State of Medicare: Trustees push back projected date of Part A insolvency, but issues must be addressed

• The Medicare Part A fund’s new projected date of insolvency is 2028 — two years later than previously expected.
• Congress and CMS could look to slow cost growth in payments to post-acute care providers.
• Although a separate fund for Part B and Part D payments isn’t in danger of becoming insolvent, physician payment cuts loom.

The annual report on Medicare finances contained a little bit of good news, with the program’s Boards of Trustees projecting an additional two years before the Hospital Insurance (HI) Trust Fund becomes insolvent.

But even though the HI Trust Fund — i.e., the Medicare Part A fund — now is expected to be depleted in 2028 instead of 2026, Medicare still faces daunting challenges.

“With that great news of a two-year-later depletion date, it doesn’t really change the view of the Trust Fund status all that much,” Paul Spitalnic, director and chief actuary for the CMS Office of the Actuary, said during a webinar hosted by the American Enterprise Institute (AEI). “The big picture is not particularly changed.”

If the fund ever becomes insolvent, Medicare payments to providers and to Medicare Advantage (MA) health plans undoubtedly would be reduced and delayed.

Payments in that scenario could be made “only to the extent allowed by ongoing tax revenues — and these revenues would be inadequate to fully cover costs,” the trustees wrote in the report. “Beneficiary access to healthcare services could be rapidly curtailed.”

The short-term outlook

The COVID-19 pandemic has “significantly affected Medicare short-term financing and spending [but] is not expected to have a large effect on the financial status of the trust funds after 2028,” the trustees wrote.

The most apparent effects have been on spending, such as in 2021, when expenditures were $14.3 billion lower than had been projected in the 2020 pre-pandemic report. Going forward, the latest report projects expenditures at lower levels through 2024 compared with 2020 estimates.

“Clearly, patterns of beneficiary use of care during the course of the pandemic changed significantly,” Spitalnic said. “There were a lot less doctor visits, elective services were delayed or deferred, there was an increase in telehealth services.”

In addition, COVID-19-related deaths have led to a decrease in healthcare utilization by the Medicare population. Actuaries calculated spending reductions of 1.5% in 2020 and 2.9% in 2021 stemming from that impact.

For 2022, the HI Trust Fund is expected to take in a surplus of $29.8 billion as providers continue to repay the Medicare advance payments they received near the beginning of the pandemic.

But annual deficits are expected over the remainder of the next decade, starting at $3 billion in 2023 and growing to $90 billion by 2031. A key factor will be increased expenditures due to higher projected provider payment rates.

For example, whereas the hospital market basket annual update never exceeded 2.9% between 2012 and 2022, it reached 3.2% in the FY23 proposed rule for hospital inpatient payments and is expected to stay between 3.2% and 3.6% each year through 2031. Congress and CMS could act to limit those raises in future years, although the current rate of inflation may render restrictions on payment updates untenable in the near term.

Yet cost-control measures could be more likely for other providers. Among various options for reducing the looming shortfall in the HI Trust Fund will be to pare back Medicare payment updates for post-acute care providers, Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities, said during the AEI webinar.

The Medicare Payment Advisory Commission has deemed current payments excessive relative to costs for that sector. And major cuts appear to be in the works already, with CMS calling for a $320 million decrease in payments to skilled nursing facilities in FY23, per a proposed rule.

Fundamental solutions needed

Hospital case mix is projected to increase by 0.5% per year from 2024 through 2031 due to the following factors, according to the trustees:

• Continuation of the shift in less complicated cases to outpatient settings
• Ongoing changes in DRG coding
• New technology

Those issues partially explain why even though projected HI income is higher than it was in recent years — owing largely to a rise in payroll tax revenue resulting from increases in the number of covered workers and average wages — the Part A fund is projected to be $8.6 billion in the red in 2028. By 2031, the shortfall would be $247.4 billion based on the current track.

“Policymakers will need to take action, but perhaps even more important, the health system needs to find ways to deliver care more efficiently to patients,” said Joseph Antos, the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

He added, “Other than ideas like changing payment systems, adjusting payment systems, we haven’t really had good ideas coming out of the Medicare program in terms of how healthcare is actually delivered. I think that could be a political failure, but it may be a failure of imagination as well.”

Robust strategies from Congress may not be forthcoming in an environment where no one wants to be seen as curtailing healthcare benefits for seniors.

An alternative route could be available through the Center for Medicare & Medicaid Innovation (CMMI), which “has tremendous authority to try out new ways that don’t just rely on adjustments in the current payment systems [but] can also encourage the development of new business models for Medicare and potentially for the rest of the healthcare system,” Antos said.

CMMI’s value-based payment models have been worthwhile in terms of switching the emphasis from paying for volume to paying for quality, Spitalnic said.

“Whether that is going to materialize in payment reductions, that is something there just hasn’t been as much success in,” he added. “Whenever the discussion turns to the areas where we can actually reduce costs, reducing costs typically includes reducing someone else’s revenue — and when people’s revenue is on the chopping block, there tends to be a lot of interest in protecting that.”

Issues beyond Part A

Payments to providers that deliver Medicare Part B services are made through a different fund, the Supplemental Medical Insurance Fund. That fund, which also pays for Medicare Part D and accounts for a larger share of Medicare spending than the HI Trust Fund, is not in danger of becoming insolvent because it draws on general government revenues and beneficiaries pay premiums to access those services.

A concern with Part B payments is that recent legislation severely constrains the projected payment updates for physicians. The payment rate is set to decline by 2.91% for 2023 unless Congress acts to negate the decrease. For both 2024 and 2025, the scheduled update is zero. And 2025 will bring the expiration of a 5% bonus for physicians who participate in advanced alternative payment models as defined by the Medicare Access and CHIP Reauthorization Act.

Such payment restrictions could spur providers to emphasize care delivery to segments other than Medicare.

“If the health sector cannot transition to more efficient models of care delivery and if the provider reimbursement rates paid by commercial insurers continue to be based on the same negotiated process used to date, then the availability, particularly with respect to physician services, and quality of healthcare received by Medicare beneficiaries would, under current law, fall over time compared to that received by those with private health insurance,” the trustees wrote.