Statement for the Record from the Center for Medicare Advocacy
“The Hospital Insurance Trust Fund and the Future of Medicare Financing”
Senate Finance Committee
Subcommittee on Fiscal Responsibility and Economic Growth
Hearing Date: February 2, 2022
The Center for Medicare Advocacy (Center) is pleased to provide a statement for the record for the above-referenced hearing. The Center, founded in 1986, is a national, non-partisan education and advocacy organization that works to ensure fair access to Medicare and to quality health care. At the Center, we educate older people and people with disabilities to help secure fair access to necessary health care services. We draw upon our direct experience with thousands of individuals to educate policy makers about how their decisions affect the lives of real people. Additionally, we provide legal representation to ensure that people receive the health care benefits to which they are legally entitled, and to the quality health care they need.
The annual release of the Medicare Trustees report, which projects the fiscal health of the Medicare program, focusing on the Part A Trust Fund, often serves as an impetus for calling for Medicare changes and cuts. The latest report, released in August 2021, projects that the Part A Trust Fund will be depleted by 2026 – unchanged from the previous projection, despite the impact of the COVID-19 pandemic.
The Trust Fund largely reflects the health of the economy. At various times since 1970, the trustees have projected Trust Fund insolvency in as few as four years or as many as 28 years. While the Part A Trust Fund is mostly funded by payroll taxes, Medicare Part B, which would cover these expanded benefits, is funded by a certain percent of general revenues and premiums, and therefore cannot “go broke.”
Recent discussions in Congress surrounding the Build Back Better Act have created a rare opportunity to make meaningful improvements to Medicare and other critical programs. Yet the associated costs and concerns about the Medicare Trust Fund are often raised as barriers to doing so. Despite many misconceptions, the proposed dental, hearing, and vision benefits would have been covered under Medicare Part B, not through Part A and the Trust Fund. Further, as the Center and others have asserted, it is highly likely that spending to expand Medicare coverage to include dental, hearing and vision coverage would actually yield savings to the Medicare program in other areas.
Medicare’s fiscal solvency can be strengthened through various means. Below, we provide an excerpt from a May 2021 issue brief written by Center for Medicare Advocacy Visiting Scholar Marilyn Moon which outlines potential Medicare funding solutions. We also focus, below, on one option for reducing programmatic spending – addressing ongoing Medicare Advantage over-payments.
Center for Medicare Advocacy Report: “Ensuring Medicare’s Financial Health”
In a May 2021, the Center released an issue brief titled “Medicare and Revenue – Looking Back, Looking Forward” by Center Visiting Scholar Marilyn Moon. In this report, we examined how Medicare has operated over time, how well it is doing at present, and what changes have been used in the past to keep the program financially strong. Below is an excerpt of this report focus-ing on both short-term and longer-term solutions to Medicare funding (omitting citations):
Short term solutions. In the near term, funding decisions need to recognize the short-term economic problems from the pandemic and not expect to bolster the Part A trust fund through the usual approaches. General tax increases do not make sense as the economy is recovering. But there could be proposals to help pay for some of these pandemic costs (for people of all ages) through new and temporary revenue sources. Looking for ways to level the unequal burdens that this health and financial crisis has imposed may include special surcharges on incomes —especially seeking to tax those who have profited during this period. This might not only mean taxes on higher income people in general, but also a temporary surtax on “excess” profits made by those who were fortunate enough to work in areas that thrived during this period. While many businesses and workers experienced difficulties in functioning while health concerns required stringent limitations on activities, others were in a position to benefit. Such an excess profits surcharge might compare incomes before and during the pandemic to determine whether there are feasible ways to reduce some of the inequality attributable to the enormous disruptions this disease imposed on the way that the economy functions. These revenues could help bolster Medicare’s higher costs.
Some other more minor changes in tax laws could also be considered. Key among these would be to dedicate at least a portion of the existing Net Investment Income Tax which was passed as part of the Affordable Care Act to the Part A Trust Fund. Although it was justified in the legislation as a way to help finance Medicare, none of that revenue was dedicated to the Part A Trust Fund. This tax on those with higher incomes is expected to bring in approximately $350 billion to the U.S. Treasury over the next 10 years and at least some of it could be earmarked for Part A. (Closing other tax loopholes might also be an option and are discussed below.)
Solutions over the longer term. To ensure stable financing for Medicare over time, it is important to look at the two largest sources of revenues that support the federal government: payroll taxes and personal income taxes. As noted above, both are important current sources of financing for Medicare and over time, general revenues have grown and will continue to grow as a share of the total even if no policy changes are made. Each has advantages and disadvantages.
Payroll taxes have always been popular among the general public, likely because they are simple, administered by employers with no filing requirements by most workers, and because they are dedicated to Social Security and Medicare which remain popular programs. Taxpayers see a direct link between their taxes and these key sources of retirement and disability protections. Traditionally, the payroll tax has been criticized by economists, largely because of its lack of progressivity. Assessed only against wages—and for a long time with an upper limit on the wages subject to tax—the burdens of the tax fall more heavily on persons with lower incomes. On the one hand, progressivity for the Medicare portion of the payroll tax improved when the taxable wage cap was eliminated and when additional requirements for higher income taxpayers and beneficiaries to pay more were added to the program. But, wages have also declined as a share of incomes for Americans over the years, with income from interest and dividends rising particularly for those with higher incomes. This worsens the progressivity of the tax to some degree.
Nonetheless, a modest increase in the payroll tax could raise substantial new revenues to Medicare’s Part A Trust Fund, extending its life substantially and keeping the dedicated nature of the tax that funds most of Part A. For example, a Congressional Budget Office estimate in 2020 indicated that a one percentage point increase (0.5 percent each on employers and employees) would raise nearly $900 billion between 2021 and 2030. Introducing such a change through a more gradual increase in that rate over time as the economy recovered would bring in less, but still provide substantial support for the Part A Trust Fund. And since general revenues by law will naturally increase over time to fund Parts B and D, this approach would mean that both types of taxes will expand to fund Medicare over time.
An alternative would be to add personal income taxes to the funding for Part A (presumably as a dedicated amount to retain the Trust Fund nature of this part of the program). Income taxes are applied to all types of income, including wages, capital gains, and interest and dividends. This would mean that there would be no extra burden on individuals whose incomes come mainly from wages, but that the burden would be more evenly spread across all income sources. This breaks the historical link between wages and retirement benefits, but that has changed to a considerable degree over time anyway.
Another variation of this approach would be to specifically target certain types of income to be devoted to the Part A Trust Fund. Closing various tax loopholes (for both personal and corporate income taxes) and increasing IRS enforcement capabilities are often popular proposals and have been advocated for a variety of purposes. The Congressional Budget Office has offered a number of options for increasing revenue in this way, often with a particular focus on capital gains treatment in the personal income tax. For example, a tax on capital gains could be used to explicitly supplement the existing payroll tax and hence implicitly enhance the progressivity of taxation. This would avoid raising taxes further on wages and instead tax income from capital—often associated with those with higher incomes. But it would also fall disproportionately on older taxpayers who are more likely to own stocks and bonds than younger persons with similar incomes. That could be viewed as a positive by those who would like to see seniors pay a greater share of the costs of Medicare, but it would further add to the shifting of the burden of costs onto this group as was noted above. Another loophole closer might be to eliminate existing exclusions from tax offered to various business structures. For example, including income from S Corporations and limited partnerships in various tax bases such as the Net Investment Income Tax has been proposed. Although it would affect only a very small number of people, such a change could raise over $200 billion over a ten year period.
Medicare Savings Could be Achieved by Correcting the Imbalance in Medicare Advantage Payment
Overpayments to Medicare Advantage (MA) plans continue to negatively impact Medicare’s finances. The Medicare Payment Advisory Commission (MedPAC) noted in their March 2021 report to Congress that Medicare payments to MA plans average 104% of spending in traditional Medicare. MedPAC stated in a press release announcing the report that Medicare paid MA plans an estimated $317 billion in 2020 (not including payments to cover Part D expenses):
This level of payment reflects Medicare payments that were higher for MA enrollees than the program would have spent for similar beneficiaries in traditional FFS Medicare, continuing a long-standing trend. Using plan bid data for 2021, we estimate that MA payments will be 101 percent of FFS spending. However, for several years, the Commission has expressed concern that enrollees in MA plans have higher risk scores than similar beneficiaries in FFS because of plans’ more intensive coding practices that result in excess payments to plans. Accounting for coding intensity, in 2021, we estimate that Medicare payments to MA plans actually average 104 percent of FFS spending (quality bonuses in MA account for an estimated 2 to 3 percentage points of MA payments in 2021). Medicare payments to MA plans continue to exceed FFS spending levels, despite the fact that plan bids in 2021 decreased to 87 percent of FFS, in aggregate—a record low.
In prior work, we identified some MA policies that need immediate improvement. The Commission previously recommended in 2017 that CMS reduce excess payments stemming from plans’ coding practices, which would improve equity across plans and produce savings for Medicare. In 2020, the Commission also recommended replacing the MA quality bonus program with a value incentive program that would more accurately characterize the quality of care in MA. Currently, the Commission is assessing an alternative MA benchmark policy that would improve equity and efficiency in the MA program. [emphasis added]
Echoing MedPAC’s findings, in August 2021 the Kaiser Family Foundation (KFF) released a report outlining how Medicare spending is higher and growing faster per person for beneficiaries in MA than in traditional Medicare. Despite most plans submitting bids below the local benchmarks, KFF notes that the MA program “has never generated savings relative to traditional Medicare” and while higher payments have led to coverage of some limited extra benefits for plan enrollees, “the higher payments have also led to higher Medicare spending than would have occurred under traditional Medicare and higher Medicare Part B premiums paid by all beneficiaries, including those in traditional Medicare.”
The KKF report concludes, in part:
As more Medicare beneficiaries enroll in private plans, differences in Medicare payments across Medicare Advantage and traditional Medicare will lead to even higher Medicare spending, and more generous benefits for beneficiaries in Medicare Advantage than traditional Medicare. That higher spending increases Part B premiums paid by all Medicare beneficiaries, including those who are not in a Medicare Advantage plan, and contribute to the financing challenges facing the Medicare [Part A] Trust Fund. Further, these projections raise questions of equity between Medicare Advantage and traditional Medicare because the faster growth in spending per Medicare Advantage enrollee, compared to traditional Medicare beneficiaries, is in part due to rising rebates to private plans, which cover the cost of benefits not available to traditional Medicare beneficiaries. Although taking steps to address the fiscal challenges facing Medicare are not front and center in current Medicare policy discussions, policymakers may soon be on the lookout for options to achieve Medicare savings to fund other spending priorities or extend the solvency of the Medicare [Part A] Trust Fund. This analysis suggests that reducing the difference in payments between Medicare Advantage and traditional Medicare would generate savings, with the potential for reductions in extra benefits for Medicare Advantage enrollees.
In other words, all Medicare beneficiaries are subsidizing the limited dental, hearing, vision and other benefits only available through MA plans, to the minority of beneficiaries who choose MA, or for whom MA plans are the sole retiree option. The Center asserts that it is time we spread this funding around in a more equitable way, to benefit all Medicare beneficiaries – both those in private plans and those in traditional Medicare. To continue with the status quo would be “unnecessary and unfair” to the Medicare program as a whole.
It is clear that policymakers must confront long-term fiscal challenges facing the Medicare program. While various health policy experts have raised MA overpayments as a potential source of addressing the program’s fiscal solvency, wasteful spending on private MA plans is often overlooked by policymakers – particularly those issuing the loudest warnings of the program’s impending fiscal doom.
We appreciate the opportunity to submit this statement for the record. For additional information, please contact David Lipschutz, Senior Policy Attorney, DLipschutz@MedicareAdvocacy.org at 202-293-5760.
 See, e.g., CMA Alert, “Medicare is at a Crossroads – Time to Dispel Myths Hindering an Historic Expansion of Benefits” (September 2, 2021), available at: https://medicareadvocacy.org/stop-the-myths-about-expanding-medicare-benefits/.
 Center for Medicare Advocacy, “Medicare and Revenue – Looking Back, Looking Forward” by Center Visiting Scholar Marilyn Moon (May 2021), available at: https://medicareadvocacy.org/medicare-and-revenue-looking-back-looking-forward/. Also see, e.g., CMA Alert, “Commonwealth Fund Issues Series of Articles Addressing Medicare’s Fiscal Solvency – Introductory Statement by Marilyn Moon (February 11, 2021), available at: https://medicareadvocacy.org/m-moon-medicare-solvency/.
 MedPAC, March 2021 “Report to the Congress: Medicare Payment Policy”, available at: https://www.medpac.gov/document/march-2021-report-to-the-congress-medicare-payment-policy/.
 Kaiser Family Foundation, “Higher and Faster Growing Spending Per Medicare Advantage Enrollee Adds to Medicare’s Solvency and Affordability Challenges” (August 2021), available at: https://www.kff.org/medicare/issue-brief/higher-and-faster-growing-spending-per-medicare-advantage-enrollee-adds-to-medicares-solvency-and-affordability-challenges/.
 See, e.g., CMA Alert, “Policy-Makers Should Review Overpayments to Medicare Advantage when Considering Medicare Fiscal Solvency” (March 18, 2021), available at: https://medicareadvocacy.org/policy-makers-should-review-overpayments-to-medicare-advantage-when-considering-medicare-fiscal-solvency/.