A Deeper Dive into the Medicare Trustees Report: What’s really going on with Medicare’s finances?
In 2015, Republican Congressman and future Speaker of the House Paul Ryan proclaimed that “Medicare is going broke,” and in 2016 Republican Senator Marco Rubio asserted that entitlement programs like Medicare “will bankrupt themselves.” Yet in 2014, the Democratic House Minority leader Nancy Pelosi released a press statement claiming that since the Affordable Care Act was passed, “the life of the Medicare Trust Fund has been increased by more than a decade.” So which is it? Is Medicare truly going broke or is the program doing well? These statements are of course partisan and meant to portray the program in politically advantageous ways; but they do a disservice to the American people by shrouding the full picture of what’s really going on with the Medicare program.
Medicare was created over five decades ago to provide universal healthcare to individuals aged sixty-five or older, and has since been expanded to include individuals below the age of sixty-five with certain disabilities such as End-Stage Renal Disease (ESRD). The funding for Medicare expenditures comes from two centralized trust funds: the Hospital Insurance (HI) trust fund which finances Part A expenditures, and the Supplementary Medical Insurance (SMI) trust fund which finances Medicare Parts B and D. The HI is financed by payroll taxes extracted from employers and employees, or the self-employed, at the respective rates of 1.45 and 2.9 percent, with higher income individuals often paying an additional .9 percent. The SMI is financed by mandatory, annual general revenue funding by Congress as well as by monthly premiums that Medicare beneficiaries are required to pay.
So what’s the problem?
The growing rate of Medicare eligibility amongst America’s baby-boomer generation poses serious concerns regarding the financial longevity of the HI and SMI trust funds. The HI trust fund is already operating at a deficit, with a negative annual imbalance of income to expenditures. The rising influx of Medicare-eligible baby boomers is pushing the program’s expenditures higher and higher, and exacerbating the existing annual deficit the program now faces.
To cover these now-annual budgetary deficits, which are expected to worsen as the Medicare eligible population and subsequently program expenditures grow, Medicare has dipped into surplus funding accumulated in the HI trust fund during a number of prior profitable years; but at some point the surplus will run out. When the surplus funding in the trust fund is entirely depleted and the Medicare program can no longer cover full benefits for a given year with the funding they already have, Medicare will enter insolvency.
The most recent financial projections from the Medicare Board of Trustees projects the Medicare HI trust fund will reach insolvency by the year 2028, two years earlier than last year’s projection of 2030. To protect Part A benefits for the aging baby boomers, Congress and the Center for Medicare and Medicaid Services (CMS) will have to find a way to reduce spending on benefits, or go the alternative route of increasing the amount of revenue the program receives through actions such as: increasing payroll taxes, raising premiums, or redirecting money from other federal programs.
As previously described, Parts B and D of Medicare are not financed by the HI and payroll taxes, but rather by a combination of general federal spending and premiums deposited into the SMI trust fund. Therefore, unlike the HI trust fund, the SMI trust fund does not have an insolvency date. This is because the law allows the SMI trust fund to vary the amount of revenue it gets from Congress each year. Historically, premiums have covered approximately 25 percent of SMI expenditures and general fund transfers have covered 75 percent of Part B and D expenditures. However, like the HI, the SMI is not immune to the persistent growth of the Medicare-eligible population, and the amount of funds the SMI will require from Congress to remain solvent each year will continue to drive higher and higher for the foreseeable future.
While concerns of Medicare insolvency in 2028 are rational, there is more to the Medicare financing story than what lies on the surface of the Trustee’s Report…
The hidden truth…
While Part A Medicare has undeniably started to run a regular deficit, the deficit has been financed each year in its entirety by the surplus funding in the HI trust fund. It would appear, at least for the time being, that Medicare has found an effective way to counter the effects of a negative expenditure to income ratio. However, Medicare’s current solution to covering the deficit comes with a massive caveat: it fails to address the Treasury Department’s frequent borrowing of the “surplus funding” from the HI trust fund.
Despite the fact the HI fund was able to bring in surplus revenue through years of positive income versus expenditures, the Treasury Department had been simultaneously borrowing all of the HI’s surplus funding and spending it elsewhere, with the promise to pay the Trust Fund back with interest at a later date. On paper this seems like a reasonable agreement, but the reality is troubling. Medicare’s 2016 Board of Trustees Report specifies that at the close of the 2015 calendar year the two Medicare trust funds had combined saved assets of $263.3 billion dollars. However, according to the same report at the close of 2015 the entire Medicare program had a total of $263.2 billion in outstanding loans owed to it by the Treasury Department. This means at the start of 2016, 99.96 percent of Medicare’s total “surplus funding” existed as uncollected loans from the Treasury Department. In other words, Medicare’s “surplus funding” which is already on track to run out by 2028, is not really “surplus funding” at all but is instead unpaid loans taken by the Treasury Department.
Given that the federal government is currently in over $19 trillion of debt, for the Treasury Department to be able to pay back the Trust Funds they will have to borrow money to cover their exorbitant loans. The alternative is for the Treasury Department to redirect funds to the Trust Funds at the expense of other Federal programs, an equally unpleasant resolution.
The most obvious ways to improve Medicare’s finances are to reduce the program’s expenditures, increase its revenues, or both. Some of the ways this can be accomplished are by raising the program’s eligibility age, reducing the amount of benefits the program provides, or raising payroll taxes. While these solutions may be reasonable, they are politically divisive proposals and all of them are unlikely to come to fruition in a gridlocked Washington.
In an attempt to avoid those politically unpopular options, Congress and CMS are actively experimenting with Medicare payment and delivery reform in an attempt to reduce spending, improve care and achieve greater overall efficiency in healthcare. The most notable example of that to date is a bipartisan bill passed last year called the Medicare Access and CHIP Reauthorization Act (MACRA). The legislation significantly overhauls the Medicare payment system and aims to transition payments away from volume-based fee-for-service to a system that rewards value-based payments and quality outcomes. Nonetheless, even if the MACRA reforms work as intended and create a more efficient Medicare program, critics question if MACRA will be enough to significantly alter the fiscal outlook of Medicare.
Many politicians and experts on both sides of the aisle have chosen to highlight the Medicare insolvency date of 2028 as Medicare’s doomsday; but in reality, the program is already running on borrowed money. If it hasn’t been made clear: Medicare is in serious financial trouble. The Trustees Report believes that MACRA is a step in the right direction, but the data implies that it might be too little too late. The incentives in MACRA are designed to be phased in between 2019 and 2025. Given that the current Medicare insolvency projection date is 2028, if MACRA is ultimately unsuccessful Congress will essentially be out of time to do anything other than take drastic, politically challenging actions.