You may have heard that Medicare is expected to run out of money in 2031, about eight years from now. Although that’s not exactly true, the program is facing serious headwinds that should concern anyone on Medicare or approaching the enrollment age of 65.
“Something must be done between now and 2031 to avoid more severe cuts to Medicare or other changes,” says Tricia Neuman, executive director of the Program on Medicare Policy at KFF, a nonpartisan health research nonprofit.
But Dr. Tanya Feke, author of Medicare Essentials: A Physician Insider Reveals the Fine Print says: “All is not lost. There is time to course correct and make Medicare solvent and even stronger.”
What’s unknown is whether Congress and the President will turn the Medicare reform ideas into reality.
The clock is ticking.
The Congressional Budget Office predicts that by 2032, Medicare will spend $1.9 trillion (up from $944.3 billion in 2022), which would be twice the defense budget.
Robert Emmet Moffit, co-editor of Modernizing Medicare, says Medicare’s financial challenges are due to a combination of factors: rising numbers of older Americans eligible for Medicare and living longer; fewer younger workers depositing Medicare payroll taxes; advanced medic al technology; costly new medications.
“This is going to create a tremendous growth in Medicare spending over the next 10 years,” says Moffit.
Although polls repeatedly show that Medicare is wildly popular with Americans, 74% of 3,500 beneficiaries surveyed by eHealth said they’re worried about the program’s long-term sustainability, with Democratic and Republican voters in agreement.
However, 97% don’t want to see any changes in Medicare that would affect them. Most surveyed believe significant changes must be made to ensure Medicare is there for future generations and that people not yet on Medicare will need to pay more, or accept reduced benefits, to keep the program on firm footing.
The 2031 insolvency forecasted by the Medicare Board of Trustees earlier this year doesn’t mean Medicare is going bankrupt. In fact, it doesn’t even mean all of Medicare will face insolvency in 2031.
That’s because of the complicated way Medicare is financed.
The 2031 date refers to the trust fund for Medicare Part A, which pays for hospital visits, nursing home care, hospice care and some home health visits. Most of its revenue comes from payroll taxes: a 2.9% tax on earnings, with a 0.9% surcharge for people earning over $200,000.
“If we don’t do something about the insolvency of this trust fund, you’re going to have an 11% automatic cut in benefits in 2031,” says Moffit.
Medicare Parts B (doctor’s visits, outpatient services, preventive services and some home health visits) and D (prescription drugs) are financed differently and have no insolvency dates, though they’re expected to run into financial problems, too.
Parts B and D are financed mostly through general revenues and Medicare premiums, so keeping them afloat has implications for the federal deficit and beneficiaries’ ability to pay higher premiums.
Since Medicare Part C (insurer’s Medicare Advantage plans that are alternatives to Traditional Medicare, cover Part A, B and often D benefits, they’re financed the way those other parts of Medicare are.
How could Medicare’s solvency woes be addressed?
“It’s easy to come up with ideas. It’s more politically fraught to enact them,” says Neuman. “There hasn’t been serious discussion in Congress. There’s talk about setting up a bicameral fiscal commission that would address Medicare issues, but it hasn’t risen to the top of the agenda yet.”
Below are the most discussed alternatives to bolster Medicare’s hospital trust fund and the program overall:
Raise Medicare payroll taxes on some or all workers
In his 2024 budget, President Biden proposed increasing the Medicare tax rate on earned and unearned income above $400,000 from 3.8% to 5%. He also called for closing loopholes that let some high-paid professionals and wealthy business owners shield some income from the Medicare payroll tax.
Some Senate Democrats have endorsed those ideas; Republicans typically loathe them.
“Neither party is eager to raise taxes on the middle class and the working class,” notes Chris Pope, a Senior Fellow at the Manhattan Institute, a nonpartisan, conservative think tank.
But Moffit, who worked in Reagan’s Department of Health and Human Services, believes it may be worth considering either a temporary “minor” Medicare payroll tax surcharge on all workers or just on higher-income people to stave off the 2031 insolvency.
Raise the Medicare enrollment age
It’s been age 65 since the program was created nearly 60 years ago. But some Republicans, including presidential candidate Nikki Haley, think the Medicare age should gradually rise, to perhaps 67 or 70. When he was a Congressman, Ron DeSantis voted to gradually raise Medicare’s eligibility age.
“I think raising the age of eligibility makes sense,” says Moffit, adding that those no longer eligible for Medicare could buy health insurance in the Affordable Care Act marketplaces.
There’s something of a precedent to boosting the Medicare age. In 1983, Congress and President Reagan gradually raised Social Security’s Full Retirement Age from 65 so it would eventually max out at 67 for people born in 1960 or later (those now 63 or younger).
However, Neuman says, a higher Medicare age could increase total health care spending in America if people in their mid-to-late 60s had to switch to costlier private health insurance.
Some might not be able to afford private health insurance, Neuman noted. A higher Medicare age could lead to “a risk that people will be uninsured during a time in their life when they need health insurance,” she says.
Also, “there are questions that have been raised about whether raising the age would be fair for people from communities of color because their expected life span is not as long as others.”
Slow the addition of new procedures to Medicare’s basic benefits package
Pope maintains that Medicare spending on new procedures is most responsible for the projected surge in the national debt over coming decades.
Recent increases in Medicare spending, Pope has written, have been concentrated in specialties with the greatest proliferation of new Medicare billing codes. Payments to doctors for cardiovascular procedures increased from $1.3 billion in 2000 to $3.0 billion in 2019, for example, mostly on codes that didn’t exist in 2000.
Requiring Congress to approve Medicare coverage of new technologies and treatments with federal offsets to pay for them, Pope notes, would be more palatable than cutting benefits or raising payroll taxes or the eligibility age.
“It’s easier than saying ‘We are going to add a whole bunch of new taxes to people’ or ‘You thought you were getting Medicare at 65; you’re just going to have to wait to 68 or 70 or whenever.’”
If Medicare and policymakers just did 10% of what he’s suggesting, Pope says, “you’re talking about trillions of dollars” in Medicare savings.
Pope recommends new billing-code approvals be done gradually, starting with ones costing more than $10 billion. “If you do that, maybe a couple of years later, you lower it to $8 billion or $5 billion,” he says.
Making Medicare look more like Medicare Advantage plans
One way is by moving to a “premium support” system to improve competition among health plans, leading to lower Medicare costs. The federal government would provide a payment on behalf of every Medicare beneficiary toward buying health insurance.
This proposal, floated by former Republican House Speaker Paul Ryan in 2012, is favored by some Republicans including DeSantis. Democrats typically oppose it, calling premium supports a euphemism for vouchers.
“It is politically charged and would be a massive shift in what Medicare looks like,” says Neuman.
Moffit, who favors it, says “Medicare Part C is a foundation for building a better Medicare program.” He believes a premium support system would emulate the popular federal employees’ health plan, which he had when serving in the Reagan administration.
But he conceded “it is highly unlikely that you will have any kind of movement in 2024 on a premium support,” due to the presidential election.
Other Medicare solvency solutions
Feke thinks Medicare Advantage payment reforms could appeal to both political parties. “Reforming the payment model to these plans may help the government save money while getting better care for Medicare beneficiaries,” she says.
Cutting waste, fraud and abuse is often just political talk. Raising Medicare premiums dramatically would likely infuriate beneficiaries.
One thing to remember about the impending Medicare hospital trust fund insolvency: it’s just a forecast.
Many things can happen between now and 2031 that could make Medicare either stronger or weaker financially. Most notably: the health of the U.S. economy (since payroll taxes are directly related); health care spending and the political environment.
“There are a lot of factors that go into these projections that would affect where the [Medicare] trustees ultimately come out,” says Neuman.