CBO Finds COVID-19 Puts Medicare Trust Fund Insolvency Just 4 Years Away

Dive Brief:

  • * The Congressional Budget Office now expects the Hospital Insurance Trust Fund, which finances Medicare Part A, to become insolvent by 2024, two years earlier than previously forecast due to the effects of COVID-19.
  • * Without Congressional action, CBO estimates Medicare spending will have to be cut by 17% — about $1,000 per beneficiary — to keep the program operational for future generations.
  • * Watchdogs and deficit hawks have tried to sound the alarm on Medicare’s increasingly precarious financial situation for years, but legislators have yet to take any meaningful policy action.

Dive Insight:

The sharp economic contraction spurred by the pandemic has caused the country’s financial outlook to deteriorate substantially, and Medicare’s ongoing trust fund depletion is only accelerating in the context of COVID-19. The pandemic, and its public health and economic effects, have shaved two years off the expected lifespan of the hospital insurance fund.​

CBO’s updated budget outlook released Wednesday is the first to include the expected effects of the coronavirus pandemic. CBO now expects the overall budget deficit to reach a record $3.3 trillion  —​ 16% of GDP and more than triple the shortfall recorded in 2019 — in the 2020 fiscal year, and total $13 trillion over the next decade.

All major trust funds for programs like Medicare, Social Security and highway construction will run out of reserves in the next 11 years.

Medicare is particularly at risk. The hospital trust fund already spends more than it collects annually, and would have been insolvent long ago if it wasn’t for surpluses left over from past years. Last year, the Medicare Part A fund ran a deficit of $5.8 billion, and that excess of spending over revenue is expected to continue until it finally runs dry.

Medicare, which covers roughly 62 million Americans, is facing demographic shifts like an aging population increasing stress on the program, and ongoing growth in federal healthcare costs per beneficiary.

Medicare outlays are expected to rise 12% this year to $721 billion, CBO projects, mostly due to advance loans in the program to help struggling providers, based on historic claims. However, as the federal government recoups the loans, they should equal out in 2021. Medicare spending is expected to rise from 3.2% of the GDP in 2021, to 4.3% in 2030.

Yet payroll taxes, which primarily fund Medicare’s hospital insurance fund and Social Security, are only expected to increase by 6% this year.

Congress has kicked the can on the issue. Bipartisan efforts to lower spending in the early 2010s proved toothless. However, an annual report to Congress from the Medicare Board of Trustees in April triggered a Medicare funding warning, which requires the president to propose legislation fixing the issue to Congress in 2021.

The looming insolvency date — 2024 — should light a fire under lawmakers, experts said at a meeting of Medicare congressional advisory group MedPAC on Thursday.

“The government hasn’t taken bold steps to curb these trends,” Susan Thompson, a MedPAC commissioner and SVP of integration and optimization at health system UnityPoint, said. “We are at a crisis stage if we want to ensure Medicare is in place for future generations.”

It’s not a popular political move, but Congress could increase the payroll tax from 2.9% to 3.7%, or the program will have to figure out how to decrease Part A spending by 17%, MedPAC recommended. Additionally, Medicare companies can focus on preventing upstream costs, move toward value-based payment arrangements and look to shave down unnecessary care, and the high cost of drugs.

Medicare’s other trust fund, the Supplementary Medical Insurance Trust Fund, which covers Medicare Part B and Part D, is on more solid financial footing, and is expected to remain whole over the next decade, per the Medicare Board of Trustees’ April report. Premiums and revenue in Parts B and D are reset each year to cover expected costs.

CBO also found Medicaid spending is rising rapidly as enrollment rises in the safety net insurance amid economic deterioration. The group estimates spending will total $466 billion this year, a 14% increase over 2019 outlays. However, Medicaid as a percentage of the GDP is expected to remain relatively stable over the next decade (about 2% each year).


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