By Trudy Lieberman, Rural Health News Service

Changes in tax law aren’t helping Medicare

Is Medicare going broke?  That scary thought raced through the media a few weeks ago when the program’s trustees issued their annual report to Congress.

The media reported the “news” in its predictable fashion; painting a bleak picture of the program some 59 million older and disabled Americans depend on for their health care. Every year the media fail to give the full or nuanced picture of what’s happening, instead opting for dramatic headlines announcing the program is broke. This year is no different.

“Medicare is not going broke,” says Tricia Neuman, senior vice president at the Kaiser Family Foundation. “ It does face a financing challenge.” By 2026 the program will be able to pay only 91 percent of covered benefits for hospital services. “But it’s not true to say the program is going broke.”

First, it’s important to understand that policymakers are talking only about shortfalls in the Part A trust fund, which pays for inpatient hospital care. That care is financed by payroll taxes paid by employers and their employees. Part B, which pays for outpatient care, lab tests and physician services, is financed by beneficiary premiums and general tax revenues, and those sources can be adjusted as needed.

Why this year’s gloomy predictions?

A lot of those financial challenges identified this year by the program’s trustees have been caused by recent changes in the law, Neuman told me. Some changes reduce the revenue that supports Medicare, and others increase the costs of preserving health care for all Americans.

Changes in the tax law passed late last year result in lower than expected revenues.  Trustees noted that lower payroll tax revenue, which results from lower wages and lower economic growth projections for the future, also played a role in their assessment.  

The new tax law also repeals the individual mandate that called for almost all Americans to have health insurance or pay a financial penalty. The mandate was never popular with the public, but eliminating it has consequences for Medicare. Neuman said the repeal of the mandate is expected to lead to higher spending out of the Part A trust fund to cover uninsured Americans when they need hospital treatment. Medicare helps cover those costs.

Higher than expected payments to Medicare Advantage plans also figure into the trust fund shortfall. This is due to the relatively aggressive way in which those plans document or “code” the health conditions of members of their plans. This results in higher payments from Medicare.

The Bipartisan Budget Act of 2018 also adversely affected the Medicare trust fund by repealing the Independent Payment Advisory Board (IPAB) designed to lower program spending. The board had been expected to make recommendations about spending that could trigger automatic spending cuts.  Because of opposition from the health care community, the IPAB never got off the ground. Last summer a group of sellers, including drug and device companies, hospitals, and insurers, waged a campaign to convince Congress to wipe the IPAB off the books. Lawmakers did that in February, eliminating a potential path for Medicare to control its costs.

Neuman says it’s important to remember that Congress “has faced even worse shortfalls and in the past has taken action to strengthen the trust fund. That used to be standard to keep the program stronger.”

So to sum up, Congress itself has worsened the state of the Medicare trust fund and made the program less stable, a point rarely discussed in the gloom and doom news accounts about the trust fund going broke. That’s not to say that the Part A trust fund can’t use an infusion of money as more Americans turn 65 while the cost of medical services continues to rise without serious cost control.

Marilyn Moon, a former Medicare trustee, told me it wouldn’t take much to put the program on a sound financial footing.  But it would require an increase in the payroll tax, which is never discussed as a solution. Instead, the answer seems to be to encourage more Americans to join Medicare Advantage plans, a private market alternative to Medicare that requires beneficiaries to shoulder more of their medical costs.

But as someone who just went through a serious illness, spent four months in the hospital, and racked up bills totaling more than more than $4 million, I can attest to the value of traditional Medicare.

It’s worth recalling what President Lyndon Johnson said when he signed Medicare into law in 1965. “No longer will illness crush and destroy the savings that they (Americans) have so carefully put away over a lifetime.” Nor would young families see their own incomes and hopes eaten away as they carry out moral obligations to their parents.  

That’s reason enough to make sure the Part A trust fund is well funded.