The Medicare Cliff


One of Medicare’s trust funds is expected to run out of money in the next few years, but we’ve heard almost nothing about it on the campaign trail. We explain what would happen, how things got so bad, and what can be done to fix it.

Listen to the full episode below, read the transcript or scroll down for more information.

Click here for more of our 2020 election coverage.https://embed.acast.com/tradeoffs/themedicarecliff/?brandColor=e65a4b

The Basics: Medicare

Medicare is a federal health insurance program that covers Americans 65 years or older as well as some Americans with certain disabilities. The federal government spends $800 billion a year — 15% of the overall federal budget — on care for the roughly 60 million Medicare beneficiaries. 

Medicare is split into four parts:

Medicare Part A

Covers inpatient hospital visits, as well as hospice, post-acute care and graduate medical education.

Medicare Part B

Covers physician and outpatient services.

Medicare Part C

Also known as Medicare Advantage. Allows beneficiaries to get Part A and B benefits through a private insurer.

Medicare Part D

Covers prescription drugs.

Medicare Part A comes out of the Hospital Insurance (HI) trust fund, which is primarily funded by a 2.9% payroll tax split evenly between employers and employees.

Parts B and D are funded by the Supplementary Medical Insurance (SMI) trust fund, which is primarily funded by general tax revenues and beneficiary premiums.

Medicare Advantage (or Part C) is supported by set per enrollee payments from the HI and SMI trust funds, as well as additional enrollee premiums in some cases.

The Problem: Part A Is Running Out of Money

For many years, the payroll taxes coming into Medicare Part A exceeded the benefits the program needed to pay out. This has allowed Medicare Part A to build up a reserve in the HI trust fund.

Over time, two main factors have often pushed Part A’s annual benefits payments higher than its tax revenue, forcing Medicare to dip into its reserves:

  • Health care spending per capita has grown faster than the rest of the economy
  • Baby boomers have started aging into the Medicare program, adding nearly 4 million new beneficiaries each year

In April, the Medicare Board of Trustees reported that the Part A trust fund had around $200 billion in reserves and that, barring any changes, it would run out in 2026.

But with significant job losses during the pandemic, far lower levels of payroll taxes are expected to be collected, leading the Congressional Budget Office and the Committee for a Responsible Federal Budget to now estimate the HI trust fund will run out — or become insolvent — in 2024.

If Congress is unable to make any changes before the trust fund runs out, Medicare would effectively be operating paycheck-to-paycheck — only able to use current payroll taxes to pay out claims. The Congressional Budget Office estimates that would only cover about 85% of Part A’s bills, leaving providers likely to receive late and incomplete payments, which could lead them to accept fewer Medicare patients or stop taking them altogether.

Solutions: Cut Spending, Increase Revenue or “Cheat”

Congress has never let Medicare Part A run completely dry. When it has gotten close to exhaustion — most recently in 1997 and 2009 — lawmakers used a combination of three tactics to extend the life of the trust fund.

Cut Spending

Congress can lower how much it pays hospitals and other providers for different services. It did this as part of the Balanced Budget Act of 1997 and the Affordable Care Act in 2010. One area that has been mentioned this time around as a potential place to cut are payments to post-acute care facilities.

Increase Revenue

Congress can increase the amount of money coming into the trust fund. It did this as part of the ACA by adding a 0.9% payroll tax surcharge to people earning more than $200,000 a year.

“Cheat”

Congress can also ease the burden on the trust fund by deciding to pay for certain benefits from somewhere other than the HI trust fund. For example, in 1997, Congress moved some home health payments into Medicare Part B, which is funded by general tax revenues and premiums.

While leaders from both parties have suggested similar policies to address Medicare’s financial troubles, any spending cuts or tax increases are likely to be politically difficult and generate opposition. Any fix will also take time to implement, meaning that the next president and Congress will have to act quickly to avoid more abrupt and painful remedies.

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