The Budget-Busting Inflation Reduction Act
Back in November, the Congressional Budget Office (CBO) reported that the Inflation Reduction Act (IRA) was looking a lot more expensive than the agency or the law’s supporters thought. Insurers selling standalone drug plans have indicated to the federal government that they expect Part D enrollees will cost them 35 percent more in 2026 than in 2025. Last week, the CBO’s latest report showed what that will look like over the next decade: “Part D spending per beneficiary in 2035 is now projected to be more than $4,000, up from less than $3,000 in the January 2025 baseline.” The agency increased its 10-year projection of Part D spending by $600 billion, or $60 billion per year.
How could this happen?
In 2024, at a Cato Institute forum on Medicare prescription drug spending, I explained. The forum featured Cornell University economics professor (and former Cato health policy intern) Pragya Kakani, Harvard University economics professor Luca Maini, and me. All three were generally supportive of the IRA’s efforts to reduce the prices Medicare pays for prescription drugs, which would (or should) begin to reduce Medicare spending in 2026. (My perspective was that the price Medicare should pay for prescription drugs is $0.00—i.e., government should not buy medical care for civilians at all—and that moving the actual prices it pays in that direction is a positive step.)
I noted, however, that other parts of the IRA would have the effect of increasing Medicare drug spending, at least in the initial years. In particular, the IRA took multiple steps to insulate Medicare enrollees even further from the cost of their own drug consumption. Those provisions would predictably increase their drug consumption and Medicare spending. Noting that the federal government was already predicting rapid growth in Medicare spending on prescription drugs from 2024 through 2026, I cautioned:
In 2024 through 2026, that accelerated growth in Medicare prescription drug spending is in part a result of…provisions of the Inflation Reduction Act that will tend to increase Medicare spending on prescription drugs.
The IRA, like many other health care bills that Congress has passed, takes sort of a “dessert first, spinach later” approach to Medicare spending: it frontloads additional subsidies that have the effect of increasing Medicare spending (in some cases increasing the prices that Medicare pays for prescription drugs), with the promise of fiscal restraint later…
It remains to be seen whether that is going to happen, because we have seen this before, in the Affordable Care Act and in other laws that Congress has passed, where they have promised austerity, but not yet…
“Dessert first, spinach later” is standard fare on the congressional budget menu. To gather support for a bill among special-interest groups (or to reduce special-interest opposition), Congress increases federal spending (“dessert”) in the early years and postpones the spending restraints (“spinach”) until later years. Even if the CBO projects the bill would cause federal spending to fall, it can instead cause federal spending to rise because special interests who stand to benefit from the new spending then ensure that it takes effect, while those who stand to lose from the spending restraints get to work on postponing, reducing, or rescinding them.
Back in November, the CBO reported that the IRA’s “dessert” was a lot more expensive than the agency had previously projected, quite possibly due to the provisions limiting beneficiary cost-sharing:
The cap on out-of-pocket spending and other changes in the [IRA] reduced Part D beneficiaries’ required cost sharing (the amount they pay for a prescription). CBO, CMS, and private insurers may have underestimated the cost to insurers of the reduced cost-sharing requirements for beneficiaries with high spending on prescription drugs in 2025…A private actuarial firm’s analysis of early 2025 claims data found large increases in spending on specialty drugs for beneficiaries whose cost sharing was most affected by the benefit changes.…
The actual increase in spending resulting from the reduction in out-of-pocket costs may have been larger than CBO projected. One possible explanation is that beneficiaries’ behavioral responses to cost-sharing changes are more similar among people at different levels of spending on prescription drugs than the agency expected.
The CBO also noted that the IRA may have increased Medicare spending by facilitating drug manufacturers’ sneaky price-discrimination schemes:
Alternatively, CBO may have underestimated the potential for spending growth partly because it did not anticipate changes in manufacturers’ policies that would shift more of the cost of expensive drugs to Part D plans. The agency’s analysis relied on historical claims data, which may not have captured certain transactions funded through drug manufacturers’ patient assistance programs. Some manufacturers have changed eligibility criteria for their assistance programs in response to the benefit changes in the [IRA]. As a result, prescriptions for certain expensive drugs may be submitted to insurance plans for coverage instead of supplied directly through the patient assistance program—increasing the volume of prescriptions financed by the government.
(For a primer on how sneaky pharmaceutical firms use so-called “patient assistance programs” to facilitate price-discrimination and maximize government subsidies, read pages 66–70 of Charlie Silver’s and David Hyman’s excellent Cato book, Overcharged.)
Finally, the CBO offers other potential reasons why Part D spending is higher than the agency had expected, including insurer administrative costs, broader trends in prescription drug spending, and “temporary” subsidies that the Biden administration created by fiat, which “capped year-over-year increases [in enrollee premiums] at $35” and which may have led insurers to “be less constrained in submitting bids with higher costs.”
In total, the CBO increased its 10-year projection of Medicare spending by $1 trillion. More than half of that increase—$600 billion—comes from higher spending on Part D. That’s the best indicator we’ve got of how much the dessert is currently outweighing the spinach.
And remember: that’s assuming the spinach actually takes effect. The pharmaceutical industry is hard at work trying to ensure it does not.