On October 2, 2024, the Congressional Budget Office (CBO) provided an update to Congress on significant developments concerning Medicare's prescription drug coverage under Part D. This report, addressed to various committee chairs, sheds light on how changes in 2025 plan bids, paired with newly announced temporary subsidies, are projected to affect federal spending.

Key Background on Medicare Part D

Medicare Part D provides prescription drug coverage to Medicare beneficiaries through private plans. These include both Medicare Advantage plans with prescription drug coverage (MA-PD) and standalone prescription drug plans (PDPs). Each year, these plans submit bids to the Centers for Medicare & Medicaid Services (CMS) representing the expected cost of providing coverage to enrollees. The bid amounts directly influence federal subsidies, premiums paid by beneficiaries, and the overall cost of Medicare’s Part D program.

Major Developments for 2025

Rising Bid Amounts: CMS announced a significant increase in the average bid amount for 2025—an astonishing 179% compared to 2024. This sharp rise is primarily due to the redesign of the Part D program implemented by the 2022 Reconciliation Act (P.L. 117-169), which includes capping out-of-pocket costs for enrollees and requiring manufacturers to provide new price discounts. CBO originally projected a 26% increase in costs for 2025, but the actual 42% rise in bid and reinsurance costs exceeded their expectations by 16 percentage points. This miscalculation could result in additional federal spending of $10 billion to $20 billion in 2025 alone.

Temporary Subsidies: A Short-Term Solution

In response to the rising bid amounts and the potential burden on beneficiaries, CMS has introduced temporary subsidies for prescription drug plans from 2025 to 2027. These subsidies aim to stabilize premiums and lessen the financial impact on both beneficiaries and the federal government. The subsidies for 2025 are expected to:

• Reduce beneficiaries' premiums by $15 per month.

• Cap the increase in monthly premiums at $35, compared to the previous year.

• Provide additional subsidies to plans incurring losses exceeding 2.5% of their bid amounts.

The CBO estimates that these temporary subsidies will increase federal spending by an additional $5 billion in 2025. The breakdown of this spending includes:

• $2.9 billion from premium reductions.

• $1.8 billion from premium caps.

• $250 million from increased risk corridor subsidies.

Long-Term Effects on Federal Debt

The increased federal spending in 2025, coupled with the temporary subsidies, is expected to contribute to higher national debt. The CBO projects that this will result in an additional $2 billion in net interest costs over the next decade (2025-2034).

The recent developments in Medicare Part D are a mixed bag for beneficiaries and taxpayers. While temporary subsidies will offer some relief to enrollees, the sharp rise in plan bids and increased federal spending pose challenges for long-term budgetary stability. As lawmakers continue to monitor these changes, the key question remains: Will the short-term fixes be enough to offset the rising costs of prescription drug coverage under Medicare?