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Economics

Medicare's Fiscal Ruin

Are Medicare's fiscal problems even worse than the headline numbers suggest?

Peter Suderman | From the January 2022 issue

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topicseconomics | Illustration: Joanna Andreasson Source image: cnythzl/iStock
(Illustration: Joanna Andreasson Source image: cnythzl/iStock)

The most recent annual report on the fiscal health of Medicare from the program's trustees wasn't much of a surprise. But it was yet another warning of the program's looming fiscal ruin.

Like the 2020 edition, the 2021 Medicare Trustees Report estimated that Medicare's hospital insurance trust fund will be insolvent in 2026. At that point, the fund will have to rely on incoming revenues, essentially operating on a cash-flow basis—and there won't be enough cash.

In 2026, the hospital insurance fund will be able to cover only about 91 percent of its bills. In the years that follow, that gap will grow only larger. Without changes to the program's financing, doctors, hospitals, and other medical providers will face rapidly reduced payments from the program. This will have ripple effects on the provision and availability of health care and on the wider American economy, roughly a sixth of which revolves around health care services.

The report also provided reason to suspect that Medicare's fiscal problems may be even worse than the headline numbers suggest: The fiscal forecast assumes that an array of cost-reduction measures, including a series of caps on Medicare physician payments and bonuses, will persist. But the trustees noted that Medicare's "long-range costs could be substantially higher than shown throughout much of the report if the cost-reduction measures prove problematic and new legislation scales them back."

The report seemed to generate little concern on Capitol Hill. It was released at the end of August, as Democrats in Congress were pursuing two massive, interlocked spending packages: a -bipartisan $1.2 trillion infrastructure bill (about $550 billion of which constituted "new" spending) and a partisan spending bill focused on climate and welfare programs that was initially priced around $3.5 trillion.

That second bill has faced downward pressure from moderate Democrats in the Senate. But one provision supported by both President Joe Biden and progressives in Congress is the expansion of Medicare benefits, adding dental, hearing, and vision coverage to the program. In 2019, the Congressional Budget Office put the price of a similar proposal at $358 billion over a decade. (A later version of the package priced at $1.85 trillion proposed hearing coverage only.)

Progressive Democrats, of course, have long looked for ways to expand Medicare, from broadening eligibility to pushing for Medicare for All. The party's control of the White House and both chambers of Congress provides a potential opportunity.

In some ways, the stage for Medicare expansion was set by Republicans. In the late 2000s and early 2010s, then–House Speaker Paul Ryan (R–Wis.) backed Medicare reforms that would have set the program on a more sustainable fiscal path, but those proposals went nowhere. By 2012, the GOP's presidential nominee, former Massachusetts governor and current Utah Sen. Mitt Romney, was criticizing Obamacare for cutting Medicare. On the campaign trail, Romney repeatedly promised he would never cut Medicare to pay for another program.

Under President Donald Trump, the GOP abandoned even the pretense of supporting meaningful old-age entitlement reform. Trump rejected out of hand any spending reductions to such programs. According to the trustees' estimates at the time, the next president would face a shortfall. Yet both parties were now committed to ignoring Medicare's daunting fiscal problems.

By the time Biden became president, it was left to a handful of self-styled moderates—in particular, Sen. Joe Manchin (D–W.Va.), perhaps the most powerful vote in the Senate—to point out the obvious. "Spending trillions more on new and expanded government programs, when we can't even pay for the essential social programs, like Social Security and Medicare, is the definition of fiscal insanity," he said in September, calling for Medicare funding to be "stabilized" before any expansion was pursued.

Manchin is no one's idea of a limited-government conservative or a die-hard fiscal hawk. But he was saying what few others in Congress would: Medicare isn't sustainable in its current form, and it hasn't been for a long time. Both parties might oppose cuts to the program. But the trustees' report makes clear, yet again, that without serious reforms, the program is going to end up cutting itself.

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NEXT: Crisis at Rikers Island

Peter Suderman is features editor at Reason.

EconomicsMedicareHealth CareGovernment Spending
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