Born nearly 60 years ago, the Medicare Trust Fund remains a cornerstone of the United States healthcare system, providing essential coverage to millions of elderly and disabled individuals.  As of 2023, Medicare enrollment stood at 65 million beneficiaries, constituting approximately 19% of the US population, with funding totaling $1 trillion annually.

Medicare is structured around two primary components: the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund.  Together, these vital resources play a crucial role in ensuring access to essential healthcare services.

The HI Trust Fund, Part A, primarily covers inpatient hospital care, skilled nursing facility care, home health services and hospice care.  Roughly 90% of the HI Trust is financed by payroll taxes.  $397 billion was its total income in 2022.  Funded primarily by employees, employers and self-employed individuals, this trust faces significant financial pressures due to demographic shifts and rising healthcare costs. The projected date for HI insolvency is 2036. 

The SMI Trust Fund provides coverage for Medicare Part B (outpatient services) and Part D (prescription drugs). Financial stability for this fund is ensured through a combination of beneficiary premiums and federal revenues. While the SMI Trust Fund currently does not face imminent shortfalls, future adjustments to both expenditures and premiums will be necessary to address rising costs associated with outpatient services and prescription drugs.

Navigating these complex and interconnected funding challenges offers no simple solution.  One thing is clear: reforms to Medicare must be vigorously pursued to curb excessive spending.  Overcoming these obstacles entails exploring adjustments in revenue sources, implementing robust cost containment strategies and enacting policy reforms aimed at ensuring the sustainability of Medicare.

One easy way the government can generate revenue: adjust the Medicare Payroll Tax Rate.

In 2022, an analysis by the Committee for a Responsible Federal Budget (CRFB.org) determined that a modest increase in the Hospital Insurance (HI) payroll tax rate could significantly bolster revenues.  Raising the HI payroll tax rate by 0.5 percentage points (0.25 percentage points for employers and employees) would generate approximately $530 billion over the next decade.  Alternatively, a full percentage point in the combined employer and employee tax rate would yield over $1 trillion during the same period.  While these amounts could sufficiently cover the HI Trust Fund’s financing gap over the next decade, they do not fully address the projected long-term growth in HI’s expenses.

Another proposal suggests targeting affluent individuals with higher Medicare taxes to further enhance revenues.  Increasing the HI tax by 1 percentage point for households earning $400,000 (or $500,000 for couples) and above would raise an estimated $117 billion over the next decade.

Repealing the exclusion for Employer-Sponsored Health Insurance (ESI) represents a significant policy option with far-reaching fiscal implications that could reshape coverage in the US.  Today, premiums paid by employers for health insurance on behalf of their employees are exempt from income and payroll taxes, constituting one of the largest tax breaks within our tax code.  According to the Tax Policy Center (TPC), eliminating this tax break could potentially increase federal revenues by $414 billion over a decade.  This shift may drive individuals to seek coverage through alternative avenues such as Medicaid, the Children’s Health Insurance Program (CHIP), or the nongroup insurance market (Healthcare.gov), spawning further financial stressors.

The government can contain costs by re-focusing in on Part C, Medicare Advantage (MA).

Part C offers Medicare-eligible individuals the choice to enroll in private health plans in lieu of original Medicare (Parts A, B, and D).  These MA plans, which are favored by 30 million beneficiaries, were initially designed to promote competition and innovation.

Eyes wide open:  In exchange for outsourcing original Medicare, insurance carriers who provide Part C plans receive risk-adjusted payments from the federal government based on the “health-score” of the beneficiary.  In 2023, carriers who enrolled beneficiaries in Part C plans captured $14,380 per enrollee, per year ($1,198.33 per month).   Despite TV advertisements proclaiming low or no MA premiums, the price tag back to the Medicare Trust and taxpayer is a very pressing concern.  

According to the Congressional Budget Office (CBO), federal expenditures for MA plans totaled $320 billion in 2021 and are projected to sharply increase to $921 billion by 2031.  Part C insurers spend approximately 82% of what traditional Medicare spends on services—yet they are receiving payments averaging 122% of what traditional Medicare is spending for comparable beneficiaries.

Rethinking Part C’s Quality Bonus Program is another way to contain tax dollars. MA carriers receive additional payments (on top of the 14k per person) which amounted to nearly $13 billion in 2023. This line item is a substantial increase compared to previous years.  Adopting measures to refine payment methodologies and control coding practices has the potential to yield significant cost savings. Reviewing MA math is a MUST!

The financial health of the Medicare Trust Funds stands at a critical juncture.  It is imperative that lawmakers consider both spending and revenue adjustments to strengthen Medicare’s finances, with a particular emphasis on implementing reforms aimed at reducing overall healthcare costs.

By prioritizing reforms that improve value for current seniors while lessening the financial burden on future generations, we can ensure the viability of Medicare and sustain quality healthcare for all beneficiaries.