Medicare Part D: Time for Re-Modernization?

Objective: To understand the mechanisms that have held Part D beneficiary premiums stable despite increasing reinsurance subsidies.

Data Sources: Secondary data on Part D plan bids, federal subsidies, and claims from 2007 through 2015.

Study Design: Comparisons of standardized, enrollment-weighted average Part D plan bids and reinsurance bids with plan and reinsurance liability calculated from Part D claims data.

Data Collection/extraction Methods: Part D plan payment data were merged with premium data to derive plan bids, which were merged with claims-based spending measures.

Principal Findings: Plan bids and reinsurance bids increasingly diverged from the spending observed in the claims data over the study period. This divergence was attributable to the growth in rebates and systematic under-bidding of expected reinsurance payments, enabling plans to hold premiums low and collect excess federal subsidies of approximately 3 percent of total Part D spending in 2015.

Conclusions: Revenue from rebates and excess federal subsidies via reinsurance reconciliation has played an important role in holding Part D premiums low, despite increasing federal reinsurance subsidies. While policy makers should consider implementing reforms to address these misincentives in the program, doing so is likely to result in unavoidable premium increases to levels more reflective of actual net spending.