Cost, rate cuts won’t prevent Medicare hospital trust fund insolvency

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The Medicare program, which provides health insurance coverage to 64 million elderly and disabled Americans, faces serious short- and long-term financial pressures. Cutting costs and rates has been floated as a means of alleviating this, but those measures alone won’t be enough to ensure solvency in the program’s Hospital Trust Fund, which is on pace to run dry in six years, according to the Urban Institute.

While the spending cuts will be needed, more taxes will be required to ensure the short-term stability of the program, the report found.

Financial pressures are affecting two components of Medicare. The first, Hospital Insurance (HI) or Part A, helps pay for hospital and most institutional services as well as skilled nursing facilities, hospice and some home healthcare. It’s financed through the HI trust fund, into which receipts from a payroll tax imposed on workers’ earnings are deposited. When the inflows of payroll taxes and other receipts, along with accumulated surpluses, are insufficient to cover HI costs, the law requires that payments to providers somehow be reduced to the level of incoming receipts.

The second component, Supplementary Medical Insurance (SMI), has two elements: Part B, which helps pay for physicians’ outpatient services, laboratory tests, physician-administered drugs, and durable medical equipment; and Part D, which helps pay for self-administered prescription drugs. Both Parts B and D are financed by beneficiary premiums and federal general revenues deposited into the SMI trust fund. Unlike the HI trust fund, when the balances in the SMI trust fund run low, they are automatically replenished with general revenues, and beneficiary premiums for Parts B and D are increased.

The HI trust fund is expected to be depleted around 2028, in which case Medicare would not be able to make full, timely payments to HI healthcare providers – creating adverse consequences for patient care, UI found.

Meanwhile, SMI spending will require ever larger infusions of funds from general revenues, leading to higher deficit spending and ever-increasing beneficiary premiums, the growth rate of which typically will exceed that of beneficiaries’ incomes.

Given the immediate and visible adverse effects that HI trust fund insolvency would cause, some type of Congressional action is inevitable, said UI. Tackling HI insolvency and the growing pressure on the federal budget requires slowing the rate of growth in health or other benefits paid, increased financing – or most likely both.


Several key takeaways emerged.

Taxes are only one means of financing Medicare spending growth, the report found. Deficits, premiums, and reductions in other spending are each employed over time. And financing and spending issues for Medicare are intertwined; policies that nominally address one have implications for the other that must be anticipated.

Because Medicare spending is under the partial control of people who demand services and the providers who supply services, much of the power of Medicare financing is passed from elected officials to individual actors – providers and consumers.

Although creating a new dedicated financing source could close a given Medicare financing shortfall, it’s hard to match future growth in Medicare spending needs exactly with growth in a particular financing source, the report found. 

And it’s easier to enact reforms consistent with the goals of tax or budget policy through general revenue financing than through dedicated financing. Dedicated financing via a trust fund can work when it covers all costs and imposes budgetary rigor on matching spending and receipts, but the HI trust fund isn’t set up to work that way.

Broadening the base of an existing dedicated tax, such as subjecting employer-sponsored health insurance to the HI payroll tax, would follow the tax policy principle of horizontal equity without necessarily adding to the complex array of Medicare financing sources, according to the report.

Also, addressing HI and SMI financing issues together would help confront longer-term Medicare financial challenges and allow fairer and more efficient financing and spending trade-offs to be made within HI, SMI and the broader tax system.


Legislation introduced in the U.S. House of Representatives in July seeks to avoid a shortfall in the Medicare Hospital Insurance Fund by closing tax loopholes and redirecting tax revenue in a push to keep the fund solvent for at least another decade.

Introduced by Representative Lloyd Doggett, D-Texas, the “Assuring Medicare’s Promise Act” looks to eliminate a loophole by which wealthy Americans can bypass paying net investment income tax (NIIT) and would redirect that revenue to the Medicare Hospital Insurance Fund.

Doggett claimed the move would not raise taxes but would assure an additional seven years of Medicare solvency.

Twitter: @JELagasse
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