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The Medicare Trust Fund
December 3, 2009 • Volume 9, Issue 47
There has been a lot of debate in the U.S. Senate this week over whether health reform will hurt or help Medicare’s finances. The opponents of health reform say the bill takes money from Medicare at a time when the program faces an imminent financial crisis. Senators who support the health reform legislation say it will actually improve Medicare’s financial outlook.
Much of the attention has been focused on what many people refer to as the Medicare trust fund. Let’s review what that is and how it works.
Part A covers inpatient care, which is delivered primarily in hospitals and skilled nursing or other facilities. Part A is funded by the Hospital Insurance Trust Fund, which is paid for by the payroll tax deducted from the paychecks of working people. This is the trust fund that lawmakers are worried about because in 2017—seven years from now—it is scheduled to become insolvent. That means that the revenue the trust fund receives from payroll taxes and the repayment of loans it has made to the federal government will not be enough to pay the claims for hospital and other Part A care that is anticipated in 2017.
There are three tools Congress can use to extend the life of the trust fund. It can:
- Raise revenue, for example, by increasing the payroll tax;
- Reduce what Part A will pay out, either by lowering the reimbursement rates to hospitals and other providers, or by eliminating wasteful spending;
- Cut benefits, for example, by increasing the deductible for a hospital stay, or by making people with Medicare pay a premium for Part A (most people with at least 10 years of work history get Part A for free).
The Senate health reform bill, The Patient Protection and Affordable Care Act, takes only the first and second approaches. The bill does not cut any benefits under Part A or Part B (doctor visits and other outpatient care) or Part D (drug coverage).
The bill raises the Medicare payroll tax for individuals earning more than $200,000 and couples earning more than $250,000. That generates about $54 billion over ten years. The legislation generates a lot more in savings—over $200 billion over ten years—by reducing what Part A will pay out, principally by:
- Reducing the annual rate of increase that hospitals and other Part A providers receive;
- Reducing payments that hospitals receive for providing care to the uninsured;
- Reducing wasteful spending on hospital readmissions and care for infections or other conditions acquired in the hospital;
- Bringing payments to Medicare private health plans more in line with costs under Original Medicare (subsidies for private plans come from both Part A and Part B).
Altogether, the savings and added revenue extend the life of the trust fund by another five years, strengthening Medicare’s financial outlook. No money is taken from the trust fund; the revenues it receives from payroll taxes will continue to pay for care for people with Medicare.
The trust fund savings in the bill also lower the overall deficit in the federal budget (which includes the trust fund), and in previous Medicare legislation, that is what happened. Under the Patient Protection and Affordable Care Act, however, the reductions in the federal deficit are used to offset the cost of providing coverage to Americans who now have no health insurance.
By using the savings to cover the uninsured, the hospitals who shoulder the bulk of the cost-cutting can better absorb it, because the uninsured people who now show up at emergency rooms needing treatment will have coverage that pays for their care. That is why America’s hospitals have rallied behind health reform and are pushing to ensure the final bill covers as many of the uninsured as possible. And if the hospitals are financially strong, they will be there for people with Medicare as well as everybody else.
And that is good for the 45 million people with Medicare. The Medicare savings in health care reform shore up Medicare’s finances and strengthen the health care system that older adults and people with disabilities rely on more than anyone.
“By curbing the annual reimbursement increases to hospitals and other facilities and by bringing subsidies to Medicare Advantage plans more in line with costs under Original Medicare, the Patient Protection and Affordable Care Act would extend the solvency of the Medicare trust fund by five years. By reversing the payment provisions in the bill, the McCain amendment would keep the Medicare trust fund on its current path to bankruptcy in 2017. The amendment even rescinds provisions that deliver savings by reducing hospital readmissions and improving care coordination.” (Joint Statement by Medicare Rights Center President Joe Baker and Center for Medicare Advocacy Executive Director Judith Stein on McCain Amendment to Senate Health Reform Bill, December 2009)
“CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades. . . . Adjusting for inflation, Medicare spending per beneficiary under the bill would increase at an average annual growth rate of roughly 2 percent during the next two decades—much less than the roughly 4 percent annual growth rate of the past two decades.” (Cost Estimate of the Patient Protection and Affordable Care Act, Congressional Budget Office, November 2009)
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