The trust fund that finances Medicare’s hospital insurance program is expected to run out by the year 2028. Last year, a report by the Medicare trustees predicted that the fund wouldn’t run out until 2030.
To understand what is happening, it helps to understand how Medicare is funded. The program for senior citizens and disabled people is paid for by two trust funds that by law can only be used for Medicare. One of those trust funds, the Hospital Insurance Trust Fund, is the one expected to run out in 2028.
This trust fund is funded by payroll taxes, which are paid by almost all employees, employers, and self-employed people. Other sources of funding for the Hospital Insurance Trust Fund include income taxes on Social Security benefits, interest that the trust fund’s investments earn, and the premiums for Medicare Part A (hospital insurance) from people who are not eligible for Part A Medicare coverage without paying a premium.
Another trust fund, the Supplementary Medical Insurance (SMI) Trust Fund, pays for Medicare Part B (outpatient medical insurance) and Medicare Part D (prescription drug coverage). Funds for the SMI Trust Fund are authorized by Congress and come from the premiums paid by people enrolled in Medicare Part B and Medicare Part D. These monies are also invested, and interest earned on those investments is put back into the trust fund.
Projections for Medicare Trust Fund Have Been Dire Before
If predictions of the Medicare Trust Fund running out seem familiar to you, that’s because such predictions have happened before, and they have been even more grim in the past. Before the passage of the Affordable Care Act (ACA) in 2010, the fund was expected to run out in 2017. Last year’s report predicted the trust fund would run dry by 2030, and the years 2024 and 2026 have also been predicted as years when the Medicare Trust Fund would finally run out. In other words, we’ve been here before as Americans, and we’ve made changes to keep the fund going. Checks and balances are built into Medicare funding to ensure the money is there for the people who receive Medicare services.
The Effect of the Affordable Care Act on Medicare Funding
Although the ACA was primarily designed to address health insurance coverage for people under age 65 (when most people qualify for Medicare), it also included provisions to improve the efficiency of the healthcare delivery system and contain growth in healthcare costs. Other provisions were designed specifically to strengthen Medicare.
For example, the ACA addresses gaps in prescription drug benefits and Medicare preventive services. It also triggers testing of new payment methods designed to improve care quality while containing costs. By slowing growth of future Medicare outlays, the ACA helps extend the solvency of the Medicare trust funds. Ultimately, the ACA is designed to wean Medicare from the traditional (and expensive) fee-for-service payment structure, and toward managed care payment structures. But it isn’t just Medicare shifting away from the fee-for-service structure, because many private health insurance plans are doing the same thing.
Will the Independent Payment Advisory Board Be Triggered Next Year?
One provision of the ACA that has been controversial, particularly among doctors, is the potential for an Independent Payment Advisory Board (IPAB) to be created if the condition of the Medicare Trust Fund deteriorates enough. Should an IPAB need to be formed, it will be a 15-member government agency tasked with achieving designated savings in Medicare without affecting either coverage or quality. If an IPAB is triggered and created, only a Congressional supermajority could overrule its recommendations.
Normally, changes to Medicare rules and payment rates are recommended by a federal body called the Medicare Payment Advisory Commission, or MedPAC, which was established in 1997. The 17 members of MedPAC are appointed to three-year terms by the Comptroller General of the United States. Recommendations made by MedPAC require an act of Congress to be implemented. As you may imagine, plenty of Congressional representatives were upset at the concept of the IPAB implementing changes where Congress could only overrule them via supermajority vote.
Every year starting in 2013, the Centers for Medicare and Medicaid Services (CMS) Chief Actuary determines projected per capita growth rates for Medicare over a multi-year period. If the growth projection is higher than a given target, an IPAB is created, must develop a proposal for reducing Medicare spending by a specific amount, and submits the proposal one year before the proposal is to be implemented. There have been murmurings about an IPAB being triggered at the end of 2017, but whether that happens remains to be seen.
What Is Expected to Happen to the Medicare Trust Fund in Intermediate Years?
Though current projections have the Medicare Trust Fund running out in 2028, the years between now and then aren’t expected to be uniformly bad. For example, the fund is expected to show a slight surplus between 2016 and 2020. Per-enrollee spending in Medicare has gone up by around 1.4% over the past five years, compared to overall per capita health expenditures growing by 3.4%. Over the next ten years, too, trustees expect per-enrollee spending in Medicare to increase more slowly than per capita health expenditures overall.
Baby Boomers Increasingly Becoming Eligible for Medicare
By the year 2030 the number of Medicare enrollees is expected to rise from around 54 million to more than 80 million as the rest of the Baby Boom generation reaches Medicare eligibility age. While initially, the average age of Medicare recipients will skew younger, eventually the proportion of Medicare recipients aged 85 and older will swell. The combination of a bigger Medicare population and more Medicare recipients over 85 is a major factor in predictions of stress on the Medicare Trust Fund by 2028.
The ailments for which the Baby Boom generation will receive Medicare services will also be different from the services received by their elders. Baby Boomers have a longer life expectancy than prior generations, and they also have lower rates of smoking. On the other hand, they have higher obesity and diabetes rates than older generations. While Baby Boomers have higher rates of some chronic diseases than previous generations, they are also more likely to have long-term control over those conditions. In other words, they’ll be healthier in some respects (such as with smoking-related conditions), and sicker in others (as with obesity and diabetes). It’s mostly the sheer size of the Baby Boom generation that will stress Medicare funding.
How Much of the Financial Burden Will Seniors Have to Bear?
Medicare Part B coverage requires payment of a monthly premium just like with private health insurance, though these premiums are generally lower, and are influenced by the Medicare enrollee’s income situation. In 2016, nearly one-third of Medicare recipients faced a 16% premium increase, which is high, but still less than premium increases experienced by most people with private insurance.
While 70% of Medicare recipients are covered by a 1987 “hold harmless” provision, which states Medicare premiums can’t increase by more than the extra money enrollees receive as a Social Security cost of living adjustment, higher-income enrollees do not have this protection and may face larger premium increases in the future as well. It is only to be expected that Medicare premiums will continue to increase at least in step with cost of living adjustments.
While the Medicare Trust Fund is projected to run out of money in 2028, this is actually a better scenario than what was expected before the ACA was passed. New payment models and a drift away from fee-for-service reimbursement are expected to help contain costs. If costs increase too rapidly, certain checks and balances come into play to get Medicare spending back under control.
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