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Key Points

• On January 27, 2026, the Trump administration released details of the latest iteration of the Mexico City Policy (MCP), now part of a broader umbrella called “Promoting Human Flourishing in Foreign Assistance (PHFFA),” significantly expanding the policy to encompass more funding, more organizations, and new policy areas.
• First announced in 1984 by the Reagan administration, the Mexico City Policy has been rescinded and reinstated by subsequent administrations along party lines and has been in effect for 23 of the past 42 years.
• Historically, when in effect, the policy had required foreign non-governmental organizations (NGOs) to certify that they would not “perform or actively promote abortion as a method of family planning” using funds from any source (including non-U.S. funds) as a condition of receiving U.S. government global family planning funding. This was expanded by President Trump in 2017 to encompass the vast majority of U.S. bilateral global health assistance (including PEPFAR, maternal and child health, malaria, nutrition, and other U.S. global health programs). The latest expansion now includes most non-military foreign assistance and applies to U.S. NGOs, international organizations, and foreign governments, as well as foreign NGOs. In addition to abortion, it prohibits the promotion of “discriminatory equity ideology” and “gender ideology.”
• KFF estimates have found that almost $40 billion could now be subject to the policy restrictions, billions more than during the first Trump administration ($7.3 billion).
• While the full reach of this latest expansion will be shaped by broader changes to the U.S. foreign aid portfolio, potential legal challenges, and additional applications to other agencies and funding streams, it already extends well beyond the reach of what was in place during the first Trump administration.

What is the Mexico City Policy?

The Mexico City Policy is a U.S. government policy that – when in effect – has required foreign NGOs to certify that they will not “perform or actively promote abortion as a method of family planning” using funds from any source (including non-U.S. funds) as a condition of receiving U.S. global family planning assistance and, as expanded by the first Trump administration, most other U.S. global health assistance. The latest expansion, by the second Trump administration, applies to significantly more funding (most non-military foreign assistance), many more organizations (beyond foreign NGOs), and new services and activities (beyond abortion).The policy was first announced by the Reagan administration at the 2nd International Conference on Population, which was held in Mexico City, Mexico, on August 6-14, 1984 (hence its name; see Box 1).¹ It was renamed “Protecting Life in Global Health Assistance” (PLGHA) in 2017, and now “Protecting Life in Foreign Assistance” (PLFA) as part of the broader “Promoting Human Flourishing in Foreign Assistance (PHFFA)” Policy umbrella. Among opponents, it is also known as the “Global Gag Rule,” because, in addition to prohibiting service delivery, it also prohibits the promotion of restricted activities, including through lobbying, referrals, and public information campaigns.

Box 1: The Original Language of the Mexico City Policy, 1984

“[T]he United States does not consider abortion an acceptable element of family planning programs and will no longer contribute to those of which it is a part. …[T]he United States will no longer contribute to separate nongovernmental organizations which perform or actively promote abortion as a method of family planning in other nations.”²

When first instituted in 1984, the Mexico City Policy marked an expansion of existing legislative restrictions that already prohibited U.S. funding for abortion internationally. Prior to the policy, foreign NGOs could use non-U.S. funds to engage in certain voluntary abortion-related activities as long as they maintained segregated accounts for any U.S. money received, but after the Mexico City Policy, they were no longer permitted to do so if they wanted to receive U.S. family planning assistance. During those years, U.S. funding for family planning ranged from approximately $300-$600 million annually.

When the policy was expanded by President Trump in 2017 to include the vast majority of U.S. bilateral global health assistance, including funding for HIV under the U.S. President’s Emergency Plan for AIDS Relief (PEPFAR), maternal and child health, malaria, nutrition, and other programs, it increased the funding that could be subject to restrictions to more than $7 billion.³ At that time, the Trump administration also moved to further tighten restrictions in how it defined “financial support,” reaching other areas of U.S. development assistance beyond global health and other non-U.S. funding streams. See “What is the definition of ‘financial support’?” below.⁴

Although President Biden rescinded the policy, President Trump reinstated the MCP through a presidential memorandum on January 24, 2025, directing the Secretary of State to “to implement a plan to extend the requirements of the reinstated Memorandum to global health assistance furnished by all departments or agencies,” which would reach beyond the 2017 expansion. Some organizations and members of Congress had also called for the policy to be expanded to apply to all foreign assistance, and last year, it was reported that the administration intended to include new areas of restrictions related to DEI and gender.

On January 27, 2026, the policy details were released under three separate, but inter-related final rules (interim final rules were first posted on January 23) as part of the PHFFA umbrella (see Box 2). The rules cite the presidential memorandum on the MCP and eight other presidential actions issued in January and February of 2025 that addressed foreign aid, DEI, and gender issues to “ensure that foreign aid is aligned with administration policy and promotes human flourishing.” As such, the PHFFA applies to most non-military foreign assistance and most recipients of foreign aid (not just foreign NGOs). In addition to abortion, it prohibits promoting “discriminatory equity ideology,” including activities related to diversity, equity, and inclusion (DEI), and promoting “gender ideology,” including providing gender affirming care, seeking legal protections based on gender identity, and other related services and activities. The rules indicate that the State Department will work with other agencies that administer foreign assistance to expand the policy further.

Box 2: Promoting Human Flourishing in Foreign Assistance (PHFFA) Policy

The Trump administration released details of its new Promoting Human Flourishing in Foreign Assistance (PHFFA) Policy, which includes the latest expansion of the Mexico City Policy, via three separate, but related, final rules on January 27, 2026. Each rule applies to the same funding streams, types of organizations, and award mechanisms but restricts different activities and services:

• Protecting Life in Foreign Assistance (PLFA): prohibits recipients from providing or promoting abortion as a method of family planning.
• Combating Discriminatory Equity Ideology in Foreign Assistance: prohibits recipients from promoting or engaging in diversity, equity, and inclusion-related (DEI-related) policies and activities.
• Combating Gender Ideology in Foreign Assistance: prohibits recipients from providing or promoting gender affirming care, legal protections based on gender identity, and other related activities; defines sex as “person’s immutable biological classification as either male or female.”

With the latest expansion, KFF estimates have found that as much as $39.8 billion in U.S. foreign aid and almost 2,600 prime recipient organizations may be affected (this number should be considered a floor since the policy requirements are passed down when funding is sub-awarded to another organization).

When Has the Mexico City Policy Been in Effect?

The Mexico City Policy has been in effect for 23 of the past 42 years, primarily through executive action, and has been instated, rescinded, and reinstated by presidential administrations along party lines (see Table 1). 

The policy was first instituted in 1984 (taking effect in 1985) by President Ronald Reagan and continued to be in effect through President George H.W. Bush’s administration. It was rescinded by President Bill Clinton in 1993 (although it was reinstated legislatively for one year during his second term;⁵ see below).⁶ The policy was reinstated by President George W. Bush in 2001,⁷ rescinded by President Barack Obama in 2009,⁸ and reinstated and expanded by President Trump in 2017.⁹ It was rescinded by President Biden in 2021.¹⁰ President Trump then reinstated the policy from his first term in January 2025, noting an intention to expand it further, with final rules released in January 2026.¹¹

How Has the Mexico City Policy Been Instituted (and Rescinded)?

The Mexico City Policy has, for the most part, been instituted or rescinded through executive branch action (typically via presidential memoranda¹²). While Congress has the ability to institute the policy through legislation, this has happened only once in the past when  a modified version of the policy was briefly applied by Congress during President Clinton’s last year in office as part of a broader arrangement to pay the U.S. debt to the United Nations.¹³ (At that time, President Clinton was able to partially waive the policy’s restrictions.¹⁴)Other attempts to institute the policy through legislation have not been enacted into law,¹⁵ nor have legislative attempts to overturn the policy.¹⁶ See Table 1.

To What Entities Does the PHFFA Policy Apply?

Under the PHFFA, the types of organizations now subject to the policy, albeit with different applications, include:

• Foreign NGOs,¹⁷ which include:
  • international NGOs that are based outside the U.S.,
  • regional NGOs that are based outside the U.S., and
  • local NGOs in assisted countries.
• U.S. NGOs,¹⁸
• Foreign governments¹⁹ and parastatals²⁰ (note: the State Department will assess whether or not to apply the policy based on foreign policy considerations), and
• International organizations (note: applies to voluntary contributions; international organizations who are recipients of only U.S. assessed contributions are not subject to the policy).²¹

A waiver of the policy or its elements in specific cases is allowed if, in the Secretary of State’s judgment, such a waiver is necessary for national security or foreign policy purposes; see “Are waivers or exemptions allowed?”.

When in place, the policy applies to these organizations as a condition of receiving most non-military U.S. foreign assistance, either directly (as the main – or prime – recipient of U.S. funding) or, for foreign NGOs, U.S. NGOs, and international organizations, indirectly (as a recipient of U.S. funding through an agreement with the prime recipient; referred to as a sub-recipient); see “To what assistance does the PHFFA apply?” below.

Importantly, some aspects of the policy are applied differently based on organization type:

• The strongest restrictions apply to foreign NGOs and international organizations, which are required to agree that outside the U.S. they will not provide or promote abortion as a method of family planning, promote gender ideology, promote discriminatory equity ideology, or engage in unlawful DEI-related discrimination with any funding, from any source; they also must agree not to provide financial support to any other foreign NGO or international organization that engages in such activities. See “What is the definition of ‘financial support’?” below.
• A U.S. NGO is required to agree that it will not provide abortion as a method of family planning outside the U.S. (including with non-Federal funds) and that it will not, “within the scope of any program, project, or activity funded by foreign assistance,” provide or promote abortion as a method of family planning, promote gender ideology, promote discriminatory equity ideology, or engage in unlawful DEI-related discrimination. It is also required to “ensure the physical and financial separation of their foreign assistance-funded programs, projects, and activities from the provision or promotion of” prohibited activities; if such separation is made, a U.S. NGO may carry out prohibited “promotion” activities (such as conducting public information campaigns, or using or teaching education materials) with non-Federal funds but still may not “provide” prohibited activities (such as providing abortion, providing “sex-rejecting procedures,”²² or engaging in unlawful DEI-related discrimination) with any funds. In addition, U.S. NGOs “are not subject to an additional requirement not to provide financial support using non-Federal funds to other organizations that provide or promote abortions outside the United States.”
• A foreign government or parastatal is subject to the policy if the State Department decides to apply the policy – in whole or in part – to an award based on foreign policy considerations; specifically, foreign governments and parastatals may have to agree to not use U.S. foreign assistance award funds to provide or promote abortion as a method of family planning, promote gender ideology, promote discriminatory equity ideology, or engage in unlawful DEI-related discrimination. If it is applied, foreign governments and parastatals “will be required to place any foreign assistance funds under the award in a segregated account to ensure that such funds may not be used to support such activity to the extent the foreign government conducts or supports such activity.” Thus, a foreign government may carry out prohibited activities with non-Federal funds, and they are not subject to the financial support requirement.

To What Assistance Does the PHFFA Apply?

The PHFFA policy applies to most non-military foreign assistance, beyond U.S. global health assistance or U.S. family planning assistance alone (see Table 2).²³ Specifically, it applies to foreign assistance administered by the State Department under title III of the annual Department of State, Foreign Operations, and Related Programs (SFOPS) Appropriations Act as well as four other headings within the SFOPS appropriations act: International Narcotics Control and Law Enforcement; Nonproliferation, Anti-Terrorism, Demining and Related Programs; Peacekeeping Operations; and International Organizations and Programs.²⁴ This extends its reach to other sectors, beyond global health, to include humanitarian assistance; economic development, democracy, human rights, and governance; peace and security; education and social services; and environment.²⁵ Within these accounts, the policy currently applies to two main types of funding instruments used for foreign assistance – grants and cooperative agreements – and also to grants provided under contracts. The administration has stated its intention to apply the policy to contracts, subject to future rule-making.²⁶ This was also sought during President Trump’s first term when a proposed rule to this effect was issued, but it was never finalized.²⁷ The rules also indicate that the State Department will work with other agencies that administer foreign assistance to apply the restrictions to their funding streams.

What Does It Mean to “Flow Down” the Policy?

Foreign NGOs, international organizations, U.S. NGOs, foreign governments, and parastatals must pass down (or “flow down”) the policy requirements under the award terms, as applicable, to sub-recipients of foreign assistance, which would then require the sub-recipients to agree to the policy’s restrictions and then flow down the requirements to other organizations, as applicable, if they sub-award the funding further.

What is the Definition of “Financial Support”?

The financial support²⁸ requirement governs any funding, no matter the source of funds, provided by foreign NGOs and international organizations to a foreign NGO or international organization for any purpose, if that foreign NGO or international organization happened to provide or promote prohibited activities (there are some differences based on type of organization; see “To what entities does the PHFFA Policy apply?” above). This approach codifies how the financial support requirement was expanded during the first Trump administration.²⁹

Accordingly, this approach to “financial support” may affect funding provided by other donors (such as other governments and foundations) and non-foreign assistance funding provided by the U.S. government for a wide range of purposes. For example, if this funding is first provided to a foreign NGO or international organization that has accepted the policy (as a recipient of U.S. global health or other non-military foreign assistance), the organization then could not, using another donor’s funding for any purpose, provide support to a foreign NGO that provides or promotes prohibited activities.

What Activities Are Prohibited Related to Abortion?

Under the expanded Protecting Life in Foreign Assistance (PLFA) policy under PHFFA, foreign NGOs and international organizations “agree that, during the period of the award, [they] will not, outside the United States, provide or promote abortion as a method of family planning, or provide financial support to any other foreign NGO or [international organization] that engages in such activities” (there are some differences based on type of organization; see “To what entities does the PHFFA Policy apply?” above. Restricted activities include (also see Box 3):

• providing abortion as a method of family planning,³⁰
• providing advice and information about and offering referral for abortion – where legal – as part of the full range of family planning options,
• promoting changes in a country’s laws or policies related to abortion as a method of family planning (i.e., engaging in lobbying), and
• conducting public information campaigns about abortion as a method of family planning.³¹

The prohibition of these activities is why the policy has been referred to by its critics as the “Global Gag Rule.”

The policy also provides information and clarification about other abortion-related matters:

• Allows for exceptions in cases of rape, incest, risk to life of mother: The policy does not prohibit, where consistent with local law, organizations from providing advice and information about, performing, or offering referral for abortion in cases where the pregnancy has either posed a risk to the life of the mother or resulted from incest or rape.³² The policy also states that “treatment of an ectopic pregnancy or spontaneous loss of pregnancy (a miscarriage) is not an abortion.”
• Allows for post-abortion care: The policy states that “treatment of injuries or illnesses caused by legal or illegal abortions,” which is known as post-abortion care, is not restricted.
• Prohibits passive referral: The policy now prohibits responding to a question about where a safe, legal abortion may be obtained when a woman who is already pregnant clearly states that she has already decided to have a legal abortion (passively providing information, versus actively providing medically-appropriate information). The policy does permit an exemption to be sought from the State Department where this, or another term, is in conflict with local law. This is an expansion compared to the prior policy where passive referral was permitted and the policy requirements did not apply when healthcare providers had an affirmative duty required under local law to provide counseling about and referrals for abortion as a method of family planning.

Box 3: Other U.S. Legal and Policy Restrictions on Abortion and Foreign Assistance

U.S. funding for abortion overseas using certain U.S. foreign assistance was already restricted and remains restricted under several provisions of the law. This includes a prohibition on using U.S. funding to pay for an abortion as a method of family planning (and, in actual policy practice, it was not allowed in any case, even in cases of risk to life, rape, or incest³³), nor was using funds to conduct certain abortion-related activities.³⁴ Specifically, before the Mexico City Policy was first announced in 1984, U.S. law already prohibited the use of U.S. aid:

• to pay for the performance of abortion as a method of family planning or to motivate or coerce any person to practice abortion (the Helms Amendment, 1973, to the Foreign Assistance Act);
• for biomedical research related to methods of or the performance of abortion as a means of family planning (the Biden Amendment, 1981, to the Foreign Assistance Act); and
• to lobby for or against abortion³⁵ (the Siljander Amendment, first included in annual appropriations in 1981 and included each year thereafter).

Shortly after the policy was announced in 1984, the Kemp-Kasten Amendment was passed in 1985, prohibiting the use of U.S. aid to fund any organization or program, as determined by the president, that supports or participates in the management of a program of coercive abortion or involuntary sterilization (it is now included in annual appropriations).

The Leahy Amendment (first passed in 1994 and now included in annual appropriations) clarified that the Helms Amendment use of the term “motivate” should not be construed to prohibit, where legal under local law, the provision of information or counseling about all pregnancy options.  

What Activities Are Prohibited Under “Gender Ideology”?

Under the new Combating Gender Ideology in Foreign Assistance policy of the PHFFA, foreign NGOs and international organizations “agree that, during the period of the award, [they] will not, outside the United States, promote gender ideology, or provide financial support to any other foreign NGO or [international organization] that promotes gender ideology” (there are some differences based on type of organization; see “To what entities does the PHFFA Policy apply?” above). Gender ideology is defined in the policy as “an ideology that replaces the biological category of sex with an ever-shifting concept of self-assessed gender identity.”³⁶ Restricted activities include:

• providing or promoting gender-affirming care;
• lobbying for legal protections based on gender identity, legalization or availability of gender-affirming care, and lobbying for the continued legality of such activities or to change policies;
• conducting a public information campaign in foreign countries regarding acceptance of “gender ideology” or the benefits and/or availability of gender-affirming care;
• using or teaching sex education materials that include gender ideology; and
• conducting drag queen workshops, performances.

The policy also defines sex as “person’s immutable biological classification as either male or female,” which will have likely implications for vulnerable populations served by U.S. foreign assistance programs, including transgender persons.

The policy allows procedures done to “to treat a person with a medically verifiable disorder of sexual development,” “for purposes other than attempting to align an individual’s physical appearance or body with an asserted identity that differs from the individual’s sex,” or “to treat complications of, including any infection, injury, disease, or disorder that has been caused by or exacerbated by, the performance of” gender-affirming care.

What Activities Are Prohibited Under “Discriminatory Equity Ideology”?

Under the new Combating Discriminatory Equity Ideology in Foreign Assistance policy of the PHFFA, foreign NGOs and international organizations “agree that, during the period of the award, [they] will not, outside the United States, promote discriminatory equity ideology, engage in unlawful [diversity, equity, and inclusion-related, or] DEI-related discrimination, or provide financial support to any other foreign NGO or [international organization] that conducts such activities” (there are some differences based on type of organization; see “To what entities does the PHFFA Policy apply?” above). Discriminatory equity ideology is defined in the policy as “an ideology that treats individuals as members of preferred or disfavored groups, rather than as individuals, and minimizes agency, merit, and capability in favor of generalizations,”³⁷ such as that “an individual, by virtue of the individual’s race, color, religion, sex, or national origin, should be discriminated against or receive adverse treatment to achieve diversity, equity, or inclusion.” Restricted activities include:

• promoting discriminatory equity ideology, which includes using or teaching education materials (including books, curricula, and media) that advance such ideology; and
• unlawful DEI-related discrimination, which the policy defines as “discrimination on the basis of race, color, religion, or national origin if such discrimination violates U.S. federal antidiscrimination law or would violate U.S. federal antidiscrimination law if it occurred inside the United States, including the use of those characteristics as a selection criterion or preference for, or basis for exclusion from, employment, contracting, program participation, resource allocation, or similar activities, opportunities, or benefits.”³⁸

The policy does not “address discrimination on the basis of disability or other protected classes, nor does it address … grounds other than race, color, religion, or national origin.”

Are Waivers or Exemptions Allowed?

The rules allow for waivers or exemptions in certain cases as follows:

• Waiver: A waiver of the policy or its elements in specific cases is allowed if, in the Secretary of State’s judgment, such a waiver is necessary for national security or foreign policy purposes. A waiver can be issued either by the Secretary of State or the Under Secretary of State for Foreign Assistance, Humanitarian Affairs, and Religious Freedom, and according to the rules, the State Department will issue guidance on the waiver process.
• Foreign governments/parastatals: The State Department is allowed to exercise discretion, based on foreign policy considerations, in determining whether, and how (in full or in part), to apply the policy terms to the awards of foreign governments and parastatals.
• Local law: The policy permits an exemption to be sought from the State Department where a specific PHFFA award term is in conflict with local law (see, for example, “Prohibits passive referral” above).

What Has Been the Impact of the Mexico City Policy?

A KFF literature review of studies examining the policy, from 2001 to 2024, identified a range of impacts associated with the policy, when in effect, including: increases in abortion rates and reductions in contraceptive prevalence (among other health outcomes); disruption and gaps in services; reduction in service integration; over-implementation and chilling effects; confusion about the policy; loss of civil society/NGO coordination and partnerships; and increased administrative burden (see Box 4). In addition, several studies sought to calculate or estimate the reach of the policy, as measured by amount of funding, countries, and/or NGOs affected.

Box 4: Impacts Associated with the Mexico City Policy in the Literature

• Increased abortion rates
• Increased pregnancy
• Decreased contraceptive prevalence
• Disruption in family planning and other services
• Gaps in family planning and other services
• Reduced service integration
• Over-implementation and chilling effect
• Confusion
• Loss of civil society/NGO coordination and partnerships
• Increased administrative burden

During the first Trump administration, two official assessments by the State Department were released:

• Initial six-month review of implementation of the policy: released in February 2018, it directed agencies to provide greater support for improving understanding of implementation among affected organizations and provided guidance to clarify terms included in standard provisions of grants and cooperative agreements.
• Second review of the policy, covering the first 18 months of implementation: released in August 2020, it found the awards declined spanned a variety of program areas,³⁹ in addition to cross-cutting awards; spanned geographic areas, but many were for activities in sub-Saharan Africa; and led to gaps or disruptions in service delivery sometimes being reported, despite U.S. efforts to transition projects to another implementer in order to minimize disruption.

Additionally, a report by the U.S. Government Accountability Office (GAO), released in March 2020, found that from May 2017 through FY 2018, the policy had been applied to over 1,300 global health projects, with the vast majority of these through USAID and CDC, and NGOs declined to accept the expanded policy during the first Trump administration in 54 instances, totaling $153 million in declined funding⁴⁰ across USAID and CDC. The State Department and DoD did not identify any instances where NGOs declined to accept the policy conditions.

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1. “Policy Statement of the United States of America at the United Nations International Conference on Population (Second Session), Mexico City, Mexico, August 6-14, 1984,” undated, https://www.jstor.org/stable/1973537?seq=1; United Nations Division of Economic and Social Affairs/Population Division, “United Nations Conferences on Population,” webpage, undated, https://www.un.org/en/conferences/population. ↩︎
2. “Policy Statement of the United States of America at the United Nations International Conference on Population (Second Session), Mexico City, Mexico, August 6-14, 1984,” undated, https://www.jstor.org/stable/1973537?seq=1. ↩︎
3. KFF analysis of Trump Administration/Department of State: “Protecting Life in Global Health Assistance,” fact sheet, May 15, 2017, https://2017-2021.state.gov/protecting-life-in-global-health-assistance-2/index.html; “Background Statement: Announcement of ‘Protecting Life in Global Health Assistance,’” background opening statement, May 15, 2017; “Implementation of Protecting Life in Global Health Assistance (Formerly known as the ‘Mexico City Policy’),” PRM press guidance, May 15, 2017; “Background Briefing: Senior Administration Officials on Protecting Life in Global Health Assistance,” press release of special briefing by senior Department of State officials via teleconference, May 15, 2017, https://2017-2021.state.gov/background-briefing-senior-administration-officials-on-protecting-life-in-global-health-assistance/index.html; “Subject: Protecting Life in Global Health Assistance,” Federal Assistance Management Advisory Number 2017-01; “Protecting Life in Global Health Assistance (May 2019),” MCP-related portion of standard provisions for cooperative agreements and grants to U.S. NGOs (May 2020) and foreign NGOs (Aug. 2020)); and KFF analysis of data from: Congressional Appropriations Bills, Press Releases, and Conference Reports; Federal Agency Budget and Congressional Justification documents and Operating Plans; ForeignAssistance.gov; Office of Management and Budget, personal communication. ↩︎
4. USAID, “Protecting Life in Global Health Assistance Frequently Asked Questions and Answers,” Oct. 2019, https://web.archive.org/web/20210125230730/https://www.usaid.gov/sites/default/files/documents/1864/FINAL_Protecting_Life_in_Global_Health_Assistance_FAQs_Oct_2019_USAID.pdf. ↩︎
5. The temporary, one-year legislative imposition of the policy occurred as part of a broader deal related to paying the U.S. debt to the United Nations. See FY 2000 Consolidated Appropriations Act, P.L. 106-113, https://www.congress.gov/bill/106th-congress/house-bill/3194/text; PAI, Global Gag Rule Timeline, July 12, 2011; and Richard Cincotta and Barbara Crane, “The Mexico City Policy and U.S. Family Planning Assistance,” Science, Oct. 19, 2001, Vol. 294: pp. 525-526, https://science.sciencemag.org/content/294/5542/525. ↩︎
6. Bill Clinton Administration, “Subject: AID Family Planning Grants/Mexico City Policy,” Memorandum for the Acting Administrator of the Agency for International Development, January 22, 1993, Clinton White House Archives, https://clintonwhitehouse6.archives.gov/1993/01/1993-01-22-aid-family-planning-grants-mexico-city-policy.html. ↩︎
7. George W. Bush Administration, “Subject: Restoration of the Mexico City Policy,” Memorandum for the Administrator of the United States Agency for International Development, January 22, 2001, Bush Administration White House Archives, https://georgewbush-whitehouse.archives.gov/news/releases/20010123-5.html; “Subject: Restoration of the Mexico City Policy,” Memorandum for the Administrator of the United States Agency for International Development, March 28, 2001, Federal Register, https://www.federalregister.gov/documents/2001/03/29/01-8011/restoration-of-the-mexico-city-policy; George W. Bush Administration, “Subject: Assistance for Voluntary Population Planning,” Memorandum for the Secretary of State, August 29, 2003, Bush Administration White House Archives, http://georgewbush-whitehouse.archives.gov/news/releases/2003/08/20030829-3.html. ↩︎
8. Barack Obama Administration, “Mexico City Policy and Assistance for Voluntary Population Planning,” Memorandum for the Secretary of State, the Administrator of the United States Agency for International Development, January 23, 2009, Obama White House Archives, https://obamawhitehouse.archives.gov/the-press-office/mexico-city-policy-and-assistance-voluntary-population-planning. ↩︎
9. Donald J. Trump Administration, “The Mexico City Policy,” Memorandum for the Secretary of State, the Secretary of Health and Human Services, the Administrator of the Agency for International Development, Jan. 23, 2017, Trump Administration White House Archives, https://trumpwhitehouse.archives.gov/presidential-actions/presidential-memorandum-regarding-mexico-city-policy/. ↩︎
10. Joe Biden Administration, “Memorandum on Protecting Women’s Health at Home and Abroad,” presidential actions, Jan. 28, 2021, https://bidenwhitehouse.archives.gov/briefing-room/presidential-actions/2021/01/28/memorandum-on-protecting-womens-health-at-home-and-abroad/; White House, “FACT SHEET: President Biden to Sign Executive Orders Strengthening Americans’ Access to Quality, Affordable Health Care,” statements and releases, Jan. 28, 2021, https://bidenwhitehouse.archives.gov/briefing-room/statements-releases/2021/01/28/fact-sheet-president-biden-to-sign-executive-orders-strengthening-americans-access-to-quality-affordable-health-care/. ↩︎
11. White House/Donald J. Trump Administration (second), “The Mexico City Policy,” Memorandum for the Secretary of State, Secretary of Defense, the Secretary of Health and Human Services, the Administrator of the Agency for International Development, Jan. 24, 2025, https://www.whitehouse.gov/presidential-actions/2025/01/memorandum-for-the-secretary-of-state-the-secretary-of-defense-the-secretary-of-health-and-human-services-the-administrator-of-the-united-states-for-international-development/; White House/Donald J. Trump Administration (second), “FACT SHEET: President Donald J. Trump Enforces Overwhelmingly Popular Demand to Stop Taxpayer Funding of Abortion,” fact sheets, Jan. 25, 2025, https://www.whitehouse.gov/fact-sheets/2025/01/fact-sheet-president-donald-j-trump-enforces-overwhelmingly-popular-demand-to-stop-taxpayer-funding-of-abortion/; Protecting Life in Foreign Assistance, 91 Fed. Reg. 3319 (Jan. 27, 2026) (amending 2 C.F.R. §602), final rule, https://www.federalregister.gov/documents/2026/01/27/2026-01519/protecting-life-in-foreign-assistance. ↩︎
12. Presidential memoranda “are often used to carry out routine executive decisions and determinations, or to direct agencies to perform duties consistent with the law or implement laws that are presidential priorities” and are not required to be published in the Federal Register (although those pertaining to the Mexico City Policy sometimes have been). These presidential instruments or directives “may have the force and effect of law only if the presidential action is based on power vested in the President by the U.S. Constitution or delegated to the President by Congress.” Memoranda have the same legal authority as executive orders, although the latter is always required to be published in the Federal Register. Quotes as stated in Congressional Research Service (CRS), Executive Orders: Issuance, Modification, and Revocation, April 16, 2014, RS20846, https://www.congress.gov/crs-product/RS20846. ↩︎
13. The legislative application of the policy – applying to FY 2000, which was from Oct. 1, 1999, until Sept. 30, 2000 – included language that prohibited USAID from providing family planning assistance to any foreign private, nongovernmental, or multilateral organizations until they certified that during the period for which the funding was made available 1) they would not perform abortions as a method of family planning in any foreign country and 2) they would not violate the laws of any foreign country regarding abortion and would not engage in lobbying any foreign country regarding abortion. FY 2000 Consolidated Appropriations Act, P.L. 106-113, https://www.congress.gov/bill/106th-congress/house-bill/3194/text; PAI, Global Gag Rule Timeline, July 12, 2011; and Richard Cincotta and Barbara Crane, “The Mexico City Policy and U.S. Family Planning Assistance,” Science, Oct. 19, 2001, Vol. 294: pp. 525-526, https://science.sciencemag.org/content/294/5542/525. ↩︎
14. The legislation included an option for the president to waive these restrictions; however, if he exercised the waiver option (for no more than $15 million in family planning assistance), then $12.5 million of this funding would be transferred to maternal and child health assistance. The president did exercise the waiver option. FY 2000 Consolidated Appropriations Act, P.L. 106-113, https://www.congress.gov/bill/106th-congress/house-bill/3194/text. ↩︎
15. CRS, Abortion and Family Planning-Related Provisions in U.S. Foreign Assistance Law and Policy, May 17, 2016, R41360, https://digital.library.unt.edu/ark:/67531/metadc855791/. ↩︎
16. CRS, Appropriations for FY2000: Foreign Operations, Export Financing, and Related Programs, updated August 4, 1999, RL30211, https://digital.library.unt.edu/ark:/67531/metadc814156/; CRS, International Family Planning: The “Mexico City” Policy, updated April 2, 2001, RL30830, https://digital.library.unt.edu/ark:/67531/metacrs1906/; CRS, Abortion and Family Planning-Related Provisions in U.S. Foreign Assistance Law and Policy, May 17, 2016, R41360, https://digital.library.unt.edu/ark:/67531/metadc855791/; PAI, Global Gag Rule Timeline, July 12, 2011. ↩︎
17. Under PHFFA, an NGO is a for-profit or not-for-profit organization that is not part of the U.S. government, a foreign government, or a international organization; includes private sector organizations, non-profit organizations, and educational institutions. A foreign NGO is formally defined in the rules as “any non-governmental organization or entity, whether non-profit or profit-making (including any commercial firm and educational institution), not organized or existing under the laws of the United States, any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any other territory or possession of the United States.” ↩︎
18. Under PHFFA, an NGO is a for-profit or not-for-profit organization that is not part of the U.S. government, a foreign government, or a international organization. A U.S. NGO is formally defined in the rules as “any non-governmental organization or entity, whether non-profit or profit-making (including any commercial firm and educational institution), organized or existing under the laws of the United States, any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any other territory or possession of the United States.” Prior to the latest expansion, U.S. NGOs had not been directly subject to the Mexico City Policy but had to agree to ensure that they did not provide funding to any foreign NGO sub-recipients unless those sub-recipients had first certified adherence to the policy. ↩︎
19. Under PHFFA, a foreign government is “any department, agency, independent establishment, or other entity of the government of a foreign country.” ↩︎
20. Under PHFFA, a parastatal is a “foreign-government-owned organization operated as a commercial company or other organization, including non-profits, or enterprises in which foreign governments or foreign government agencies have a controlling interest.” ↩︎
21. An international organization (also referred to as a multilateral organization) is an organization that is jointly supported by multiple governments and, often, other partners (versus bilateral efforts, which are carried out on a country-to-country basis); includes specialty agencies of the United Nations (U.N.) and international financing mechanisms that pool and direct resources from multiple public and private donors for specific causes. Furthermore, each rule of PHFFA defines an international organization as “(A) Any organization designated as being entitled to enjoy the privileges, exemptions, and immunities under the International Organizations Immunities Act; (B) Any organization treated as a public international organization pursuant to the regulations or policies of the Department of State; (C) Any organization established by international agreement and whose governing body is composed principally of representatives of national governments; or (D) Any other multilateral entity in which sovereign nations participate.” ↩︎
22. According to the rule, to “provide a sex-rejecting procedure means any act of performing any procedure, or prescribing, dispensing, or utilizing any drug or device, for a sex-rejecting procedure, and any act of paying for, assisting in carrying out, or operating a facility that carries out, any such activities.” It also defines a “sex-rejecting procedure” as “any pharmaceutical or surgical intervention that is provided for the purpose of attempting to align an individual’s physical appearance or body with an asserted identity that differs from the individual’s sex either by: (I) intentionally disrupting or suppressing the normal development of natural biological functions, including primary or secondary sex-based traits; or (II) intentionally altering an individual’s physical appearance or body, including amputating, minimizing or destroying primary or secondary sex-based traits such as the sexual and reproductive organs.” ↩︎
23. In the past, foreign NGOs had been required to adhere to the Mexico City Policy – when in effect – as a condition of receiving support through certain U.S. international funding streams: family planning assistance through the U.S. Agency for International Development (USAID) and, beginning in 2003, family planning assistance through the U.S. Department of State. In the 2003 memorandum announcing the policy’s expansion to include the Department of State, President Bush stated that the policy did not apply to funding for global HIV/AIDS programs and that international organizations that are associations of governments are not included among “foreign NGOs.” The first Trump administration expanded the policy to apply to the vast majority of U.S. bilateral global health assistance furnished by all agencies and departments, including: family planning and reproductive health; maternal and child health (including household-level water, sanitation, and hygiene (WASH)); nutrition; HIV under PEPFAR; tuberculosis; malaria under the President’s Malaria Initiative (PMI); neglected tropical diseases; global health security; and certain types of research activities (see: George W. Bush Administration, “Subject: Assistance for Voluntary Population Planning,” Memorandum for the Secretary of State, August 29, 2003, Bush Administration White House Archives, http://georgewbush-whitehouse.archives.gov/news/releases/2003/08/20030829-3.html. Department of State: “Protecting Life in Global Health Assistance,” fact sheet, May 15, 2017, https://2017-2021.state.gov/protecting-life-in-global-health-assistance-2/index.html; “Background Statement: Announcement of ‘Protecting Life in Global Health Assistance,’” background opening statement, May 15, 2017; “Implementation of Protecting Life in Global Health Assistance (Formerly known as the ‘Mexico City Policy’),” PRM press guidance, May 15, 2017; “Background Briefing: Senior Administration Officials on Protecting Life in Global Health Assistance,” press release of special briefing by senior Department of State officials via teleconference, May 15, 2017, https://2017-2021.state.gov/background-briefing-senior-administration-officials-on-protecting-life-in-global-health-assistance/index.html; “Subject: Protecting Life in Global Health Assistance,” Federal Assistance Management Advisory Number 2017-01; “Protecting Life in Global Health Assistance (May 2017),” MCP-related portion of standard provisions for cooperative agreements and grants to NGOs, May 11, 2017; USAID: USAID: “Standard Provisions for U.S. Nongovernmental Organizations: A Mandatory Reference for ADS Chapter 303,” ADS Reference 303maa, partial revision May 18, 2020, http://web.archive.org/web/20200916043917/https://www.usaid.gov/ads/policy/300/303maa; “Standard Provisions for Non-U.S. Nongovernmental Organizations: A Mandatory Reference for ADS Chapter 303,” ADS Reference 303mab, partial revision Aug. 18, 2020, https://web.archive.org/web/20200916055738/https://www.usaid.gov/ads/policy/300/303mab ; CDC, “Additional Requirement – 35: Protecting Life in Global Health Assistance,” webpage, https://web.archive.org/web/20201028113231/https://www.cdc.gov/grants/additional-requirements/ar-35.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fgrants%2Fadditionalrequirements%2Far-35.html; NIH, “Protecting Life in Global Health Assistance,” webpage, https://web.archive.org/web/20201217194950/https://grants.nih.gov/policy/protecting-life-global-health-assistance.htm. ↩︎
24. This includes voluntary contributions to international organizations from foreign assistance. ↩︎
25. This includes stabilization assistance and migration and refugee assistance. ↩︎
26. As of Feb. 26, 2026, the policy will be effective and apply to all new grants and cooperative agreement awards that provide covered non-military foreign assistance, as well as to all existing grants and cooperative agreement awards when amended to add new funding. ↩︎
27. The exception to this is “grants under contracts,” which were previously subject to the policy; they are essentially grants made to sub-awardees by recipients of contracts. ↩︎
28. The rules state “to provide financial support means to provide funds from any source and for any purpose to a foreign NGO or [international organization] through an award, sub-award, contract, sub-contract, grant under contract, or other written agreement or donation of funds.” ↩︎
29. In June 2019, USAID provided additional information to reflect this broader interpretation of the standard provisions. USAID, “Protecting Life in Global Health Assistance Frequently Asked Questions and Answers,” Oct. 2019, https://web.archive.org/web/20210125230730/https://www.usaid.gov/sites/default/files/documents/1864/FINAL_Protecting_Life_in_Global_Health_Assistance_FAQs_Oct_2019_USAID.pdf. ↩︎
30. The PLFA of the PHFFA defines “to provide abortions as a method of family planning means any of the following activities: (A) any act of performing or inducing an abortion as a method of family planning; (B) any act of prescribing, dispensing, utilizing, selling, manufacturing, or distributing drugs, devices, or equipment for the purpose of performing or inducing abortion as a method of family planning; or (C) any act of paying for, assisting in carrying out, or operating a facility that carries out, any of the activities described above.” ↩︎
31. The PLFA of the PHFFA defines “to promote abortion as a method of family planning includes any of the following activities: (A) Committing resources, financial or otherwise, to increase the availability, or use, of abortion as a method of family planning; (B) Operating a service-delivery site that provides counseling, including advice and information, regarding the benefits and/or availability of abortion as a method of family planning (unless, in the case of a United States nongovernmental organization, the physical and financial separation requirements under this paragraph with respect to foreign assistance are satisfied); (C) Providing advice that abortion as a method of family planning is an available option, or referring for, or encouraging women to consider, abortion as a method of family planning[;] (D) Lobbying, pressuring, or encouraging a foreign government to legalize or make available abortion as a method of family planning, or lobbying, pressuring, or encouraging such a government to continue the legality of abortion as a method of family planning;(E) Conducting a public-information campaign in a foreign country regarding the benefits and/or availability of abortion as a method of family planning; and, (F) Using or teaching sex education materials (including books, curricula, media, etc.) that promote abortion as a method of family planning.” ↩︎
32. While the policy allows exceptions for organizations that perform abortions with non-U.S. funds in the cases of a pregnancy that threatens the life of the woman or was a result of rape or incest, long-standing USAID interpretation of the Helms Amendment to the Foreign Assistance Act had not permitted U.S. funding to support the performance of abortions in these exceptional cases. ↩︎
33. While the policy allows exceptions for organizations that perform abortions with non-U.S. funds in the cases of a pregnancy that threatens the life of the woman or was a result of rape or incest, long-standing USAID interpretation of the Helms Amendment to the Foreign Assistance Act had not permitted U.S. funding to support the performance of abortions in these exceptional cases. ↩︎
34. For information about other U.S. government requirements and policies related to family planning and reproductive health, see: KFF, The U.S. Government and International Family Planning & Reproductive Health: Statutory Requirements and Policies; KFF, Statutory Requirements & Policies Governing U.S. Global Family Planning and Reproductive Health Efforts, 2012; CRS, Abortion and Family Planning-Related Provisions in U.S. Foreign Assistance Law and Policy, R41360, https://www.congress.gov/crs-product/R41360/. ↩︎
35. When initially introduced, the amendment prohibited only lobbying for abortion, but in subsequent years Congress modified the language to include lobbying against abortion as well. ↩︎
36. The rule defines gender identity as “an individual’s fully internal and subjective sense of self, disconnected from biological reality and sex and existing on an infinite continuum. Gender identity does not provide a meaningful basis for identification and cannot be recognized as a replacement for sex.” ↩︎
37. According to the policy, generalizations include the following: (I) Members of one race, color, religion, sex, or national origin are morally or inherently superior to members of another race, color, religion, sex, or national origin; (II) An individual, by virtue of the individual’s race, color, religion, sex, or national origin, is inherently racist, sexist, or oppressive, whether consciously or unconsciously; (III) An individual’s moral character or status as privileged, oppressing, or oppressed is primarily determined by the individual’s race, color, religion, sex, or national origin; (IV) Members of one race, color, religion, sex, or national origin cannot and should not attempt to treat others without respect to their race, color, religion, sex, or national origin; (V) An individual, by virtue of the individual’s race, color, religion, sex, or national origin, bears responsibility for, should feel guilt, anguish, or other forms of psychological distress because of, should be discriminated against, blamed, or stereotyped for, or should receive adverse treatment because of actions committed in the past by other members of the same race, color, religion, sex, or national origin, in which the individual played no part; (VI) An individual, by virtue of the individual’s race, color, religion, sex, or national origin, should be discriminated against or receive adverse treatment to achieve diversity, equity, or inclusion; (VII) Virtues such as merit, excellence, hard work, fairness, neutrality, objectivity, and racial colorblindness are racist or sexist or were created by members of a particular race, color, religion, sex, or national origin to oppress members of another race, color, religion, sex, or national origin; or (VIII) the United States is fundamentally racist, sexist, or otherwise discriminatory.” ↩︎
38. The policy cites “examples of unlawful practices such as race-based training sessions, race-based segregation in facilities or resources, implicit segregation through program eligibility, race-based “diverse slate” policies in hiring, race-based program participation (including when framed as addressing underrepresentation), DEI training programs that promote discrimination based on protected characteristics, such as by stereotyping, excluding or disadvantaging individuals based on their race, color, religion, or national origin, or creating a hostile environment.” ↩︎
39. Including family planning and reproductive health (FP/RH), HIV and AIDS (HIV/AIDS), maternal and child health (MCH), tuberculosis (TB), and nutrition. ↩︎
40. Specifically, seven prime awards amounting to $102 million and 47 sub-awards amounting to $51 million (more than two-thirds of sub-awards were intended for Africa). ↩︎

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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.