Cutting costs and rates in Medicare is likely not going to be enough to shore up the program as insolvency for the Hospital Trust Fund looms in six years, a new analysis found.
The analysis released Monday by the think tank Urban Institute predicted that more taxes will be needed to help ensure the program is on a stable financial footing in the short term, although spending cuts will still be needed.
“It’s likely that the most expeditious way to solve the short-term problem is a mix of new revenue and perhaps some reduced spending,” said Bowen Garrett, senior fellow with Urban, in an interview with Fierce Healthcare.
Urban looked at the various funding streams for the Medicare program and the fiscal challenges that the program faces.
The Medicare Trustees report released earlier this year showed that the Hospital Insurance (HI) trust fund, which pays for Part A, is going to run out of money sometime in 2028.
The other component of the Medicare program is the Supplementary Medical Insurance (SMI) fund that covers Parts B and D. Unlike the hospital fund, when the SMI runs low it is automatically replenished with money from general revenues and beneficiary premiums that are increased, Urban said.
However, Medicare spending has grown as a share of gross domestic product (GDP). Medicare spending increased from above 2% of GDP in 2000 to roughly 4% in 2020 and could go to 6% by 2040.
Part B represented the largest amount of spending growth and Part A spending has increasingly exceeded revenue from the Hospital Insurance trust fund.
“Excluding interest payments from past surpluses, which are available only until 2028, recent deficits would be even larger,” the analysis said. “The HI program is projected to run a deficit from 2023 onward.”
Cost containment measures like cutting payment rates to providers are likely going to be needed long term but may not be enough in the short term.
In 2028, when the HI fund is likely to be exhausted, Congress is not likely to “immediately cut rates to providers of HI services by 10 percentage points,” the analysis said. “Also, cost containment could stretch across all Medicare Parts, with the savings not fully accruing to HI alone.”
The report doesn’t address any specific measures to contain spending. Garrett said there are several options that could be considered, including reforming Medicare Advantage (MA) payments.
An analysis from the Kaiser Family Foundation showed that MA overspent traditional Medicare by $7 billion in 2019.
The Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare issues, has made several recommendations to address MA overpayments, including changes to risk adjustment.
Another area of reform could be post-acute care payments, which MedPAC has also considered too high.
However, even if such reforms are made they will have to be phased in to ensure the cuts are not too disruptive.
“When insolvency happens, you may still want to consider some revenue options,” Garrett said.
It remains unclear how much such new revenues would be needed, especially if the spending reaches 6% of GDP.
“Using the current tax bases for Social Security and the individual income tax, it would take about a 15% Social Security tax rate (essentially all of the payroll tax currently devoted to both Social Security and HI health benefits) just to cover that cost,” the analysis said. “Or it would take a 12% average individual income tax rate — that is, about three-quarters of individual income tax revenues.”