Executive Summary

• The Voluntary Prescription Drug Benefit Program, commonly referred to as Medicare Part D, was created in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and has delivered competitive forces that control participant and taxpayer costs and provide wide beneficiary choices and broad access to new drugs.
• Recent policies, notably the Inflation Reduction Act’s drug price controls, have undercut the integrity of the policy design and damaged the functionality of the Part D program.
• President Trump’s order to impose “most favored nation” pricing would be the death knell for Part D; importing price controls from failed single-payer health care systems would set up a dynamic of failure in the prescription drug plan market.

Introduction

The Voluntary Prescription Drug Benefit Program, commonly referred to as Medicare Part D,  was created by the Medicare Modernization Act (MMA) in 2003. Its revolutionary design harnessed the power of competition to control beneficiary and budget costs and provide consistently high-quality drug coverage.

The goal of Part D was to provide a stable mechanism for competing insurance issuers to offer prescription drugs at negotiated prices to Medicare beneficiaries. In its lifetime, the program has more than achieved its goals, costing taxpayers much less than the original budgetary projections, providing a wide variety of low-cost plan options, and maintaining member satisfaction.

The annual Part D bidding process allows issuers to place bids for plans in any or all of the 34 designated regions in the country. These issuers submit a bid displaying the potential per member per month (PMPM) cost of providing benefits to members in the established regions. All bids contain a rate for the basic benefit or “standard plan” as well as an enhanced benefit plan that goes above and beyond the minimum plan requirements.

Part D members can choose whether they would like to participate in a plan that contracts with nearby pharmacies as part of a preferred pharmacy network, pay a higher premium for plans with enhanced benefits, or save money by selecting a standard plan.

Despite initial worries about plan participation, this bidding and selection process has led to many available plans. The Part D program allowed private prescription drug plans to use formularies meeting basic standards and to negotiate directly with the manufacturers. The open competition for beneficiaries resulted in a robust market. Part D plans and their agents negotiate discounts on behalf of tens of millions of seniors at a time, a population that is bigger than many European countries.

The success of the program is not an accident: Part D is designed to provide seniors with affordable choices. Competitive bidding and plan selection have led to high-quality products, as measured through member satisfaction rates.

The Inflation Reduction Act: Damage to the Integrity of the Part D Policy Design

Over the years, there was a gradual drift away from exclusive reliance on strong bargaining between prescription drug plans (PDPs) and drug manufacturers. At first glance, the policy ship appeared to have been righted by the Inflation Reduction Act (IRA) in 2023. (See here for a description of the impacts of the IRA on Medicare.) The IRA contained a redesign of the basic Part D benefit that reduced the taxpayer liability. In broad terms, it made PDPs liable for 65 percent of the cost of the benefit up to the initial coverage limit, and 60 percent of the cost in the catastrophic region. Manufacturers would be responsible for 20 percent of the catastrophic costs.

The combination of these changes greatly increased the incentives for PDPs to negotiate low prices, and for manufacturers to avoid prices that drove seniors into the catastrophic region. Taken at face value, this was a return to the policy roots of the Part D program. But the IRA allowed for little transition to the new design. Faced with higher potential premiums, the Centers for Medicare and Medicaid Services undid the reforms with an ill-considered Premium Stabilization Demonstration Project (see here).

Worse, the IRA contained language that requires Medicare to set prices (known as the maximum fair price, or MFP) for select drugs, a process the legislation calls “negotiation.” Drugs were initially selected in 2023 and the prices set will be applied beginning in 2026. A second round of drugs was selected in 2024. (New drugs will be selected each year, expanding to Part B drugs and raising the number of drugs.) Drugs eligible for selection are defined as those among the 50 single-source drugs with the highest total expenditures in either Part B or Part D and are at least seven years past their Food and Drug Administration approval date.

The IRA sets up an opaque and subjective process for developing an MFP. Manufacturers that do not comply with the price-setting process, including not engaging in the process or agreeing to an MFP, will be charged an increasingly large excise tax ultimately reaching 95 percent. Note that the 95-percent rate is rate applied to the tax-inclusive price. The effective rate of tax on the price received by the seller is therefore 1,900 percent. This means, for example, that the manufacturer would pay $190 in taxes on a sale that yields $10, for a total retail price of $200.

Research shows that because of the IRA, insurers are increasing patient cost-sharing by moving more drugs to co-insurance tiers, increasing copays, and moving medicines to higher tiers. The Pioneer Institute found that these actions increased out-of-pocket costs by 32 percent for nine of the first 10 selected drugs. A study by the Council for Affordable Health Care found that plans increased patient cost-sharing at the pharmacy counter due to the IRA, with increases ranging from 10.6 percent to 75.8 percent for four selected drugs. In addition, plans have been increasing deductibles and beneficiaries face fewer plan choices. The number of PDPs available in 2025 dropped to the lowest level since the program started.

Price-fixing – even when labeled negotiation – has a long track record of policy failure. The data are beginning to accumulate on the IRA version as well.

“Most Favored Nation” Pricing: Death Knell for Part D?

In May, the president signed an executive order (EO) directing the secretary of Health and Human Services (HHS) to implement “most favored nation” (MFN) drug pricing. (See the fact sheet here and a discussion here.) In short, the MFN price is the lowest price paid for a drug by any applicable nation in the Organisation for Economic Co-operation and Development. The president also directed HHS to act as a consolidated pharmacy benefit manager and pharmacy that will funnel drugs from manufacturers to Americans. Put differently, manufacturers will be forced to adopt a direct-to-consumer distribution model. In this vision, the drug manufacturers would deliver the drugs at MFN pricing.

This paradigm shift would mean the end of the Part D program. Having HHS bureaucrats impose foreign prices will lead to the restriction, elimination, or simply obsolescence of all the tools Part D plans use in price negotiations and designing formularies, such as cost-sharing tiers and utilization management. But the usurpation of pricing wouldn’t even stop at U.S. policymakers. In effect, it would be delegated to foreign governments. These are top-down, single-payer health systems that do not reflect what American patients value, especially advancements in medical science and access to them. These same governments were once leaders in the global biopharma industry and lost much of the industry and its jobs to the United States. MFN imports the worst decision-making on the planet.

Part D would become a component of a single-payer, government system. National price controls mean that the government will define the formulary and, regardless of clinical merit, set the prices. The government will come between patients and providers. There will be a central bureaucracy, long wait times for products, and reduced innovation.

The robust PDP market would be a thing of the past. Standalone plans would be unable to manage their financial liability and would drop out of the program. As plan offerings begin to look the same, the only way a prescription drug plan can compete for enrollment and manage financial liability is through utilization management. During the slow demise of the market, plans will survive only by cherry-picking the healthiest enrollees and having high restrictions on drug utilization. The other plans that end up covering sicker enrollees would lose money and end up dropping out of Part D altogether.

Conclusion

The establishment of MFN pricing is a threat to Medicare Part D.  The program – arguably one of the United States’ most successful entitlements, with broad participation, high beneficiary satisfaction, and powerful controls of participant and taxpayer costs – would be transformed into its exact opposite. There would be no benefit to tailoring formularies to different needs of seniors. There would be no negotiation to control future drug costs. The drug benefit would be transformed into an expensive, one-size-fits all government single-payer system.