The Inflation Reduction Act Comes for Medicare It will cut benefits and increase premiums, upsetting millions of elderly voters. By Casey B. Mulligan and Tomas J. Philipson
President Biden has accused Republicans of scheming to cut Medicare. In fact it is his signature legislation, the Inflation Reduction Act, that will lead to benefit cuts and premium increases for seniors. Medicare’s popular drug-coverage program is headed for a painful amputation.
The private plans participating in Medicare’s prescription-drug program, known as Part D, currently draw on three sources of revenue to finance prescriptions: out-of-pocket payments from patients, premium payments made by plan members, and subsidies from the federal government. In 2025, under the Inflation Reduction Act, both government subsidies and out-of-pocket payments by patients are scheduled to be cut sharply. The difference will have to be made up by premiums. But the statute inhibits this third revenue source, which is also subsidized, from increasing more than 6%. That’s hardly enough to cover inflation, let alone compensate for the other two revenue losses.
We estimate that beginning in 2025, plan subsidies—specifically, the reinsurance subsidies for the beneficiaries with the most drug spending—will be cut $30 billion, out of revenue that currently totals about $110 billion. With $30 billion less to finance prescription benefits, something will have to give. Plans currently have far too little profit to span the chasm that the Inflation Reduction Act opens between expenses and revenue.
Existing plans have room to cut benefits, although the original Part D statute limits their ability to do so. As plans are under no obligation to take a loss, their other choice is to exit the market, which from the patient’s perspective means that all the benefits disappear. In essence, the Inflation Reduction Act statute may prohibit Part D plans from being economically viable, even if it doesn’t explicitly ban them.
We see a last resort. Seniors might find drug coverage in Medicare Part C even as the Biden administration unwittingly amputates stand-alone drug plans from the Medicare program. These plans, known as Medicare Advantage, cover drugs, hospitalization and physician visits. They will also be losing the same two drug-revenue sources, but the Inflation Reduction Act gives them room to compensate with higher premiums, reduced drug benefits (with fewer drugs covered and more constraints on accepted claims), or cuts to nondrug benefits such as dental or mental-health coverage. They will likely do all three, which will be undesirable for seniors but at least be economically viable. The best part of the last resort? The plans won’t go away.
Roughly half of Medicare beneficiaries currently have traditional Medicare coverage rather than Medicare Advantage plans. These are the beneficiaries relying on stand-alone Part D drug plans, which are the ones that may be run out of business by the Inflation Reduction Act. Traditional Medicare members face a difficult choice in 2025: Either take drastic cuts in drug coverage, or switch to Medicare Advantage plans that cover prescriptions but may not cover the hospitals and doctors who are currently providing them care.
Welcome to the fiscal and regulatory nightmare known as government-provided health care, where those writing the rules don’t understand the consequences of what they do. Democrats hate that Medicare Advantage has been available as a pseudo-private alternative to original Medicare’s single-payer arrangement. Yet they have (unwittingly?) passed a law that so thoroughly disrupts traditional Medicare as to render it the worst of the Medicare options.
From a political perspective, Democrats couldn’t have scheduled Medicare’s amputation for a worse time. With Congress so evenly divided, a short-term legislative fix may be impossible. By September 2024, the presidential campaign will be in high gear at the same time that beneficiaries begin to consider their 2025 Medicare enrollments. That’s when the Inflation Reduction Act will thoroughly upset tens of millions of elderly voters, all while the authors of the statute ask the country to vote for their presidential nominee. By then, America will have no doubt which party is cutting Medicare.
Mr. Mulligan, an economics professor at the University of Chicago and a fellow with the Committee to Unleash Prosperity, was chief economist for the White House Council of Economic Advisers, 2018-19. Mr. Philipson, an economist at the University of Chicago, was a member of the White House Council of Economic Advisers, 2017-20, and its acting chairman, 2019-20.
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