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Medicare Malpractice

Last week, President Biden released his fiscal year 2024 budget. Let’s get the obvious out of the way: It is far moremessaging platform than budget. But it is an important guidepost for determining what the administration’s priorities will be, so it’s worth taking a look.  

The president’s health care budget provisions cover a broad swath of health policy issues, and I’ve written an insight that covers the major pieces. This piece focuses on perhaps the budget’s most important policy proposal: making Medicare Part A solvent. 

For background, the Medicare Part A Hospital Insurance (HI) Trust Fund is on a trajectory to become insolvent in 2028, according to the latest Medicare Trustees Report. Specifically, the trust fund faced a $26.4 billion cash deficit in 2021, which would require an increase in payroll taxes from 1.45–1.6 percent, an 8.7 percent hike, to cover. Currently, Medicare “covers” this shortfall by borrowing tax revenues from other programs. The Biden Administration proposes increasing income taxes and the number of drugs for which Medicare can “negotiate” price as specified in the Inflation Reduction Act (IRA). Regarding the tax increases, the budget proposes raising the 3.8 percent “Medicare tax” currently paid by all individuals making over $200,000 to 5 percent for individuals making over $400,000. The budget also proposes to count pass-through business income as part of an individual’s total income alongside earned and investment income, and then dedicate the new revenue from the “net investment income” tax (from both realized investment income and pass-through business income) to the HI Trust Fund. 

There are several problems with this plan. First, despite the branding from the White House, the proposal wouldn’t extend Medicare’s solvency – just Part A’s, and only on paper. The budget says nothing about the 2021 cash shortfalls in Parts B and D, which were respectively $294.5 billion and $88 billion. Second, the 3.8 percent Medicare surtax on net investment income created by the Affordable Care Act was never designated specifically for the HI Trust Fund. This revenue has simply been deposited in the U.S. Treasury to be used to cover up those shortfalls in Parts B and D on top of Part A expenditures. The Biden Administration’s plan would take this flawed surtax and apply it solely to Part A, but would not address the subsequent need of Parts B and D to be made whole. Third, the budget doubles down on the flawed IRA price-setting scheme, euphemistically called “negotiation.” As I’ve detailed in previous Weekly Checkups, this plan will likely result in fewer new drugs and higher prices (and spending) across the board. 

Fundamentally, the biggest problem with this budget is that it doesn’t address the cost of health care, which is the real issue at the heart of Medicare’s cash shortfalls. While Part A was the only Medicare program designed to be self-sustaining, Parts B and D were supposed to be financed by roughly 25 percent in premiums and 75 percent in general revenues, which in practice has meant a lot of debt financing. The combined shortfall of these programs over the years was responsible for just under 29 percent of the national debt in 2021.   

While the president’s health care budget talks a big game on Medicare, its tax hikes and drug-price-setting scheme do nothing to address the program’s greatest challenges. Nowhere in this budget is there a plan to increase provider competition, disincentivize high-volume, low-value care, or slow consolidation in the health care industry. Why? Those things are hard to do and can’t be rolled out in a single news cycle. Making Medicare sustainable in the long run will require the program to undergo an invasive procedure, but this budget only gives it a band-aid. 


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