Medicare Hospital Insurance Trust Fund Near Insolvency

Medicare Hospital Insurance Trust Fund Near Insolvency

Before 2020 came to an end, a new forecast from the Congressional Budget Office (CBO) confirmed that Medicare’s Part A Hospital Insurance (HI) trust fund is running out of money two years earlier than previously expected. The CBO’s forecast indicates that there will be insufficient funds to cover all Part A benefits beginning in 2024 — less than 3 years from now.

Medicare Part A pays for hospital in-patient care, as well as short term stays in skilled nursing facilities, home health and hospice services, in addition to covering a portion of payments paid to private insurers for the care of Medicare Advantage enrollees.  It’s funded through payroll taxes of 2.9% on earnings, with workers and employers each paying 1.45%.  Workers pay Medicare taxes on all earnings.  There is no wage limit subject to Medicare taxes as there is for Social Security.

The Medicare Part A outlook has worsened due to both the financial impacts of COVID-19 and the high levels of people out of work.  Nationwide business closures, layoffs and salary cuts, have significantly reduced the amount of revenues received by the Medicare HI trust fund over the past year, while payments to hospitals were increased 20% by emergency legislation for COVID-related care, and the elimination of cost sharing associated with COVID treatments.

Addressing the Part A shortfall will be particularly difficult and contentious for everyone.  To bring greater solvency to the HI trust fund, lawmakers will be faced with the politically unpalatable choices of reducing Medicare spending, which could include requiring that Medicare recipients pay more for their coverage and increasing the tax revenues received by Medicare.  Congress last addressed Medicare Part A finances in the 2010 Affordable Care Act which, among other things, required hospitals to become more efficient in their delivery of care, while requiring that higher income workers pay a higher Medicare payroll tax rate.

This time, with large numbers of hospitals straining to care for COVID-19 patients, cutting payments to hospitals and increasing revenues is likely to be far more difficult.  Hospitals across the country say they have been pushed to their financial limit.  And simply raising payroll tax rates may not provide enough of a revenue in the short term if unemployment remains at high levels longer than anticipated.  Payroll taxes cannot be collected from workers who are unemployed.

Even before the coronavirus pandemic Congress was facing tough decisions on how to strengthen the Medicare’s Part A Hospital Insurance trust fund.  But Congress is now running out of time and will need to move soon on a plan to prolong program solvency.

Source:  “The Outlook for Major Federal Trust Funds: 2020 to 2030,” Congressional Budget Office, September 2020.