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What Would It Take to Restore Medicare’s Financial Solvency?

Options for Extending Medicare’s Trust Fund: The Commonwealth Fund Solvency Series

This is a companion piece to a To the Point series on the solvency of the Medicare Hospital Insurance Trust Fund. The series is available here.

In September 2020, the Congressional Budget Office (CBO) projected that the Medicare Hospital Insurance (HI) Trust Fund, which pays for inpatient hospital care, skilled nursing facilities, and hospice care for Medicare patients, would become insolvent in 2024. This forecast has not received significant attention, but Congress and the Biden administration will be forced to address it.

The insolvency date of the trust fund is only a partial measure of Medicare’s financial health. It captures financing and spending for Medicare Part A. There are also Part B, which funds outpatient care and physician services; Part D, which covers the cost of prescription drugs; and Part C, which pays private Medicare Advantage plans.

All told, more than 50 million seniors and the disabled access Medicare’s benefits. But the program’s sickest and most in need of care utilize the benefits covered by Medicare’s HI fund. That is why trust fund solvency matters to people across the political spectrum. For progressives, Medicare’s funding through payroll taxes secured by the trust fund represents a social compact, like Social Security. And for conservatives, it links hospital spending to available revenues, mostly from payroll taxes. It acts as a reminder to policymakers to keep Medicare’s spending under control.

Mainly for these reasons, both parties have worked to ensure that taxes are sufficient to cover spending in the HI trust fund. It has mostly held to its original intent: a bulwark against unconsidered spending on the one hand and the promise of a valued social benefit on the other. Accordingly, whenever Medicare insolvency, as measured by the HI trust fund, looms sooner than 10 years, Congress has historically come together to address the threat.

What would it take to restore Medicare solvency to 10 years — or beyond? Based on internal estimates from the Council on Affordable Health Care, the cumulative HI trust fund deficit between 2022 and 2030 will reach between $500 billion and $700 billion. But a “worst-case scenario” of higher-than-expected spending because of greater intensity and utilization of health services, for example due to COVID, could see the cumulative deficit exceed $900 billion.

That magnitude of budgetary savings or revenue increases needed — in the range of $500 billion to $900 billion over 10 years — would be painful politically, but not catastrophic. For example, increasing the HI payroll tax rate by 1 percentage point would raise nearly $1 trillion over 10 years. The gap also could be filled by cutting the growth of Medicare’s hospital spending by about 2 percentage points per year from its projected average of about 6 percent growth to about 4 percent annually.

Considering the political makeup of Congress, a compromise approach is necessary to shore up the trust fund. Conservatives might have to agree to revenue increases while progressives might need to go along with spending reductions, at least in future spending growth. For example, a tax increase of one-half of 1 percent of payroll plus a spending cut of 1 percent per year could mostly rebalance the trust fund’s long-term funding and outlays. Of course, in the midst of a pandemic and economic downturn, hospital payment cuts, tax increases, or any efforts to shift costs to Medicare beneficiaries would be even more politically challenging than usual.

In addition to compromising on policy, the two sides would need to agree on a process for achieving shared goals. With a likely divided government, a logical first step is agreeing that solvency is a legislative priority. Then, that agreement can be formalized in a directive in a budget resolution that sets out targets for savings or revenue increases to place Medicare on solid financial footing. A budget resolution is typically passed by both chambers shortly after the release of the president’s annual budget in February, or later in the case of a new president and administration. It is also important to note that Congress has failed to pass a budget resolution for the past two years. If Congress succeeds in passing one in 2021, it would ideally include reconciliation instructions that direct the relevant congressional committees with jurisdiction over Medicare to achieve specific revenue and savings targets and by when they must be met. Reconciliation was designed to make deficit-reduction legislation easier to pass. Instead of requiring 60 votes in the Senate, a reconciliation bill that meets instructions laid out in the budget resolution only requires a simple majority.

The committees then craft legislation based on input from members of Congress and policy ideas generated by advisory groups, such as the Medicare Payment Advisory Commission, CBO, the president’s budget, the Government Accountability Office, the Inspector General of the Department of Health and Human Services, as well input from advocates, physician or hospital groups, and private plans. As set out in the Constitution, legislation that includes revenue provisions must originate in the House of Representatives.

The outlook for legislation is tricky and the outcome often depends on a combination of the urgency of the crisis, politics, and the ability to balance stakeholder interests. Previous budget bills that have included measures to restore Medicare fiscal balance have often also included an expansion of benefits or solutions to nettling problems (i.e., adding a drug benefit, addressing physician payment cuts) to help ease the sting of austerity and provide a political rationale for advancing otherwise painful legislation.

Even so, we should keep in mind that most lawmakers and recent Congresses have reduced the priority of fiscal balance and addressing deficits. Medicare solvency seems different, however, as an insolvent HI trust fund could result in actual benefit reductions for people who typically vote. This combination of an urgent problem, the means to address it, and political saliency, has historically ensured that Medicare’s HI trust fund roughly matches its obligations. The looming insolvency date of the HI trust fund means we may soon find out if the new administration and Congress plan to prioritize Medicare’s financial future.

Publication Details

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Joel White, Founder and President, Horizon Government Affairs

Citation

Joel White and Elizabeth Fowler, “What Would It Take to Restore Medicare’s Financial Solvency?,” To the Point (blog), Commonwealth Fund, Jan. 28, 2021. https://doi.org/10.26099/0cj6-2951