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Medicare Trust Fund outlook worsened by COVID

As our country continues to deal with the consequences of the COVID-19 pandemic, some of the resulting impacts are starting to come into focus. The Medicare Part A Trust fund is another entity that is impacted by the changes in everyday life arising from life during the coronavirus.

A recently published article in Health Affairs describes some of the impacts on the already troubled hospital insurance trust fund. The authors write,

In the midst of the COVID-19 pandemic, it is worth paying attention to the Medicare Part A Trust Fund. In the most recent Actuaries’ report issued in April 2020, the Trust Fund was projected to be depleted in 2026. COVID-19 is causing the Medicare Part A program and the Hospital Insurance (HI) Trust Fund to contend with large reductions in revenues due to increased unemployment, reductions in salaries, shifts to part-time employment from full time, and a reduction in labor force participation. In addition to revenue declines, there was a 20 percent increase in payments to hospitals for COVID-related care and elimination of cost sharing associated with treatment of COVID. Furthermore, a part of the hospital relief effort, the Advance Payment Program, is adding to claims made against the Part A program. All this is happening as 10,000 new people enter the Medicare program every day.

It is clear that the HI Trust Fund will come under additional stress. While no formal projections have been made, the Actuaries’ worst-case scenario in this year’s report called for an expected exhaustion date closer to 2024. These pressures on the Trust Fund could be aggravated if the Medicare Advanced Payment program is extended and allowed to apply to Part A as it did in its original formulation.

As is the case in other areas of social policy, COVID-19 is revealing areas of weakness and inattention in the Medicare Trust Fund. We learned some lessons about how major economic disruption affects the HI Trust Fund from the Great Recession. There, HI Trust Fund revenues fell from $199 billion in 2008 to $182 billion in 2010 and then went back to $205 billion by 2012. That occurred in the context of a peak unemployment rate of 10 percent in October 2009. Since we are at 14.7percent unemployment today, we should expect a larger impact on HI revenues.

If we assume that the increase in unemployment translates into maybe an 8 percent reduction in taxable income then, using the Congressional Budget Office (CBO) elasticity of 1, payroll taxes might decline by 8 percent, or roughly $23 billion (annualized). This represents a conservative lower bound estimate on the payroll tax impact. This is because the April jobs report also had a reduction in labor force participation and a rough doubling of the number of people that were “involuntarily” working part time. The CBO Monthly Budget Review reports a decline of 15 percent in worker withholding for April relative to April 2019, or a potential $43 billion (annualized) impact on Trust Fund revenues. These numbers have the potential to increase in the coming months, with the magnitude depending on the length of the economic slowdown.

I wrote about the troubling outlook of the Medicare Trust Fund on the blog in the past. Increased COVID-19 hospital reimbursements and corresponding drops in employment have accelerated the exhaustion of the Medicare Trust Fund.

The Health Affairs article continues by offering a range of policy solutions to try and sure up the trust fund. I encourage readers to check those out.

However, none of those recommendations will matter unless Congress actually sounds the alarm on this ticking time bomb. Despite the projections which show that in just a few short years the Medicare Trust Fund may be depleted, no member of Congress seems to show any interest in solving this issue. Whether lawmakers want to deal with this issue, time is running out to come up with solutions to make sure this massive program can continue to pay for the promises it made to seniors.

Jordan Roberts / Health Policy Analyst

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing governm...

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