Increasing Medicare Spending Calls For Short, Long Term Financing Solutions

September 21, 2022 - With Medicare spending increasing, finding both short- and long-term solutions for Medicare financing is imperative, an issue brief from Urban Institute found.

“With Medicare spending growing faster than national income historically, and projected to do so into the future, the nation faces increasingly difficult choices between obtaining additional sources of financing that take money away from other public and private uses and reducing Medicare spending,” the researchers explained.

The Medicare program has two components. The first, the Hospital Insurance or Part A component, is expected to run out in 2028 even as the financial demands of the second component—the Supplementary Medical Insurance component which is made up of Medicare Part B and Medicare Part D—continue to grow.

The bulk of Medicare financing is from federal general revenues, including when the government’s budget is at a deficit.

The most effective, long-term approach to improving Medicare financing would be to reform it through general revenue financing, as opposed to setting up a new dedicated financing source or adjusting the Hospital Insurance trust fund.

Specifically, the researchers recommended expanding an existing dedicated tax to cover Medicare’s increasing financial needs.

Currently, the Hospital Insurance trust fund relies primarily on payroll taxes for financing. This share of financing is not expected to increase, despite the rise in Medicare Part A spending. In addition to this, there is a 0.9 percent Medicare income tax for high-income employees. There is also an income tax on Social Security cash benefits which goes toward the Hospital Insurance trust fund.

Premiums also fund the Supplementary Medical Insurance component, but they account for less than a quarter of total Medicare funding.

Tax expansions may be necessary for the long-term, but the researchers found that the current state of Medicare spending also required a short-term plan. New taxes or borrowing might offer some immediate fiscal relief. Bond sales from the federal government might also provide a temporary solution.

Moreover, it would be wrong to assume that fixing the Health Insurance trust fund would resolve the financing issue, the researchers warned. Policymakers need to address spending on a systemic level.

“As an exception to the preference for general revenue financing, dedicated trust fund financing can work when it covers all costs and imposes budgetary rigor on matching spending and receipts,” the issue brief explained.

“But as it currently operates, the HI trust fund performs that function only minimally by forcing occasional congressional action on the Part of the Medicare program that is not even the fastest growing.”

The researchers highlighted that there are various levers that policymakers can use to increase funding for Medicare.

Additionally, policymakers should be aware that Medicare spending and financing are interconnected, the researchers noted.

Also, Medicare spending is not altogether in the power of the government to control. The nature of the Medicare program gives non-government actors—from hospital administrators to beneficiaries themselves—the ability to determine how services will be reimbursed, limiting the government’s control of its own funding.

Overall, national healthcare spending is expected to grow five percent in the 2020s.

In light of these escalating costs, policymakers are juggling the demand for more funding for the Medicare program and the need to reduce costs for beneficiaries and prevent cost-related barriers to care. Historic increases in Medicare Part B premiums along with inflation have increased affordability challenges for seniors, which can result in postponing necessary care.

Meanwhile, Medicare Advantage plans are touting lower costs for beneficiaries along with better benefits. However, these plans also rely in part on financing from the Hospital Insurance trust fund and the Supplementary Medical Insurance trust fund.