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The Uncertain Future of the Medicare Trust Fund

Medicare trust fund

The COVID-19 pandemic has increased pressures on an already-stressed public health care financing system. This is especially evident when it comes to the financial health of Medicare’s Hospital Insurance (HI) Trust Fund, which finances health care services related to hospital, skilled nursing facility, and hospice stays for Medicare beneficiaries. In April, using pre-COVID-19 data, the Trustees of Social Security and Medicare projected that the HI Trust Fund would become insolvent in 2026 — meaning that Medicare Part A claims submitted by providers would not be fully reimbursed. The Congressional Budget Office (CBO) made a similar projection when it issued its March 2020 baseline projections. In a September 2020 report, the CBO projected that the date of insolvency had moved up to 2024.

The pandemic has disrupted economic activity in the United States in several ways: a large and rapid rise in unemployment substantially reduced payments to the Trust Fund from payroll taxes, and hospitals experienced unprecedented financial stress from lost revenues because of a dramatic drop in admissions and procedures, along with new costs arising from the pandemic. One way that Congress provided relief to address these economic shocks was to make advance payments. Between $65 billion and $92 billion in advance payments were made to Medicare Part A providers that draw upon the HI Trust Fund. This increased claims on the Trust Fund in 2020 and lowers them for 2021 — assuming they are paid back in 2021. Together these economic dynamics create a situation that requires quick action to prevent insolvency; the margin for error is small.

The duration of the pandemic and the timing and size of an economic recovery remain highly uncertain. While unemployment has declined notably, from 14.7 percent in April to 8.4 percent in August, new spikes in COVID-19 cases across the country continue to dampen economic activity. The recent jobs report also suggested a slowing of employment recovery. Further, there is great uncertainty about the timing, availability, and effectiveness of a potential vaccine. As a result, we are quite unsure when payroll tax revenues will recover or to what degree hospital finances will recover. The Federal Reserve Bank of St. Louis recently underscored the uncertainty when it issued the following assessment:

“The COVID-19 pandemic — like all pandemics — will come to an end. Of course, nobody knows when that will be. No one also knows whether there will be subsequent waves of the virus that trigger a nationwide resumption of strict social distancing protocols or whether a proven vaccine allows a swift return to pre-COVID norms. Thus, the trajectory of the recovery is the key unknown at this point.”

Together these forces create policy tensions. It is important to continue to support hospitals and nursing homes whose revenues have not yet recovered, and those that continue to incur unusual costs because they are still carrying heavy financial burdens stemming from COVID-19. At the same time state and federal health care financing programs are under extreme financial stress.

Recent legislation negotiated between Congress and the Trump administration would permit hospitals to request an extension for repaying advance payment loans and also reduce the interest rate. Together, these provisions recognize the continued financial stress and provide relief but also introduce new uncertainty. That is, by lengthening the repayment period and reducing the costs of carrying the loans it becomes less certain when they will be paid back in full and returned to the Trust Fund, making the solvency date of the Trust Fund less certain (as specified further in Centers for Medicare and Medicaid Services guidance). In addition, this assumes that the full amounts of the loan will be paid back.

The timing of the COVID-19 pandemic has been especially unfortunate in terms of maintaining the Medicare HI Trust Fund’s solvency. The Trustees issued a warning that action was needed when insolvency was estimated to occur in 2026; it has now been pushed up to 2024. One way to address the uncertainty would be to make a fund transfer from general revenues to the Trust Fund in the amount of the outstanding loans, thereby removing any additional uncertainty around timing of repayment. This could help mitigate risks in a world with highly uncertain economic and epidemiological forecasts but would risk further increasing federal spending during an economic downturn.

Publication Details

Publication Date: October 13, 2020
Citation:

Richard G. Frank, "The Uncertain Future of the Medicare Trust Fund," To the Point (blog), Commonwealth Fund, October 13, 2020. https://doi.org/10.26099/212r-nr44

Experts

Richard G. Frank
Margaret T. Morris Professor of Health Economics, Department of Health Care Policy at Harvard Medical School