With COVID-19, economic shutdowns, and a deep winter freeze going on, it’s hard to look far down the road. Unfortunately, we’re facing a major healthcare and financial crisis that’s getting closer every day, the bankruptcy of Medicare. It won’t be a problem in 20 years, or even 10. The program could be bankrupt before President Biden finishes his first term.
The financial stress impacts just one part of Medicare – Part A, which pays for hospital bills. Unlike other parts of Medicare, Part A is funded mainly through the Medicare payroll tax; parts B and D are financed through a combination of general government revenue and enrollee premiums.
The Medicare trustees projected last year that the Hospital Insurance Trust Fund will become insolvent in 2024 – less than three years from now. Just last week, the Congressional Budget Office (CBO) forecast a somewhat longer insolvency date due to an improving economic outlook – 2026. But we will have to wait and see what the Medicare trustees have to say a bit later this year.
An easy way to understand the problem is by thinking of the trust fund as a checking account balance that receives Medicare’s payroll tax payments, and uses it to pay the bills. Without changes to expected spending or trust fund revenue, the checking account will run dry in 2024, and would have sufficient funds from current tax payments to meet just 90% of its obligations.
We can address the issues, but we need to get moving.
We could add new revenue, raise the share of costs shouldered by enrollees, or cut benefits – or reduce payments to healthcare providers.
Mark Miller estimates that cutting Medicare benefits just makes no sense, considering the precarious financial health of many retirees: half of Medicare beneficiaries lived on incomes below $29,650 in 2019 and 25% had incomes below $17,000, according to the Kaiser Family Foundation.
We’re likely to end up with higher payroll taxes or even a new tax on investment income to fund Medicare.
A solvency fix also could present an opportunity to improve benefits. For example, a reform package could add a hard cap on out-of-pocket costs for prescription drugs, or add dental, vision and hearing benefits to Original Medicare. It also could include addition of a long-term care benefit, perhaps the most significant uncovered risk for most retirees.
To learn more about Medicare’s solvency problem, check out Miller’s podcast interview with Gretchen Jacobson