Medicare Sustainability Policy Agenda

Policy solutions for the 119^th Congress to ensure Medicare is affordable and fiscally sustainable for the long run.

Problem: The Medicare program, which provides health insurance to over 66 million seniors and disabled Americans, faces serious, long-term fiscal challenges. Medicare spending has been increasing due to rising per-enrollee health care costs and growing enrollment as the population ages. Medicare now accounts for over 13 percent of the federal budget and that share is projected to climb to nearly 17 percent over the next decade.¹

This spending growth — much of which is deficit-financed — puts pressure on all Medicare beneficiaries, who must pay higher premiums, and on taxpayers. Rising spending also threatens the solvency of Medicare’s Hospital Insurance (HI) trust fund, which is projected to be insolvent by 2036.² At that point, Medicare will not be able to fully cover its spending for hospital stays, skilled nursing facilities, hospice, and some home health care services for beneficiaries.

While there are areas of wasteful spending and overpayments that deserve attention across the Medicare program, the growth of Medicare Advantage (MA), which now enrolls over half the Medicare population, is a major driver of Medicare’s financial challenges. Taxpayers pay 20 percent more for enrollees in MA than they do for similar enrollees in traditional Medicare (TM).³ The substantial overpayments to MA insurers are becoming an even greater concern for Medicare’s financial health as MA enrollment continues to grow.

Solutions: There are ways to reduce wasteful spending in Medicare without harming beneficiaries, and in many cases, such policy solutions would save beneficiaries money. In addition to spending reductions, achieving long-term program sustainability will likely require raising new revenues. Enacting reforms that slow the growth of Medicare spending and strengthen the program’s financing will also help extend the life of the HI trust fund. Congress and the Administration should take a balanced approach to improving Medicare’s fiscal challenges by addressing the areas highlighted below. These short- and long-term solutions are crucial for preserving Medicare’s fiscal sustainability.

1. Make Traditional Medicare More Efficient
   • Issue: TM operates largely on a fee-for-service (FFS) basis that provides little incentive to ensure Medicare beneficiaries are receiving efficient, high-value care. Payments to certain providers also far exceed the cost of providing care, and waste and abuses that lead to higher spending occur in some areas of the program.
   • Recommendations:
     • Enact comprehensive site-neutral payment reform by paying outpatient hospital departments the same Medicare rate as physician offices for services that can safely be performed in a lower-cost setting. This would ensure that Medicare is not paying a higher price for the same service based on setting alone and would reduce provider incentives to consolidate. Site-neutral payment would save the Medicare program $157 billion over 10 years and reduce out-of-pocket costs for beneficiaries.⁴
     • Reduce excessive payments to post-acute care (PAC) providers by lowering or eliminating their payment rate updates to better align PAC provider payments with their costs. Payments to PAC providers exceed costs – Medicare FFS profit margins for many PAC providers, particularly skilled nursing facilities, are in the doubledigits.⁵ Congress could also establish a unified payment system for PAC providers to align payments for similar patients across settings and ensure that Medicare payments are based on the most appropriate, cost-effective site of care given a patient’s health needs. Reducing overpayments across PAC settings would save between $20 – 45 billion over 5 years.⁶
     • Reduce Medicare’s coverage of bad debt that occurs when Medicare pays additional dollars to cover services that were not paid in full by the beneficiary or other health payer. Reducing Medicare’s coverage of bad debt from the current level of 65 percent to 45 percent would save nearly $17 billion over 10 years, and reducing coverage from 65 percent to 25 percent would save $33 billion for the same period.⁷
     • Improve the accuracy of physician payments to better align with value and the true cost of providing care, particularly for primary care, and accelerate the shift to effective population-based payment models. (See AV’s Payment Reform Policy Agenda for more details.)
     • Reform the way Medicare pays for physician-administered drugs so providers are not incentivized to prescribe higher cost medications when there may be lower cost alternatives. (See AV’s Medicare Prescription Drug Coverage Policy brief for more details.)
2. Reduce waste, fraud, and abuse in Medicare Advantage

   • Issue: Medicare has a long history of paying MA plans more than TM to provide care for similar enrollees — in 2025, MA plans will be overpaid by $84 billion.⁸ Although intended to be less costly than TM, MA has never resulted in aggregate savings for the Medicare program. There are multiple factors contributing to overpayments to MA insurers. A major driver is upcoding, which occurs when MA insurers engage in aggressive — and in some cases fraudulent — coding of their enrollees’ health conditions to make them appear less healthy than they actually are and generate higher Medicare payments to plans. Upcoding accounts for $40 billion in excess Medicare payments in 2025 alone.⁹

     
     MA plans also receive higher payments and rebates based on their performance in the Quality Bonus Program (QBP). Despite little evidence that the QBP provides meaningful quality information, has improved quality, or helps beneficiaries select a plan, the QBP is an important driver of spending in MA – bonus payments to plans reached over $11 billion last year.¹⁰,¹¹

   • Recommendations:
     • Address upcoding by increasing the statutory minimum coding intensity adjustment that reduces payments to MA plans based on the coding differential between MA and TM. This policy should be implemented in a way that accounts for coding differences across MA plans, as some MA insurers code much more aggressively than others. Increasing the coding adjustment could reduce Medicare spending by up to $1 trillion over 10 years.¹²
     • Exclude health risk assessments (HRAs) and chart reviews as sources of diagnoses and use two years of diagnostic data for MA risk adjustment. HRAs and chart reviews are major drivers of upcoding that often result in additional diagnoses for which patients receive no follow-up care, and using two years of data would improve coding accuracy in TM. Excluding HRAs and including two years of data for risk adjustment could save $124 billion over 10 years.¹³
     • Reform the Quality Bonus Program by making it budget-neutral to align with all other Medicare quality programs, which are either budget-neutral or reduce spending. This would save between $115 – 170 billion over 10 years.¹⁴
     • In the longer term, policymakers should consider more fundamental changes to improve the risk adjustment model, such as incorporating alternative data sources that insurers are less likely to manipulate and combining a more parsimonious model with reinsurance, and reforms to the benchmark system used to determine payments to plans.
3. Create fairer competition between Medicare Advantage and Traditional Medicare
   • Issue: Having strong competition between MA and TM puts pressure on MA insurers to compete for beneficiaries by delivering greater value to beneficiaries and offering better care at a lower cost. TM also serves as an important backstop for people with significant health needs by allowing them to opt into TM if MA plans are not meeting their needs. However, the substantial overpayments MA insurers receive each year and TM’s outdated benefit design are diminishing healthy competition between the two Medicare programs.
   • Recommendations
     • Modernize the benefit package in TM, including by adding an out-of-pocket maximum and expanding coverage to include additional services like dental, hearing, and vision, which are core supplemental benefits now offered by virtually all MA plans. Obviously, these changes would add costs to the program. To offset some of those costs, benefit design reforms that limit cost-sharing should be combined with reforms to supplemental Medigap plans, which many enrollees in TM purchase to help reduce their costsharing. Medigap reforms could limit first-dollar coverage until beneficiary out-of-pocket costs reach a certain threshold. CBO recently estimated that a version of this approach would save $116 billion over 10 years.¹⁵
     • Support more informed beneficiary enrollment decisions, including by addressing differences in agent and broker compensation rates between MA and Part D plans to remove financial incentives to steer beneficiaries to MA plans, even in instances where that may not align with beneficiaries’ preferences. Additional policies to protect beneficiaries from misleading MA plan marketing tactics should also be considered, such as requiring agents and brokers to disclose information to beneficiaries about MA plan design (e.g., that MA plans have limited provider networks).
4. Strengthen Medicare financing: Medicare’s HI trust fund is primarily financed through payroll taxes, but Medicare spending consistently outpaces the trust fund’s dedicated revenue. The Supplementary Medical Insurance (SMI) trust fund pays for Parts B and D benefits and is financed by general revenues and beneficiary premiums, meaning higher spending puts increased pressure on taxpayers and beneficiaries to cover these costs. A balanced approach to addressing the sustainability of the Medicare program should include a mix of reforms to reduce wasteful spending and strengthen Medicare’s financing. Options to increase Medicare revenues could include those recently examined by experts at the Tax Policy Center at the Urban Institute and the Brookings Institution.¹⁶

Conclusion: Ensuring Medicare’s long-term sustainability requires action to reduce wasteful spending in TM and MA, curb excessive overpayments to MA insurers, and promote competition and efficiency across the program. Failure to act results in higher costs for beneficiaries, increases pressure on taxpayers and the federal debt, and threatens the solvency of the Medicare program. By pursuing these reforms, Congress and the Administration can put the Medicare program on sounder financial footing for future generations while maintaining its commitment to providing high-quality health care for millions of Americans.

Note: The ten-year savings estimate for applying a higher coding adjustment factor to fully account for coding intensity is interactive with the savings estimate for excluding HRAs and using two years of diagnostic data for risk adjustment.