When Will Medicaid Run Out Of Money

Medicare was established through legislation in 1965 to ensure that senior citizens would have access to health care in the later years of their lives. Shortly after the creation of Medicare, the Centers for Medicare and Medicaid Services (CMS) began to project the number of years until Medicare's Hospital Insurance Trust Fund would be exhausted. That projection has changed over time as budget shortfalls, economic recession, and major health care legislation have impacted the outlook for Medicare's viability into the future.

The United States is running out of time to save the Medicare trust fund as the time frame to exhaustion has become compressed. The Congressional Budget Office (CBO) now projects that the trust fund will be exhausted in 2024, a little more than three years from now, which is the nearest the fund has come to exhaustion in the 55 years of its existence.

As a result, 2021 will be a crucial year for the future of Medicare. The combination of the urgent need to address the trust fund's solvency and the first year of a presidential administration will create a political opportunity to address health care at the national level.

History

In 1975, when the Department of Health and Human Services (HHS) released its assessment of the trust fund, the CMS Office of the Actuary predicted the fund would run out within 24 years, in 1999. Over the years, Congress has taken action to restructure Medicare and buy more time for the trust fund. The projection is revised each year, based on this congressional action that further depletes or replenishes the trust fund. Over the past 45 years, each time the trust fund has neared exhaustion, major federal legislation has been passed to extend its solvency. This pattern suggests similar action will be needed in the near future. Exhibit 1 provides an overview of the trust fund's projected insolvency over time, with related legislation shown.

Exhibit 1: Medicare trust fund projected years to exhaustion, 1975–2020

Source: Author's analysis of Medicare trustees and Congressional Budget Office annual reports.

1980s

The expected life span of the trust fund declined rapidly in the late 1970s, and by 1982, the fund was only five years from exhaustion. The Tax Equity and Fiscal Responsibility Act of 1982 was signed on September 3, 1982, and required the development of prospective payments for Medicare. A plan to implement this prospective payment system (PPS) was presented in December 1982 and signed into law on April 20, 1983, as part of the Social Security Amendments of 1983 legislation, which went into effect for fiscal year 1984. The PPS required Medicare to pay for most inpatient care using diagnosis-related groups. This significantly reduced federal outlays, quickly leading to an increase in the life span of the trust fund, which remained relatively stable through the end of the 1980s.

1990s

In the early 1990s, the trust fund began to drop quickly, reaching its lowest level to date, with only four years to expected exhaustion. This led to major changes to Medicare in the Balanced Budget Act of 1997, including reductions in the growth of payments to providers, expansion of prospective payments to postacute care facilities, and increased cost sharing for beneficiaries. This law bought more time for Medicare, and by 2002, HHS projected that the trust fund would not be exhausted for 28 years.

2000s

The outlook for the trust fund changed significantly in the early 2000s when the Dot-com bubble popped and dragged the economy down. At that point, the growth in the cost of health care exceeded the growth in the cost of inflation, which triggered the Sustainable Growth Rate (SGR) provisions of the 1997 Balanced Budget Act, requiring a significant cut in Medicare payments. With extensive industry lobbying to avert these cuts, multiple short-term legislative "doc fixes" were introduced over the subsequent years, erasing the savings to the trust fund that the Balanced Budget Act promised and leaving the fund in a perilous position.

During the Great Recession, in 2009, the trust fund reached a projected life of just eight years. The Affordable Care Act (ACA), President Barack Obama's signature health care legislation, passed in early 2010 and increased the trust fund's life span through increased Medicare payroll taxes for high-wage earners, a Medicare net investment income tax, and more. When the Trustees' report was released later in 2010, the trust fund was now expected to avoid exhaustion for 19 years.

2010s

Despite the initial promise of the ACA's impact on the trust fund, the projected years until depletion decreased quickly when expected revenue generators such as the "Cadillac Tax," medical device tax, and other parts of the ACA did not end up becoming reality. A year after the ACA went into effect, a fiscal crisis led to the Budget Control Act of 2011, which cut Medicare payments by 2 percent. The Medicare Access and CHIP Reauthorization Act of 2015 permanently repealed the SGR and provided temporary increases in payments for a variety of providers, including ambulance services and home health services in rural areas. The effect has been a depletion of the trust fund at faster than expected rates. Over the past five years, the expected year of exhaustion shortened from 2030 to 2026.

2020s

The COVID-19 pandemic of 2020 has further altered the stability of the trust fund. As payroll taxes are the major contributor to the trust fund, the pandemic-inducted increase in unemployment has led to a significant decrease in payroll taxes. In September 2020, the CBO revised its estimates about the exhaustion of the trust fund from 2026 to 2024 (exhibit 1), primarily because of the reduction in payroll tax revenue.

What Happens If The Trust Fund Is Exhausted?

If the trust fund is exhausted, no law dictates what will happen, but the Social Security Act (which governs Medicare) does not authorize the government to use general revenues to fund the deficit, so Medicare will only be able to make payments based on money it collects in taxes. How Medicare would make payments for care rendered, then, is unknown, but two scenarios are possible. In the first scenario, CMS would pay claims as money comes into the account, but as tax revenues will come in slower than providers request payments, the time between billing and payment will constantly increase. The effect will be providers getting paid the full amount they are due but waiting significant periods for their payments. The second scenario is to pay a decreased rate for all care. The CBO projects that following 2024 exhaustion, Medicare will only have sufficient tax receipts to be able to pay 83 cents for each dollar billed. For example, if a physician were owed $100, Medicare would only pay $83, but the payments would be made in a timely manner. With either choice, legal challenges would ensue, and it is likely that some hospitals and physicians would stop serving Medicare patients, leading to a potential crisis in access to care.

Implications

Medicare is very popular for beneficiaries, which has led Congress to pass legislation to further its existence every 10 to 15 years. With the trust fund now expected to be depleted in 2024, these next years will be a crucial juncture for Medicare. Congress will either need to find ways to preserve the current program, reform it, or prepare for its replacement. Hopefully, this imperative to act will encourage a thoughtful discussion of Medicare, health care, and government programming and may offer an opportunity for the Biden administration and Congress to work to achieve shared goals.

For industry stakeholders, this will also be an opportunity to provide input into the direction of US health care for the coming decades. While Congress ultimately bears the responsibility to pass legislation and guarantee Medicare, industry leaders have significant influence in how policies are crafted, adopted, and implemented. By the time the new administration is in place, the trust fund will have three years prior to its expected exhaustion, suggesting that the administration should solicit new ideas, proposals, and recommendations early in the next presidential term.

In past iterations of near exhaustion, Congress has passed major pieces of legislation with bipartisan support. This time, two factors will change how the trust fund is addressed. First, the COVID-19 pandemic with its attendant economic impact will be the top priority of the new administration—while three years to exhaustion is important, other issues will likely be focused on first, and by the time Congress is able to address this, the trust fund will be even closer to exhaustion. Second, there may be a divided control between the White House and House of Representatives and the Senate (pending the outcome of the Georgia senatorial elections). While a divided government has existed during prior iterations, such as in 1997 with the Balanced Budget Act, this time the divided government will come after more than a decade of extremely divided, partisan government. This may provide an opportunity for Congress to come together and work in a more bipartisan manner.

Conclusion

The trust fund's potential exhaustion represents a significant threat to the Medicare program. Over the past 40 years, whenever such a threat has come, Congress has risen to the task of addressing it. If that commitment continues, this current threat will serve as an imperative to act and provide an opportunity to improve and preserve the Medicare program for future generations. Now is the time for all health care stakeholders to prepare for and influence this conversation.