Addressing Medicare’s Finances Is Still Urgent: A Framework For Considering Options

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Every year, the Medicare Trustees provide an update on the financial status of the Medicare program. The report is watched closely by policy makers and researchers because it provides insight into the sustainability of the program and whether changes might be needed to ensure that the benefits promised to beneficiaries will indeed be covered. In turn, it gives rise to policy discussions about how to create a Medicare program that is structurally and financially sound for the millions who depend on it.

As with most recent Trustees reports, this year’s report points to trouble ahead. The Medicare Hospital Insurance (HI) Trust Fund is projected to be depleted in 2028, two years later than projected last year. The reprieve buys time for Congress to avoid future calamity for the Trust Fund and the 64 million people on Medicare. However, two additional years is not much considering the time needed to enact and implement changes to Medicare. The projected additional time until insolvency is valuable and presents an opportunity for Congress to thoughtfully revisit the Medicare program in an environment where health care and how it’s delivered are vastly different from when the program was originally created. The additional time shouldn’t be squandered.

What Led To This Improvement In The Trust Fund’s Outlook?

More people are projected to be employed and wages are projected to be higher than previously thought, leading to higher payroll tax receipts—the primary source of financing for the HI Trust Fund. The Medicare Trustees also reallocated projected payments from Medicare Advantage plans, resulting in a smaller part of the payments coming from the HI Trust Fund (See exhibit 1).

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Exhibit 1: HI Trust Fund revenues and expenditures projected in the 2021 and 2022 Medicare Trustees reports

Sources: 2021 and 2022 Medicare Trustees reports.

The shoring up the solvency of the Trust Fund has been an ongoing discussion for decades, since not long after the program was established. The projected date of insolvency has swung back and forth from one year to the next, showing the extent to which Trust Fund solvency is sensitive to the economic conditions that affect payroll tax revenues. And conditions could quickly flip the other way with an economic downturn or recession, resurrecting prospects of having to turn to hasty measures or accounting gimmicks to rescue Medicare’s finances from disaster. In this year’s report, the Trustees highlight the unusually large degree of uncertainty in the projections due to the unknown future paths of the COVID-19 pandemic and the economy.

What Would Happen If The Trust Fund Were Depleted?

Disaster may sound dramatic, but it is not. Millions of Medicare beneficiaries and health care providers would be affected by insolvency. In 2028, Trust Fund revenues are projected to cover only 90 percent of projected expenditures, and even less in the following year. One possibility is that payments to hospitals, rehabilitation providers, and hospice companies would be delayed until sufficient funds are available. Hospitals could end up providing millions of dollars’ worth of care with no real sense of when they’ll be paid for it, potentially affecting the wages and employment of nurses and other hospital employees. Another possibility is that payments to providers, including those participating in accountable care organizations (ACOs), would be proactively cut by a set percentage to account for the shortfall. It’s unclear what combination of the two options the program would adopt, and for how long.

In addition, payments to Medicare Advantage plans would be cut or delayed because they cover the costs of hospital care and rehabilitative care for people in their plans, further increasing the disruption. With health care representing nearly 20 percent of the US economy, the effects would be far reaching.

There is also a real possibility that people on Medicare might not be able to get the care they need. With one in four people on Medicare spending a high share of their income on health care, many can’t afford to pick up any additional costs.

Why Should Congress Spend Time On The HI Trust Fund’s Solvency When It Is Six Years Away?

Congress rarely does such long-term planning because it has many pressing matters to address, and it is politically difficult to enact changes when the deadline for action is multiple election cycles away. Most changes to Medicare, especially those designed to save money, are also difficult and accompanied by bruising policy debates and intense lobbying by stakeholders. However, the reality is that there are no good short-term fixes if economic conditions change and the Trust Fund dries up. If we run down the clock, we will be left with gimmicky measures or band-aid solutions that would be of questionable efficacy.

Medicare is a program that was designed to provide health insurance to older Americans in the 1960s. This was—and remains—a laudable policy achievement since most people 65 and older at that time were not covered by health insurance. However, demographic shifts, such as the Baby Boom generation aging into Medicare without a corresponding growth in wage earners paying taxes into the program, stress the program’s financing and its ability to provide the promised benefits. The types of policy changes that would help the Trust Fund the most will take a long time to enact and financially realize the effects—time that we may have now.

Revenue Options

By funding the HI Trust Fund primarily through payroll taxes, Congress ensured that most people would buy into Medicare and have a stake in the program and its future. Yet, the current imbalance between the number of wage earners and the number of people receiving Medicare benefits raises the question of whether the HI Trust Fund ought to continue being funded this way or be financed differently. If the desire is to continue funding through payroll taxes, existing taxes could be raised. If the desire is to change the source of funding for the Trust Fund, this could include establishing new taxes, redirecting existing taxes such as the Net Investment Income Tax to the Trust Fund, or changing the financing of the Trust Fund entirely, for example, funding it through general revenues similar to the way Medicare Part B is funded.

Each of these options could improve the Trust Fund but would entail tradeoffs. For instance, adding funding from general revenues would reduce the importance of worker contributions in the program’s funding, could increase pressure on the budget, and would increase the deficit. New or increased taxes on select populations, such as high earners, would reduce the linkage between program benefits and program contributions. In addition, the political challenge of increasing taxes or establishing new taxes would be a significant lift for any Congress.

Options To Reduce Spending

Reducing Medicare spending could also be an avenue for shoring up the Trust Fund’s solvency, and the possible changes to Medicare fall along a matrix of two continuums: whether the change would improve the program’s finances and whether the change would improve the program overall and help it to meet the needs of Medicare beneficiaries and improve their quality of care (exhibit 2). High priority should be given to those policies that would both address the program’s finances and strengthen it overall. Approaches that do neither should be avoided.

Exhibit 2: Classifying potential Medicare reforms: effects on finances and overall programs

Source: Authors’ analysis.

Some near-term changes could improve the program’s solvency as well as set it on a course for better meeting the needs of beneficiaries. These include right-sizing prices and payments for hospital, rehabilitative, and hospice care, as well as for ACOs and Medicare Advantage plans. (Medicare Advantage is projected to cover more than half of all Medicare beneficiaries by 2025.) Assessing and addressing how much Medicare pays, including revisiting what it underpays and overpays, is foundational and should ideally be done before adding revenues or making other changes to spending.

Other near-term changes could address the mathematics problem facing the Trust Fund but wouldn’t make policy improvements to the program. For example, Congress could enact a transfer from general revenues to the Trust Fund, which would open up a financing spout that could be difficult to turn off and change the financing of the program. Congress could also assess whether to restructure how it pays for Graduate Medical Education, which is the training program for all physicians in the country. Other blunt changes would be to move some services currently funded through Part A, such as Home Health, to Part B. Again, the structural problems in the program would remain while temporarily addressing the Trust Fund’s shortfall.

Large-scale changes could also help to set the program on a course for fiscal sustainability, but the consequences for beneficiaries, both short and long term, should be carefully weighed. Such changes include changing Medicare to a premium support system or paying Medicare Advantage plans through competitive bidding. These changes could, depending on the details, result in significant savings for Medicare, but they wouldn’t necessarily improve the program for beneficiaries.

An option considered in the past, but less so recently, would be to increase the age for qualifying for Medicare. This could help the Trust Fund but not improve the program for beneficiaries. It would also likely widen inequities: Given the differences in life expectancy by race and ethnicity—particularly the lower life expectancies for non-Hispanic Black Americans compared to non-Hispanic White Americans—the injustice that is introduced when people work to contribute into the program but do not live to realize the benefits must be carefully considered.

Some changes could improve the program for beneficiaries but wouldn’t necessarily reduce program spending. These could include restructuring the program to combine and simplify the cost-sharing requirements for hospital and physician services, improving benefits and making the program more affordable for beneficiaries, or developing policies to better address the social and structural determinants of health. Notably, all of these changes take significant time to thoughtfully develop and implement.

The Time To Start Examining Options Is Now

We are not advocating for or against any of these approaches. Many of these changes would require time to develop the details for current and future beneficiaries. Even more straightforward changes, such as reducing Medicare’s payments to providers, ACOs, and Medicare Advantage plans, or dedicating new tax revenues to the Trust Fund, typically require at least two years for the effects to be realized. Many changes could also exacerbate existing disparities in care, and those potential perverse consequences need to be addressed if we are to build a better system.

To be clear, choosing not to address the program’s financing in the near future would be a decision. It would mean implementing short-term measures or gimmicks that don’t actually improve the program or address its long-term sustainability. Or, if Medicare can’t pay its bills in the future, it would mean forcing partial or delayed payments on Medicare providers and Medicare Advantage plans, which could hinder beneficiaries’ access to care.

Ideally, shoring up the Trust Fund would be undertaken in a bipartisan manner to foster stability in the programmatic changes for beneficiaries and providers. We owe it to everyone who is currently and will someday be on Medicare (that is pretty much all of us!) to engage in a discussion of fundamental reforms.

Authors’ Note

Dr. Enekwechi is an operating partner at Welsh, Carson, Anderson and Stowe, an investment firm with investments across various technology and health care companies. She also serves on the board of directors at the Public Health Institute, Alliance for Health Policy, MedStar Health, UnityPoint Health System, and Tia, a women’s health company.



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