Stronger-than-expected economic recovery from the COVID-19 pandemic pushed back the date when Medicare is expected to become insolvent, though budget hawks are warning the outlook could rely on outdated and optimistic assumptions.
In the Medicare Board of Trustees’ annual report to Congress released Thursday, trustees moved back the projected depletion date of Medicare's trust fund that covers inpatient hospital care by two years, from last year's forecast of 2026 to the new estimate of 2028.
The coronavirus pandemic isn't expected to have a net effect on long-range projections moving forward, the report stated.
The additional breathing room for funds that backstop Medicare and Social Security are due to a stronger and faster recovery in employment, pay and economic growth than trustees projected in last year's report, although trustees now expect that those funds will be unable to pay out full benefits starting in 2025.
However, the trustees, including HHS Secretary Xavier Becerra, noted that economic assumptions in the report were made in February. That's before COVID-19 cases began climbing again and inflation increased.
As a result, Medicare's outlook could be slightly worse, according to the Committee for a Responsible Federal Budget, a fiscal policy nonprofit.
"Importantly, the Trustees' economic assumptions appear somewhat outdated and thus likely understate inflation and overstate real economic growth," CRFB said in an analysis of the report.
The economic recovery factored into the report improved the projected actuarial status of the trust funds, as Medicare's hospital insurance fund — which is paid for mostly by payroll taxes — benefited from an increase in worker and higher average wages.
The Hospital Insurance Trust Fund, which pays hospitals and providers of post-acute services, and also covers some of the cost of private Medicare Advantage plans, is also funded by income from premiums, along with taxes on Social Security benefits.
The HI fund is separate from another trust fund that covers benefits for Medicare Parts B and D, including outpatient services and physician-administered drugs. That Supplemental Medical Insurance trust fund is largely funded by premiums and general revenue that reset each year and doesn't face the same looming solvency concerns as the hospital fund.
Following the go-broke date for the hospital fund, now estimated in six years, Medicare will pay out 90% of scheduled benefits by relying solely on income, impacting the care of about 64 million seniors and disabled Americans.
The program's burdens are slated to grow absent legislative action, primarily due to the aging U.S. population and projected increases in volume and intensity of services provided.
The report projects the HI fund will run deficits of $530 billion over the next decade. Over 75 years — the length of the projection period — trustees project a shortfall of 0.7% of payroll, or 0.3% of the gross domestic product.
That means it would take a roughly 24% increase in the payroll tax rate, or a 15% spending cut, to ensure solvency, the CRFB said.
Gross Medicare spending will grow from 3.9% of GDP this year to 6% by 2040, slightly lower than last year's projection, before leveling off around 6.5% annually from 2070 onward. The 6.5% figure is in line with last year's estimate.
To date, lawmakers have not allowed the Medicare trust fund to become depleted. But amid increasingly dire warnings from trustees and watchdogs urging the need to align spending with revenue, Congress has largely kicked the can on taking action to improve Medicare's finances, following bipartisan efforts to lower spending in the early 2010s.
The fund hasn’t met the trustees’ test for short-range financial adequacy since 2003, and has triggered funding warnings since 2018.
Under current law and actuaries' projections, funding warnings will recur every year through the next 75-year projection period if nothing is done, according to the CRFB.
"Policymakers need to get their heads out of the sand and stop pretending these vital programs’ funding issues will fix themselves," Maya MacGuineas, CRFB president, said in a statement on the report.
Sen. Rick Scott, R-Fla., has proposed an 11-point plan that would sunset Social Security and Medicare unless Congress continually re-enacts the programs. Biden decried the plan in a statement, noting it would "put these programs on the chopping block every five years. That's not the way to strengthen these programs."
