The Medicare Hospital Insurance (HI) Trust Fund will become insolvent in 2028, according to the latest report by the Medicare Board of Trustees in June 2022. Last year’s report projected the HI Trust Fund’s insolvency date to 2026, which means the fund now has just two additional years of breathing room.
In brief, the HI Trust Fund funds Medicare Part A, which reimburses providers for inpatient hospital services, hospice care, and skilled nursing facility and home health care services and is funded primarily through payroll taxes. In contrast, a separate account known as the Supplementary Medical Insurance (SMI) Trust Fund funds physicians and other outpatient services under Part B and prescription drugs under Part D and is funded through general tax revenue and the premiums enrollees pay.
Better-than-expected recovery in economic growth, pay, and employment convinced the Medicare trustees to push out the HI Trust Fund’s insolvency date by two years. The trustees also noted in their report that the COVID-19 pandemic isn’t expected to have a serious impact on Medicare’s finances.
New projections that the HI Trust Fund will become insolvent two years later than initially expected isn’t the good news it seems to be. In fact, the HI Trust Fund is in a world of trouble. As the trustees noted in their report, there is much uncertainty on the economy, population demographics, and access to health care that indicate serious problems with the HI Trust Fund’s estimates on future expenditures, and there may be cause for concern regarding the report’s projected insolvency date.
For example, the trustees made the economic projections that were included in the report back in February 2022 – right before COVID-19 cases started to shoot up again and inflation began to climb. An analysis from the Committee for a Responsible Federal Budget says the trustees’ estimates appear to “understate inflation and overstate real economic growth.” If inflation and poor economic growth is persistent into next year, the report might estimate a sooner insolvency date in their 2023 report.
Furthermore, the HI Trust Fund still faces a massive shortfall to the tune of a $350 billion deficit over the next 10 years. The trustees project there will be a shortfall of 0.7% of payroll, or 0.3% of Gross Domestic Product (GDP). This means either a 24% payroll tax or a 15% spending cut is required to prevent the fund from becoming insolvent.
Additionally, Medicare spending is expected to quickly increase. According to the report, Medicare spending is projected to grow from 3.9% of GDP to 6% by 2040 before hitting 6.5% around 2070. Medicare Advantage (MA) is cited as a primary driver of rising spending, as MA plans are argued to be more expensive than traditional Medicare. On top of this, an aging population is driving overall health care spending higher, which includes the kind of inpatient services that Part A pays for. High spending means addressing the HI Trust Fund’s finances – whether by upping payroll taxes or cutting spending – is only going to get harder down the road.
There is some disagreement on how dire the situation is for the HI Trust Fund’s finances. Even if the HI Trust Fund were to be depleted in the next few years, it would still pay roughly 90% of its current level. However, this is far from an ideal scenario. Insolvency essentially means Medicare Part A payments to providers would be reduced to levels that could only be covered by incoming tax revenues. By only being able to pay nine-tenths of current program expenditures, an insolvent HI Trust Fund would affect providers by either delaying payments for all providers or having Medicare reimburse at a decreased rate for Part A care. Either scenario could result in many seniors potentially losing access to care.
Thus, the HI Trust Fund going insolvent is a big deal, and lawmakers will have to get their act together at some point to shore up Medicare’s finances. It is important that lawmakers act sooner rather than later to bolster the trust fund by reducing spending, increasing revenues, or some combination of both. Acting sooner would also boost the public’s trust in Medicare and stabilize the fund, heading off scenarios where providers face declining reimbursement and beneficiaries could lose access to care.