Note: This transcript has been created with a combination of machine ears and human eyes. There may be small differences between this document and the audio version, which is one of many reasons we encourage you to listen to the episode!

Dan Gorenstein: Medicare is running out of money. 

Estimates suggest it could happen in the next four years. 

And yet, we’ve heard almost nothing about this impending crisis on the campaign trail.

Today, what happens if Medicare runs out of money, what’s driving the shortfall, and what can be done to fix it?

From the Annenberg Studio at the University of Pennsylvania, I’m Dan Gorenstein, and this is Tradeoffs.

Marc Goldwein: I’m Marc Goldwein. I’m the senior vice president at the Committee for a Responsible Federal Budget. We are a nonpartisan think tank that is here to really inform the public as well as policymakers on important fiscal issues.

DG: Medicare definitely qualifies as an important fiscal issue.

More than 60 million Americans rely on the program for their trips to the hospital, doctor’s visits and prescriptions.

The federal government spent nearly $800 billion on Medicare benefits in 2019, good for around 15% of the total federal budget.

But only part of Medicare is technically running out of money. 

That’s Medicare Part A, which covers hospital visits plus some other things like skilled nursing facilities.

MG: Medicare Part A is funded through a payroll tax. This is very similar to Social Security. Workers every year pay a share of their wages towards a trust fund. And then out of that trust fund, money is used to pay seniors for their hospital benefits.

DG: And Marc, when people talk about the trust fund running out of money, becoming insolvent, does that mean there’s no money left in the bank?

MG: Medicare’s already spending more every year than it’s bringing in, but it’s got money in reserves, about $150 billion in reserves. Over the next few years it’s going to be drawing down those savings, and by 2024, they’re going to run out completely. What that means is the program is going to have to start living paycheck-to-paycheck. It can only pay as much as it’s bringing in in revenue. And at that point, we can only pay about 85% of what we need to pay.

DG: And Marc, what happens if Medicare can’t pay all of its bills?

MG: What most people think is that Medicare will keep trying to pay, and when it doesn’t have money, it’ll wait. And that means that hospitals will get increasingly late payments to the point that ultimately hospitals will see they’re not really being fully paid for their services. So if we keep not paying them, hospitals may respond by trying to discourage Medicare patients or even not accepting Medicare patients at all.

DG: And so Marc, what is driving this fast approaching insolvency? Or this fast approaching shortfall probably is maybe a more accurate way to say it.

MG: So there are really two factors driving up the cost of Medicare. First is having more and more beneficiaries each year as more and more of the baby boomers turn 65. At the same time, overall health care costs continue to rise. And so we’re actually paying more over time for the same services or at least for the same beneficiaries.

DG: So there are lots of reports coming out, including from you, the Congressional Budget Office and the Medicare Board of Trustees, that a shortfall is coming, as soon as 2023, 2024. Has Medicare been this close to the edge before?

MG: We’ve been close to the edge, but we’re getting towards uncharted territory. In the late ’90s, we were, I think, four or five years away.

Clip: Today’s report shows once again that one of the trust funds, the hospital trust fund, would be exhausted by 2001.

MG: In 2009, before the Affordable Care Act, we were eight years away.

Clip: Medicare’s Hospital Insurance trust fund is projected to become exhausted in 2017, two years earlier than projected in last year’s report.

DG: What happened when we got close before?

MG: Both in 1997 and in 2009, we prevented insolvency of Medicare through a combination of real savings to the Medicare program, new revenue, and some amount of cheating. In 1997, we made some reforms that would lower Medicare costs. 

President Bill Clinton: It modernizes Medicare and extends the life of the trust fund for a decade. 

MG: But we also took a lot of home health spending, which was in Medicare Part A, and moved it totally out of Medicare, so it was no longer an obligation of the trust fund. More recently, in 2009, we reduced hospital payments, and we’ve increased the tax revenue coming in.

President Barack Obama: These steps will ensure that you, America’s seniors, get the benefits you’ve been promised. They will ensure that Medicare is there for future generations.

DG: Marc, how much does this shortfall have to do with the pandemic?

MG: Medicare was in financial trouble before the pandemic, but the pandemic has taken a bad situation, and it’s made it more urgent. And the big reason it’s more urgent is there’s now fewer people paying into the Medicare trust fund.

News clip: The pandemic continues to take a terrible toll on the economy and American workers. 

News clip: The Labor Department just reported another 1.4 million Americans filed for unemployment last week.

DG: Again, the trust fund is supported by the payroll tax — the fewer people working, the less the trust fund takes in.

MG: And so that means even for the same amount of spending, we’re not going to last as long as we thought we were before.


DG: Before the break, Marc, you were telling us that the record job losses we’ve seen because of the pandemic has meant fewer payroll taxes coming in, and therefore we’ve had an accelerated push toward Medicare running out of money. 

So I guess that raises the question, what options do lawmakers have at their disposal to address this?

MG: So the two responsible sets of options they have are either they can bring more revenue into the program or we can change the amount that the program spends. And again, we could do that by adjusting benefits. But there are actually a lot of places in the health care system where we’re paying more money than we have to. And so we could pursue either of those options or both, or we could cheat. We could just take money from the rest of government. 

DG: Ok, let’s set aside the cheating option, and let’s focus on the other two. So one option is simple and straightforward. Just raise taxes. But then there’s another. Your organization has identified some areas where there could be real savings. What you mean when you say savings is the federal government would pay hospitals less than they are right now.

MG: That’s basically the case. We would pay them less, but we could also pay them smarter. One area that has been identified over and over and over again is payments to post-acute facilities, skilled nursing facilities, home health. 

DG: Medicare spends about $60 billion a year helping people rehab after leaving the hospital.

Several groups say these payments encourage unnecessary care and can safely be cut.

Post-acute providers say that would be financially disastrous for them and harmful for patients.

MG: Another place is graduate medical education. Right now, the federal government pays medical residents, and we’re doing it under Medicare. And so I think that the cost of that program could be reduced and also taken out of Medicare.

DG: Critics say the way we pay residents — doctors in training — contributes to physician shortages, especially in underserved communities, but cutting the program could exacerbate the problem. 

MG: The third place I would suggest is through payment reforms. There’s something called an accountable care organization, basically a way to pay doctors to work together rather than work separately to get the same outcomes at a lower cost. 

DG: Accountable Care Organizations, or ACOs, came out of Obamacare.

Some doctors and hospitals have used them to cut unnecessary or wasteful care, albeit with modest results.

MG: Just from those areas, we’re talking anywhere from $50 to $200 billion over a decade. That’s not enough to solve Medicare’s solvency problem, but it’s a good start.

DG: It’s also a way to start a fight. 

The American Hospital Association opposes payment cuts as a way to firm up Medicare’s finances.

Hospitals argue that Medicare already pays less than it costs to treat older patients, and reducing reimbursements would likely compromise care.

DG: President Trump and former Vice President Biden have talked a lot about the the ACA, drug prices, abortion rights, but not much about Medicare. 

It makes me wonder, Marc, is this impending shortfall even on their radar?

MG: I sure hope it is. Some good news here is there’s actually a surprising sort of behind-the-scenes bipartisan agreement on some of the changes we need to make to health care costs. If you look at President Trump’s budget submission, it actually pretty closely matches President Obama’s budget submission, which, by the way, pretty closely matches the ideas that Elizabeth Warren was putting forward to help pay for her Medicare for all. The question is, when are they going to feel the urgency to do it? And I do think whoever is inaugurated in January is going to have to deal with this because it’s getting increasingly urgent.

DG: When you say increasingly urgent, what are you actually saying? Because in one way, if you were to tell me that, “Hey, Dan, in three years time, in four years time, you’re going to have a budget crunch.” But I don’t have it now. So that makes me think I’ve got plenty of time to figure this out. 

MG: Four years is not that much time for the way the federal government budgets. If we make a tax policy change, at minimum, it’s not going to start until the following calendar year. If we make a spending change, these can take years. We have to give the hospitals warning. We have to let them come up with the new systems. We could do this faster. We could do this in 2023. But you’d have to see immediate tax increases. You’d have to see immediate payment cuts to providers without the ability for them to really figure out how to do it the smart way.

DG: Even if there’s some cheating, there’s some tax raising and there’s some belt tightening, cutting reimbursements to providers, are we going to just be in the same place again in another 10 or 15 years? Is this just sort of cyclical, Marc?

MG: I don’t think we’re going to come up with the 100-year solution to Medicare. I wouldn’t expect a lawmaker in 2020 to know what Medicare should look like in 2070, but I do think that we can make improvements that will have lasting effects on the program, and then we can keep building on them every 5, 10, 15 or 20 years.

DG: Marc, thanks very much for taking the time to talk to us on Tradeoffs. 

MG: Well, thank you so much for having me.

DG: I’m Dan Gorenstein, and this is Tradeoffs.