Official Washington, D.C., just got another early warning. The Congressional Budget Office recently confirmed the Medicare trustees’ 2020 report that the Medicare trust fund — the Part A account that funds the hospitalization and related services — faces insolvency in 2026.
Insolvency means that Medicare wouldn’t be able to fully reimburse hospitals, nursing homes and home health agencies for promised benefits. In 2026, Medicare payments would be immediately cut by 10 percent, and the payment cuts would continue each year thereafter.
Medicare patients would be hit hard. You cannot cut provider payments for medical services without impacting the beneficiaries of those services.
The COVID-19 pandemic briefly highlighted Medicare’s vulnerability to economic setbacks when CBO last September projected trust fund insolvency even earlier: 2024. Statewide lockdowns shocked the economy, spiking widespread business closures and driving high unemployment. These disruptions reduced Medicare’s job-based federal payroll taxes, threatening insolvency earlier than anticipated.
Insolvency two years earlier or later makes little difference. Washington policymakers must soon make some big decisions and cannot escape responsibility for what will happen to the program, its beneficiaries or the taxpayers.
What to do? If Congress and the White House really wanted to eliminate Medicare trust fund deficits altogether — a big if — the trustees say that Washington could either raise the standard payroll tax from 2.9 percent to 3.66 percent, immediately, or reduce Medicare trust fund expenditures by 16 percent. That is unlikely.
Painless solutions are nonexistent. But targeted solutions are available. Congress could enact a temporary Part A premium — the equivalent of a surcharge — to cover the Medicare trust fund’s projected deficit, and eliminate it when the fund is rebalanced.
The big change would be to build on the successes of Medicare Advantage, Medicare’s system of competing private health plans, and enact a comprehensive defined-contribution program and harness the powerful forces of consumer choice and market competition. That would not only improve the quality of care, but also control costs for beneficiaries and taxpayers alike.
That is a big job, and it must start sooner rather than later. It will take a combination of brains, guts and bipartisan cooperation. It’s called statesmanship.
Robert E. Moffit, Ph.D, is a senior fellow in domestic policy studies at The Heritage Foundation.
