2 Big Medicare Changes Joe Biden Wants to Make

September 1, 2020

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Source: The Motley Fool, by Sean Williams

Despite the chaos of 2020, it’s important not to lose sight of the fact that this is an election year. In just 65 days, Americans from across our great nation will head to their local voting booths or mail in their ballots to decide who’ll lead the country for the next four years.

As you can rightly imagine, there are a number of hot-button issues that’ll be tackled this election by Democratic contender Joe Biden and Republican incumbent Donald Trump, including their responses to the coronavirus, social justice concerns, immigration, and the economy.

But one oft-overlooked issue that may take the spotlight, and which can no longer be kicked down the road, is Medicare.

Medicare is in pretty big trouble

Signed into law 55 years ago, the Medicare program today covers more than 62 million Americans, many of whom are senior citizens aged 65 and older. The traditional Medicare program consists of Part A (hospital insurance), Part B (outpatient services), and Part D (prescription drug coverage). Meanwhile, Part C refers to Medicare Advantage, an alternative program run by for-profit insurance companies that provides some perks that aren’t available with traditional Medicare, like vision, dental, and hearing care.

Behind Social Security, Medicare is one of the country’s most important social programs for seniors, as it helps to ensure that late-in-life medical costs don’t bankrupt the elderly. But like Social Security, the Medicare program is in deep trouble.

Although Parts B and D are paid for by collected premiums and general revenue, the Hospital Insurance (HI) Trust Fund that covers in-patient care (i.e., Part A) is predominantly funded by payroll tax revenue. That’s because 10 years’ worth of qualified work credits ensures an individual won’t pay a premium for Part A.

For years, expenditures for Part A have been outpacing collected revenue, leading to a depletion in net assets for the HI Trust. By 2026, the remaining net assets for the HI Trust are expected to be exhausted. Once gone, the HI Trust will only be able to pay out 90% of Part A expenses, which could mean one of the most valuable perks of Medicare — i.e., the fact that a large number of physicians accept Medicare insurance — could go out the window.  By 2044, HI Trust outlays would again drop to only 78% of Part A expenses by 2044.

Over the long term, which is defined as the next 75 years, Medicare’s HI Trust is facing a $4.6 trillion funding shortfall. Without some assistance from lawmakers, Medicare and its more than 62 million beneficiaries could see some big changes very soon — and they probably won’t be for the better.

Two big changes Joe Biden wants to make to Medicare

Biden, who’s been leading in virtually all polling over Trump, has big plans for Medicare. In particular, he’s highlighted two changes he’s eager to make if he wins the election. Interestingly, though, neither of these changes appear to tackle Medicare’s most pressing concern: the HI Trust funding shortfall.

1. Lower the qualifying age for Medicare to 60

The former vice president proposes that the eligibility age for Medicare should be lowered from 65 to as low as age 60. Enrolling in Medicare would be optional for persons aged 60 to 64, so up to 18 million people would suddenly have the option of leaning on the national program for their medical care needs.

Why lower the age of eligibility? First, the more patients Medicare has in its network, the more clout the program has to negotiate prices with hospitals and many outpatient services. Adding even a few million additional members between the ages of 60 to 64 could help lower aggregate program costs.

Another consideration is that persons aged 60 to 64 will have less medical care cost risk than older patients in the Medicare program. The average cost to treat each Medicare patient would fall by allowing relatively younger seniors to join.

Then again, with costs for this expansion being covered by general revenue, it would actually move the needle in the wrong direction for Medicare. Bringing in millions of seniors between the ages of 60 and 64 could cost up to $200 billion, in aggregate, over the next decade, according to Marc Goldwein, the senior VP of policy at the Committee for a Responsible Federal Budget. Goldwein does note that Biden’s proposed inclusion of a public health option could prove more appetizing for folks in the 60-to-64 age range, which would bring down the $200 billion cost estimate.

2. Allow the federal government to negotiate for lower prescription drug prices

The second big change Joe Biden wants to implement would lower prescription drug prices. For context, Medicare spent $796.2 billion in 2019, $97.1 billion of which was attributed to prescription drugs.

The first and most direct method of reducing prescription drug prices would be to allow the federal government to negotiate on behalf of Medicare. Currently, doing so is prohibited by law. According to the Congressional Budget Office, allowing the federal government to negotiate directly with drugmakers on price would save the program an estimated $456 billion between 2023 and 2029. However, it could come with a cost. Reduced revenue for drug developers might inhibit clinical studies and research.

Biden’s healthcare plan also allows consumers to purchase select prescription drugs from other countries, assuming there’s a way to deem they’re safe. This would create a more competitive marketplace that should effectively lower prescription drug pricing. It’s unclear if Medicare would be able to participate in purchasing drugs outside the U.S., but this rule could only have a potentially positive impact on drug pricing for Medicare.

Furthermore, Biden’s Medicare plan would prohibit drugmakers from raising the price of their therapies at a rate faster than inflation as a condition of Medicare participation. Drug developers that raise the costs of their prescription medicines faster the annual inflation rate would face a tax penalty.

A big question left unanswered

At this point, it’s unclear if Biden would have enough support in the House and Senate to pass his two-pronged plan to change Medicare. Much depends on the political makeup of Congress after the election.

But what’s more concerning is the lack of a plan to tackle the HI Trust’s imminent cash shortfall. If Biden wins, I suspect this won’t be the last we hear about Medicare reform during his presidency, especially with regard to Part A.

 

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