Medicare spent $9.8 billion to hide a Part D price increase

When the Inflation Reduction Act's redesigned Part D benefit took effect in 2025 — a $2,000 annual out-of-pocket cap, funded by pushing more catastrophic drug cost onto insurers — stand-alone drug plan premiums threatened to spike.▸ So CMS reached for a tool built in 1967: Section 402 demonstration authority, meant to test "changes in methods of payment," to pay insurers directly to hold premiums down. It is now in its second year, and the bill has a number attached to it.

The mechanics are simple: CMS reduces every participating plan's base premium by a flat amount, then caps how much a plan's total premium is allowed to rise year over year — and the government's direct subsidy payment to the insurer absorbs the difference.▸ In 2025 that meant a $15 uniform premium cut and a $35 cap on year-over-year increases. For 2026, CMS loosened both levers: the uniform cut shrinks to $10, and the increase cap widens to $50 — CMS's own framing is that this "facilitat[es] the program's return to operating under regular market conditions." The U.S. Government Accountability Office reports CMS's own estimate of the total cost: $9.8 billion across 2025 and 2026 combined, paid for by increasing what Medicare pays plans directly. A separate May 2025 GAO legal opinion (B-336645) found the arrangement consistent with CMS's statutory authority — legal, but not free, and not something Congress voted to appropriate.

It worked, in the narrow sense that the number seniors see went down: from $41.63 in 2024 to an actual $38.31 in 2025 to a projected $34.50 in 2026 — CMS calls that "expected to remain stable," which undersells a 17% drop over two years.▸ What that chart doesn't show is what the subsidy is covering up.

Every year, CMS calculates a "national average monthly bid amount" (NAMBA) — the weighted average of what insurers say it actually costs them to cover an average Part D enrollee, before any demonstration adjustment.▸ It is the number the premium is supposed to track. In 2025 it was $179.45. For 2026, CMS put it at $239.27 — a 33% jump in a single year.

That is the actual price of insuring a Part D enrollee, rising by nearly a third in a year the sticker premium fell by 10%.▸ The gap between the two lines is exactly what the $9.8 billion demonstration exists to paper over — paid through a bigger direct subsidy check to insurers, not through insurers actually finding $60 a month in savings. Paragon Institute, a conservative health-policy think tank, has called the arrangement "effectively a bailout," and noted CMS launched it weeks before the 2024 election. GAO's own new report on the demonstration, issued February 2026, notes CMS has not yet completed an evaluation showing the money is achieving what it was designed to do, as opposed to simply being spent.

24.9 million people are enrolled in stand-alone Part D plans in 2026, up from 23.2 million in 2025, per KFF's analysis of CMS enrollment data — more people leaning on a market the subsidy is trying to hold together.▸ What that market offers them is shrinking on schedule regardless.

KFF counts 464 PDPs on offer in 2025 — itself a 35% drop from 2024 — falling again to 360 in 2026, an additional 22% cut, spread across just 17 parent companies.▸ The number of "benchmark" plans with a $0 premium for low-income beneficiaries fell from 90 to 88 over the same year, the fewest since Part D began in 2006. Roughly 14 million Extra Help enrollees depend on those benchmark slots existing in their region at all — a subsidy measured in billions did not stop that number from shrinking too.

Premium and bid figures are calendar-year CMS projections and actuals as of each cited release; final 2026 figures post to the MA & Part D Landscape in September 2026 and may differ slightly from the July 2025 projections used here.