President Joe Biden’s proposed 2024 budget includes plans to to support Medicare financesthe federal health insurance program that includes Americans age 65 and older and some younger people with disabilities.
His administration is seeking elevation from 3.8% to 5% an existing Medicare tax collected on the employment and investment proceeds of Americans who earn more than $400,000 annually. It is also meant to have some savings from the government negotiate prices for more prescription drugs.
The White House projects that these changes would bring an extra $650 billion in sales over a decade. Some independent experts to agree.
As economists who have long investigated the Medicare and Social Security programswe believe the president’s proposal is an important first step in opening the necessary debate about strengthening Medicare’s finances.
The precarious financing of Part A
Medicare consumes more than 15% of the federal budget. The program will cost $975 billion by 2022, from the government $6.5 trillion in total federal spending.
As anyone who has enrolled can tell you, the program itself is rather complicated. It is divided into three parts known as A, B and D, each of which relies on income from a different mix of sources.
Medicare Part A covers care provided in hospitals and nursing homes, as well as home care. Part B pays for doctor visits and outpatient procedures, and Part D pays for prescription drugs. There is also Part C, a private insurance option known as Medicare Advantage. However, its cost is included in the accounts for part A and part B.
Part A is mainly financed by a 1.45% Medicare payroll tax on both employees and employers. If that tax and the program’s other tax revenues do not raise enough money to cover the costs of Part A, the program will lapse into the Medicare Hospital Insurance trust fund to make up the difference. The trust fund, built from past payroll taxes in excess, currently stands at approx $143 billion.
With no cuts, funding increases, or a combination of the two, Medicare program administrators predicted in their annual report that the Medicare Trust Fund will be exhausted by 2028. The trustees are the secretaries from the Departments of Finance, Labor and Health, and Human Services, plus the Commissioner for Social Security. There can be up to two additional trustees, but those seats are vacant.
The cost of Medicare is rising rapidly with the retirement of baby boomersthe large generation of Americans born between 1946 and 1964, and rising healthcare costs.
If the trust fund is drained, the trustees predict that hospital benefits will have to be cut by 10%. But those cuts are widely seen as politically unacceptable, as exemplified by Biden statements and his predecessor, former president Donald Trump.
In addition to proposing an increase in the tax levied on the investment gains of high-income Americans, Biden also proposes to allocate this income entirely to the trust fund. Currently the the government treats that money as general revenue what can be used for any government program.
2 very different scenarios
Unlike Medicare Part A, Parts B and D are funded largely by general federal revenue and premiums paid by retirees.
Because the government is allowed to use general revenue to pay for them, the funding of parts B and D is not compromised by the depletion of their trust fund – no matter how fast those costs increase.
Even without Biden’s proposed changes, official spending projections for Medicare rise rapidly into the mid-2030s and then plateau as a percentage of gross domestic product.
However, these projections are based on a presumption that payments to hospitals are limited as specified in the Affordable Care Act and other spending restrictions doctor payments to be realised.
Unfortunately, history offers little certainty that lawmakers will enforce all of these requirements to limit future payments to health care providers.
We say this because of what happened after 1997, when Congress passed the Sustainable Growth System, which was designed to limit the annual increase in costs per Medicare beneficiary to the pace of economic growth. Year after year, from 2002, Congress passed legislation to override it – and only stopped doing so once completely abolished the system in 2015.
Due to this uncertainty, the annual receivers report features an alternate projection that is arguably more believable and scarier. It indicates that Medicare costs will grow much faster than the economy from 2036 onwards.
Competing demands
The Social Security program, a national retirement program that primarily supports older Americans, faces similar funding shortfalls.
The trustees expect that the The Social Security trust fund will be exhausted by 2035 with no changes in funding, promised benefits – or both. In that case, Social Security benefits may need to drop by about 20% of expected levels.
Medicare and Social Security are the largest in the country rights programs. Nearly all Americans, if they live long enough, will eventually qualify for these benefits—regardless of their income or wealth.
While Americans still disagree on how to put these programs on a more stable fiscal footing, the math is clear.
Our elected representatives are forced to make tough decisions about raising taxes, cutting benefits, or both.
