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The U.S. government created two programs to care for Americans as they get older. In 1935, FDR created the Social Security system, which was intended to be a source of income for people once they retired. In 1966, the Johnson administration created Medicare. Prior to that, most Americans did not have health care plans, especially once they left work and retired.

Both programs had a similar design, namely that workers would fund their accounts through payroll taxes while they were working and draw on the accumulated savings once they retired, much like a deferred compensation savings plan. Predictably, politicians couldn’t help but act like politicians. They decided to tax Social Security payments as income (originally the benefits were not taxable) and use the accumulated funds in these programs for purposes other than those they were originally designed for. This is one of the main reasons why both programs are facing insolvency in the near future. Also, as the country ages, the number of those still working vs. those who are retired is changing. For example, Social Security originally had 16 persons working for every one that was retired. By 2024, that ratio will be 2:1.

Medicare solvency is one of the most challenging health care issues facing the Biden administration. Last November, the Congressional Budget Office (CBO) projected that the Medicare Hospital Insurance (HI) Trust Fund, which pays for hospital, nursing home, home health, and hospice services provided under traditional Medicare Part A and Medicare Advantage plans, will become insolvent in 2024. The insolvency date is two years earlier than anticipated in 2016 because the COVID-19 pandemic caused widespread unemployment and financial losses. The Medicare HI Trust Fund is funded mainly by payroll taxes and the taxation of Social Security benefits (Part B is funded by payments made by recipients). The CBO projects that the trust fund’s obligations will outpace revenues by 1% per year over the next decade, resulting in a deficit of $758 billion. Without an infusion of funds, by 2024 Medicare will be unable to fulfill its obligations to more than 68 million individuals and will only be able to pay 83% of its bills for hospital, nursing home, and home health services under Part A.

Given the magnitude of the Medicare HI Trust Fund shortfall, a combination of revenue increases and spending cuts may be necessary to avoid increasing the financial burden on beneficiaries or negatively impacting financially fragile institutions like rural hospitals. But it is all but certain that hospital systems will be impacted, as will post-graduate medical training programs. Most people are not aware that Medicare pays almost 100% of the costs associated with medical intern, residency, and fellowship programs, making these programs revenue streams for hospital systems. These programs will likely see financial cuts at a time when they are needed most – there is a nationwide shortage of physicians. Medicare payroll taxes will likely be increased, especially for high income earners. Proposals for reducing Medicare outlays by reducing benefits are often raised, however given that Congress and the White House are now controlled by Democrats, benefit reductions are unlikely. What is likely given our current political realities are tax increases. Either way, action must be taken by our elected representatives as insolvency is something that cannot be allowed to happen.

For more information go to: https://tinyurl.com/4am7mrfp 

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By Peter Galvin, MD

 

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