Medicare Drug Cut Coverage Hides Real Causes of High Costs
Photo by Matt Artz
Much news coverage of the Trump administration’s decision to end a Medicare drug subsidy program focused on the immediate effects – namely, higher health care costs for seniors. But the discussion has failed to zoom out and discuss the larger issues at play.
Last week, the Center for Medicare and Medicaid Services (CMS) announced that it would end the temporary Part D Premium Stabilization Demonstration earlier than originally expected. This program carries an estimated $9.8 billion price tag for 2025 and 2026. It was meant to offset costs for insurers created by one of the Biden administration’s and congressional Democrats’ central legislative achievements: the capping of annual prescription drug costs for seniors enrolled in a Medicare Part D drug plan.
These drug plans are run by private insurance companies rather than the government; but, taxpayers foot the bill when it comes to paying monthly subsidies to these companies to provide coverage. Somewhat similar to the Medicare Advantage program, these public payments are capitated, meaning that they are per patient and affected by the health needs of each patient. These companies — otherwise known as plan sponsors — also make money by charging enrolled patients premiums.
Like much of the health care system, the market for private Plan D sponsors is heavily concentrated rather than a diverse, competitive free market. Five companies are behind 74.4 percent of Plan D enrollment for 2026.
The Part D Premium Stabilization Demonstration specifically applied to stand-alone prescription drug plans — otherwise known as PDPs, which do not include Medicare Advantage plans that also offer Part D drug coverage. Here concentration is even higher, with five companies behind 91.3 percent of enrollment.
In the 2022 Inflation Reduction Act (IRA), Congress capped annual out of pocket expenses on drugs for seniors enrolled in Part D plans at $2,000. In reality, this capping means that insurance companies can only force seniors to pay up to $2,000 a year for the medications they used. The insurer has to cover the rest. The rationale for this cap was simple: seniors, many of whom require expensive medications over long periods of time, like cancer patients – could not afford their treatment without such a cap. If the purpose of Medicare Part D is to actually allow seniors to afford their medications, then they need an out-of-pocket cap to ensure their insurance actually allows them to afford their medications.
Anticipating that these insurance companies would hike premiums to account for the higher amount of money they would have to spend covering patients’ health care — thereby finding a different route to shift costs onto patients — CMS launched the Part D Premium Stabilization Demonstration in 2024. This program was meant to run for at least three years and directly subsidized the insurance companies to cover their higher costs over the temporary period. Rather than end at the end of 2027 at the earliest, as originally planned, the Trump administration is ending them a year and a half earlier.
The Trump administration is framing this as an end to a subsidy for large insurance companies (which is correct), and much of the media, the insurance companies, and concerned patients see this as a cut that will make drugs less affordable for patients (which will also likely be true). The former is naturally correct as large insurance companies dominate the Plan D market. But, as will be discussed later, pointing the finger at insurance companies misses the real culprit: drug companies and their patent monopolies.
The latter makes sense as higher premiums will make affording a Plan D drug plan more difficult for seniors in the first place, even if they won’t pay more than $2,000 for covered medications after paying premiums. Since 24.9 million Americans have PDP plans in 2026, premium increases will raise costs for millions.
Make no mistake, this move will hurt seniors financially sooner than it otherwise would have if the program had lasted longer. However, policymakers and the American people at large should zoom out and grapple with the larger issues that cause this problem in the first place.
Why Are Drug Costs So High? Big Pharma Corruption and Patents
Especially on the Democratic side of the aisle, many critics of the current state of high prescription drug costs point to the lack of government negotiation of drug prices. Indeed, other nations have some form of negotiation take place, resulting in far lower drug costs. This dynamic even exists in the United States. The Department of Veterans Affairs (VA) negotiates drug prices directly with drug manufacturers. Thus, a December 2020 Government Accountability Office (GAO) report found that, in 2017, the VA paid roughly half (54 percent less on average) for a sample of 399 brand-name and generic prescription drugs compared to Medicare Part D.
Why doesn’t CMS directly negotiate drug prices like the VA and other countries? The answer is quite simple: the drug industry invested millions to ensure Congress banned the practice.
In 2003, Congress birthed Medicare Part D as part of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA). In 2003, the Pharmaceutical Research and Manufacturers of America (PhRMA) — the trade association and lobbying group for the pharmaceutical industry — and its member companies spent $72.6 million lobbying Congress. A principal goal of PhRMA’s was to ban Medicare from negotiating drug prices, knowing full well that such negotiation would lower their profits.
Accompanying the lobbying spending, the drug industry — as it has done for decades — also bought influence by financing the campaigns of members of Congress, spending around $20 million on such campaigns and the national political parties in 2002. Spending was particularly targeted to members with the most power to affect the upcoming prescription drug legislation. The industry gave the top Democrat and Republican on the Senate Finance Committee, Max Baucus and Chuck Grassley, around $114,000 and $100,000, respectively. The top Democrat and Republican on the House Energy and Commerce Committee, John D. Dingell and Billy Tauzin, each received around $100,000.
Indeed, Rep. Billy Tauzin was one of the key architects of the MMA. After he helped ban Medicare from negotiating drug prices, Tauzin decided against running for reelection, becoming the president and CEO of PhRMA immediately upon exiting Congress. His gig at PhRMA was very lucrative, where he raked in $11.6 million in 2010 as the highest-paid health-law lobbyist.
The Inflation Reduction Act cut a hole in this ban by allowing Medicare to negotiate drug prices for a small sliver of the thousands of drugs on the market. As of 2026, around three and a half years after the IRA became law, Medicare had selected 40 drugs subject to negotiation, albeit the government selects these drugs amongst those that Medicare spends the most money on.
Yet, Medicare still pays more than other countries for the limited set of drugs subject to negotiation compared to other countries, and drug prices overall are still exorbitantly high. Ultimately, government negotiation of drug prices may lower prices — with varying success — but it doesn’t address the root problem: government-enforced patent monopolies.
In a fully free market without any government intervention, medical innovation would struggle, as there would be little financial incentive for anyone to invest in the costly research and development (R&D) behind drugs, devices, and other medical products. To address the lack of financial incentive, Congress has chosen a particular policy option: government-enforced monopolies. With patents and various exclusivities, drugmakers are free to charge as high a price as possible without fear of competition for many years.
Contrary to the claims of industry, these prices are exorbitant and far higher than necessary to make a profit and recoup losses from R&D. Fourteen of the top drug companies from 2013 to 2022 spent more 105 percent of their net income on stock buybacks and dividends, which was $72 billion more than they spent on R&D. If these companies could spend so much money to enrich their shareholders that it not just exceeded R&D costs but also their net income, then they are simply charging prices that are way higher than necessary to fuel innovation.
The discussion on the subsidies toward Part D sponsors focuses on whether it is worth it for taxpayers to subsidize insurance companies so they don’t raise costs on seniors. But it completely neglects the drug companies and their government-enforced patent monopolies, which are the reason taxpayers and insurers have to pay exorbitant drug prices at all.
There are alternatives to the current patent system for medical innovation. Principally, any system should both provide a sufficient financial incentive for innovation and result in affordable products so patients can actually make use of said innovation. The current policy of the federal government granting patents and eliminating competition only accomplishes the former. The American people end up paying exorbitant sums in the end, whether it be through massive government spending of taxpayer dollars, large premium payments to insurance companies, or out-of-pocket spending.
Rather than creating and enforcing monopolies, federal policymakers can allow for free market competition that lowers prices while also ensuring that innovators get rewarded. The solution simply lies in direct public financing of medical innovation.
There are multiple models that can accomplish this, and they are not mutually exclusive. Most recently, Rep. Rashida Tlaib (D-Michigan) introduced the Medicines for the People Act in March 2026. This bill would create the National Institute for Biomedical Research and Development (NIBRD) to fund the research and development for drugs, biologics, and medical devices. This funding would go to both internal scientists along with private researchers via contracts, and the resulting products would exist in a competitive market. This proposal alone would not replace the patent system, but it would create a public option.
Previously, Sen. Bernie Sanders (I-Vermont) has introduced the Medical Innovation Prize Fund Act (MIPFA), most recently in 2017. Rather than provide funding upfront prior to research taking place, the MIPFA would have a prize fund authority — advised and informed by numerous independent committees — allocate prize funds to those who discover new medicines or create other medical innovations. This bill explicitly bars anyone from having “the right to exclusively manufacture, distribute, sell, or use a drug, a biological product, or a manufacturing process for a drug or biological product in interstate commerce.” Thus, it would replace the patent system, and it could also exist alongside an upfront funding model like the Medicines for the People Act.
Such a system would undoubtedly dramatically lower prices, and those savings would likely more than pay for the increase in spending necessary to finance R&D. The introduction of generic competition ultimately lowers the prices of drugs, and it does so to varying degrees based on the number of competitors. A general cost reduction estimate, cited by the Food and Drug Administration, is that generics cost 80-85 percent less than their brand-name counterparts. Assuming an 80 percent cost reduction in 2020, estimated savings from just brand-name drugs would have more than doubled the added cost for full federal funding of research and development.
These savings would not just help seniors who have a Medicare Part D plan. They would apply to all Americans. It makes sense that the media and affected Americans are concerned with the specific cost-increasing effects of the elimination of the temporary Part D Premium Stabilization Demonstration. But, if policymakers, the media, and the American people want to attack the root cause of exorbitant drug prices for all Americans rather than focus on specific programs designed to barely keep people financially afloat, then we all need to confront the issue of patent monopolies.
This first appeared on CEPR.
