Medicare is running out of money. According to the latest projections from the Congressional Budget Office (CBO), the program's Part A hospital insurance trust fund will be exhausted in 2024. That's just three years away, before the end of President Joe Biden's first term.
Congress and the Biden administration will have to take action to preserve the program for its more than 60 million beneficiaries. Requiring wealthy seniors to cover a greater share of their benefits and injecting more competition into the program by subsidizing the purchase of private coverage would help put Medicare back on sound financial footing.
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When former President Lyndon Johnson signed Medicare into law in 1965, the average life expectancy was 70. Today, it's nearly 79. Seniors are the fastest-growing group in the country. They're projected to outnumber children by 2034. Medicare's outlays are steadily growing, too; they hit $800 billion in 2019.
Revenues aren't keeping pace. The program is financed through income taxes and payroll taxes. Young and middle-aged workers effectively hand over a portion of their wages to pay for seniors' health care. Half a century ago, there were four workers per Medicare enrollee. Today, that ratio is down to three to one. It'll be just over two to one within the next ten years.
With fewer workers supporting more seniors, the math behind Medicare stops working. The program's hospital insurance trust fund ran a nearly $6 billion deficit in 2019. Pre-pandemic, it was on track to become insolvent—meaning there wouldn't be any money in the fund—by 2026.
COVID-19 and the economic turmoil that accompanied it sped up that timeline. Mass business closures, layoffs, furloughs and downshifting to part-time work all contracted the government's tax receipts. The CBO calculates that COVID-19 will cut $43 billion from Trust Fund revenues this year. That's pushed insolvency up to 2024.
Raising taxes or slashing benefits would be politically unpalatable under normal circumstances. In the midst of a pandemic, with millions of people in dire financial straits, they're not an option.
Unfortunately, Biden has yet to articulate a vision for keeping Medicare afloat. In fact, he's gone the other direction. During his campaign for the White House, he called for lowering the program's eligibility age from 65 to 60. That would open the program up to 23 million more enrollees. An analysis from a professor at Harvard estimates that could add up to $100 billion in additional costs each year to its balance sheet.
We need to reduce costs in Medicare. Why not start with means-testing? Multi-millionaire retirees don't need taxpayer-funded health care.
Lawmakers can also consider roping in the private sector to help reduce costs. Instead of directly providing coverage, Medicare could give seniors cash to help them purchase a health plan on the private market. The idea is to get multiple insurers competing against one another for seniors' business—and thereby bring down the cost of coverage. A 2017 CBO report found that such a model of "premium support" could save nearly $420 billion between 2022 and 2026.
Ensuring the solvency of Medicare will have to be a focal point of Biden's presidency. Absent action, the program may not be around much longer than the Biden administration itself.
Sally C. Pipes is president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.