In recent years, growth in federal reinsurance—the government subsidy that covers 80% of catastrophic spending—and increasing beneficiary out-of-pocket costs have sparked interest in Part D reforms among policymakers and other stakeholders such as the Medicare Payment and Advisory Commission (MedPAC). In this analysis, Avalere examines factors driving trends in Part D bids and payments and the shift of spending and risk to the federal government through reinsurance.

Specially, Avalere’s analysis finds that despite stable premiums, government reinsurance costs have more than doubled since 2010. This growth in government reinsurance has meant that a greater portion of program spending has shifted from capitated risk-based payments to plans—known as the direct subsidy—to cost-based reinsurance payments. For example, based on 2010 plan bids, plans were at risk for 45% of total Part D program costs through capitated direct subsidy payments, and the government was at risk for 29% of the total costs through reinsurance payments. However, as of 2021, plans’ risk through direct subsidies has declined to 8% of total benefit costs, while the government’s risk through reinsurance has increased to 67% of total costs (Figure 1).

Avalere Analysis of the Centers for Medicare and Medicaid Services annual release of the Part D national average bid amount and other Part C and D bid information, 2006–2021.

The analysis examines various factors contributing to this shift in program spending, including changes to the Part D benefit structure and modifications to the coverage gap following the implementation of the Affordable Care Act, the launch of new and more complex therapies at higher price points, enrollee progression through the benefit based on list price, and growing use of manufacturer rebates to lower premiums.

Policymakers have considered various proposals such as Part D benefit redesign and rebate reform to address these current program dynamics and realign stakeholder incentives. For instance, in November 2020, the Trump administration released a final rule that would replace rebates with point-of-sale discounts passed directly to enrollees at the pharmacy counter. While the outlook for the rule is unclear due to ongoing legal action, Congress has indicated renewed interest in Part D and other drug pricing reforms. On April 21 and 22, House Republicans and House Democrats reintroduced updated versions of their drug pricing bills, H.R.19 and H.R.3, respectively. The packages, which were first considered in Congress in 2019, both include proposals to redesign the Part D benefit along with other Part D reform provisions. Looking ahead, Part D benefit redesign and other Part D reforms may be considered as part of a larger spending or drug pricing package.

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Funding for this research was provided by the Pharmaceutical Research and Manufacturers of America (PhRMA). Avalere Health retained full editorial control.

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