Any day now, the 2021 Medicare Trustees’ Report will be released. It will detail the financial status and outlook of the Medicare program, which provides health insurance coverage to over 62 million adults, primarily people aged sixty-five and older, and younger people with disabilities. This much-anticipated report will inform the public and policymakers on the financial stability of the two trust funds that pay for services delivered to Medicare beneficiaries: 1) the Hospital Insurance Trust Fund (HI), which finances hospitalization services (Part A), and 2) the Supplementary Medical Insurance Trust Fund (SMI), which finances physician and outpatient hospital services (Part B) and prescription drugs (Part D). The report also details the Medicare program’s impact on the federal budget and its beneficiaries.
The report is expected to highlight the fiscal and policy challenges facing the program. A large and growing share of federal spending, Medicare is projected to consume almost one-fifth of the federal budget in the next decade. Medicare spending is increasing due to rising per capita health care costs and the aging of the baby boomer generation — which is causing an unprecedented number of individuals to enroll in Medicare — while revenues flowing into the program have not kept up.
What’s more, the last three Trustees’ Reports have projected that the HI trust fund will become insolvent and be unable to cover its full payment obligations in 2026, a year that is fast approaching. This, coupled with the uncertainty of how the COVID-19 pandemic has affected Medicare spending and financing, has created a buzz around what this year’s Trustees’ Report will say about the status of the Medicare program.
While we wait for it to be released, here are five things to be on the lookout for in the upcoming Medicare Trustees’ Report.
Insolvency Date of the HI Trust Fund
Perhaps the most awaited aspect of the Trustees’ Report is the insolvency date of the HI trust fund. This is the point at which the trust fund’s reserves will be fully depleted. The HI trust fund, as mentioned earlier, pays for hospital services covered under Medicare Part A, including inpatient hospital care, skilled nursing facility services, home health care and hospice care. It is largely financed through payroll taxes paid by employers and employees.
Last year, the Trustees’ Report estimated that the HI trust fund would become insolvent by 2026. If this date stands, that puts the insolvency date of the trust fund within five years. At that point, Medicare would only be able to pay for 94% of its hospital expenses since the revenue coming into the trust fund, combined with the small amount of reserves in the trust fund at the beginning of the year, would fall short of Medicare’s full payment obligations. Over time, this percentage would decline. Medicare will continue paying for benefits as revenue comes in, but will get further and further behind as hospital spending continues to exceed this revenue.
The 2020 Medicare Trustees’ Report did not account for COVID-19’s impact on Medicare spending and revenue. This year’s report will, but the impact is unclear. Some clues on whether the forecasted insolvency date will change lie in how the Congressional Budget Office’s (CBO) projections changed throughout the course of the pandemic. CBO estimated in January 2020 , before the pandemic, that the HI trust fund would become insolvent in 2025. Due to the economic downturn caused by the pandemic and the subsequent decline in the employment rate, and thus in payroll tax revenue that funds the HI trust fund, along with higher projected spending on hospital services, CBO changed its projection in September 2020 to a projected insolvency year of 2024. However, a faster projected economic recovery coupled with lower-than-expected spending on hospital services led CBO in February 2021 to revise their projection to 2026.
There have been only two times in the last thirty years when the HI trust fund came within five years of insolvency, in 1996 and 1997 — and this year could be the third. Past Presidents and Congresses have never allowed the HI trust fund to become insolvent and fail to pay the benefits owed. They have recognized the urgency and enacted solutions that aligned program spending and revenues to strengthen the financial outlook of the trust fund. But this time, no actions have been taken to address the Medicare HI trust fund’s impending insolvency to date.
Size of the Shortfall
The Medicare Trustees’ Report will also include an estimate of how large the trust fund shortfall would be, and what would be required (e.g. spending reductions or additional revenues) to close this gap.
Last year’s Trustees’ Report estimated that extending the solvency of the HI trust fund by four years – from 2026 to 2030 – would cost a total of $523.5 billion. The CBO projected a similarly sized shortfall. In CBO’s latest estimate, closing the gap from 2026 through 2031 would require a total of $517 billion in spending reductions and/or revenue increases.
Regardless of the exact funding gap projected in the 2021 Trustees’ Report, it will likely be sizeable. A variety of revenue increases and spending reductions will likely be needed to fill in a shortfall of this magnitude. The sooner Congress can act to close this gap, the better off the Medicare program will be financially. According to a recent analysis by the Bipartisan Policy Center, delaying reforms by even a few years significantly reduces the enacted reforms’ ability to extend the solvency of the HI trust fund and put the program on sounder financial footing. Delaying would also narrow policymakers’ options to address the near-term solvency issue, and make it more likely they would have to pursue more aggressive and politically harder reforms.
Spending Growth in the Medicare Program
While a lot of focus has been placed on the insolvency date of the HI trust fund and the near-term challenges to the financing of the Medicare program, this emphasis runs the risk of missing the bigger picture. The Medicare program faces long-term fiscal challenges due to rising per capita health care costs and increased enrollment as baby boomers age onto the program. According to the latest Trustees’ Report, total Medicare expenditures will increase in future years at a faster pace than both total workers’ earnings and the overall economy.
This spending growth places an ever-increasing burden on taxpayers and the federal budget. Focusing solely on HI trust fund insolvency overlooks the need to reform other areas of Medicare beyond those that directly affect the HI trust fund’s spending or revenue. To get a handle on the bigger fiscal picture, it is important to pay attention to the total spending growth of the program — and the growth of its individual parts, Parts A (hospital services), B (physician and outpatient hospital services) and D (prescription drugs) — in the upcoming Trustees Report.
For all of the focus on the financial status of the HI trust fund and Part A spending and revenues, Parts B and D of the Medicare program have been experiencing higher spending growth than Part A. Over the past five years, annual growth in Part A spending averaged 4%, while Part B spending growth averaged 6.9%, and Part D averaged 4.5%.This pattern is expected to continue over the next five years, with cost growth for Parts A, B and D projected to average 6.5%, 8.2% and 7.3%, respectively. These growth rates markedly outpace the projected average annual Gross Domestic Product (GDP) growth rate of 4.3% over the same period. In terms of total Medicare spending growth, the Trustees projected that total Medicare spending would rise from 3.7% of GDP in 2019 to 6% by 2044.
This year’s Trustees Report is not expected to dramatically alter these estimates, and the challenge of high and increasing spending growth in the Medicare program as a whole will continue to be an issue that challenges policymakers and burdens taxpayers for the foreseeable future.
Funding from Federal General Revenues and Part B Premiums
To dig deeper into the larger, long-term fiscal challenges facing the Medicare program, we should take a closer look at two other key sources of financing for the Medicare program: federal general revenues and the premium burden placed on beneficiaries. Looking at these revenue sources provides an indication of the strain Medicare is putting on the federal budget and deficit, taxpayers and Medicare beneficiaries.
While the HI trust fund is financed primarily through the payroll tax, the SMI trust fund is financed through general revenues from the federal government and Part B premiums paid by beneficiaries. Unlike the HI trust fund, which can face a funding shortfall, the SMI trust fund can never be truly insolvent. This is because raising the payroll tax requires an explicit act of Congress, whereas Part B premiums and general revenue going into the SMI trust fund are reset annually to meet spending expectations, and can be raised to account for increased SMI spending accordingly.
However, just because the SMI trust fund cannot have a funding shortfall does not mean that there is no cause for concern. Higher projected spending in Parts B and D has increased the amount of general revenue and premium amounts needed to finance the SMI trust fund — a burden that falls on taxpayers and beneficiaries.
Since 2000, the Part B premium has more than tripled from $45.50 to $148.50 in 2021, growing at a pace that exceeds the rate of inflation. In its last report, the Medicare Trustees estimated that 2022 premiums would rise to $157.70, a 6.2% increase in just one year, and that Part B premiums would increase at an average rate of 5.8% per year through 2029. This places a strain on Medicare beneficiaries, who are more likely to rely on fixed incomes.
Similarly, general revenues going into the SMI trust fund, which finance about three-quarters of the trust fund, have been increasing as well. Because Medicare Parts B and D are growing at a faster rate than Part A, general revenues are covering a larger and larger share of Medicare spending. This puts additional pressure on the federal budget as more resources are devoted to Medicare and contributes to the federal debt, which is projected to reach 103 percent of GDP in 2021. In recent years, the difference between Medicare’s outlays and its dedicated financing sources has led the trustees to issue a “Medicare funding warning”.
To get an idea of the portion of general revenue directed to the SMI trust fund, approximately 16.4% of all federal income taxes went to funding the SMI trust fund in 2019. However, the 2020 Trustees’ Report projected that in the next 20 years more than one-quarter (26%) of federal income taxes will go toward the SMI trust fund. They also estimated that general revenues will grow to cover nearly half (49%) of Medicare financing in 2034.
Medicare Advantage
The final item on our list to watch for in the upcoming Trustees’ Report is the growing role Medicare Advantage (MA) plays in the Medicare program. MA has outpaced the traditional Medicare program in both enrollment and spending growth and has become a key issue when considering how to alter overall Medicare spending.
MA enrollment has been steadily increasing over the past decade. From 12.8% of Medicare beneficiaries in 2004, to 37.5% in 2019, and to a projected 43% in 2029, this growth shows little sign of abating. As enrollment into MA plans has grown, Medicare spending on MA plans has also increased. It now consists of approximately 35% of total Medicare spending on benefit payments.
While MA holds the promise of providing care more efficiently than traditional Medicare, there is reason for concern. Medicare consistently pays more for beneficiaries in MA than it does for comparable beneficiaries in traditional Medicare. In addition, per enrollee spending growth in MA has been increasing more rapidly than in traditional Medicare. In 2019, the Medicare per beneficiary cost growth rate was 6.3% for MA, but only 2.2% for traditional Medicare beneficiaries , according to the Medicare actuaries. This was the fifth year in a row that the actuaries found that per enrollee spending for Medicare private health plans, of which MA plans are a vast majority, grew faster than traditional Medicare.
In fact, in the 2020 Medicare Trustees report, HI expenditures were lower than the year before, but this decline was partly offset by higher projected spending growth for MA beneficiaries, which is partially funded by the HI trust fund.
Because MA is an alternative to traditional Medicare plans, the HI and SMI trust funds flow into the MA program to cover hospital and physician services and prescription drug benefits for MA beneficiaries. Therefore, reforms to the MA program could help address the financial challenges facing the HI and SMI trust funds. It will be important to see what the upcoming Trustees’ Report has to say about projected MA enrollment and spending estimates and how they will affect the HI and SMI trust funds.
Solutions to These Challenges Must Ultimately be Long-Term and Systemic
Hopefully sometime soon, the report will be released and provide more detail on the scale of the problems facing Medicare and the program’s impact on the federal budget and its beneficiaries.
Until then, however, one thing we know for sure is that the Medicare program faces considerable fiscal challenges – both short and long term. This will not change until policymakers adopt reforms to slow the rate of spending in Medicare, such as by addressing overpayments to providers and Medicare Advantage plans, and adopt reforms to increase revenues into the program. A balanced approach of spending cuts and revenue increases will be needed to ensure the program continues to fulfill its promises to beneficiaries going forward. Look here to find out more on policy ideas to address Medicare financing.
