CBO's $1 Trillion Medicare Shock: Part D Bids Catch Washington Off Guard

When the Congressional Budget Office quietly posted its February 2026 baseline projections on the afternoon of Wednesday, February 11, the headline numbers looked at first like routine federal accounting. By the following week, after policy analysts had finished pulling apart the spreadsheets, the document had become the most consequential health policy story of the month. CBO's nonpartisan scorekeepers had added roughly $1 trillion to projected Medicare outlays for 2026 through 2035 compared with their January 2025 baseline—and almost all of the increase traced back to a single, startling line item: the bids that private insurers submitted to administer Medicare Part D in 2026 came in 35 percent higher per enrollee than the year before, when CBO had been expecting a roughly 5 percent increase.

Health Management Associates, in its February 18 weekly roundup, called the gap "a trend CBO was not expecting and wants to study further." The American Action Forum and the Committee for a Responsible Federal Budget both flagged the Part D revision as the dominant driver of a broader $1.5 trillion upward revision in CBO's overall ten-year health spending estimate. Of that total, roughly $973 billion came from higher Medicare projections, and Part D alone accounted for about $600 billion of the increase—an inflection point that has reframed every conversation in Washington this winter about prescription drug pricing, the Inflation Reduction Act, and the financial trajectory of the Medicare Trust Fund.

The bids that broke the model

For more than a year, the conventional wisdom was that the Inflation Reduction Act's redesign of Part D would put downward pressure on premiums and federal spending. The 2022 reconciliation law capped beneficiary out-of-pocket costs at $2,000 starting in 2025 (rising to $2,100 in 2026), eliminated the donut hole, and shifted catastrophic-phase liability away from the federal government and toward plans and manufacturers. Combined with the first ten negotiated drug prices taking effect on January 1, 2026—savings the prior administration estimated at roughly $6 billion in the first year, with an additional $1.5 billion in beneficiary out-of-pocket relief—the assumption was that the program was finally bending its cost curve.

The bids told a different story. CMS's calculations now suggest that insurers expect their overall costs for the Part D benefit to be much higher in 2026 than in any previous year, with the base premium component (the average monthly amount paid by beneficiaries before stabilization) jumping by $75.38, or 35 percent, from 2025. Were it not for the IRA's premium stabilization mechanism, which limits annual base premium growth to 6 percent, the increases passed on to seniors would be eye-watering. Instead, plans absorbed the gap, federal reinsurance subsidies absorbed the gap, and CBO's baseline absorbed the gap.

The implications for the federal balance sheet are sweeping. Part D spending per beneficiary in 2035 is now projected to exceed $4,000—up from less than $3,000 in last January's baseline. CBO published a separate paper, "A Call for New Research in the Area of Spending on Medicare Part D," signaling that even its own analysts are not yet satisfied with the explanations on offer. Possibilities under examination include higher-than-expected utilization of expensive specialty drugs that have shifted into Part D under the IRA's redesign, plans pricing in catastrophic-phase liability they had previously been protected from, weight-loss and GLP-1 drug coverage entering the bid math in unexpected ways, and a possible reaction to the negotiated-price program itself, with manufacturers raising launch prices and list prices on non-negotiated products to offset the discounts taken on the original ten drugs.

A Medicaid mirror image

If Part D blew up CBO's Medicare projections, Medicaid moved in the opposite direction. CBO trimmed roughly $514 billion from Medicaid mandatory outlays for 2026 through 2035, almost entirely because of the One Big Beautiful Bill Act of 2025, which CBO now expects will reduce total Medicaid enrollment by 13.1 million people by 2035. Work requirements, redetermination tightening, and the rollback of expansion incentives are all loaded into that figure. Nebraska is set to become the first state to enforce federal Medicaid work requirements on May 1, 2026, with Montana following in July and Iowa in December, and the Secretary of HHS faces a June 1, 2026 deadline to issue an interim final rule guiding the rollout in the 42 expansion states required to implement work requirements by 2027.

But the savings come paired with a quieter, more troubling number. Medicaid costs per enrollee grew 16 percent in 2025—well above what CBO had anticipated—and the agency now expects payment rates for Medicaid managed care plans to begin rising in 2026 as the average health status of remaining enrollees deteriorates following the end of pandemic-era continuous eligibility. Centene, which reported a $1.10 billion fourth-quarter loss on February 6 and a 2025 GAAP loss of $13.53 per diluted share (largely driven by a $6.7 billion goodwill impairment), is reaffirming its 2026 adjusted EPS guidance of greater than $3.00 in investor meetings the week of February 23—but its Medicaid health benefits ratio of 93.0 percent in the fourth quarter underscores how tight the math has become. Elevance Health, which reported on January 28, set its 2026 Medicaid operating margin guidance at approximately negative 1.75 percent, citing rate trends that are still lagging utilization. The CBO baseline confirms what insurers have been warning carriers and state Medicaid directors about all winter: enrollment is shrinking, but acuity is rising, and the dollar-per-enrollee figures are climbing fast enough to offset much of the headcount-driven savings.

The Medicare Advantage flip

CBO's revision also captured something insurers themselves only began to acknowledge during their late-January and early-February earnings calls: more Medicare beneficiaries are leaving Medicare Advantage and returning to traditional fee-for-service Medicare than CBO had projected. The agency lifted its fee-for-service utilization assumptions and lowered its MA take-up rate, a directional shift that ripples through every payment, risk-adjustment, and Star Rating model the industry uses. Humana's February 11 results captured the human-level consequences: the company swung to a $796 million fourth-quarter loss, posted a $3.96 adjusted Q4 loss per share, and set 2026 GAAP EPS guidance at "at least $8.89" against a $3.5 billion Star Ratings headwind, even while projecting 25 percent individual MA membership growth in 2026 on top of roughly 1 million net adds in 2025. UnitedHealth's January 27 release showed Q4 adjusted EPS of $2.11 against revenue of $113.2 billion, with full-year 2025 earnings down 69 percent year over year and 2026 outlook set at greater than $17.75 per share on more than $439 billion in revenue.

In the background of all of this sits the CY 2027 Medicare Advantage and Part D Advance Notice, which CMS released in late January. The proposal projects a net 0.09 percent payment increase—essentially flat—but layers in tighter risk-adjustment calibration that uses 2023 diagnoses and 2024 expenditures to recalibrate the Part C model, replacing the older 2018/2019 reference period. Comments on the Advance Notice are due February 25, two days after this week's news cycle wraps, and the final Rate Announcement is expected by April 6. The combination of a flatter rate environment, tighter coding scrutiny, the lingering Star Ratings cliff, and now a Part D bid environment that has shocked even CBO's modelers means that the 2027 bid season is shaping up to be the most uncertain in a decade.

A second front: the 2027 Marketplace Notice and Cigna's exchange uncertainty

Layered on top of the budget story is the proposed 2027 HHS Notice of Benefit and Payment Parameters, published in the Federal Register on February 11 with a 30-day comment window closing March 13. The proposal represents the second major piece of the administration's marketplace overhaul, following the rules CMS finalized earlier in the month that scrapped mandatory standardized plan options and lifted caps on non-standardized plan offerings. The 2027 Notice carries forward changes to risk adjustment and risk-adjustment data validation, sets 2027 user-fee rates for federally-facilitated and state-based marketplaces operating on the federal platform, and refines parameters for the Basic Health Program. Issuers and brokers spent the week reading it through the lens of a marketplace that has already lost roughly 1.5 million enrollees this year following the December 31 expiration of the enhanced premium tax credits, with KFF estimating average net premium payments could rise about 114 percent—or roughly $1,016 a year—for typical subsidized enrollees, and insurers projecting that 6.4 to 17 percent of their individual-market membership will exit before 2027.

Cigna, which has drawn intense scrutiny over the past two weeks for the future of its exchange business, used investor briefings during the week of February 16 to underscore that 2026 is a transitional year for the Affordable Care Act book and that the company is already "evaluating the path forward." Industry observers have speculated about a potential exit announcement on Cigna's spring earnings call, though the company has not committed to one publicly. Either way, the combination of a $1 trillion Medicare cost upward revision, a marketplace losing both enrollees and at least one major carrier's commitment, and a Medicaid program shedding members while spending more per remaining beneficiary has put unusual stress on every public-program balance sheet at once.

Three numbers brokers and benefits leaders are watching

The week's storylines distilled to a handful of figures that will drive carrier conversations and renewal modeling well into the spring:

• 35 percent—the Part D per-enrollee cost increase reflected in 2026 plan bids, against CBO's prior expectation of roughly 5 percent.
• $1 trillion—the upward revision to projected 2026–2035 Medicare outlays in CBO's February baseline, with about $600 billion of that attributed to Part D alone.
• 13.1 million—the projected reduction in Medicaid enrollment by 2035 under the One Big Beautiful Bill Act, even as per-enrollee costs grew 16 percent in 2025.

Why this lands harder than the average baseline release

CBO baselines are normally read by tax-policy specialists, appropriations staff, and a small circle of healthcare analysts. The February 2026 release broke into a wider audience because the Part D number is, in effect, the first hard signal that the post-IRA equilibrium is not what anyone modeled. The legislation was sold partly on the premise that Medicare would save money by negotiating prices on its highest-spend drugs while shifting catastrophic-phase risk away from taxpayers. Plans bidding 35 percent higher in the first year that program design is fully effective has given ammunition to almost every faction in the drug-pricing debate. PhRMA-aligned voices are using the figure to argue that negotiation is causing manufacturers to raise launch prices on non-negotiated drugs and that broader market distortions are emerging. IRA defenders point to GLP-1s, specialty drug utilization, and continued patent-protected branded launches as the real culprits and warn against drawing premature conclusions. CBO itself, in publishing a companion call for new research, signaled that the agency is reluctant to fully bake the bid environment into its long-run assumptions until it understands what is actually happening inside plans' actuarial models.

The political reverberations are likely to extend into employer-sponsored coverage. The Consolidated Appropriations Act of 2026, which became law February 3, layered new PBM transparency, pass-through-rebate, and "any willing pharmacy" rules onto Medicare Part D plans starting in 2028 and onto employer group health plans on parallel timelines. Self-funded employers reading CBO's revision now have one more reason to question whether the rebate-and-spread economics underlying their PBM contracts will hold up. The 53-plan AHIP/BCBSA prior-authorization standardization initiative continues in parallel, with plans reporting that they have eliminated about 11 percent of prior authorizations to date and are working toward a fully interoperable FHIR-based electronic prior authorization framework operational by January 1, 2027. None of those reform pressures get easier in a year when Medicare is suddenly expected to spend a trillion dollars more than budgeted.

A volatile baseline for a volatile year

The takeaway from the week of February 16 through 22 is less a single piece of news than the recognition that several previously separate storylines have collapsed into one fiscal narrative. Medicare Part D is no longer a stable, slowly maturing program operating under a familiar set of post-IRA assumptions; it is the single biggest source of upward pressure on federal health spending in CBO's baseline. Medicaid is shrinking on the headcount but expanding on the dollar. Medicare Advantage is unwinding faster than carriers expected, with members migrating to fee-for-service and Star Ratings cliffs wiping billions off plan bonus payments. And the marketplace is being reshaped simultaneously by the expiration of the enhanced premium tax credits, by carrier exits, and by a regulatory rewrite that will continue through the March 13 comment deadline on the 2027 Payment Notice.

For a brokerage community that already entered 2026 navigating Mount Sinai's March 1 hospital cutoff with Anthem, ACA enrollment that had dropped by more than a million people, and Q4 earnings calls full of warnings about elevated medical-cost trend, the CBO release is less a discrete event than a confirmation of how thin the margin for error has become. The Federal Register filings, the comment letters, and the carrier investor-day decks of the next four weeks will determine how much of CBO's $1 trillion Medicare revision sticks—and how much of it is washed out as plans, manufacturers, and regulators recalibrate to the new equilibrium that the 2026 bid season has just revealed.