According to a 2023 report by the Medicare Trustees, the Medicare Hospital Insurance (HI) trust fund is projected to exhaust its reserves in eight years--when today’s 57-year-olds first qualify for benefits. Translated, this means that in 2031 the fund’s income will be sufficient to pay just 89% of scheduled benefits and reach the point, at which the law requires an 11% spending cut to match revenues. However, this is actually an improvement in the timeline, moving the projected insolvency three years later than was projected in 2022.

The HI trust fund pays Medicare’s Part A benefits, which cover inpatient hospital stays, skilled nursing facility (SNF) stays, some home health visits, and hospice care. It is financed primarily by payroll taxes paid by employers and employees and is highly sensitive to economic conditions that impact payroll taxes, such as the number of workers and average wages. While the government could increase payroll taxes to support the HI fund, it is estimated that the Medicare payroll tax would need to be increased by 21 percent to render the HI trust fund solvent. This makes it clear that boosting revenue alone will never solve the problem. 

The other Medicare trust fund is the Supplemental Medical Insurance (SMI) trust fund. It covers Part B and some of Part D and is financed through a combination of premiums and general revenue amounts that change each year to account for projected spending. As a result, the SMI trust fund does not have the same funding pressure as the HI trust fund despite representing more of Medicare’s spending. Spending funded by both trust funds were up in 2022 compared to the prior two years.

The Committee for a Responsible Federal Budget (CFRB) identifies additional factors that contributed to Medicare’s improved solvency projections. The expected sharp uptick in services driven by pent-up demand during the pandemic did not occur. Also, the passage of the Inflation Reduction Act brought new prescription drug savings to future spending projections. As a leader in reforming the health care payment system to improve efficiency, Medicare has outperformed private health insurance in holding down the growth of health costs. Knowing that any policy fix takes years to implement and refine, CMS is expected to continue to focus attention on solutions that will slow the progression of chronic disease and make Medicare spending more efficient.  

CFRB’s Health Saver’s Initiative offers a series of proposals for cutting Medicare costs including:

• §negotiating lower payments for drugs and medical services
• reducing Medicare Advantage overpayments so as not to stifle these federally funded private health plans’ incentives for improving care quality and efficiency
• engaging primary care first to reduce overuse
• equalizing payments regardless of the site of service – also known as “site neutral payments”

Understanding their parallel role in driving higher value healthcare and reducing more expensive hospital care, private sector purchasers employ strategies to encourage preventive care and effective primary care relationships for employees. Health savings accounts or other forms of consumer-driven healthcare encourage employees to take a more active role in managing their healthcare costs. With comparative information on cost and quality differences in health care more readily available than ever, employers can support enrollees in understanding how to access useful and trusted information when it is needed for themselves and their loved ones. Employers can also encourage their health plan partner to track CMS’ successful initiatives and adopt them in their commercial contracting strategies, such as site neutral payments for services or limits on specialty drug reimbursement. Healthcare costs already significantly burden employers and workers, we all need to stay focused on realizing lower cost and higher value care. 

Warm regards,

Louise Y. Probst,
BHC Executive Director