Beyond Solvency: Expanding Dialogue on Health Insurance Sustainability

Across the Medicare policy environment, systemic lows, inconsistent incentives and growing complexity raise costs while making it harder for beneficiaries to make informed choices. A new three-part series on Medicare sustainability introduced by the Medicare Center on Medicare’s sustainability describes how Medicare’s long-term financial health is challenged by misunderstood financing structures, payment differences in rewarding more expensive care environments, and the rapid growth of Medicare Advantage Advantage programs that often overwhelm consumers while increasing the cost of the program.

Part 1: Medicare Financing

The first part of the Medicare Financing series sets the stage for discussion of sustainability, outlining the history of the program through various reforms starting in 1965, which have made Medicare make today’s history a reality. By explaining the current Medicare funding structure and showing how forecasts and spending fluctuate over the program’s history, this section aims to extend policy dialogue beyond solvency that is merely overall sustainability.

Structure and history of Medicare funds

The three parts of original health insurance have different funding mechanisms. Only the portion of the Hospital Insurance (HI) Trust is funded primarily through payroll taxes, which makes it highly sensitive to economic volatility. Part B and Part D jointly consider most Medicare expenditures and are funded through general income and beneficiary premiums from the Supplementary Health Insurance (SMI) Trust Fund. This makes Part B and D more stable during the economic downturn.

Since the creation of Medicare in 1965, the HI financing structure has undergone several revisions and recalibrations. This was done primarily by increasing the taxable income cap (and its ultimately cancelled in 1993), which made all incomes pay high taxes) and payroll tax rates. These policy changes are triggered by huge fluctuations in the HI Trust Depletion forecast, which is common but may attract public attention. Historically, every sharp decline in the HI forecast takes corresponding Congressional action, causing it to rise again.

However, since 2016, Part B spending has exceeded Part A’s spending, and the status of the HI Trust is increasingly telling the full story of Medicare’s financial position. As experts predict this trend continues, policy dialogue must address the entire Medicare financing structure in pursuit of cost-saving reforms.

Further reform is needed

The history of Medicare legislation shows that the funding structure of the program evolved through a series of policy options that respond to changes in general economic conditions and specific needs of Medicare. Currently, with the proportion of SMI expenditure in Medicare, policy reforms must be centered on Part B and D. 2022 of the Inflation Reduction Act (IRA) is an important step in the right direction, with inflation and Part D lowering drug costs over the next decade through price negotiations.

There is more work to be done to save the cost of the SMI Trust. Eliminating Medicare Advantage overpayment, establishing providers’ on-site neutrality and further reducing the cost of prescription drugs are policy priorities for developing a more sustainable Medicare program.

During a time when Medicaid and Medicare are under threat, the policy series aims to promote discussion about the sustainable future of these programs, rather than speech on the health coverage that millions of Americans rely on. Improvement of Medicare must focus on beneficiaries’ needs and preferences to ensure sustainability, affordability and solvency for each part of Medicare at present and future generations.

For more information on this topic, explore Medicare Financing Part 1 of the Medicare Sustainability Strategy Series, now available at www.medicarerights.org/policy-series/medicare-sustainability.

Explore the infographic

Medicare – Sustainability Integration Chart