Tax Cuts and the Future of Medicare: Needlessly Painful Choices Could Affect Those Who Rely on Medicare Insurance

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    The tax bill reduces revenue instead of making investments in delivery reforms designed to lower Medicare spending while meeting the needs of baby boomers
    Having dug a deficit hole with passage of the tax bill, Congress may look to cut benefits for tens of millions of seniors

The congressional tax bill now moving toward final passage would add $1.45 trillion to the federal deficit between now and 2027, according to Joint Committee on Taxation estimates. If passed, the bill will accelerate deficit spending over the next five years, while ignoring imminently growing demands on Medicare that are right on the federal doorstep. 

The baby boom generation is aging into the Medicare program, driving enrollment to historic highs. By 2030, more than 80 million Americans will rely on Medicare, up from nearly 57 million in 2016. This increase in enrollment promises spiking demand for health care services covered by Medicare. According to the Congressional Budget Office (CBO), annual net Medicare spending (mandatory spending minus income from premiums and other offsetting receipts) will more than double over the next 10 years from $584 billion in 2018 to $1.2 trillion in 2027. CBO points out that spending per beneficiary is also likely to grow as new tests and treatments with high price tags become available. 

The tax bill aside, Medicare is not adequately funded. The Medicare Trustees project that the program’s Part A trust fund covering hospital insurance will be depleted in 2029 — right as the baby boom generation reaches the older ages (including a growing group of those over age 85) that typically have higher rates of spending than younger beneficiaries. This tenuous situation would be made worse by the tax cuts, given that 45 percent of the total program’s funds come from general tax revenue. Payroll taxes finance Medicare Part A, which covers hospital services, while general revenues support Parts B and D, which pay for physician care and prescription drugs.

In recent years, the Centers for Medicare and Medicaid Services (CMS) has initiated many efforts to obtain more value from Medicare spending, while ensuring that future beneficiaries will have access to high-quality, affordable care. Continued investments in delivery system reform and new payment models will be necessary to help stave off future spending increases. To illustrate the point, if reforms could hold Medicare spending per beneficiary constant at 2014 levels ($10,986 per person), net spending in 2027 would be $900 billion per year, a reduction of 30 percent and hundreds of billions of dollars less than the $1.2 billion per year anticipated by current projections. Reforms are already making a difference: Just a decade ago, a near-zero per capita spending growth rate seemed impossible — yet since 2010, average annual growth of Medicare per capita spending has been just 1.3 percent (in contrast to 7.4 percent in the decade before 2010).

It has long been clear to policy advisors that a combination of solutions—new revenue, value-based payment reforms, and delivery system innovation—will be necessary to sustain Medicare in the future. Yet, the proposed tax bill ignores these solutions. Instead, it reduces revenue, increasing Medicare’s share of a shrinking federal budget without spending more on health care, just as seniors are entering the program in larger numbers. Increasing the short-term federal deficit does nothing to improve Medicare’s financing or to help fund the delivery system reforms that could produce more value per Medicare dollar in the future.  

Having dug a deeper deficit hole, Congress may face the prospect of indiscriminately cutting benefits for tens of millions of seniors, leaving many of them exposed to crushing medical expenses. Raising revenue under any future scenario will be unavoidable, and raising it later may cost more than it would have otherwise. For the more than 80 million Americans who will need Medicare coverage in 2030, the tax bill sets up needlessly painful decisions that will affect their health and financial security in the future.


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Publication Details

Publication Date: December 13, 2017
Authors: Eric C. Schneider, M.D., Arnav Shah, Shawn Bishop
Contact: Eric C. Schneider, M.D., Senior Vice President for Policy and Research, The Commonwealth Fund
E-mail: es@cmwf.org
Citation:
E. Schneider, A. Shah, and S. Bishop, "Tax Cuts and the Future of Medicare: Needlessly Painful Choices Could Affect Those Who Rely on Medicare Insurance," To the Point, The Commonwealth Fund, Dec. 13, 2017.

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