Medicare’s Hospital Insurance Trust Fund May Deplete by 2028

July 11, 2016 - The Medicare program may be in trouble with regard to its financial standing. The latest Medicare Trustees report found that the Hospital Insurance Trust Fund may be depleted in as little as six more years. The longest it is expected to last is until 2028.

The Hospital Insurance Trust Fund plays a part in paying for Medicare Part A, which covers hospital costs along with skilled nursing facilities, home health agencies, and hospice care. Essentially, the report finds that the Hospital Insurance Trust Fund may not be adequately financed over the coming decade, which will essentially deplete its resources.

To garner more knowledge about the future finances within the Medicare program, HealthPayerIntelligence.com interviewed Michael Thompson, Chairperson of the American Academy of Actuaries Medicare Subcommittee.

HealthPayerIntelligence.com: What steps can be taken to sustain the Medicare program for future generations in the midst of depletion of the Hospital Insurance Trust Fund?

Michael Thompson: “The Medicare HI Trust Fund, which pays for inpatient hospital services, is now projected to be depleted by 2028. At that time, payroll tax revenues are projected to cover only 87 percent of program costs. Eliminating the deficit would require an immediate 25 percent increase in standard payroll taxes or an immediate 16 percent reduction in expenditures, or some combination of the two.”

“Delaying action would require more severe changes in the future. The depletion of the HI Trust Fund is not the only challenge to Medicare’s long-term sustainability, however. Increases in Medicare Supplementary Medical Insurance (SMI) spending, which covers physician and outpatient hospital services and the Part D prescription drug program, could increase pressure on beneficiary household budgets and the federal budget.”

“In addition, because Medicare spending is expected to continue growing faster than GDP, greater shares of the economy will be devoted to Medicare over time, meaning smaller shares will be available for other priorities.”

“The Affordable Care Act (ACA) contains provisions designed to reduce Medicare costs, increase Medicare revenues, and develop new health care delivery system and payment models that aim to improve healthcare quality and cost efficiency. Additional steps need to be taken to address Medicare’s long-term financial challenges.”

“Options to change the program come in many forms, including more rapid movement to and expansion of alternative provider payment models, revising the program’s benefit design (e.g., the types of services covered and cost-sharing requirements), raising the age for benefit eligibility, transitioning to a premium support approach, setting spending targets to limit Medicare spending growth, and increasing revenue.”

“Ultimately, reductions in the cost and utilization of Medicare services will require fundamental changes to how we manage health care delivery so that the incentives are better aligned to focus on value rather than volume.”

HealthPayerIntelligence.com: What do you expect for the future of the Medicare program?

Michael Thompson: “Working-age adults fund Medicare, through payroll taxes and income taxes. However, growth in the retiree population coupled with lower fertility rates is causing the ratio of workers to Medicare beneficiaries to shrink.”

“Fewer workers will be paying into the system to support the growing number of retirees. The Medicare program has helped provide access to health care for the nation’s retiree population, but more needs to be done to ensure the program is sustainable in the long-term.”

“Policy makers should explore the various options available to improve its long-term sustainability. Taking action sooner rather than later would allow 1) the existing funds to be extended longer, 2) the changes to be less drastic, 3) more systemic changes (e.g., in healthcare delivery) to take hold sooner and 4) future generations of beneficiaries to know and plan for what to expect in their retirement years.”  

“When evaluating proposed changes, it is important to consider the impact not only on the program’s long-term financial condition, but also on the access to and quality of health care. The impact on the broad range of beneficiaries, especially those with special health needs or limited resources, also needs to be considered. Policies should aim to ensure that Medicare beneficiaries have access to high-quality health care that is affordable both to them and to the nation as a whole.”

HealthPayerIntelligence.com: Do you project payroll taxes or premiums increasing to cover the dwindling funds within the Medicare program?

Michael Thompson: “Bringing the Hospital Insurance Trust Fund into balance over the next 75 years would require an immediate 25 percent increase in standard payroll taxes or an immediate 16 percent reduction in expenditures, or some combination of the two.”

“Approximately one-quarter of SMI spending is financed through beneficiary premiums, with federal general tax revenues covering the remaining three-quarters. Projected increases in SMI spending will require increases in beneficiary premiums and general revenue contributions.”

HealthPayerIntelligence.com: What type of regulatory changes could be made to improve the financial outlook of the Medicare program?

Michael Thompson: “Fundamentally, CMS is the largest influencer of the healthcare system. Through programs like Medicare and Medicaid, CMS can help realign incentives in the healthcare system to reward value and quality and reduce the incentive for greater volume of care.”

Dig Deeper:

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