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Introduction

Medicaid is a very complex program that involves millions of enrollees, hundreds of thousands of providers, and significant federal and state expenditures. Both the federal government and states are responsible for ensuring the proper management and functioning of the Medicaid program to ensure it is providing quality and efficient care while using funds–taxpayer dollars–appropriately with minimal waste. Program integrity efforts historically have worked to prevent and detect fraud, waste, and abuse, to increase program transparency and accountability, and to work on corrective action plans and recover improperly used funds. The Trump Administration has signaled reducing fraud, waste, and abuse across federal programs (including Medicaid) is a priority.  However, broader Medicaid cuts from 2025 reconciliation law may impede states’ ability to invest in oversight and other administrative initiatives to reduce fraud. The reconciliation law also includes changes that directly address the Medicaid Payment Error Rate Measurement (“PERM”) program, which over time could have financial and administrative implications for states. The Congressional Budget Office (CBO) estimates that Medicaid payment reductions related to PERM could reduce federal spending in Medicaid by $7.6 billion over ten years.

The PERM program measures “improper payments” in Medicaid to produce improper payment rates. Improper payments are payments that do not meet CMS program requirements, often the result of administrative or paperwork issues. PERM is designed to help states improve their operation of the program and reduce errors; it is not a measure of fraud against the program. Beginning October 1, 2029, the reconciliation law requires HHS to reduce federal Medicaid financial participation to states that exceed a three percent PERM eligibility error rate threshold. (SNAP policy changes will also require states to pay a portion of SNAP benefit costs, depending on the state’s payment error rate.) While Medicaid pays most outlays properly (93.9% in 2025) most improper payments are due to insufficient documentation (77.2% in 2025), including eligibility-related errors (68.1% due to insufficient documentation in 2025). State error rates vary, but nearly one quarter of states have eligibility error rates above the three percent PERM threshold based on their most recent audit result. This brief explains the PERM program and its three components as well as upcoming changes to PERM and possible state impacts.

What is PERM?

The PERM program operates according to requirements set in law and CMS rulemaking. The Improper Payments Information Act (IPIA) of 2002 (replaced by the Payment Integrity Information Act (PIIA) of 2019) requires the heads of federal agencies to annually review programs they administer and identify those that may be susceptible to significant improper payments, to estimate the amount of improper payments, to submit those estimates to Congress, and to submit a report on actions the agency is taking to reduce the improper payments. The federal government has designated Medicaid and other programs (including Medicare, SNAP, and TANF) as “risk-susceptible.” Medicaid receives this designation due to its size and complexity, as the program involves millions of enrollees, hundreds of thousands of providers, 51 state agencies (including DC), different delivery systems, complicated eligibility rules, and significant federal and state expenditures. GAO monitors high-risk programs and their improper payments, including Medicaid.To comply with IPIA requirements in Medicaid, CMS developed the PERM program.

The PERM program measures improper payments in Medicaid by producing a national improper payment rate through cyclical audits of state Medicaid programs. Improper payments are payments that do not meet Medicaid program requirements. The improper payment rate is the estimated share of Medicaid claims that do not meet Medicaid program requirements. The error rate is not a “fraud” rate (or a waste or abuse rate), but a measurement of payments made that did not meet statutory, regulatory, or administrative requirements or are made in an incorrect amount including overpayments and underpayments. Each year (since 2009) HHS has reported an estimated national (or overall) Medicaid improper payment rate, which is based on reviews of three program components: fee-for-service (FFS) claims, managed care capitation payments, and eligibility determinations. In 2025, Medicaid paid an estimated 93.9% of outlays properly, representing $610.95 billion in proper federal payments (Figure 1). The overall estimated improper payment rate was 6.1%, or $37.39 billion in federal payments. (See Box 1 for discussion of improper payment rate trend over time.)

PERM audits a sample of state Medicaid FFS claims and managed care payments every three years. Federal contractors conduct standardized audits of states on a rolling three-year basis, meaning each PERM cycle measurement includes one-third of states (see Appendix). Annually, the most recent three cycles are combined to produce a national improper payment rate (weighted by state size). Audits include a random sample of FFS claims and managed care payments from a 12-month period. To create the 2025 improper payment rate, PERM program contractors reviewed about 48,000 claims and managed care payments.¹ States receive results of their audits and use the information to improve compliance during the next audit cycle. States are often required to develop and implement corrective action plans to reduce mistakes and improve recordkeeping.

What types of errors does the improper payment rate capture?

Most improper payments are due to insufficient documentation or missing administrative steps. HHS reports the different types of errors that contribute to the improper payment rate each year. In 2025, 77.2% of improper Medicaid payments were the result of insufficient documentation or missing administrative steps (Figure 2). These payments were not necessarily for ineligible enrollees, providers, or services since they may have been payable if the missing information had been on the claim and/or the state had complied with requirements. Examples include state failure to retain documentation of enrollee eligibility or to appropriately screen enrolled providers, or medical records not submitted or missing required documentation to support the medical necessity of a claim. Errors that represent “monetary loss” made up the remaining one quarter (22.8%) of improper payments in 2025 (Figure 2). Monetary loss represents a subset of improper payments where CMS has sufficient information to conclude the payment should not have been made or was made in the incorrect amount. These errors include payments made for enrollees who are ineligible for the program or for services and providers not enrolled. 

How do the different PERM components contribute to the improper payment rate?

The overall improper payment rate is calculated based on three component error rates: fee-for-service, managed care, and eligibility. The PERM program uses a random sample of Medicaid claims and managed care payments to calculate component error rates. Those component error rates are combined to produce an overall improper payment rate.

Fee-for-Service. Within a FFS delivery system, the state Medicaid agency pays providers or groups of providers directly. The FFS PERM component estimates the payment error rate for fee-for-service claims, where selected claims undergo a medical review (focused on documentation in the medical record) and a data processing review (checking if claims followed correct procedures –e.g., coding, billing and payment amounts).

Managed Care. States that contract with Medicaid managed care plans pay a set per member per month (“capitation”) payment to the plan for the services covered by the contract. The managed care PERM component estimates Medicaid managed care capitation payments made by the state in error (plan payments to providers are not reviewed under PERM). The PERM program’s first report (2009) estimated a managed care component error rate of 1.5%, and since 2011, the estimated managed care error rate has remained below one-half of one percent (Figure 3).

Eligibility. The eligibility component assesses the state’s application of federal rules and documented state eligibility policies and procedures. States must provide records or documentation to support eligibility determinations. Non-compliance with eligibility requirements may include not performing a required element (e.g., income verification); not providing or retaining sufficient documentation for a required element; failing to conduct timely eligibility redeterminations; determining eligibility under the incorrect eligibility category; or enrolling an individual who is not eligible. (Note that PERM does not attempt to identify or measure instances where a state incorrectly determines an individual is ineligible for Medicaid – i.e., where eligibility rules were applied inaccurately.) 

Box 1: The improper payment rate has changed over time, largely due to the ACA implementation and the COVID-19 public health emergency.

Pre-ACA: Between 2009 and 2013, the overall improper payment rate trended downward as information systems improved states’ ability to determine provider and enrollee eligibility . The PERM program’s eligibility component error rate decreased from 2011 to 2014, when it was estimated at 3.11 percent (Figure 3). The Patient Protection and Affordable Care Act (ACA) passed in 2010 and phased in several changes to the Medicaid program, including the 2014 Medicaid expansion.

ACA Implementation: During the 2013-2019 period, the overall improper payment rate trended upward, driven by errors in FFS claims related to state non-compliance with new provider screening, enrollment, and documentation requirements introduced in 2012 under the ACA. From 2015 to 2018, HHS suspended eligibility audits as states began to implement new eligibility standards and determination requirements under the ACA. During this period, the overall PERM rate was calculated using a proxy eligibility estimate of the 2014 eligibility component error rate, 3.11 percent to provide states with time to adjust to eligibility process changes in the Affordable Care Act.

Post ACA: Beginning in 2019, PERM reintroduced the eligibility component under updated rules, for the first time requiring states to work with an independent contractor using nationally standardized eligibility audit procedures². Between 2019 and 2021 the overall improper payment rate rose again (Figure 3), driven by the new standardized PERM eligibility audits. Most of the eligibility error rate was attributed to errors due to insufficient documentation or administrative mistakes. The 2021 improper payment rate is the first estimate that includes reintegrated eligibility error rates (conducted under updated rules) for all three audit cycles (i.e., all states).

COVID-19 Public Health Emergency (PHE): Beginning in 2021, the overall improper payment rate decreased sharply. In 2024, the improper payment rate (5.1%) was less than one-fifth of the 2021 estimate (21.7%). The 2024 improper payment rate was the lowest rate since the COVID-19 pandemic began, which HHS reported was due in part to the exclusion of certain audit review elements as policies adopted during the PHE that paused eligibility renewals and disenrollments and reduced requirements for provider enrollment and revalidations were taken into consideration and due to improved state compliance with program rules. The COVID-19 PHE and related flexibilities were in place from early 2020 through early 2023.

Post-COVID-19 PHE: In early 2023 states began to phase-out the continuous enrollment provision that suspended Medicaid eligibility renewals and disenrollments during the pandemic and flexibilities that reduced provider enrollment requirements. Most states completed eligibility redeterminations for all Medicaid enrollees and resumed disenrollments by August 2024. Improper payment rates since 2021 include at least some audits conducted while COVID-19 PHE flexibilities were in place. The 2025 improper payment rate incorporated the first full audit conducted following the end of the PHE (July 2023 – June 2024). The 2025 improper payment rate (6.1%) increased relative to 2024 (5.1%). From early 2023 through late 2024, states resumed eligibility renewals and disenrollments and phased out provider screening flexibilities allowed during the PHE.

What types of errors are driving the eligibility component error rate?

Insufficient documentation errors are the cause of most eligibility errors. While the national eligibility error rate decreased from 2021-2024, due in part to audits that accounted for the continuous enrollment provision that paused Medicaid eligibility renewals and disenrollments from March 2020 through March 2023 (e.g., excluding errors due to out-of-date redeterminations or changes in the enrollee’s circumstances), the eligibility error rate rose from 2024 to 2025 as states resumed normal eligibility operations (Figure 3 and Box 1). Insufficient documentation errors continue to be the cause of most eligibility errors (Figure 4). Eligibility determination errors caused by reasons other than insufficient documentation include enrollees receiving services for which they are financially or categorically ineligible (for example, an enrollee who is eligible for a certain eligibility group and receives services through a program for another eligibility group).

Recent federal rules increase recordkeeping requirements aimed at reducing insufficient documentation errors. Beginning in 2026, states must adhere to updated eligibility and payment recordkeeping standards required in the 2024 Eligibility and Enrollment Final Rule. This rule aimed to reduce “paperwork” errors that lead to the majority of eligibility-related improper payments by implementing new documentation and retention requirements and procedures. The Eligibility and Enrollment rule specifies that states must maintain records for all eligibility determinations in an electronic format, clarifies what information must be contained in the records, and requires that records be kept for a minimum of three years. States must comply with these requirements by June 2026.

How is the reconciliation law changing the PERM program and how could these changes impact states?

PERM program changes in the reconciliation law focus on the eligibility component of the error rate. Beginning in 2029, states may be subject to a financial penalty if PERM eligibility error rates exceed three percent. Even before passage of the reconciliation law, HHS had the authority to recoup federal funds from states with eligibility-related improper payment error rates greater than three percent. This statutory recoupment authority was first implemented by CMS through the Medicaid Eligibility Quality Control (MEQC) program (which complements the PERM program). In 2020, GAO reported no recoupments due to MEQC eligibility errors had occurred since 1992. In 2017, CMS introduced new procedures to begin recouping funds based on PERM eligibility errors beginning in FY 2022, but there are no public reports of any recoupments. Prior law also gave HHS authority to grant states “good faith” waivers if they demonstrated a “good faith effort” to improve eligibility error rates. However, the reconciliation law effectively eliminates “good faith” waivers, requiring CMS to impose the penalty for states that exceed the PERM eligibility error threshold. Beginning October 1, 2029, states with eligibility error rates greater than three percent will have to repay the federal portion of the improper payment amount above the three percent threshold. The reconciliation law also expands the types of eligibility errors that are used to calculate the financial penalty. Insufficient documentation errors will be included in the federal financial recoupment calculation. Implementing federal financial recoupment will likely depend on further federal guidance to states.

Based on the most recent PERM audits, nearly one quarter of states have eligibility error rates above the new threshold for penalty.³ Twelve states had eligibility error rates above three percent in their most recent PERM audit (Figure 5). The most recent three PERM audit cycles used Medicaid claims and payments from July 2021 – June 2024. During most of this period, eligibility redeterminations and disenrollments were paused under flexibilities related to the COVID-19 PHE, which likely decreased the rate of eligibility errors. As a result, the audit results may not indicate future state performance. The amount of federal funds recouped will vary across states due to differences in eligibility error rates and because of federal match rate (FMAP) differences across states. States with a higher traditional “FMAP” rate risk losing a greater share of any payments subject to recoupment because a larger share of their Medicaid payments come from federal funds.

States will need to prepare for PERM program changes and implement other complex eligibility and enrollment policy changes required by the reconciliation law at the same time. State readiness to comply with increased recordkeeping and electronic documentation requirements in the Eligibility and Enrollment rule will also vary. At a time of increasing state budget pressures, states may need to invest in upgraded technology, expanded audits or staffing, or other costly increases to program integrity capacity to maintain a low rate of improper payments. At the same time, states are also implementing other complex eligibility policy changes required by the 2025 reconciliation law, including several changes by January 1, 2027:

• The reconciliation law requires states to implement work requirements (at application and renewal) for Medicaid expansion adults. States will need to make significant changes to eligibility systems in a short timeframe to verify compliance as well as to identify individuals who qualify for exemptions or optional exceptions. Failure to document compliance with complex work-related federal and state eligibility determination policy could lead to increased PERM eligibility errors.
• The reconciliation law increases the frequency of required eligibility redeterminations from every 12 months to every 6 months for expansion adults. An increased number of eligibility determinations could result in additional eligibility errors.
• The reconciliation law also decreases the time period that states must provide retroactive Medicaid coverage (from three months to one month of retroactive coverage for expansion adults and two months for traditional enrollees). Narrowed claims payable under new retroactive coverage rules could result in additional payment errors.

Beginning in 2029, states risk losing federal funds if their PERM eligibility error rate is above three percent – a threshold nearly one quarter of states met prior to implementing complex eligibility changes included in the reconciliation law (12 states in 2025, Figure 5). However, because these audits occurred during the PHE and unwinding periods, the results may not predict future improper payment rates. CBO estimated $7.6 billion over 10 years in Medicaid payment reductions related to the reconciliation law’s changes to PERM. Updated electronic documentation and recordkeeping requirements may help reduce some errors due to insufficient documentation or administrative missteps. However, to limit the risk of financial penalty due to eligibility errors, states may add administrative steps or impose more onerous paperwork requirements on enrollees or applicants.

Appendix

The overall improper payment estimate for each state combines the state’s fee-for-service, managed care, and eligibility estimates, with a correction factor so that sampled payments that are improper in more than one of those components are not double counted.

1. HHS selects a sample size for each PERM component for each state. The number of claims or payments sampled for a state audit ranged between 288 and 1,782 FFS claims, between 38 and 200 managed care payments, and between 97 and 644 eligibility determinations. ↩︎
2. Under PERM program procedures prior to a 2017 Final Rule (implemented in 2019), the PERM program’s eligibility component error rate was state reported rather than measured by standardized methodology under an external auditor. The PERM FFS and managed care components have continuously been measured by an external auditor. ↩︎
3. In the past, CMS has cautioned that comparing state PERM rates to one another is difficult due to variation in state systems and policies as well as due to external factors (that can make year to year comparisons difficult). ↩︎

About this Dashboard

This dashboard monitors the status of the U.S. President’s Malaria Initiative’s (PMI) partner countries’ progress toward global malaria targets. It includes data for 30 countries, including 27 focus countries in Africa (including the three PMI partner countries – Burundi, Gambia, and Togo – that were added in 2023) and three countries in the Greater Mekong Subregion in South-East Asia.¹ Together, these 30 countries represent almost 90% of the global malaria burden. Data are from the WHO’s World Malaria Report 2025. The data powering this dashboard are available for download here. KFF will continue to track PMI country progress on these indicators and update the dashboard as new data become available.

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• The President’s Malaria Initiative and Other U.S. Government Global Malaria Efforts
• KFF Dashboard: Progress Toward Global HIV Targets in PEPFAR Countries
• KFF Dashboard: Progress Toward Global Tuberculosis Targets in USAID TB Priority Countries

1. PMI countries include the following: Angola, Benin, Burkina Faso, Burma, Burundi, Cambodia, Cameroon, Côte d’lvoire, D.R. Congo, Ethiopia, Gambia, Ghana, Guinea, Kenya, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, Tanzania, Thailand, Togo, Uganda, Zambia, and Zimbabwe. U.S. President’s Malaria Initiative (PMI), Where We Work, accessed: https:/www.pmi.gov/what-we-do/. PMI, Press release: U.S. President’s Malaria Initiative Announces Plans to Expand to New Partner Countries, accessed: https://www.pmi.gov/u-s-presidents-malaria-initiative-announces-plans-to-expand-to-new-partner-countries/. ↩︎

Introduction

National spending on health has increased rapidly over time—rising to $5.3 trillion and 18% of GDP in 2024—and is projected to continue to do so into the future. Growth in health spending contributes to higher costs for families, employers, Medicare, Medicaid, and other payers. In 2025, average annual premiums for employer-sponsored family coverage reached $26,993, with workers paying $6,850 for their coverage, according to KFF’s annual survey of employers.  Hospital care accounted for nearly one-third of national health expenditures in 2024, and more than doubled in nominal terms over the preceding two decades, making hospitals a major driver of health spending growth over time.

This data note analyzes the extent to which hospital spending has contributed to the growth in national health expenditures in recent years (2022-2024) and over the long term (2005-2024) using data from the Centers for Medicare & Medicaid Services (CMS) National Health Expenditures Accounts (NHEA). (See Key Facts About Hospitals for more information about hospital spending and the Peterson-KFF Health System Tracker for more on national health expenditures).

Hospital Spending Accounted for 40% of the Growth in National Health Spending Between 2022 and 2024, A Far Larger Share Than Any Other Health Spending Category  

National health expenditures increased by $692 billion between 2022 and 2024, from $4.6 trillion to $5.3 trillion. During this period, spending on hospital care alone accounted for $277 billion of spending growth, or 40% of the total increase in national health spending (Figure 1). The large contribution of hospital care to overall health spending growth reflects the fact that hospital spending accounted for nearly a third of national health expenditures in 2022 (30%) and grew more quickly than national health expenditures overall in both 2023 (10.6% versus 7.4%) and 2024 (8.9% versus 7.2%).

The growth in hospital spending in 2023 and 2024 was primarily due to a “rebound in nonprice factors, such as the use and intensity of services, that were somewhat depressed during the [COVID-19] public health emergency,” according to CMS. Nonetheless, hospital prices, which grew by 2.7% in 2023 and 3.4% in 2024, also played a role. In fact, according to CMS, 2024 saw the fastest hospital price growth since 2007. Hospital price growth includes Medicare and Medicaid as well as commercial prices; hospital prices in these public programs have grown more slowly than commercial prices over time.

The contribution of hospital care to overall spending growth was larger than that of other major spending categories. Physician and clinical services accounted for the second-largest share at 22% of the growth. Retail prescription drug spending, which grew at about the same rate as hospital spending during the period between 2022 and 2024, accounted for 11% of the growth during this period (Appendix Table 1). Spending on non-medical insurance expenditures, other professional services, home health care, nursing care and continuing care retirement communities, dental services, and government administration accounted for smaller shares. Spending on government public health activities declined by 7% during this period, likely due to the winding down of activities related to the COVID-19 pandemic. Spending on all other goods and services, which includes some long-term services and supports, accounted for 13% of the growth in total spending.

Hospital spending grew at a faster rate (20%) than total health spending (15%) from 2022 to 2024.  Retail prescription drugs (20%), other professional services (25%), home health care (23%) and government administration (24%) also grew more quickly than total health spending, although these categories contributed less to overall growth than hospitals because they had lower baseline spending in 2022. 

Over a longer period, 2005-2024, hospital spending accounted for 32% of the overall increase in national health spending growth, while spending on physician and clinical services accounted for 22% and spending on retail prescription drugs accounted for 8% (Appendix Table 2). CMS projects that hospitals will return to a similar share of spending growth through 2033 (32%), down from the 40% share that hospitals have accounted for in recent years.

Hospital Spending Per Year Increased by $1 Trillion Over the Past Two Decades and by $277 Billion Between 2022 and 2024

Hospital spending grew from $609 billion in 2005 to $1.6 trillion in 2024, a $1.0 trillion increase (Figure 2). During this period, total health spending grew $3.3 trillion, from $2.0 trillion to $5.3 trillion. In more recent years, hospital spending increased from $1.4 trillion in 2022 to $1.6 trillion in 2024, a $277 billion increase.

Hospital spending growth over the past two decades was greater than the spending growth for physician and clinical services (the second-largest increase), and substantially greater than the growth in retail prescription drugs (the third-largest increase).

Spending on hospital care specifically and national health expenditures generally have both exceeded overall economic growth over time. Hospital spending increased from 4.7% to 5.6% of GDP from 2005 to 2024, while total health care spending increased from 15.5% to 18.0% of GDP over the same period. By 2033, CMS projects that hospital spending will rise to 6.4% of GDP, with national health expenditures increasing to 20.3% of GDP.

Hospital spending growth over the past two decades is primarily due to increases in both prices and quantity of services provided, particularly when outpatient care is taken into account. From 2005 to 2024, hospital prices increased by 61% based on KFF analysis of the Producer Price Index (PPI). In terms of volume, although total hospital inpatient days decreased 5% (17% per 1,000 population), outpatient visits increased by 44% (25% per 1,000 population), based on KFF analysis of the AHA Trendwatch Chartbook and the AHA Annual Survey Database. The continued growth in hospital spending will contribute to higher costs for public programs like Medicare and Medicaid, employers and families, and exacerbate ongoing concerns about health care affordability.

Appendix

The Medicare Drug Price Negotiation Program, enacted as part of the Inflation Reduction Act of 2022 (IRA), was designed to help lower Medicare spending on prescription drugs by requiring the federal government to negotiate the price of some high-cost drugs covered by Medicare. Along with lowering prices, the negotiation program could also improve coverage of drugs selected for negotiation for Medicare beneficiaries because the law requires all Medicare Part D plans to cover each of the selected drugs, including all dosages and forms, when negotiated prices take effect.

To measure the effect of the IRA’s coverage requirement for selected drugs, this analysis examines 2026 Medicare Part D formulary coverage of drugs selected for negotiation, including the first 10 drugs selected for price negotiation that now have Medicare-negotiated prices available as of January 1, 2026, and the second set of 15 drugs selected for price negotiation, whose negotiated prices will take effect in 2027. The analysis shows that for several dosages and forms of nine out of the first 10 selected drugs, coverage rates have improved since 2025, before the IRA’s coverage requirement took effect.

The IRA’s coverage requirement for selected drugs led to improved coverage of the Part D drugs with negotiated prices available in 2026

Consistent with the IRA’s coverage requirement, in 2026, all Part D enrollees have coverage of all 10 selected drugs with negotiated prices available this year, including all dosage forms and strengths. Moreover, access to several doses and forms of 9 of the first 10 drugs selected for negotiation has improved since 2025 (Figure 1). In particular, coverage rates of the insulin products Fiasp and NovoLog and two dosages of the cancer drug Imbruvica have expanded the most. Fiasp was covered for 24% of Part D enrollees in 2025, while NovoLog was covered for 32%, and two dosages of Imbruvica were covered for roughly half Part D enrollees in 2025.

The IRA’s coverage requirement will improve coverage of several of the 15 selected drugs with negotiated prices available in 2027, including the GLP-1 drug Wegovy

The GLP-1 drug, Wegovy, one of the 15 selected drugs with negotiated prices available in 2027, is currently covered by a small number of Part D plans enrolling less than 1% of Part D enrollees in 2026 (Figure 2). Wegovy is approved for both obesity and cardiovascular disease risk reduction but Medicare Part D plans are currently allowed to cover Wegovy only for cardiovascular disease because Medicare is prohibited from covering drugs used for weight loss. The Trump administration is planning to launch a temporary, voluntary model to expand Medicare coverage of GLP-1s to treat obesity beginning in 2027, which would allow beneficiaries in participating Part D plans to use Wegovy for this purpose.

The IRA’s Part D coverage requirement for selected drugs will increase the share of Part D enrollees who have coverage of Wegovy for Medicare-covered uses beginning in 2027, along with 6 other selected drugs for 2027 that are not currently covered for all Part D enrollees, including Austedo and Austedo XR, a treatment for involuntary movement disorders (covered for 72% and 51% of enrollees, respectively); Otezla, a treatment for psoriasis and psoriatic arthritis (covered for 68% of enrollees); and Breo Ellipta, a treatment for asthma and COPD (covered for 74% of enrollees). At the same time, several of these drugs are already covered for all or nearly all Part D enrollees, including six drugs that belong to one of the six protected classes of drugs that are required to be covered by all plans: Xtandi, Pomalyst, Ofev, Ibrance, and Calquence are antineoplastics (drugs used to treat cancer) and Vraylar is an antipsychotic.

On January 1, 2026, the Center for Medicare & Medicaid Innovation (CMMI) launched the Wasteful and Inappropriate Service Reduction (WISeR) Model that establishes new prior authorization requirements in traditional Medicare. The model tests the use of technologies such as artificial intelligence to review the appropriateness of select services in six states over a six-year trial period. Prior authorization requirements are used routinely by Medicare Advantage plans and other private insurers, but rarely in traditional Medicare. Prior authorization aims to reduce unnecessary or inappropriate utilization of health care services, but it can also lead to delays and denials of needed medical care, uncertainty for patients, and administrative costs and hassles for health care providers. Nonetheless, it remains a common feature of health insurance in the US, in part because it is one of the few tools available for insurers to manage utilization and spending on covered services.

The rollout of the WISeR model comes at a time when roughly seven in ten US adults with health insurance (69%) say that prior authorization is a burden, and more than a third (34%) say that it is their single biggest burden, beyond costs, when it comes to getting health care. In July 2025, the Trump administration announced a voluntary effort in which dozens of private health insurers pledged to impose fewer prior authorization requirements and streamline the review process, and later that same week the administration announced the WISeR model to expand these types of requirements in traditional Medicare. Reflecting concern among some policymakers about the new model, an amendment to prohibit spending for the implementation of WISeR was approved by the House Appropriations Committee in September 2025 but was not included in the Consolidated Appropriations Act of 2026 that was signed into law in February 2026.

This analysis explores the potential impact of the WISeR model by examining recent spending and utilization trends in traditional Medicare for services selected for prior authorization requirements in the six model states (Arizona, New Jersey, Ohio, Oklahoma, Texas, and Washington), using 100% traditional Medicare claims data from the Chronic Conditions Warehouse (CCW) for 2019-2025. Services included in this analysis reflect the CPT code list provided in the CMS WISeR Model Provider and Supplier Operational Guide, as of December 10, 2025 (referred to throughout as “WISeR services”). Since this analysis was conducted, CMS has delayed the inclusion of two services originally scheduled for inclusion in 2026. These two services represent less than 1% of traditional Medicare spending on all WISeR model services during the years assessed. All results are rounded to the nearest hundred dollars or nearest hundred beneficiaries, unless otherwise noted.

The analysis suggests that the impact of the WISeR model is likely to be modest in its first year, both because WISeR services account for a small share of total Part B spending in traditional Medicare and a relatively small number of beneficiaries use these services, and because the vast majority of WISeR service spending and growth is accounted for by a single service category (skin substitutes), for which growth in spending is largely driven by increases in average service price. While prior authorization can be an effective tool for reducing wasteful or inappropriate service use, it has no direct impact on prices. CMS has simultaneously put in place nationwide changes to payment policy that standardize payment rates for skin substitutes, which went into effect on January 1, 2026. CMS estimates that these changes will reduce Medicare spending on skin substitutes by nearly 90% in 2026, which is likely to far exceed the impact on spending from changes in use that may result from prior authorization requirements under the WISeR model, which applies only to a subset of states. On the other hand, the potential for CMS to expand the WISeR model to include additional services and states means that more spending and more beneficiaries in traditional Medicare could be subject to prior authorization restrictions in future years, increasing the reach of the model with time.

Key Takeaways:

• WISeR services accounted for 5.3% ($12.3B) of all Part B spending in traditional Medicare in 2024, up from 1.1% ($2.4B) in 2019.
• Skin substitutes accounted for 83% ($10.3B) of WISeR service spending in traditional Medicare in 2024. Spending on skin substitutes was over 20 times higher in 2024 than in 2019 ($509.6M), while spending for all other WISeR model services was relatively flat over the five-year period.
• The growth in spending on skin substitutes was driven by a steep increase in price per service, which increased by 820%, on average, from 2019 ($2,300) to 2024 ($21,200), the largest increase in price per service for any WISeR service category during the period.
• Nearly 1.1 million traditional Medicare beneficiaries nationwide received at least one WISeR service in 2024, most of whom (86% or 908,000) received some type of orthopedic pain management service, while only 9.3% (98,000) received skin substitutes. Of the 1.1 million WISeR service users nationwide, 207,500 (19.7%) received a WISeR service in one of the six WISeR model states in 2024.
• Per capita spending on WISeR services varied considerably among the six WISeR model states in 2024, ranging from $202 in Ohio to $748 in Oklahoma (relative to $371 nationwide). Much of this variation was accounted for by variation in per capita spending on skin substitutes, which ranged from $143 in Ohio to $674 in Oklahoma (relative to $310 nationwide) and was driven by variation in both per capita utilization and price per service for skin substitutes.

Although Initially Limited in Scope, the WISeR Model Expands the Use of Prior Authorization in Traditional Medicare

According to CMS, the goal of the WISeR model is to test the use of artificial intelligence and similar technologies to conduct prior authorization for services at risk of fraud or misuse. For each of the six states selected for the model, CMS has partnered with a private health technology company to administer prior authorization review using these technologies, and companies will be eligible to receive a share of the savings associated with services that are denied as a result.

Since the announcement of the WISeR model in July 2025, physician groups and members of Congress have expressed concern about its potential impact on provider workloads and beneficiary access to needed services, particularly as health technology partners are rewarded based, in part, on the volume of care that they deny. An amendment to prohibit spending for the implementation of the WISeR model, as well as any future model that tests prior authorization in traditional Medicare, was adopted by the House Appropriations Committee in September 2025, but was not included in the Consolidated Appropriations Act of 2026 that was signed into law in February 2026.

Prior authorization requirements are rare in traditional Medicare. However, use of prior authorization in Medicare Advantage—where virtually all enrollees are required to obtain prior authorization for some services—has come under scrutiny in recent years for delays and denials of medically necessary care and increased administrative burden for providers. In particular, several large insurers have been investigated by Congress and faced lawsuits due to inappropriate coverage denials based on artificial intelligence tools, such as proprietary algorithms that substantially increased denial rates for post-acute care services and often operated without human oversight. While the WISeR model will initially only apply to a limited set of health care items and services, CMS has stated that the model may be expanded to include a wider range of services in future years, potentially increasing its impact on the traditional Medicare program over time.

Services selected for prior authorization under the WISeR model in 2026 include skin substitutes (synthetic products used in the treatment of severe or chronic wounds); orthopedic pain management services, such as cervical fusion and epidural steroid injections; electrical nerve stimulator implants; incontinence control devices; and services related to the diagnosis and treatment of impotence (see Appendix for further detail). (Since this analysis was performed, CMS has delayed the inclusion of two services until a future performance year: deep brain stimulation and percutaneous image-guided lumbar decompression for spinal stenosis. Together these two services account for less than 1% of all traditional Medicare spending on services reflected in this analysis from 2019-2024.)

WISeR Services Represent a Small But Growing Share of Part B Spending in Traditional Medicare

WISeR services account for a small but growing share of Part B spending in traditional Medicare. From 2019 to 2024, spending on these services increased by roughly 400% (from $2.4 billion to $12.3 billion), compared to a 9.5% increase in overall Part B spending in traditional Medicare over these same years (Figure 1). As a result, these services represent a larger share of Part B spending in traditional Medicare in 2024 (5.3%) than in 2019 (1.1%), though still a small fraction of the total in both years. The vast majority of growth in spending on WISeR services during this period was driven by growth in spending on skin substitutes (as discussed below).

Skin Substitutes Accounted for the Vast Majority of WISeR Service Spending in 2024, and of Spending Growth on These Services Since 2019

Skin substitutes accounted for the largest share ($10.3 billion or 83.4%) of WISeR service spending in traditional Medicare in 2024 (Figure 2). This represents a nearly 2,000% increase since 2019 ($509.6 million) when skin substitutes accounted for just 21.0% of WISeR service spending in traditional Medicare. In contrast, spending on all other WISeR services combined was just 6.6% higher in 2024 ($2.0 billion) than in 2019 ($1.9 billion), slightly less than the 9.5% increase seen for all Part B spending in traditional Medicare during this period. Spending on skin substitutes continued to accelerate in 2025, and was nearly 3,000% higher in the first six months of 2025 ($7.7 billion) than in the first six months of 2019 ($247.3 million) (Appendix Table 2).

Growth in traditional Medicare spending on skin substitutes has gained attention in recent years, including reports from the Office of the Inspector General (OIG) that raised concerns about unusual billing patterns, lack of adequate pricing information from manufacturers, and several instances of fraud. Prior to 2026, skin substitutes were classified as biologicals for the purpose of Medicare payment. Each product received a unique billing code, and payment rates were generally based on the manufacturer-reported average sales price (ASP) (or list price when ASP data was unavailable), allowing for considerable variation in payment rates across different manufacturers and products.

CMS has since made changes to the way Medicare classifies and pays for these products, reclassifying them as “incident to” supplies reimbursed at a fixed rate. In 2026, most applications of skin substitutes will be reimbursed at a rate of $127.28 per square centimeter, substantially less than the average rate paid for skin substitutes under traditional Medicare in 2024 ($1,470 per square centimeter), a change that CMS estimates will reduce Medicare spending on skin substitutes by nearly 90% in 2026. These changes, which went into effect on January 1, apply nationwide and represent a more direct strategy to control spending on skin substitutes than their inclusion in the WISeR model, which is temporary, has a limited geographic reach, and targets inappropriate use, rather than the price increases that have largely driven the recent increase in spending.

At the same time, new local coverage determinations (LCDs) that would have substantially limited the number of skin substitute products covered by Medicare, were also scheduled to go into effect on January 1, but were withdrawn by CMS in late December. In the absence of these new LCDs, Medicare will cover the same range of skin substitute products in 2026 as it has in past years.

Most of the 1.1 Million Traditional Medicare Beneficiaries Who Received a WISeR Service in 2024 Received Orthopedic Pain Management Services, While Far Fewer Received Skin Substitutes

Nearly 1.1 million traditional Medicare beneficiaries nationwide received at least one WISeR service in 2024, 3.2% of all beneficiaries in traditional Medicare that year (Figure 3). A similar share (just over 1.1 million or 3.0%) received at least one WISeR service in 2019 (the total number of beneficiaries in traditional Medicare declined somewhat between 2019 and 2024, from 37.8 million to 33.1 million, due to increasing enrollment in Medicare Advantage).

Roughly 908,000 of the 1.1 million beneficiaries who received at least one WISeR service nationwide in 2024 (86.0% of the total) received some type of orthopedic pain management service, slightly fewer than the number of beneficiaries who received this type of service in 2019 (1.0 million or 90.6% of all WISeR service users that year). Orthopedic pain management services subject to prior authorization under the WISeR model include epidural steroid injections, cervical fusion, lavage and debridement of the knee, and other procedures used to treat pain in conditions such as osteoarthritis, osteoporosis, and spinal stenosis (see Appendix for further detail).

In comparison, just 98,000 of the 1.1 million beneficiaries who received at least one WISeR service in 2024 were treated with skin substitutes (9.3% of the total), up from roughly 60,900 in 2019 (5.5% of all WISeR service users that year). Applications of skin substitutes subject to prior authorization under the WISeR model include treatment of wounds on the extremities, including chronic non-healing wounds such as bedsores and diabetic foot ulcers.

The number of traditional Medicare beneficiaries likely to be impacted by the new prior authorization requirements is small. Of the 1.1 million traditional Medicare beneficiaries who received at least one WISeR service in 2024, roughly 207,500 (19.7%) were located in one of the six WISeR model states (Appendix Table 3). This is similar to the share of all traditional Medicare beneficiaries (6.4 million or 19.3%) who resided in one of these six states that same year. Based on the number of beneficiaries who used WISeR services in 2024, a majority of those who will be subject to the new prior authorization requirements will encounter them in the context of services other than skin substitutes, which could limit the savings that can be achieved in the model’s first year.

Growth in Skin Substitute Spending Was Driven By Steep Growth in Price Per Service

Skin substitutes were the most expensive category of WISeR services in 2024, with an average price per service of $21,200, followed by diagnosis and treatment of impotence ($17,750) and stimulator services ($17,200) (Table 1). This is largely due to steep growth in the average price per service for skin substitutes, which increased by 820% (up from $2,300) from 2019 to 2024. In comparison, growth in the average price per service for other WISeR services was relatively modest during this period, with the second highest growth seen for incontinence control devices (38%), followed by diagnosis and treatment of impotence (18%), stimulator services (7%), and orthopedic pain management (7%). (For the purposes of this analysis, price per service refers to the average sum of all Medicare payments associated with the encounter at which the WISeR service was provided. See Methods for further detail.)

Utilization of skin substitutes increased to a lesser extent (84%) during this period, with 3.0 of every 1,000 beneficiaries in traditional Medicare in 2024 receiving skin substitutes, compared to 1.6 in 2019. Changes in utilization were modest or negligible for other categories of WISeR services as well, ranging from stimulator services (70%) to incontinence control devices (-2%). These results indicate that rising prices, more than increases in utilization, are primarily responsible for the increase in traditional Medicare spending on skin substitutes in recent years.

Per Capita Spending and Spending Growth on WISeR Services Varied Considerably Among WISeR States

According to CMS, the six states selected for participation in the WISeR model were chosen based on a range of criteria such as geographic diversity, service volume, ease of comparison between WISeR and non-WISeR states overseen by the same Medicare Administrative Contractor (MAC), and other factors.

Per capita spending on WISeR services in traditional Medicare varied considerably among the six WISeR model states in 2024 (Figure 4). This ranged from $202 per traditional Medicare beneficiary in Ohio to $748 per traditional Medicare beneficiary in Oklahoma (relative to $371 per traditional Medicare beneficiary nationwide). A similar pattern was true for spending growth from 2019 to 2024.

The six WISeR model states also varied in terms of per capita utilization of WISeR services (Appendix Table 4). In 2024, per capita utilization of WISeR services in WISeR states ranged from 24 of every 1,000 traditional Medicare beneficiaries in Washington to 43 of every 1,000 traditional Medicare beneficiaries in Arizona (compared to 32 of every 1,000 traditional Medicare beneficiaries nationwide).

Among the six WISeR model states in 2024, much of the variation in per capita spending on WISeR services was accounted for by differences in per capita spending on skin substitutes, which ranged from $143 per traditional Medicare beneficiary in Ohio to $674 per traditional Medicare beneficiary in Oklahoma (Appendix Table 5). States with higher per capita spending on skin substitutes differed from lower spenders both in terms of per capita utilization of skin substitutes (which ranged from 2.1 to 4.4 of every 1,000 beneficiaries in the state), and in terms of average price per service for skin substitutes (which ranged from $14,600 to $34,900).

Looking to the Future: Key Questions

As the WISeR model moves into its first year of operation, several questions remain about its potential impact on traditional Medicare beneficiaries, health care providers, and spending. These include: how successful the model will be at reducing inappropriate or wasteful service use and spending; whether adequate safeguards are in place to protect beneficiaries from delays and denials of needed health services; how easy (or burdensome) it will be for providers to navigate the new requirements in model states; how effectively CMS will ensure that coverage decisions from health technology vendors are consistent with medical best practices and Medicare coverage criteria; and how CMS will evaluate the model’s success, particularly when determining whether to expand prior authorization requirements to additional services in future years.

CMS has stated that health technology vendors will be required to seek a second opinion from a human clinician before denying prior authorization requests based on artificial intelligence and other technologies, and will be audited to ensure that their determinations are consistent with Medicare coverage criteria. Venders may face penalties for inappropriate denials, such as negative payment adjustments or termination from the model. CMS has also indicated that health care providers who maintain high approval rates under the model may earn an exemption from prior authorization requirements going forward (a practice known as “gold carding”).

Nevertheless, policymakers and others have voiced concern about the financial incentives inherent in the WISeR model, which rewards vendors, in large part, based on the volume of care that they deny, creating financial incentives to maximize denials. Questions have also been raised about the appropriateness of expanding prior authorization in traditional Medicare at a time when its use in private commercial insurance and Medicare Advantage is being more closely scrutinized due to potentially unnecessary delays and denials of care, and hassles for health care providers. In the month since WISeR first launched, hospitals and health care providers have reported difficulties adjusting to the model, including gaps in communication about the new rules and burdensome administrative requirements.

This analysis suggests that the impact of the WISeR model is likely to be modest in its first year, both because the services it targets are used by a relatively small number of beneficiaries and account for a small share of all Part B spending in traditional Medicare, and because CMS has simultaneously put in place nationwide changes to payment policy, beginning January 1, 2026, that are expected to achieve a 90% reduction in spending for the one service, skin substitutes, that accounts for the majority of WISeR service spending and growth in recent years.

However, if the WISeR model expands to include a wider range of services in future years, the scale of its impact may increase with time. Further, despite its drawbacks, prior authorization remains one of the few tools available to insurers to manage health care utilization and spending. The WISeR model represents an opportunity for CMS to test whether this approach can help control Medicare spending by reducing use of unnecessary or inappropriate services, and whether the safeguards put in place by CMS will protect patients against inappropriate delays and denials of care.

Appendix

Methods

KFF contracted with L&M Policy Research for data on utilization and spending trends for services included in the CMMI WISeR model. The data included Medicare fee-for-service claims from 2019 to Q2 2025 through L&M’s data license with Centers for Medicare and Medicaid Services and its access to the Chronic Condition Warehouse Virtual Research Data Center (CCW VRDC). The sample consisted of 100% Medicare fee-for-service carrier and outpatient claims with non-zero Medicare payments for beneficiaries with Medicare as the primary payer, restricted to providers located in the 50 states or the District of Columbia. Estimates of Part B payment rates were derived from the Part B Use-Specific Per Capita Cost (USPCC) rates from the CMS 2026 Part B Rate Book, updated as of April 2025.

To capture the full set of costs associated with services included in the WISeR Model, utilization was defined at the service-day level, anchored by the presence of at least one claim containing a HCPCS/CPT code identified in the WISeR Model Provider and Supplier Operational Guide (Version 3.0). For each beneficiary, all outpatient claims containing a WISeR HCPCS/CPT code and all carrier claims occurring on the same calendar day as carrier or outpatient claims with a WISeR code were aggregated to represent a single service. Costs were calculated as the sum of Medicare payments associated with those claims.

When multiple place-of-service (POS) codes were present across claims for the same service day, a single POS category was assigned using a hierarchical approach (outpatient, ambulatory care setting, physician office, home, and other), and all associated payments were attributed to the assigned category. Carrier claims billed with an outpatient POS were retained only when they could be matched to an outpatient claim with a non-zero Medicare payment on the same date, in which case the corresponding payments were classified as outpatient spending. Since HCPCS/CPT codes for different WISeR services may occur on the same service day, an additional grouping exercise was conducted that assigns services to broader, mutually exclusive modalities to limit overlap in attributed costs.

This analysis did not assess whether services were appropriate based on medical best practices or other clinical criteria.

This brief, originally published on December 18, 2025, was updated on February 9, 2026, to reflect the PBM-related provisions that were enacted in February 2026. 

The price of prescription drugs in the U.S. continues to be a concerning issue to the public, with KFF polling consistently showing the public supports various approaches to lowering prescription drug costs. Efforts to rein in drug costs have long been a priority for both federal and state policymakers. The Trump administration has recently taken steps to address drug costs through various administrative and regulatory actions, including multiple voluntary pricing agreements with drug manufacturers, the launch of the TrumpRx direct-to-consumer drug website, and CMS Innovation Center Models to bring ‘Most Favored Nation’ pricing to consumers in the U.S., though the impact and savings from these efforts are not yet known. During the Biden administration, Congress enacted the Inflation Reduction Act of 2022, which authorized the federal government to negotiate lower drug prices with manufacturers for some drugs covered by Medicare, among other provisions, resulting in an estimated reduction in the federal deficit of $237 billion over 10 years for the drug pricing provisions alone.

One player in the system of pharmaceutical pricing in the U.S. that has come under increasing scrutiny in recent years is the pharmacy benefit manager, or PBM. These so-called ‘middlemen’ are used by health insurance companies and self-insured employer plans to manage their pharmacy benefits. PBMs have been the focus of attention from policymakers for several reasons, including their business practices, market consolidation, and lack of transparency, all of which factor into concerns that PBMs themselves have played a role in increasing drug prices, even as they work to manage pharmacy benefits and costs for insurers.

In February of 2026, Congress enacted several PBM-related provisions in H.R.7148, the Consolidated Appropriations Act, 2026. This legislation includes provisions that will delink PBM compensation in Medicare Part D prescription drug plans from the price of a drug or rebate arrangements. It also requires PBMs to pass through 100 percent of rebates to employer health plans, and increases oversight of PBM services for Part D plans and employer health plans through transparency and data reporting requirements.

Separately, the Trump administration issued a proposed rule to require greater transparency from PBMs regarding their compensation in service contracts and arrangements with self-insured group health plans. This rule follows from an April 2025 Executive Order from the Trump administration directing the Assistant to the President for Domestic Policy to reevaluate the role of ‘middlemen’ to “promote a more competitive, efficient, transparent, and resilient pharmaceutical value chain”.

This brief provides an overview of the role of PBMs in managing pharmacy benefits, discusses federal efforts to reform certain PBM business practices, and explains the estimated federal budgetary impact of the recently enacted legislation, which would be a reduction in the federal deficit of $2.1 billion over 10 years, according to CBO. (This brief focuses on actions at the federal level and does not address state legislative efforts related to PBMs, which have occurred in all 50 states.)

The Role of PBMs

Pharmacy benefit managers (PBMs) act as intermediaries between drug manufacturers and insurance companies that offer drug benefits to employer health plans, Medicare Part D prescription drug plans, state Medicaid programs, and other payers. In this role, PBMs serve several functions: negotiating rebates and price discounts with drug manufacturers, processing and adjudicating claims, reimbursing pharmacies for drugs dispensed to patients, structuring pharmacy networks, and designing drug benefit offerings, which includes developing formularies (lists of covered drugs), determining utilization management rules, and establishing cost-sharing requirements.

Although there are many PBMs, a few companies dominate the overall U.S. market. According to the Federal Trade Commission (FTC), the top 3 PBMs – OptumRx (owned by UnitedHealth Group), Express Scripts (owned by Cigna), and CVS Caremark (owned by CVS Health, which also owns Aetna) – manage 79% of prescription drug claims on behalf of 270 million people in 2023 (Figure 1).

Certain PBM Business Practices Have Given Rise to Concerns About Their Impact on Drug Prices

Sources of revenue: PBMs generate revenue in different ways. PBMs are typically paid fees for the functions they serve managing pharmacy benefits. PBMs also negotiate rebates with drug manufacturers in exchange for preferred placement of rebated drugs on a health insurance plan formulary, and they may retain a portion of the drug rebates they negotiate, though this may be more common in the commercial employer market than in the Medicare Part D market. Many state Medicaid programs and Medicaid managed care plans also contract with PBMs to manage or administer pharmacy benefits, including negotiating supplemental prescription drug rebates with manufacturers.

Rebates can help lower the cost of drug benefits for health insurance plans, which enables them to offer lower premiums in turn and may translate to lower out-of-pocket costs for patients at the point of sale. In order for PBMs to maximize rebate revenue, however, they may favor higher-priced drugs with higher rebates over lower-priced drugs with low or no rebates in their negotiations with drug companies. This may have an inflationary effect on drug pricing by manufacturers, increase costs for payers across the system, and raise out-of-pocket costs for patients who pay based on the list price – a particular concern for those without insurance but also for those with high-deductible insurance plans or when cost sharing is calculated as a percentage of the drug’s price, which is typical for higher-cost specialty drugs.

Because of these impacts, some have suggested that rebates negotiated between PBMs and drug manufacturers should be passed along in full to individuals at the point of sale and make discounts available upfront at the pharmacy counter. This arrangement would produce savings for individuals who take drugs with high rebates, since they would face lower out-of-pocket costs on their medications when they fill their prescriptions. However, if rebates are no longer being used to reduce a plan’s overall drug benefit costs, point-of-sale drug discounts could result in higher premiums for all plan enrollees.

Spread pricing: Another potential source of revenue for PBMs comes from the contracting practice of spread pricing, which is when a PBM pays a lower rate for a drug to the dispensing pharmacy than the amount the PBM charges an insurer for that drug and retains the difference or “spread” as profit. The practice of spread pricing can result in higher costs for insurers, while lower reimbursement levels put financial pressure on pharmacies.

PBMs have come under bipartisan scrutiny in recent years for spread pricing arrangements in Medicaid managed care that have increased Medicaid costs for states and the federal government. As a result, a number of states have prohibited spread pricing or adopted other reforms to increase transparency and improve oversight. Concerns about Medicaid spread pricing also led the Centers for Medicare & Medicaid Services (CMS) to issue an informational bulletin in May 2019 about how managed care plans should report spread pricing, which may have reduced the practice.

Consolidation: Consolidation in the PBM market has enabled a few PBMs to gain significant market power. As mentioned above, three PBMs manage nearly 80% of all prescription claims in the U.S. Moreover, the top three PBMs are vertically integrated with major health insurers: OptumRx is owned by UnitedHealth, Express Scripts is owned by Cigna, and CVS Caremark is owned by CVS Health, which also owns Aetna. Each of these PBMs also own mail order pharmacies and specialty pharmacies.

The FTC and members of Congress on both sides of the aisle have raised concerns that this level of market concentration and vertical integration enables PBMs to steer consumers to their preferred pharmacies, mark up the cost of drugs dispensed at their affiliated pharmacies, reimburse PBM-affiliated pharmacies at a higher rate than unaffiliated pharmacies for certain drugs, and apply pressure over certain contractual terms, all of which may disadvantage unaffiliated and independent pharmacies, contributing to pharmacy closures.

Transparency: Financial contracts between PBMs and drug manufacturers, including drug pricing information and the rebate arrangements that PBMs negotiate with drug manufacturers, are generally not made public. This means that plan sponsors often do not have insight into how much PBMs are actually paying for drugs on their formularies, and PBMs often consider this information to be proprietary. In the pharmaceutical supply chain as whole, many players operating in this market do not have information about prices, which can make informed decision-making difficult and imperfect.

Federal Efforts to Regulate PBMs

In February 2026, Congress enacted legislation that will address some PBM business practices, including:

• Delinking PBM compensation from the price of a drug, or any rebates or discounts that they negotiate for drug plans under Medicare Part D and instead basing compensation on a ‘bona fide service fee’, which will be a flat dollar amount that reflects the fair market value of services provided by PBMs, beginning January 1, 2028.
• Establishing transparency and reporting requirements for PBMs that provide services to Part D plans. This will include data on utilization, pricing, and revenues for formulary covered drugs; PBM-affiliated pharmacies; contracts with drug manufacturers; and other PBM business practices. This provision requires PBMs to provide this data to Part D plan sponsors as well as the HHS Secretary on an annual basis, no later than July 1 of each year, beginning July 1, 2028.
• Assuring pharmacy access for Medicare beneficiaries. This provision reinforces existing regulatory requirements that Part D plan sponsors contract with any willing pharmacy that meets their standard contract terms and conditions and have those conditions be ‘reasonable and relevant.’ These conditions will be defined and enforced beginning January 1, 2029, according to standards determined by the Secretary of Health and Human Services (HHS) no later than April 2028.
• Allowing for increased oversight of PBMs that provide services to employer health plans through data transparency and reporting requirements. This provision requires PBMs to report detailed prescription drug utilization and spending data to most employer health plans, including gross and net spending, out-of-pocket spending, pharmacy reimbursement, and other details related to the plan’s pharmacy benefit, effective for plan years beginning 30 months after the date of enactment. PBMs must also provide summary documents with certain information to plan participants upon request. PBMs are subject to civil monetary penalties for failing to meet reporting requirements.
• Requiring PBMs to fully pass through 100 percent of drug rebates and discounts to employer health plans regulated under the Employee Retirement Income Security Act of 1974 (ERISA). This includes private employer health coverage, both insured and self-insured. It would not apply to governmental plans such as state and local employee health plans or the Federal Employee Health Benefit Plan. This provision also expands the definition of ‘covered service provider’ under ERISA to include additional service providers, including PBMs and third-party administrators, requiring them to disclose information about direct or indirect compensation to plan fiduciaries.
• Requiring studies and reports on pharmacy benefit managers and the prescription drug supply chain in Medicare Part D from independent agencies, including the Government Accountability Office (GAO) and the Medicare Payment Advisory Commission (MedPAC).

The recently enacted legislation does not include Medicaid-related PBM provisions that were included in other bills, reportedly due to concerns about cost impact. These Medicaid provisions included:

• Ensuring accurate payments to pharmacies under Medicaid: This provision would require that all retail pharmacies and certain non-retail pharmacies complete the National Average Drug Acquisition Cost (NADAC) survey, if they are selected for participation in the survey.

• Prohibiting spread pricing in Medicaid and instead basing payments on a ‘pass-through model’ in which payments made by a PBM on behalf of the State Medicaid program to the pharmacy would be limited to the drug ingredient cost and a professional dispensing fee.

Separately, in January 2026, the Department of Labor (DOL) issued a proposed rule to require PBMs and other affiliated providers of brokerage or consulting services to disclose information about direct or indirect compensation they receive to plan fiduciaries of self-insured group health plans. This includes information about rebates or other payments from drug manufacturers, spread pricing arrangements, and payments received from pharmacies. The DOL estimates that for years 2026-2034, the rule provides benefits in the form of improved medication adherence and reduced healthcare utilization ranging from $74.5 million to $746.2 million annually; transfers in the form of reduced prescription drug prices of $108.8 million to $1.1 billion annually; and costs of $117.7 million annually incurred by self-insured group health plans and PBMs.

In February 2026, the FTC secured a settlement with Express Scripts over its business practices, alleging that Express Scripts inflated insulin costs by pushing drug manufacturers to compete for formulary placement based on the size of rebates off the list price rather than net price, with Express Scripts retaining a portion of the inflated rebate. As a result, the high list prices of these drugs negatively impacted patients whose out-of-pocket payments were tied to the list price of the drug. As part of the settlement, Express Scripts has agreed to modify its business practices, including ensuring member out-of-pocket costs are based on the net price rather than the list price; delinking compensation from the list price of a drug; increasing transparency for plan sponsors, including reporting on the cost of each drug; and subject to legislative and regulatory changes, ensuring members receive the benefit of prices available through the TrumpRx website as well as counting member payments made on TrumpRx toward deductibles and out-of-pocket maximums. At the time of the TrumpRx website launch, however, discounted prices advertised on the site are only available for cash-paying patients and cannot be used with insurance. The FTC also has lawsuits pending with the two other largest PBMs – Caremark and Optum – alleging they engaged in similar conduct regarding insulin prices.

Budgetary Effects of PBM Legislation

In general, cost estimates from the Congressional Budget Office (CBO) have scored PBM provisions with relatively low savings to the federal government. In the time since Congress began debating various PBM reforms, certain PBM business practices may have evolved in ways that could blunt the potential spending impact of these efforts, unless those new practices are also specifically targeted.

For the PBM reforms in the recently-enacted appropriations law, CBO estimated a total federal deficit reduction of $2.12 billion over 10 years (2026-2035):

• A reduction of $444 million from delinking PBM compensation from the cost of medications for drugs under Part D and establishing PBM transparency and reporting requirements for Part D plans
• An increase of $188 billion from assuring pharmacy access and choice for Medicare beneficiaries

• A reduction of $1.865 billion from increasing oversight of PBMs that work with employer health plans, including $1.843 billion in additional revenues and savings of $22 million

For the provision to increase oversight of PBMs that work with employer health plans, a prior CBO estimate of this provision assumed that because insurers had more information about the operations of their PBMs, it would lead to a reduction in prescription costs, and therefore a modest reduction in premiums charged in the group health insurance market, though savings would likely diminish over time. Assuming there would be a reduction in premiums, this would increase wages and therefore increase federal revenues.

CBO did not provide an estimate for the provision that requires PBMs to pass through 100 percent of drug rebates and discounts (excluding service fees) to some employer health plans.

The 2025 reconciliation law made historic cuts to federal support for health care, including an estimated $911 billion in cuts to federal Medicaid spending, as well as additional reductions in the Affordable Care Act (ACA) marketplaces. As the proposed law moved through Congress, lawmakers expressed concern about the potential effects of those cuts on rural areas. KFF estimated that the reductions to Medicaid alone could be $137 billion over ten years in rural areas. To address those concerns, Congress added $50 billion in funding over a five-year period for a Rural Health Transformation Program (referred to here as the “rural health fund”) to the 2025 reconciliation law. At the aggregate level, $137 billion is far larger than $50 billion, but trying to combine the effects of the cuts and the rural health funding, especially for specific states in specific years, could be misleading.

The rural health fund provides states with $10 billion per year over a five-year period between fiscal years 2026 and 2030. In contrast, the cuts to Medicaid are implemented on a gradual basis, with most changes not taking effect until 2027, and the effects growing over time, including after the rural health fund is exhausted. There are numerous factors that affect how the rural health fund dollars are allocated across states and there are also numerous factors that affect how cuts to federal Medicaid spending will impact states and rural areas within states. The combination of those factors, with the differing timing of the rural health funds and Medicaid policy changes, make it misleading to compare the rural health fund allocations that have been announced for the first year with the estimated Medicaid cuts, by state.

Multiplying the first year’s rural health fund allocations by five for the purposes of comparing them to ten-year estimated Medicaid cuts could be misleading. It is unclear how much variation there will be in future allocations of the fund across states; however, some experts predict that future rural health fund allotments could be “vastly different” from first-year allotments. Further, if states do not spend their entire allotment by the end of the next fiscal year, the Centers for Medicare & Medicaid Services may redistribute allotted but unspent funds to other states.

Creating annualized state-specific estimates of expected cuts to federal Medicaid spending by state or in rural areas would also be highly uncertain. Although the Congressional Budget Office provides annual estimates of the estimated reduction in federal Medicaid spending, there would be significant uncertainty involved in trying to allocate those annual reductions across states or to urban versus rural areas. (Allocating ten-year reductions, as KFF has done, still involves a lot of uncertainty, but over a ten-year period, small annual errors in either direction may average out.) It is also difficult to create meaningful comparisons on an annual basis. For example, none of the most significant cuts to federal Medicaid take effect in 2026, which is the year of the first rural health fund allocation.

Dividing the ten-year estimated federal Medicaid cuts by ten also provides misleading information because many of the cuts will not be in effect in initial years, and the effects of the cuts will continue to grow in the years beyond the ten-year budget window. As a result, some states that receive relatively high initial rural health fund allocations and have somewhat lower estimated reductions in federal Medicaid spending could appear to receive more from the rural health fund than they will lose in Medicaid cuts. However, each year, the effects of the Medicaid cuts will continue to grow, whereas the rural health funding is only appropriated through 2030. Even within the ten-year budget window, there is clearly a large gap on an aggregate basis between the $50 billion in rural health funds and the historic cuts to federal Medicaid in rural areas, estimated at $137 billion.

Comparing states’ first-year rural health fund allocations to their estimated cuts in federal Medicaid spending does not tell the whole story. The comparison also fails to account for other cuts to federal health care and coverage losses due to the expiration of the ACA marketplaces’ enhanced premium tax credits, which tend to be larger in states that have smaller Medicaid cuts. It is highly unlikely that any state will receive more money from the rural health fund than it will lose from the historic cuts to federal funding for health care in the 2025 reconciliation law and from other federal policy changes. Also, since only 15% of rural health funds can be used for direct patient care, that funding cannot compensate for reduced Medicaid payments to rural health providers or increases in the number of uninsured people.