Ending Temporary Part D Subsidies Makes Sense | American Enterprise Institute

The Trump Administration announced yesterday that it would finish phasing out a temporary subsidy program for Medicare prescription drug plans—a sensible decision given the program’s increased generosity and low premiums. Future changes should balance cost containment against any additional federal support.

The Inflation Reduction Act (IRA) made Medicare prescription drug coverage much more generous for beneficiaries by imposing a new cap on out-of-pocket spending. It also put insurers on the hook for more costs associated with high spending patients. These reforms benefited consumers but raised program costs far more than anticipated. To ease the transition, the federal government temporarily subsidized insurers in multiple ways.

One of those subsidies, the Part D Premium Stabilization Demonstration, reduced enrollee premiums on “standalone” Part D plans, typically purchased by those on Traditional Medicare. Though nominally voluntary, the demonstration amounted to a national policy covering 99 percent of enrollees in standalone plans. This program has cost roughly $10 billion over two years. 

The subsidy was phased down by nearly half in 2026 and is scheduled to be eliminated in 2027—a reasonable policy decision for several reasons.

First, smoothing policy transitions can be justified when market participants face substantial uncertainty. But insurers now have multiple years of experience with the new rules, lessening that uncertainty.

Second, this subsidy—and a similar one—did little to address rising program costs. Rather, it simply obscured them. Given Medicare’s outsized role in the federal government’s long-run fiscal imbalance, coving substantial cost increases through indefinite federal subsidies is imprudent.

Third, context matters here. Part D plans became much more generous after the IRA, yet enrollee premiums are at historic lows. As the figure below illustrates, the inflation-adjusted average premiums for standalone Part D plans are far below historical norms. In fact, enrollees only bear roughly 13% of the cost of Part D plans overall—down from nearly 26% historically.  

Figure: Average Premiums Paid for Standalone Part D Plans, Inflation Adjusted 

More broadly, policymakers should reconsider demonstration authorities that allow the executive branch to make nationwide programmatic changes under the guise of a “test.” Such demonstrations would likely face significant legal scrutiny if challenged, but that is unlikely if market participants are made better off and have little reason to contest them—a feature more likely when the federal government increases spending.

The Part D market is in an uneasy place. The IRA increased program costs far more than anticipated and policymakers have leaned on taxpayers to absorb those expenditures. Phasing out temporary subsidies that obscure rising costs, including this one, is appropriate. Lawmakers should instead confront the program’s challenges directly through permanent policies that constrain program expenditures, share a reasonable portion of costs with beneficiaries, and tailor any permanent federal support to where market stability is genuinely at risk.

Dr. Ippolito is a member of the Medicare Payment Advisory Commission (MedPAC). The views presented are those of the author and do not reflect those of the MedPAC.