Trust Fund Seniors

What is the Medicare Trust, and why is there a heating debate around it?

According to the Constitution, Congress (more specifically the House of Representatives) has the “power of the purse”, which is the power to tax and spend. Most Americans are well aware of consistent deficits in the federal budget and the staggering public debt, so it comes as no surprise that Congress must also authorize the government to borrow money to make up the difference between revenues from taxation and expenses for programs. The debt ceiling is a limit on how much money can be borrowed, and it must come as no surprise that it has been raised dozens of times to support the growing debt.

This year, the Biden administration and the Democrats have been haggling with Republicans in Congress to push along a measure to raise the debt ceiling once again. With control of the House, Republicans are in a unique position to stall a bill from passing both houses of Congress unless they get certain concessions.

One of the top demands of Republican lawmakers is to impose measures to curb the cost of Medicare, and it’s a policy platform that many other Republicans have pushed for. Such cuts to Medicare would likely reduce the quality of healthcare coverage for millions of Americans on Medicare and would likely also hit the incomes of healthcare professionals across the country. These lawmakers cite the looming insolvency of the Medicare program as the need for such measures.

So what exactly is the trust fund for Medicare that Republicans are so concerned about? What happens if it goes “insolvent”, and what are ways to address this crisis?

Medicare’s Trusts

Medicare, which covers most Americans over the age of 65, consists of four parts — A, B, C, and D. Part of Traditional Medicare, Part A and Part B cover inpatient and outpatient care, respectively. Part D is a supplemental health plan that covers prescription drugs. Part C is more commonly known as Medicare Advantage (MA), wherein the federal government pays private health insurers to give Medicare benefits. It can be thought of as privatized Medicare.

In Traditional Medicare, Part A is funded through the Hospital Insurance (HI) trust, which is funded by a 1.45% payroll tax imposed each on employees and employers. High-income Americans pay an extra Additional Medicare Tax. While most seniors on Traditional Medicare do not pay a premium for Part A, some who have not paid payroll taxes for at least 10 years before aging into the system must pay a small premium. These revenues also go into the HI trust.

For MA plans, the Centers for Medicare and Medicaid Services (CMS) pay private insurers a fixed amount per member on the MA plan. Some of that money comes from the HI trust fund, and the rest of MA plan financing comes from premiums the member pays directly to the MA plan.

The separate Supplementary Medical Insurance (SMI) trust funds Part B and Part D, funded mostly by premiums that members of these programs must pay.

Insolvency is not Bankruptcy

The SMI trust is largely self-sustaining with its premiums, but many have raised alarm about the HI trust’s solvency. One recent report projects that the trust fund will run out of cash in 2028. Some have been quick to use these projections to claim that Medicare is going “bankrupt”, but that’s not really the story.

Insolvency means that the HI trust will not be able to pay off the full cost of Part A medical expenses on its own. Bankruptcy is a legal process for organizations that cannot pay a mountain of debt, but the Medicare Part A program would simply need Congress to allocate spending to cover Part A alongside the HI trust, which would continue to cover most of the program for many years after insolvency.

Of course, just because Congress can offset the fiscal shortfall of a future insolvent HI trust doesn’t mean that the trust shouldn’t be stabilized. The rising cost of Medicare’s programs can be attributed to the large number of baby boomers aging into the system (growing older than 65). With more seniors and less working-age Americans to pay payroll taxes, it becomes clear why changes are necessary to keep the HI trust running with new sources of revenues or cost reductions.

Pulling Congressional spending to offset shortfalls of the HI trust also mean less to go around for other social and defense programs at the federal level.

Fixing the Root

Wide-ranging cuts to the program could be a quick fix, but it will certainly have wide-ranging negative effects on members of Medicare and healthcare professionals.

Increasing the age to get Medicare from 65 to a higher threshold like 67 could cut costs by excluding millions of Americans from the program. The clear drawback is that millions of Americans would be left to pay for more expensive private health plans or without any coverage to receive healthcare.

Even without raising the age for eligibility to get Medicare, should lawmakers impose heavy cost reduction requirements, that means seniors would face even higher denials of coverage for preventative and diagnostic services through the pre-authorization process, as that is one of the easiest ways for an insurer to cut costs.

Cutting the payment rates for healthcare organizations could mean lower overall revenues to pay professionals. Generally, private insurance pays more than Medicare for the same services. If Medicare payment rates are cut, that leaves healthcare organizations no choice but to raise prices on privately-insured patients to make up the lost revenue. In areas like rural America and poorer urban neighborhoods where privately-insured individuals are not as abundant, that can mean facility closures and a worsening healthcare professional shortage.

Then let’s not forget how health is a life-long good. An inability to access affordable care at younger ages means lost opportunities to identify and control chronic conditions which prove to cost Medicare significantly in the long-run, and interestingly, producing the opposite intended result of cost cutting.

There are a handful of alternative strategies to stabilize the HI trust.

One notable tax loophole lets high-income Americans skirt the Medicare payroll tax. Closing this has the potential to bring in an extra $200 billion in revenue over the course of 10 years.

Another concern is payments made from CMS to MA plans. These private plans have proven to be more expensive than Traditional Medicare while offerings similar levels of quality of care. Curbing these payments to MA plans or pursuing more aggressive audits of not just MA claims but also other contractors of the Medicare program offer opportunities for controlling ballooning costs.