President Trump’s Fiscal Year 2020 budget request proposes unprecedented spending reductions in many domestic programs, including the Environmental Protection Agency, food stamps, and Medicaid. The budget also includes reforms to lower Medicare costs by $845 billion over the next decade. This proposal is especially noteworthy because of a little-known statute that will shortly require the president—and Congress—to submit a legislative proposal that addresses the imbalance in the program’s funding. Whether the law will be followed is a question that will play out in the coming days, but it is worth understanding where the requirement comes from and what it demands.
The Faltering State of Medicare’s Trust Funds
In June 2018, the trustees of Medicare released their annual report, painting a grim picture of the program’s financial state. An aging population and increasing growth of healthcare costs have put Medicare’s finances on an unsustainable path.
Medicare’s benefits are funded through two distinct trust funds. Part A—hospital services, nursing facility care, home health, and hospice—is funded through the Hospital Insurance (HI) trust fund. Part B—physician services and medical supplies—and the Part D prescription drug program are funded through the Supplemental Medical Insurance (SMI) trust fund. Each trust fund has its own revenue streams, shown in the figure below.
Medicare began drawing down its HI trust fund assets years ahead of previous projections. The trustees now project the HI trust fund will be completely depleted in 2026. Over the next 75 years, the HI trust fund has a $4.7 trillion financing shortfall, which would require some combination of benefit cuts and payroll tax increases to fill a gap that equals 17 percent of all scheduled benefits. Although HI is funded through dedicated revenues—primarily payroll taxes—the growing gap between revenues and spending reflects the increasing pressure of entitlement programs on the federal budget.
Meanwhile, the SMI trust fund is becoming more reliant on general revenues—already its main source of funding. In 2017, the SMI fund required a $319 billion transfer from general revenues, about 1.6 percent of GDP. Long-term, the trustees project that this will nearly double to 2.8 percent of GDP.
Last year’s trustees’ report didn’t just represent the typical warning about an impending crisis, it also placed the onus—by law—on the administration and Congress to propose a fix for Medicare’s financial problems. This responsibility stems from a provision called the “Medicare trigger.” After President Trump’s submission of his FY 2020 budget request, he will have 15 days to submit a legislative proposal addressing the Medicare funding shortfall.
What Is the Medicare Trigger?
Written into the 2003 Medicare Modernization Act, the trigger is meant to address Medicare’s long-term financing problem. Specifically, it tries to constrain how much general revenue can be spent on the program, as opposed to revenue from payroll taxes or beneficiary premiums.
The trigger establishes a 45 percent threshold for what proportion of total Medicare costs are not covered by dedicated funds, such as the payroll tax and beneficiary premiums. In each of their annual reports, the Medicare trustees determine whether this level will be exceeded within the next six fiscal years.
Has This Happened Before?
Yes, the provision has been triggered before, with funding warnings issued each year from 2007 to 2013. But a lack of follow-through and flaws in the trigger’s design limited its effectiveness. President George W. Bush issued a response proposal to the first trigger in 2008, but the House voted to nullify its fallback requirement and never voted on the bill itself. President Obama ignored the trigger each year thereafter (though payment reforms in the Affordable Care Act are often credited as reducing Medicare spending). Congress seemingly did the same.
Notably, whether the bill Congress must consider meets the 45 percent threshold is determined by the chair of the House Budget Committee, who usually relies on the Congressional Budget Office (CBO). CBO may disagree with the trustees’ determination as to whether the threshold has been crossed in the first place, as it did in 2007. If that’s the case, the Budget Committee could take a bill that makes no real changes to Medicare’s finances and certify it as complying with the trigger’s 45 percent threshold.
Additionally, although the HI and SMI trust funds are distinct—money from one cannot go to programs funded by the other—the trigger’s specific definition of “general revenue funding” doesn’t discriminate between the two. A proposal could, for example, meet the 45 percent threshold by raising the Medicare payroll tax. This would improve the solvency of the HI trust fund but does not relieve pressure on the SMI trust fund or reduce the amount of general revenues going into its programs.
Finally, note that the trigger’s procedures are congressional rules—Congress can choose to waive them. In 2009, for example, the House adopted a rules package that nullified the Medicare trigger.
Does the Trigger Matter?
In the current political climate, it is even more unlikely that the trigger will lead to any substantive changes. But without action, Medicare’s financial situation will only get worse. Each year that Congress delays a fix means that the eventual cuts or tax increases will be even more painful. Furthermore, the Medicare trustees’ projections rely on assumptions that might prove wrong—for example, that the Affordable Care Act’s “Cadillac tax” will slow the growth of health insurance premiums, even though Congress has repeatedly delayed its implementation.
The trigger gives the administration a chance to seriously pursue a fix for Medicare’s financial issues. This would be interesting to see. Though the president’s FY2020 budget would reduce Medicare spending by $845 billion over the next decade, President Trump has repeatedly promised, as recently as last September, not to make Medicare cuts. Earlier this year, the White House also announced that it would spare Medicare from $750 million in 2018 Statutory PAYGO cuts.
Even with all its flaws, the trigger offers an opportunity for the president and Congress to advance a real solution. Whether they make use of that opportunity or continue their inaction remains to be seen.