The Medicare trustees’ new estimate that the program’s Part A Hospital Insurance (HI) Trust fund will remain solvent for an extra two years—to 2028—sounds like good news. But dig deeper into the 257-page report and the news is grim for the future of Medicare and its 64 million beneficiaries.
Headlines from the trustees’ annual report always focus on the depletion date for the HI trust fund. And, due to the effects of Covid-19 and the subsequent booming economy, the trustees projected the hospital insurance fund can continue to pay all its bills for a bit long than expected.
But before you break out the champagne, keep a few things in mind:
- Even a depletion date of 2028 is terrible. The HI trust fund remains dangerously close to insolvency. When it goes into the red, payments to hospitals, skilled nursing facilities, hospice, and the increasingly popular Medicare Advantage Plans will have to be cut. And that would mean beneficiaries would lose access to care.
- The trustees’ estimates are more uncertain than usual. Because the HI trust fund is financed with payroll taxes, it is highly sensitive to changes in the economy, employment, and wages. As a result, Medicare’s short-term future could become noticeably worse if the US falls into a recession over the next year.
- Because we have waited so long to address Medicare’s financing problems, any changes to improve its solvency are likely to be extremely painful and politically enormously difficult. For example, to restore the HI trust fund’s long-term financial stability, payroll taxes would have to be increased by 24 percent, benefits would have to be cut by 15 percent, or some combination of both.
- Hospital insurance accounts for only about 40 percent of Medicare costs. The rest of the program, which is funded by beneficiary premiums and general revenues rather than a fixed rate payroll tax, never will become insolvent. But that’s only because premiums and cost-sharing will rise for beneficiaries and income taxes will go up for everyone.
Most Medicare Part B enrollees pay their premiums by deducting them from their Social Security benefits. Today, those premiums take about 28 percent of Social Security benefits. By 2040, they will absorb 35 percent, if Congress makes no changes.
Filling the gaps
Medicare is complicated. It calls the funding mechanism for Part B doctor visits, Part D drug benefits, and a share of Part C Medicare Advantage managed care the Supplementary Medical Insurance trust fund (SMI). But it isn’t a trust fund at all. Instead, it combines premiums (which it raises each year) with whatever general fund revenues it needs to fill the gap and pay the bills.
Last year, about 73 percent of Part B and 74 percent of Part D was funded through the income tax, eating up about 18.5 percent of total federal income taxes. By 2040, that share will increase to almost 27 percent.
Medicare is in trouble for multiple structural reasons. First, the number of beneficiaries is rising rapidly as the population ages. At the same time, the number of workers whose taxes support most of the program is increasing much more slowly. In 2000, there were nearly 4 workers for every beneficiary. By mid-century, there will be fewer than 2.5.
Second, over the long term, health care costs per beneficiary are likely to rise faster than wages. That means those payroll taxes can’t keep up with increased costs.
An outdated design
But the biggest problem is that Medicare’s entire design is outdated. Remember, the program was created in 1965, more than a half-century ago. Congress has made many adjustments since then, but Medicare still is based on that 1965 chassis. It is a bit like trying to keep your 1965 Ford Mustang running in 2022. You can keep patching and fixing, but in the end you’ve still got a 57-year-old car and a lot of Bondo.
Congress has kept Medicare going the same way. It added a long-needed drug benefit. And it created a functioning managed care program. It increased out-of-pocket costs for high-income beneficiaries. But it still is a 1965 health insurance program.
It still hasn’t got the payment model right for managed care and struggles to effectively encourage care coordination and quality payments for traditional fee-for-service providers. The whole idea of having to purchase supplemental health insurance on top of traditional Medicare is an acknowledgment that basic benefits are insufficient. And why separate insurance for hospital care from doctor visits? No decent private insurance does that.
What about long-term care?
Then there is long-term care. Medicare generally will not pay for long-term care, even though the majority of its beneficiaries will need it. And even though Medicare spends more than twice as much for those with chronic conditions and personal care needs than it does for those without functional impairment. And even though robust social supports and services have the potential to lower Medicare’s hospital costs.
Congress could create a fully-funded public long-term care insurance program to help families pay the high costs of these supports and services.
In a perfect world, Congress would do a top-to-bottom redesign of Medicare. That won’t happen, but lawmakers can’t continue to look the other way while one of the most important–and most popular—federal program gradually collapses.