“Congress has generally demonstrated reluctance to deal with Medicare’s financial imbalances,” says the Bipartisan Policy Center.
But that reluctance can’t stick around for much longer. Medicare’s Hospital Insurance Trust Fund, a key source of revenue for the government’s second-largest entitlement program, will become insolvent in 2026 unless significant, bipartisan change is enacted quickly.
That’s why in their 2021 report titled “The Cost of Waiting to Act on Medicare’s Hospital Insurance Trust Fund,” the Bipartisan Policy Center (BPC) emphasizes that the longer legislators delay Medicare reform, the worse the economic fallout will be. The report also cites five recent policy proposals—from both sides of the aisle—that could shore up the program’s finances.
Here’s everything you need to know.
To start, what is Medicare?
Medicare is the country’s largest health insurance program, with more than 60 million Americans, primarily over the age of 65, receiving benefits from it. Even though Medicare is funded by a combination of payroll taxes, general revenue, and trust funds, the program’s expenditures have been consistently outpacing its revenue for the past few years.
Hospital Insurance (HI) is just one of many services that Medicare provides to its beneficiaries. Also known as “Part A,” HI covers the costs of inpatient hospital services, home health visits, nursing home care, and other health services.
Got it. So what’s the HI Trust Fund, then?
HI is designed so that if you’re 65 and meet some basic criteria for retirement, you receive benefits without having to pay any premiums. But these generous benefits come at a cost, which is why in recent years, Medicare’s tax revenue hasn’t matched its spending. The HI Trust Fund plugs that funding gap, allowing Medicare to continue paying people the benefits they’ve been promised.
But the BPC report points to the Congressional Budget Office’s projection that the trust fund will run out by 2026. They predict that the trust fund’s insolvency will cause severe cuts to HI benefit payments. Without bipartisan reform to stop it from happening, millions of Americans won’t receive the benefits they’ve come to rely on.
Fortunately, there are several such reform proposals floating around, and the BPC report analyzes five of them in particular:
Proposal 1: The Balanced Approach
“The Balanced Approach” proposed by Bill Hoagland, Senior Vice President at the BPC, calls for Medicare’s age of eligibility to be raised to 67 from the current 65. It also redirects certain tax revenues toward the HI Trust Fund and tries to incentivize beneficiaries to consider their personal healthcare costs.
If the Balanced Approach was implemented later this year, it would postpone the trust fund’s insolvency from 2026 to 2034, buying us eight years to find a more sustainable solution. However, if the federal government were to wait until 2025 to implement this change, the trust fund would become insolvent by 2031. We’d also lose out on $212 billion that would have been in the trust fund’s balance at the end of the decade.
Proposal 2: Integration, Competition, and Coverage Reform
This approach, proposed by James C. Capretta, Resident Fellow and Milton Friedman Chair at the American Enterprise Institute, combines Medicare Parts A and B and introduces a simplified cost-sharing system for new enrollees. The proposal also tries to introduce more competition in the market to lower healthcare costs.
If implemented in 2021, this plan would delay insolvency beyond 2035. But again, waiting until 2025 to pass it would only get the trust fund to 2034. We’d also lose out on $219 billion in the trust fund’s balance at the end of the decade.
Proposal 3: Strengthening Trust Funds and Improving Design
This proposal comes from four economists writing for Health Affairs. It routes tax revenue from high-income investors towards the HI Trust Fund, increases the payroll tax rate for high-income households, and excludes COVID-related increases in payments from certain Medicare plans, among other changes.
If implemented this year, it would postpone insolvency until 2035. Interestingly, waiting until 2025 to implement this proposal would still get the trust fund to 2035, but we’d lose out on $131 billion in potential balances along the way.
Proposal 4: Increasing Payroll Taxes
Increasing the Medicare payroll tax from 2.9% to 3.9% in 2021 would push HI Trust Fund insolvency from 2026 to 2035. Waiting until 2025 wouldn’t make that worse, but it would cost the trust fund $238 billion that we could have saved if we’d passed the bill earlier.
Proposal 5: Reducing Provider Payments
The final proposal in the BPC report is to reduce Medicare provider payments, or the amount the program pays out to doctors, hospitals, nursing homes, and anyone else who provides patient care. Even if this is implemented in 2021, it would only buy the trust fund three extra years. The fund would still run out by 2029.
Waiting until 2025 would be even less impactful. The trust fund would reach insolvency by 2027 and lose out on $79 billion dollars in potential balances.
So what’s the bottom line here?
The BPC report puts it simply: “The sooner policymakers act, the more leverage they have to improve trust fund finances, and the more flexibility they have to choose among solutions.”
If our leaders act now, they will have a variety of policy options—from the left and right—to debate and pick from. But if they wait much longer, millions of Americans could lose out on the health care benefits that they’ve been promised.
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