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The looming insolvency of Medicare’s Hospital Trust Fund

The looming insolvency of Medicare’s Hospital Trust Fund

According to the Medicare Trustees Report released in early June, the Hospital Insurance Trust Fund, which pays for hospital services in Medicare Part A, is going to be insolvent by 2028—two years later than the estimate released last year. As a result, lawmakers will be tempted to discard insolvency as a nonurgent issue.

In reality, however, the report underlines just how urgent the problem is. Given the economic uncertainty, surging inflation, and the ongoing public health emergency, we were lucky to have a surplus last year. In fact, the last five trustees reports have predicted insolvency within 10 years. The looming insolvency needs to be fixed through meaningful reform, yet Congress is virtually mum, and the longer we wait, the more painful insolvency will be for hospitals, taxpayers and the 62 million beneficiaries who rely on Medicare’s coverage.

In particular, failure to address the issue will inevitably affect hospital revenue. The exact nature of those effects will depend on when and how Congress decides to act. While facing the music in an election year may seem like a politically foolish thing to do, healthcare leaders simply can’t afford to allow lawmakers to keep kicking the can down the road.

The Hospital Insurance Trust Fund is almost entirely funded by a payroll tax. As the population ages and healthcare prices go up, expenses are growing faster than revenue. If Congress doesn’t take action to avert insolvency, providers stand to take a steep cut in reimbursement. It’s either that or beneficiaries will lose access to some of the services they need.

This is not the first time that the trust fund has been in dire circumstances. Anyone who was around in the 1990s remembers that the threat of insolvency was part of the political debate for years. Congress addressed the issue in 1997, four years before the anticipated insolvency, passing a short-term fix to use general revenue to make up for the shortfall in payroll taxes. Today, we are in the same situation. So, what has Congress done? The Senate Finance Committee held a hearing in February of this year, but no legislation has come of it. And no hearings have been set in the House.

Two facts explain the lack of action: Medicare is extremely popular, and the emergency is currently invisible to providers and beneficiaries. In the wake of a pandemic that took the lives of hundreds of thousands of seniors and weakened millions more, and in light of the number of emergencies facing the country and the midterm elections right around the corner, touching Medicare is tantamount to political suicide. Indeed, it’s universally difficult to take credit for averting a crisis that no one ever felt. The problem is, we cannot afford to wait.

Congress has two options to stop the fund from hemorrhaging money: It can either bring in more funding or cut spending.

Bringing in more money is straightforward: Congress can raise taxes. The Medicare payroll tax is 2.9%. Half of it is paid for by employers and is rarely displayed on pay stubs, so Americans don’t feel its full effect. But if increasing revenue is the route Congress chooses, the payroll tax will go up. Depending on the economic situation a few years down the road, the increase could further damage Americans’ purchasing power and erect new barriers to accessing care.

Cutting spending is a bit more complex, and Congress will have to pick its victims. Lawmakers can choose to cut payments to hospitals in the form of lower reimbursement rates for Part A beneficiaries’ care. Under the status quo, experts anticipate a 9% cut when insolvency hits. Lower reimbursement rates risk putting hospital executives in a bind, especially those who have a Medicare-heavy patient mix.

Lawmakers could also push more of the burden of paying for care onto beneficiaries. All things kept equal, greater cost-sharing leads to lower consumption of healthcare services. The drop in demand for care can lead to short-term reimbursement downfalls and long-term uncertainty regarding future healthcare needs of patients forgoing care.

Ultimately, political pressures will determine what combination of these options materializes. For now the question remains: When will lawmakers start seriously debating these options? The nation faces an astounding number of problems. But the economic situation and lack of leadership are topping the charts of voters’ most important concerns. Now is the time for Congress to address the trust fund’s impending insolvency and devise long-term solutions that preserve access to quality, affordable healthcare.