Beyond Solvency: Broadening the Conversation to Medicare Sustainability

Across the Medicare policy landscape, systemic inefficiencies, misaligned incentives, and growing complexity drive up costs while making it harder for beneficiaries to make informed choices. A new three-part series on Medicare sustainability launched by the Medicare Rights Center explores how Medicare’s long-term fiscal health is challenged by misunderstood financing structures, payment disparities that reward more expensive care settings, and the rapid growth of Medicare Advantage plans that often overwhelm consumers while driving up program costs.

Part 1: Medicare Financing

The first part of the series on Medicare financing sets the foundation for discussions about sustainability by outlining the program’s history from its beginnings in 1965 through the various reforms that have made Medicare what it is today. By explaining the current funding structure of Medicare and showing how projections and expenditures have fluctuated over the program’s history, this part aims to expand the policy conversation beyond mere Part A solvency to overall sustainability.

The Structure and History of Medicare Funding

The three parts of Original Medicare have different funding mechanisms. Only the Part A Hospital Insurance (HI) Trust Fund is financed primarily through payroll taxes, making it highly sensitive to economic fluctuations. Part B and Part D, which together account for the majority of Medicare spending, are funded through a combination of general revenues and beneficiary premiums via the Supplementary Medical Insurance (SMI) Trust Fund. This gives Part B and D funding a higher level of stability during economic downturns.

Since Medicare’s creation in 1965, the HI financing structure has undergone several amendments and recalibrations. This has been done primarily through increases to the taxable income cap (and its eventual elimination in 1993, making all earned income subject to the HI tax) and to the payroll tax rate. These policy changes were triggered by dramatic fluctuations in the HI Trust Fund depletion projections, which are common but can cause understandable concern to the public. Historically, each sharp dip in HI projections was followed by a corresponding congressional action that caused it to rise again.

Since 2016, however, Part B spending has outpaced that of Part A, and the state of the HI Trust Fund increasingly does not tell the whole story of Medicare’s financial status. With experts predicting this trend will continue, it is imperative that the policy conversation addresses the whole of Medicare’s financing structure in the pursuit of cost-saving reforms.

Further Needed Reforms

The history of Medicare legislation demonstrates that the program’s funding structure evolved through a series of policy choices that responded to changes in both general economic conditions and Medicare’s specific needs. Presently, as the proportion of SMI spending in Medicare rises, policy reforms must center Parts B and D. The Inflation Reduction Act (IRA) of 2022 was an important step in the right direction, reducing drug costs over the following decade through price negotiations, inflation rebates, and a Part D redesign.

More remains to be done to save costs across the SMI Trust Fund. Eliminating Medicare Advantage overpayment, establishing provider site neutrality, and further reducing the cost of prescription drugs are all policy priorities in building a more sustainable Medicare program.

During a time when Medicaid and Medicare are under threat, this policy series aims to promote discussion on a sustainable future for these programs, rather than rhetoric that maligns or discredits the health coverage on which millions of Americans rely. Improvements to Medicare must center beneficiary needs and preferences in order to ensure the sustainability, affordability, and solvency of all parts of Medicare for current and future generations.

For more on this topic, explore Part 1 on Medicare Financing from the Medicare Sustainability policy series available now at www.medicarerights.org/policy-series/medicare-sustainability.

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