Feller, Gill, and Pierce (2025). "MOOP there it is: In 2025, Part D beneficiaries are spending $1,200 on average to satisfy the $2,000 out-of-pocket maximum." White Paper. Milliman.

As anticipated, beneficiaries are also reaching the cap well before spending $2,000. Among those without "low-income subsidies," the average out-of-pocket spending required to reach the cap was just $1,220.

More generous cost sharing limits clearly benefit some beneficiaries who reach the out-of-pocket limit earlier than they otherwise would have. But the magnitude of these changes is large and risks further straining an already unsteady market.

Lower out-of-pocket spending for enrollees translates to higher costs for insurers, which will be reflected in higher premiums for all beneficiaries and higher federal spending. Once enrollees reach the cap, plans also have limited ability to manage any additional drug spending. These pressures will intensify if beneficiaries begin enrolling more strategically to take advantage of the cap's current design. This could trigger adverse selection concerns in more generous plans, raising premiums further or discouraging insurers from offering them. Early evidence suggests some plans are responding by making coverage less generous for those with lower spending.

This large shift in plan generosity is particularly important for standalone prescription drug plans (PDPs), which are typically purchased by those enrolling in Traditional Medicare (TM). Since 2023, the number of PDPs available has fallen by 50% and remaining plans have projected high and variable plan costs due to the new policies. In response, the federal government has spent billions on additional subsidies to shield enrollees from premium increases.

These developments compound existing uncertainty about how competition with privately administered Medicare Advantage—which typically includes drug coverage—affects the viability of PDPs. Debates over the future of Medicare's prescription drug benefit inevitably require broader discussions about the overall design and balance between MA and TM. In the near term, however, if policymakers wish for TM to remain a viable option, then the PDP market needs greater stability. That stability should not come from the indefinite use of ad hoc subsidies that hide program costs.

One way to increase stability in the short term would be to revise how the out-of-pocket cap is calculated so that it is defined based on actual enrollee spending, and not inclusive of the value of enhanced benefits. The current administration may be able to revise existing guidance to do so, or Congress could legislate it directly. While slightly less generous, this would remain consistent with longstanding bipartisan support for a firm out-of-pocket cap for Medicare beneficiaries while improving the viability of PDPs.

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