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September 11, 2020

Weekly line: Medicare's trust fund could run dry in just 4 years. What would that really mean?

Daily Briefing

    Over the past couple weeks, you've likely seen headlines and articles warning of a dire situation for Medicare, as the Congressional Budget Office (CBO) in a new report predicted Medicare's trust fund is on track to become insolvent by 2024—two years earlier than in CBO's March projection.

    Medicare 101: Cheat sheets for Parts A through D

    The projected depletion of Medicare's Hospital Insurance Trust Fund needs to be taken seriously, with some experts even saying it should be one of the first health care issues addressed by whoever wins the presidential election. But just how catastrophic would the trust fund's insolvency be? Here's what you need to know.

    What is the trust fund—and what happens if it runs dry?

    Medicare's Hospital Insurance Trust Fund covers the cost of Medicare's hospital insurance program, known as Medicare Part A.

    Other Medicare programs—such as those that cover outpatient care, known as Medicare Part B, and prescription drugs, known as Medicare Part D—are funded separately. So, if the trust fund becomes insolvent, only Medicare Part A, which covers payments for inpatient hospital care, would be directly affected.

    CBO in its report published Sept. 4 predicts that trust fund expenditures will grow faster than income over the next several years. The trust fund's current balance could fund full benefits for a while, but according to CBO, it's on track to "become exhausted in 2024."

    To be clear, trust fund insolvency wouldn't mean Medicare Part A would be completely unfunded: The program would still bring in income via designated excise and payroll taxes, fines, appropriations, and other sources. According to the latest projections, the trust fund will be able to cover 95% of expenditures in 2024, but that will decline to about 80% from 2025 to 2030, the Kaiser Family Foundation's (KFF) Juliette Cubanski and Tricia Neuman explain.

    But as CBO notes, "[n]o provisions in law dictate" how the trust fund should operate once its balance is depleted, and the fund "would not have the authority to make payments in excess of receipts" under current law.

    How did we get here?

    There are two main factors driving the trust fund toward insolvency:

    1. The country has an aging population, and more baby boomers have aged into the program over the past several years; and

    2. Medicare spending per capita has increased, as the program's beneficiary population becomes older and sicker, and as costs of care and payments to providers increase.

    Lower payroll tax revenue and lower Social Security benefit taxes also have contributed to the issue—and now, America's coronavirus epidemic is playing a role too.

    Cubanski and Neuman explain that the epidemic's effects "on payroll tax revenue and several laws enacted by Congress and signed into law by President Trump that either increased Medicare spending or reduced revenues" have impacted the trust fund's outlook, including some legislation that wasn't related to the epidemic but that "cut taxes and repealed the Independent Payment Advisory Board, the [Affordable Care Act's (ACA)] individual mandate penalty, and the 'Cadillac tax'."

    According to Kaiser Health News' Julie Rovner, another factor is that "[a]t least $60 billion of the funding provided as part of [coronavirus relief measures] to help hospitals weather the [epidemic] came not from the general treasury, but from the trust fund itself."

    Rovner writes, "That money in 'accelerated and advance payments' is supposed to be paid back, via a reduction in future payments. But there is a push in some quarters for that funding to be forgiven, which would make the trust fund's hole even bigger."

    What can be done to save the trust fund?

    It's important to bear in mind that this isn't the first time Medicare has faced financial shortfalls, and Congress in the past has always acted to avert insolvency.

    For example, Cubanski and Neuman note, "[i]n 1997, after the Medicare [Board of] Trustees projected insolvency within four years, Congress adopted changes that extended solvency by an additional six years." And "[i]n 2009," they write, "after the Medicare Trustees projected insolvency within eight years, Congress incorporated provisions in the ACA of 2010 that slowed the growth in Medicare payments to hospitals, other health care providers, and Medicare Advantage plans, extending solvency to 2029."

    According to Healthcare Dive's Rebecca Pifer, the Medicare Board of Trustees' April report to Congress triggered a warning that requires the president to propose a legislative fix for the problem to Congress in 2021. The warning also requires Congress to act—though such a warning had been triggered in each of the last four years, with no action.

    The real challenge is that reforms aimed at solving the issue typically involve raising taxes, cutting benefits, or reducing Medicare payments—none of which are politically palatable.

    For instance, the Medicare Payment Advisory Commission (MedPAC) recommended that lawmakers could increase the Medicare payroll tax from 2.9% to 3.7%. That wouldn't be a popular move even under normal circumstances, and now, it would come amid calls by Trump to eliminate the federal payroll tax.

    Other recommendations from MedPAC include implementing programs intended to prevent higher costs in the long run, shifting toward value-based payment arrangements, reducing unnecessary care, and lowering prescription drug costs. Cubanski and Neuman note that Congress also could look to "lowe[r] payments to providers or plans" or "reduc[e] benefits" to address the trust fund's projected shortfalls.

    However unpalatable these options might be, Cubanski and Neuman argue that action is needed "soon" to ensure Medicare can continue to "fully meet [the program's] obligations to the millions of seniors and people with disabilities who rely on it."

    Marc Goldwein, SVP of policy at the Committee for a Responsible Federal Budget, agrees. Goldwein recently told CNBC's Sarah O'Brien that solving Medicare's trust fund insolvency issue is one of the most urgent health care matters that whoever wins the upcoming presidential election should address.

    "If they are going to do something with health care, I'd start with saving Medicare Part A," he said.

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