Medicare Hospital Fund Runs Out in 2026

 In CHR Blog

The future of Medicare just got worse. The annual Medicare Board of Trustees sent its 2018 report to Congress last month. It was not a pretty picture. Overall, the Medicare program took in $705 Billion, but spent $710B. Anyone who has a checking account knows that plan doesn’t work very well.  On the income side, there was a $5 billion drop from 2016 – simply not enough to pay expenses, which predictably went up. Consumers may be surprised to learn that Congress raised more money for Medicare from payroll taxes and Medicare premiums, but still the total income dropped. That’s due to complicated funding formulas used by the government.

Medicare data were shown for two separate trust funds:  Hospital Insurance (Part A), and the Supplementary Medical Insurance Trust Fund which covers Part B (physicians, Emergency Room and other hospital outpatient services) and Part D (prescription drugs). Both the Hospital Trust Fund and the Supplemental fund share the costs of Part C (private Medicare Advantage health plans).  More than 58 million people participated in the Medicare program last year. Almost 50 million were age 65 or older; the rest were disabled.

Medicare is near and dear to most people. A survey by AARP found that nearly every adult (regardless of party affiliation) believes Medicare is important to people’s health in retirement. But not everyone is confident that Medicare will be there for them throughout retirement. Just over half (54%) were somewhat or very confident Medicare will be around in the very long term.  And no wonder, for the past decade, Medicare has issued annual warnings that the Hospital fund was in immediate danger of being depleted. The 2007 report estimated the Hospital fund would be exhausted by 2019.  Luckily, financial patches were made, and quality of hospital care was improved, but the fund is still not stable long-term.

 

Warning on Medicare’s Hospital Fund

The 2018 Medicare Trustees report projects the Part A Hospital fund will run out of funds by 2026. This is three years sooner than last year’s estimates.  Part A is important because it covers inpatient hospitalizations, skilled nursing care for rehabilitation, hospice and some home health care. It also provided almost $95 billion in funds for the Medicare Advantage health plans (Part C) last year.

When you dive into the reasons why Medicare’s hospital fund future is three years shorter than the actuaries thought last year, the answer may surprise you. The reason has more to do with revenue estimates than with expenses.  From 2017 to 2022 (inclusive), expenses are actually projected to be $4 billion lower than they thought last year.  That’s a good thing, but it’s not enough. Because revenues into the Part A Medicare program are expected to be lower than anticipated by $110 billion.  Last year, the report expected the hospital trust fund to have an annual surplus all the way to 2022.  But with dramatic revenue shortfalls on the horizon, actuaries predict the fund is already losing money in 2018. They further predict losses accelerate to over $50 billion a year by 2026, at which time the fund will have exhausted all reserves it had.

Two reasons for revenue shortfalls were listed in the report:

  1. Lower income from payroll taxes attributable to lowered wages for 2017 and lower levels of projected GDP (gross domestic product); and
  2. Lower income from the taxation of Social Security benefits as a result of legislation.

In other words, the economy is not as strong as predicted last year, wages aren’t as high as hoped, and the December 2017 tax cuts contribute to Medicare revenue shortfalls.

What happens next?

 

What Happens Next, After a Medicare Warning?

When Medicare issues the kind of warning it did, there is a defined process to follow. First, the President is required to submit to Congress proposed legislation that responds to the Medicare warning. Such proposed legislation needs to be made within 15 days of his Budget submission for the upcoming year, typically in February. Congress is then required to consider the legislation (though not necessarily enact it) on an expedited basis.

The report specifies: “Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.”

 

What Does the Medicare Warning Mean for Consumers and Hospitals?

Required changes are significant.  The report notes that for the Hospital trust fund to remain solvent throughout the 75-year projection period, the standard 2.90 percent payroll tax could be immediately increased to 3.72%. A second option is to reduce expenditures to hospitals and nursing homes by 17 percent. Neither sounds very attractive. The government’s “alternative scenario” which projects higher costs for Medicare beneficiaries, is even more bleak. To fix the hospital fund in the alternative scenario, the payroll tax would need an immediate hike to 4.61% or a decrease in expenditure levels of 30 percent.

US Treasury Secretary Steven Mnuchin tried to calm fears and reassure the public that Medicare is secure. Given the pervasive and passionate public support for Medicare, such reassurance is reasonable. However, Mnuchin went on to say, “The Medicare Hospital Insurance program is on track to meet its obligations to beneficiaries well into the next decade.”  That’s a bit of a stretch given Medicare’s hospital program is completely bankrupt in eight years. According to the report’s projections it’s already losing money (estimated at $5.2 billion loss for 2018). By 2021, losses mount to $10B and skyrocket until the fund’s demise in 2026. True, the government can meet its obligations to about 2025, but after that, it reneges on its promises.

 

Two Things Consumers Can Do to Help Fix Medicare

What can consumers do to help ensure Medicare is around for the long haul?  Here are two actions you can take:

  1. Be as healthy as you can be, regardless of age. The biggest drivers of healthcare costs are illness and injury. It is well-known that poor diet and lack of physical activity contribute to many chronic illnesses, disability and early death. Consumers can apply self-discipline to better eating and greater exercise, consistent with their income and neighborhood. Eat your fruits and vegetables. Exercise five times a week for a half-hour each. Plus, do muscle-strengthening exercises at least twice a week. CDC published a report this week, that found less than ¼ of adults ages 18 to 64 met the leisure time physical activity guidelines. We know we can do better. Help save Medicare by your personal actions and choices.
  2. Vote in the mid-term elections and include healthcare in your issues list. According to the Kaiser Health Tracking Poll published May 10, the top issues competing with healthcare for consumer attention were the economy and jobs, and gun policy. Immigration was also very much in the mix. With the Medicare fund warning, it’s important to elect people to Congress who are knowledgeable, compassionate and courageous enough to fix the problem. One of the challenges in the past, is that any funds taken out of Medicare, often are tacked on to the prices that private health insurance plans must pay. And that can drive hikes in what you pay for in monthly premiums, even though you are too young to be on Medicare. Everyone has a stake in this fight.

We welcome your comments about healthcare costs and the value of Medicare. (We ask for your email, but do not show it to the public. It will be kept private.)

  • To compare costs and prices among hospitals and other healthcare providers, see Healthcare Costs  at ConsumerHealthRatings.com
  • To learn more about what Medicare pays for care, see Medicare at ConsumerHealthRatings.com
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