Yesterday’s Medicare Trustees report underscores the serious fiscal challenges facing the Medicare program. Medicare spending is projected to substantially increase over the next few decades, consuming a larger share of GDP and putting a greater strain on Medicare beneficiaries and taxpayers.
The most closely watched projection — the insolvency date of Medicare’s hospital insurance (HI) trust fund — is 2026, the same as last year’s projection. The fact that the insolvency date did not change after accounting for the effects of the COVID-19 pandemic does not take away from the urgency — we have moved one year closer to the date. This is only the third time in the program’s history that insolvency has been projected within five years. At that point, the program would only be able to fund 91% of the hospital benefits it owes. The 75-year funding shortfall is sizable — 0.77% of taxable payroll. Closing this gap would require immediately increasing the Medicare payroll tax from 2.9% to nearly 3.7% or reducing spending by 16%.
Despite the attention to the HI Trust Fund exhaustion date, that is only one indicator of Medicare’s financial health related to one of the Trust funds. There are several alarms going off in the report related to the larger picture of Medicare sustainability. Medicare spending is expected to grow rapidly due to rising per capita health care costs and the aging of the baby boomers into the program. The Trustees project Medicare spending will increase from 4.1% of GDP in 2021 to 6.2% by 2045. Spending in Part B and D is projected to grow by roughly 7% and 6% respectively over the next five years. Because Part B and D are funded through a combination of general revenue and premium contributions, their rapid growth will require taxpayers and beneficiaries to pay more. The Trustees issued the excessive general revenue warning for the fifth year in a row (that the Medicare program is getting more than 45% of its funding from general revenues which are deficit financed).
It's worth keeping in mind that the Trustees current law projection represents a best case scenario. Medicare’s financial situation would be much worse under the illustrative alternative scenario that the Trustees estimate, which assumes that policymakers increase provider payment rates above current law to help them keep pace with cost increases. The report essentially says this is a likely outcome. Under the illustrative scenario, spending would reach 8.5% of GDP in 2095 rather than leveling off at around 6.5% under current law.
The Trustees also assume that the more than $100 billion paid out in accelerated and advanced payments will be repaid on time, that the pandemic doesn’t have a net financial impact after the next couple of years, and do not incorporate any impact from the new Alzheimer’s drug since Medicare has not yet made a coverage determination. While it’s unclear whether the pandemic would have a net positive or negative impact, the financial situation is clearly worse if the loan payments are not repaid in full or if the Alzheimer’s drug is covered given the $56,000 annual price tag. The Trustees also project rapid Medicare Advantage (managed care) enrollment — a reasonable assumption. Many analysts have shown that while MA can deliver services more efficiently than traditional Medicare, our payment system coupled with industry abuses (e.g., upcoding) means MA has never actually resulted in net savings to Medicare, and indeed costs more per enrollee than traditional Medicare.
Overall, the latest Trustees report suggests that it’s critical for Congress and the president to work together to enact meaningful Medicare reforms to shore up the program for the 62 million Americans who depend on it. Improving the financial outlook for the program will require taking a comprehensive look at ways to strengthen the program’s financing and reduce inefficient spending.