Apparently, many of our political leaders don’t seem to care if Medicare goes broke. But you should if you’re one of the 67 million Americans who are currently covered by Medicare, or if you are one of the many millions more in our aging population who expect to be covered when you retire at 65 or older.
Medicare’s financial challenges are due to a combination of factors, including a rapidly growing number of Americans who are eligible for Medicare and living longer (now 18 percent of the population and growing by 10,000 people a day), fewer younger workers paying Medicare payroll taxes, and costly new medical treatments and medications.
The result of these converging factors, according to the latest annual report from the Medicare fund trustees, is that Medicare Part A (which covers hospital services, skilled nursing facilities, hospice care, and some home health care) is expected to become insolvent in 2036—running projected deficits of hundreds of billions of dollars over the next decade. Under a more conservative scenario prepared by the Chief Actuary at the Government Accountability Office (GAO), Medicare’s insolvency would come much sooner.
If and when Medicare Part A’s insolvency occurs, the law will require an automatic 11 percent cut in payments, severely limiting access to care. In addition to this shortfall in Part A, costs related to Part B (physician, outpatient, and preventive services, and some home health care) and Part D (prescription drugs) are rising faster than expected and will put further pressure on individual and federal budgets if they are not reigned in.
Part A’s looming insolvency should infuriate all U.S. adult citizens for a couple of reasons. First because you have been paying a Medicare payroll tax of between 2.9 and 3.8 percent of your wages with the expectation of having adequate health insurance at retirement. And second, because our political leaders have known about Medicare’s impending predicament since 2003 – when the program first failed its annual financial sufficiency test – and have basically done nothing to avoid it.
What’s even more infuriating is that many reasonable proposals have been put forth during the past 20 years to close the funding gap by increasing revenues and/or reducing costs. Meanwhile, Medicare’s insolvency has been fast approaching, and the cost of ignoring the problem has continued to rise.
History of Inaction
The last time any serious attention was paid to Medicare solvency was in 1983 when a bipartisan commission led by President Reagan and House Speaker Tip O’Neill coalesced to restructure both Medicare and Social Security (which is predicted to become insolvent in 2033, even before Medicare) and bought us another 50 years.
In 2010, House Speaker Paul Ryan proposed moving to a “premium support” system to increase competition among health plans. Under this proposal, the federal government would provide a payment on behalf of every Medicare beneficiary to purchase health insurance. While this approach has some similarities to the current Medicare Advantage plans, where the government pays partially fixed, capitated fees to health plans to cover Medicare beneficiaries, it was attacked by Democrats as a “voucher system” and died on the vine.
More recently, President Biden proposed increasing the Medicare tax rate on earned and unearned income (so, not just wages) above $400,000 annually from 3.8 percent to 5 percent, along with closing some related tax loopholes and reducing what Medicare pays for prescription drugs. Increasing taxes is one of the easiest ways to fix the problem, but tax increases are never popular with Republicans—so Biden’s proposal is DOA for now—and just pouring more money into Medicare doesn’t address its underlying cost issues.
The other easy fix is to raise the eligibility age, which was recently advocated by Nikki Haley during her failed Presidential bid. Congress and President Reagan did this when they restructured Social Security in 1983, raising the retirement age from 65 to 67 for those born in 1960 or later.
Raising Medicare taxes and the program’s eligibility age for future beneficiaries should be considered, among many other good ideas, but the fact is that nothing has been done in Washington to meaningfully address the looming crisis because elected officials of both parties consider touching Medicare in its current form to be one of the “third rails” of politics. Meanwhile, leaders of both parties regularly insinuate that their political adversaries want to “take Medicare away” while disingenuously suggesting that no changes are necessary.
While the House Budget Committee held a hearing in June entitled “Medicare and Social Security: Examining Solvency and Impacts on the Federal Budget,” Republican and Democratic representatives in the House and Senate have thus far been unable to agree even on proposals to create bipartisan commissions to study the problems and recommend possible solutions.
What Are the Options?
If Congress wanted to immediately eliminate Medicare’s projected deficit without raising the eligibility age, it would take a roughly 24 percent increase in the payroll tax rate or a 15 percent reduction spending cut, or some combination of the two, according to the non-partisan Committee for a Responsible Budget (CFRB), though these amounts will increase with every passing year of inaction.
Raising taxes and the eligibility age are easy to implement but difficult to achieve for political reasons, so it makes sense to focus on strategies to reduce Medicare’s costs first and then see whether and to what extent less popular revenue solutions are required.
As mentioned above, many potentially viable solutions have been proposed over the two decades since the Medicare insolvency issue was first identified. In 2021, the Commonwealth Fund asked a group of Medicare thought leaders to outline how they would extend the life of the trust fund. The result was the “Solvency Series” of 12 proposals that are each worthy of consideration. A year later, the CFRB proposed 10 options to secure the Medicare Trust Fund, including five that would reduce spending by a combined $785 billion.
This is not the right forum for exploring the merits of each proposal, but it appears that there is a substantial opportunity to reduce costs by changing the way increasingly popular Medicare Advantage plans are funded by the government (Part C).
Under these plans, which now cover about half of all Medicare beneficiaries, the federal government pays commercial insurers fees to cover Medicare beneficiaries that are currently based on county-level Medicare fee-for-service benchmarks and subsequently adjusted based on the medical experience of their beneficiaries (to ensure that sicker beneficiaries get the care they need). Without getting into the weeds, moving away from fee-for-service benchmarks to a more competitive bidding process and removing incentives that encourage plan sponsors to increase “coding intensity” in ways that may result in overpayments could save Medicare hundreds of billions of dollars.
The point is that there are solutions to Medicare’s impending insolvency that inevitably require some changes to the program, and the amount of pain involved is now a matter of whether and when we have the political will to implement them.
Just as Congress and the Reagan Administration found the courage to implement Medicare reforms for the benefit of future generations 50 years ago, we must pay it forward for the benefit of future generations of seniors now.