Medicare is the nation’s largest health insurance program, covering more than 60 million beneficiaries—primarily Americans over age 65, and younger people with certain health conditions. Administered by the federal government and funded by a combination of payroll taxes, general revenues, premiums, and other sources, the program faces significant financial challenges, with expenditures in recent years consistently outpacing dedicated revenue streams.
As these funding imbalances have attracted growing attention, a variety of reforms have been proposed to address Medicare’s solvency problems. This paper examines five such proposals, focusing specifically on how each would affect the solvency of the Hospital Insurance (HI) Trust Fund, which finances Medicare Part A (primarily covering inpatient health care services).a A February 2021 report by the Congressional Budget Office (CBO) projects that the HI Trust Fund will become insolvent in 2026. Insolvency does not mean that Medicare would no longer be able to pay Part A claims, but rather the trust fund would not have any assets. Medicare draws down on these assets to cover the difference when annual spending exceeds income, and the reserves increase when annual income exceeds spending. Since 2018, annual shortfalls have produced declining assets.
Once the trust fund depletes, CBO projects that annual program revenues will cover only about 92% of annual program outlays starting in 2026. At or before that point, Congress would have to act to close the funding gap. If Congress does not act, Medicare payments will be reduced, as the Medicare Board of Trustees has pointed out, “to levels that could be covered by incoming tax and premium revenues.”1 No statutory provision allows for an automatic transfer from general revenues or any other mechanism to fill the difference absent congressional action.
With annual deficits projected to continue for the foreseeable future, the HI Trust Fund is unlikely to regain a positive balance on its own, and any reform to the program would require time to have a meaningful effect. A higher positive balance, within reason, is desirable, as it shows that Medicare Part A is operating on stable financial footing. Table 1 shows a projection of the fund’s 2finances over the next 15 years. Note that although the fund’s balance cannot fall below $0, we list negative balances—in Table 1 and throughout this issue brief—to illustrate how much additional money from the federal government’s general budget would be required to make the HI Trust Fund whole between now and the year shown.
Policymakers have been rightly focused on the COVID-19 pandemic, addressing the public health and economic challenges it created. Now, as the nation emerges from the worst of the crisis, the solvency of Medicare’s HI Trust Fund must rise on the legislative agenda.
Congress has generally demonstrated reluctance to deal with Medicare’s financial imbalances. For example, there has been little action over the past few years to address the reality that the Supplemental Medical Insurance (SMI) Trust Fund, which is responsible for financing Medicare Parts B and D, is consuming a growing portion of general revenues. Similarly, as a result of earlier legislation, Medicare provider payments were slated to be reduced by 2% in April 2021, but President Joe Biden signed a law in mid-April to delay that reduction.c, 3
Our analysis of different reform packages or proposals for restoring solvency to the HI Trust Fund looks at two discrete measures of impact: projected date of fund insolvency (relative to the current projected date of 2026) and projected status of fund reserves at the end of 2030. In all cases, we compared impacts from immediate implementation (in 2021) to impacts from implementing the same measures four years later, in 2025. An overarching finding from this comparison is that delaying reforms by even a few years significantly changes these impacts and will be quite costly in terms of the fiscal health of the trust fund.
For example, implementing a proposal in 2021 that contains revenue increases as well as spending restraints would push the projected year of insolvency from 2026 to 2034 and result in a projected fund balance of $240 billion at the end of 2030. Waiting a mere four years to implement the same package of reforms, however, significantly diminishes these benefits. With an implementation date of 2025, the projected date of insolvency moves up to 2031, and the projected fund balance at the end of 2030 is $28 billion. The net change in program funding as a result from acting in 2021 rather than 2025, in this example, amounts to $212 billion by 2030. Unanticipated events not factored into the analysis—such as another economic downturn—could further reduce payroll revenues and increase medical expenditures, bringing the trust fund’s depletion date closer and adding to the cost of waiting.
Overall, these results show that the sooner policymakers act, the more leverage they have to improve trust fund finances, and the more flexibility they have to choose among solutions. Delay, on the other hand, only ensures that more aggressive and difficult changes are likely to be needed in the future. Proposals to expand Medicare coverage, meanwhile, may well prove unviable without action to improve the program’s finances. Congress and the administration should prioritize efforts to address the fiscal status, not only of the HI Trust Fund, but of Medicare as a whole, both to ensure the long-term sustainability of this critical program and to protect the federal government’s ability to finance other, non-Medicare budget needs and priorities.
Summary of reform packages included in this analysis and key findings:
Balanced Approach (by Bill Hoagland, Senior Vice President at the Bipartisan Policy Center)
This proposal would raise the eligibility age for Medicare, enact post-acute provider payment reforms, place limits on Medigap coverage to incentivize changes in consumer behavior, and redirect revenues from the Net Investment Income Tax (an Affordable Care Act tax) toward the trust fund. Implementing the Balanced Approach in 2021 would push projected HI Trust Fund insolvency from 2026 out by eight years to 2034. At the end of 2030, the trust fund would have a projected balance of $240 billion.
Waiting until 2025 to implement this proposal would push projected insolvency from 2026 out by five years to 2031. At the end of 2030, the trust fund would have a projected balance of $28 billion.
In this case, a delay of four years “costs” three years and $212 billion in terms of the projected date of trust fund insolvency and net change in fund balance at the end of the decade.
Integration, Competition, and Coverage Reform (by James C. Capretta, Resident Fellow and Milton Friedman Chair at the American Enterprise Institute)
This proposal aims to modernize and integrate the HI and SMI Trust Funds for new Medicare enrollees by introducing a simplified cost-sharing system, implementing a premium support system through competitive bidding and transparency reforms that would allow Medicare Advantage plans and Accountable Care Organizations to compete with traditional fee-for-service on premiums, imposing limits on Medigap coverage, instituting reference pricing for “shoppable” procedures, and reforming Graduate Medical Education payments.Implementing this proposal in 2021 would push projected insolvency from 2026 out by more than nine years to beyond 2035.d
At the end of 2030, the trust fund would have a projected balance of $375 billion. Waiting until 2025 to implement this proposal would push projected insolvency from 2026 out by eight years to 2034. At the end of 2030, the trust fund would have a projected balance of $156 billion. In this case, a delay of four years “costs” several years and $219 billion in terms of the projected date of trust fund insolvency and net change in fund balance at the end of the decade.
Strengthening Trust Funds & Improving Design (by David M. Cutler, Richard G. Frank, Jonathan Gruber, and Joseph P. Newhouse in Health Affairs)
This proposal would increase the Medicare surtax paid by high-income households, redirect the Net Investment Income Tax toward the HI Trust Fund, return Medicare Advantage benchmarks to lower, pre-COVID-19 levels and remand savings from Medicare Advantage plans given the drop in elective claims they received during the pandemic, implement siteneutral payments, limit growth in prescription drug spending, and institute competitive bidding in Medicare Advantage.
Implementing this proposal in 2021 would push projected insolvency from 2026 out by nine years to 2035. At the end of 2030, the trust fund would have a projected balance of $304 billion.
Waiting until 2025 to implement this proposal would still push projected insolvency from 2026 out by nine years to 2035. At the end of 2030, however, the trust fund would have a projected balance of $173 billion.
In this case, a delay of four years “costs” $131 billion in terms of net change in projected fund balance at the end of the decade.
Payroll Tax Increase (included in the December 2020 CBO report: Options for Reducing the Deficit)
This policy option would increase the current 2.9% Medicare payroll tax to 3.9%.
Implementation in 2021 would push projected insolvency from 2026 out by more than nine years to beyond 2035. At the end of 2030, the trust fund would have a projected balance of $487 billion.
Waiting until 2025 to implement this change would still push projected insolvency from 2026 out by more than nine years to beyond 2035. The projected trust fund balance at the end of 2030 would be $249 billion. In this case, a delay of four years “costs” $238 billion in terms of the net change in projected fund balance at the end of the decade
Reduction in Provider Payments under Medicare Part A In this policy option, the productivity adjustment factor used to calculate annual changes in provider payment rates would be adjusted so providers across the board would be paid less.
Implementation in 2021 would push projected insolvency from 2026 out by three years to 2029. At the end of 2030, the trust fund would have a projected balance of -$115 billion.
Waiting until 2025 to implement this change would push projected insolvency from 2026 out by one year to 2027. At the end of 2030, the trust fund would have a projected balance of -$194 billion. In this case, a delay of four years “costs” two years and $79 billion in terms of the projected date of trust fund insolvency and net change in fund balance at the end of the decade.
a The HI Trust Fund is essentially an accounting mechanism (much like the Social Security Trust Funds) for the federal government’s revenues and expenditures related to Medicare Part A. More detailed explanations of the function of the trust fund and the differences between Medicare Parts A, B, C, and D are provided in the body of the paper.
b CBO’s baseline projections are required to assume that scheduled payments will be fully made after the exhaustion of the fund, even though no legal authority exists to make those payments. Given the dependence on future legislation, CBO shows a zero balance in the trust fund after exhaustion. BPC shows the cumulative negative balance instead.
c The Coronavirus Aid, Relief, and Economic Security (CARES) Act that passed in March 2020 exempted Medicare until the end of the year from sequestration, across-theboard reductions to certain kinds of federal spending that were mandated by the Budget Control Act of 2011 and subsequent legislation. The sequester relief was extended to March 31, 2021, by the Consolidated Appropriations Act, 2021, passed at the end of 2020 before being most recently extended again.
d Our projections end in 2035 to extrapolate no more than four years beyond 2031, the furthest year for which CBO has projected a baseline balance.
1 2020 Annual Report Of The Boards Of Trustees Of The Federal Hospital Insurance And Federal Supplementary Medical Insurance Trust Funds, 2. Available at: https://www.cms.gov/files/document/2020-medicare-trustees-report.pdf.
2 Congressional Budget Office, 10-Year Trust Fund Projections – Feb 2021. Available at: https://www.cbo.gov/system/files/2021-02/51136-2021-02-11-trustfundprojections.xlsx.