Medicare Advantage helping the Solvency of Medicare

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While many focus on the dwindling Social Security funds, a more pressing matter is looming – the solvency of the Medicare program. In just a few short years, the Medicare program could become insolvent.

To address the issue, we must understand how the program stays funded, what factors impact solvency, and what solutions may help solve the problem.

How is the Medicare program financed?

Medicare funding remains provided by payroll tax revenues, general revenues, and the premiums paid by Medicare beneficiaries. Smaller sources of funding come from state payments, Social Security benefits, and interest gains. Varying methods configure funding for each part of Medicare.

Medicare Part A offers financial assistance for inpatient hospital stays, home health visits, hospice, and skilled nursing facility care. It remains essentially financed with a 2.9% tax on employee and employer income. (Higher-income earners contribute a slightly higher tax rate.) n 2019, these payroll taxes accounted for 88% of the Medicare Part A funding.

Medicare Part B offers financial assistance for outpatient physician visits and services, preventive care, and some home health visits. It was financed with a combination of general revenues and premiums from Medicare beneficiaries. In 2019, general revenues accounted for 72%, and Premiums from beneficiaries accounted for 27%. Like they did for Part A funding, higher-income earners paid higher premiums.

Medicare Part D offers financial assistance for outpatient prescription medications. It was financed with general revenues, premiums from Medicare beneficiaries, and payments from the states. In 2019, general revenues contributed 71% of the funding, premiums from beneficiaries contributed 17%, and states’ contributed 12%. (These state payments were for beneficiaries who were eligible for both Medicare and Medicaid.) Again, high-income earners paid a more significant share for their premiums.

Even though Medicare Part C (Medicare Advantage) plans replace the other parts of Medicare, the Medicare Advantage program remains financed separately. Benefits associated with Part A transpire taken from the Medicare Hospital Insurance (HI) trust fund. In 2021, this accounted for 42% of HI trust fund expenses. Benefits of Parts B and D occur taken from the Supplementary Medical Insurance (SMI) trust fund.

Couple sits and discusses problems with medicare cost and how Advantage plan could help.
The number of Medicare beneficiaries is increasing at a rapid pace as more and more Baby Boomers turn 65

Where’s the problem?

The problem lies within the HI trust fund – the fund that helps pay for Part A medical expenses. The trust fund is issuing more payments than this is receiving – it’s a checking account that signifies approximately to go into overdraft. Medicare trustees estimate that it will become insolvent in 2024, or possibly as late as 2026, due to a recent improvement in the economic outlook. 

Various factors impact some HI trust fund solvency. It is affected by health care spending, the number of beneficiaries, and the declining ratio of workers to beneficiaries. The number of Medicare beneficiaries is increasing rapidly as more and more Baby Boomers turn 65. Since fewer younger adults enroll in the workforce, fewer individuals pay Medicare taxes to support the rising beneficiaries. The fund does also impacted by both legislative and regulatory changes in Part A spending and revenue.

Changes in any of these factors can quickly increase or decrease solvency projections. For example, previous to the COVID-19 pandemic, HI trust fund insolvency implied predicted to occur in 2025. Six months into the pandemic, this projection transpired, shortened by one year due to a significant economic downturn and the massive reduction in employment (which meant less revenue in payroll taxes).

Suppose changes transpire not made in expected spending or trust fund revenue. In that case, there will be insufficient funds to cover the cost of healthcare for Medicare beneficiaries.

Could Medicare Advantage plans help solve the Medicare solvency issue?

There are several propositions to help combat the looming Medicare solvency problem. Options include those to address spending and revenue. Many have taken a closer look at the growing popularity of Medicare Advantage plans and sought answers there.

Medicare Advantage Quality Bonus Program and Risk-Coding Reforms

The federal government pays Medicare Advantage plan carries more than it would a fee-for-service Medicare provider. With about 40% of current Medicare beneficiaries enrolled in a Medicare Advantage plan, this adds up quickly. (Plus, Medicare Advantage enrollment numbers are expecting to continue to increase.)

Many carriers have implied accused of aggressively risk-coding their members. This practice makes the member appear to be in a worse medical condition (on paper) than in real life. The federal government pays the plan more for sicker members. While the government is beginning to prosecute those accused of this practice, current overpayments last projected to remain in the millions. Accounts for a large portion of the HI trust funds.

Several Medicare Advantage plans qualify for bonuses, which the HI trust fund finances. A budget-neutral reformation would redistribute quality bonuses and penalties among all Medicare Advantage plans.

Medicare Advantage Competitive Bidding

Enhanced competition between Medicare Advantage plan carriers would increase fiscal pressure on private insurance companies. Currently, federal payments to Medicare Advantage plans occur based on their bids against the spending in Original Medicare. Many counties with substantial Medicare Advantage enrollment numbers bid below 95% of the fee-for-service amount. An increase in competition would change payments made to other Medicare Advantage plans. Implementing a new policy could save $100 billion in funds over ten years.

What happens if the Medicare program reaches insolvency?

If the Medicare program becomes insolvent, it will not abruptly cease to exist. Revenue will continue to flow into the program via payroll taxes and other resources. If it becomes insolvent in 2024, it will still cover 94% of that year and around 90% of the benefits through 2029.

What happens next remains to be seen.

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Justin Brock

President & CEO of Bobby Brock Insurance