More on Medicare’s Financial Woes

Almost all Americans over age 65 and many who are disabled depend on the Medicare program to pay for most of their health care needs. The program currently covers over 66 million Americans and cost over a trillion dollars in 2023, part of which was offset by Part B premiums and cost-sharing, for a net outlay of over $830 billion. In ten years the program is projected to cost over $2 trillion, but forecasters have a habit of underestimating spending. You can learn more about the Medicare program’s financial state and challenges at the Congressional Budget Office, www.cbo.gov; from the Medicare Trustees’ annual report, found here (Trustees’ Report), and from the Medicare Payment Advisory Commission, found here (MedPAC Report). Every older American should read these reports, or at least their executive summaries, to understand exactly how in jeopardy their Medicare benefits are. In particular, read the introduction to the Trustees’ Report.

Medicare has four main components. Part A generally covers hospital care. Part B generally covers physician services and outpatient care. Part C is the Medicare Advantage program. Part D is the prescription drug program, which is elective, although most beneficiaries enroll. Part A is paid for by the Hospital Insurance Trust Fund, which in turn is funded by payroll taxes. Parts B and D are paid for from the Supplementary Medical Insurance Trust Fund, which gets 25% of its money from beneficiary premiums and 75% from general federal revenues.

The hospital trust fund currently gets substantial interest income, primarily and ironically from investing in US government debt. The recent rise in interest rates has helped improve the fund’s finances, but it is projected to run out of money within ten years. By 2025, outlays will exceed inflows to this fund, reducing the net balance. The epidemic also provided a short term benefit to Medicare’s finances, as many older beneficiaries who died had relatively high spending. Part B premiums continue to rise rapidly as that program’s cost increases, and by law must be enough to cover 25% of the total cost. Legislation and rules to limit drug prices and reform payments to Medicare Advantage plans will have some favorable impact, but only to defer insolvency for a short time. There is and will be political pressure to raise payments to providers, who perceive themselves to be significantly underpaid for services to beneficiaries.

There are no easy solutions to any of America’s fiscal problems. The Federal government has wasted trillions of dollars and run up an enormous debt with a massive annual interest cost. The fiscal situation cannot be fixed without changes to Social Security, Medicare and Medicaid. As any of us knows from our personal lives, when you make a mess it doesn’t get fixed without pain. Our politicians lack any courage, but it is obvious what steps must be taken, so I will outline them here.

As I suggested in a prior post, Medicare needs to do a strict review of disability eligibility and enrollment and tighten the criteria for coverage for this group. Payroll tax increases may help, but are highly regressive—they affect the lowest-income workers most. The age of eligibility for Medicare should be raised, just as it has been for Social Security. Americans are living longer and working longer and the eligibility age should be adjusted for life expectancy changes. Wealthy Americans should bear more and in some cases all of the costs of their Medicare coverage. Medicare Advantage payments should be further reformed, as should drug pricing.

No one can deny that there are immense financial issues facing Medicare. Far better to acknowledge and address those issues now, than to wait til the day there literally is no money to pay for services or benefits have to be severely cut back. And that day is surely coming.