State of Medicare: Some good news on program solvency still leaves questions and challenges

Medicare should remain solvent a little bit longer than previously anticipated, while a policy debate is ramping up over how to make the program sustainable for the long term.

The 2023 annual report of the Medicare Boards of Trustees projects that the Hospital Insurance (HI) trust fund, which subsidizes Part A services, essentially will be bankrupt in 2031. That’s three years later than the projection in last year’s report.

The change stems in large part from lower costs and higher revenues, relative to expectations, in 2022.

One reason revenues were higher than anticipated was that increases in the number of covered workers and wages boosted the amount that came in through Medicare taxes. In addition, adjustments made for prior years represented a greater revenue increase than projected.

Expenditures were lower than expected in part because utilization of services did not pick up to the degree predicted in the third calendar year of the COVID-19 pandemic.

Nonetheless, the trustees estimate that outlays will exceed revenue starting in 2025, leading to HI fund depletion six years later if nothing changes. Benefit payments are expected to pick up significantly over the next few years, from $396.8 billion this year to $447.5 billion in 2025 (about a 12% increase).

What’s at stake

If the fund becomes insolvent, Medicare spending would need to be slashed to match revenues. The Committee for a Responsible Federal Budget puts the required reduction in spending at 11% for 2031.

“The result would likely be a disruption in health services,” the organization states in an analysis.

In their report, the Medicare trustees expressed awareness that a strategy of keeping Part A provider payment rates in check to shore up the HI trust fund can only go so far before affecting the viability of the U.S. healthcare system.

“There is substantial uncertainty regarding the adequacy of future Medicare payment rates under current law,” they wrote.

Simulations that include some of the current restrictions on Medicare payment rates suggest that by 2040, a third of hospitals and more than half of skilled nursing facilities would have negative overall margins, “raising the possibility of access and quality-of-care issues for Medicare beneficiaries.”

The report adds, “Without fundamental change in the current delivery system, these adjustments would probably not be viable indefinitely. In view of these issues with provider payment rates, the Trustees note that the actual future costs for Medicare could exceed those shown in this report.”

If payment rates are increased to a level that bolsters provider sustainability, such as by removing the annual reduction that’s based on an economywide productivity metric and phasing out the Medicare payment sequester, the long-term difference in Medicare spending would be substantial.

In that scenario, “Policy reforms will have to address much larger financial challenges than those assumed under current law,” the report states.

Congress, White House search for solutions

In Washington, D.C., the debate over the future of Medicare intensified after President Joe Biden released his proposed budget for FY24. Biden seeks to build on the Inflation Reduction Act (IRA) as a money-saving tool for Medicare by expanding the list of drugs that are subject to price negotiation.

Biden also said increasing the Medicare tax from 3.8% to 5% for income above $400,000 per year could help extend the program’s solvency past 2050 with no cuts to benefits. In addition, cost savings from drug price negotiations would be funneled into the HI Trust fund.

Republicans in the House of Representatives have said they would not cut Medicare benefits as part of their efforts to address the national debt in upcoming months. But they have their own views on fortifying the program.

In a budget hearing held March 29 by the House Energy and Commerce (E&C) Committee’s Health Subcommittee, members of the majority grilled Xavier Becerra, secretary of Health and Human Services, about some of the White House’s proposals.

Higher taxes and price negotiations for more prescription drugs “will ultimately backfire and lead to even fewer lifesaving cures for our seniors,” said Rep. Brett Guthrie (R-Ky.).

Rep. Michael Burgess (R-Texas) said drug price negotiations will affect physician reimbursement and, in turn, patient access.

Burgess apparently was alluding to the impact of the IRA in shifting the basis for reimbursing physician drug costs from average sales price to the negotiated maximum fair price. The change especially could have an adverse impact for drugs procured under a buy-and-bill approach.

“Those reimbursement rates are going to be significantly cut under the maximum fair price,” Burgess said. “No one really knows what that [rate] is.”

With lower reimbursement amid higher costs, he said, “What happens is doctors will say, ‘I cannot afford to see a Medicare patient.’ That’s a tragedy.”

Rep. Raul Ruiz (D-Calif.) noted that Medicare physician payment overall is a concern. He said that when adjusted for inflation, physician pay in the program declined by 26% — or 1.8% per year — between 2001 and 2023. Instead of the current system, he said, a better alternative would be to tie the annual update to inflation as measured by the Medicare Economic Index.

“I wish I could tell you we could do more, but we’re constrained because we have to be budget-neutral in whatever we do,” Becerra replied. “So, if we’re going to increase payments in one place, we have to decrease them in another place.

“And so, I think physicians around the country will tell you, come up with a better system [via legislation].”