Ten Options to Secure the Medicare Trust Fund

Note: The first paragraph and the table have been updated from the original version to reflect the 2022 Medicare Trustees' Report and the May 2022 CBO baseline. You can read the original version here.

The Medicare Hospital Insurance (HI), or Part A, trust fund is expected to be six years away from insolvency according to the Medicare Trustees and eight years away according to the Congressional Budget Office (CBO). It faces $285 billion in deficits over the next decade. Trust fund solutions are needed to bring the program’s dedicated revenue and spending in line. Without action, Medicare payments from the trust fund would be significantly reduced or delayed, leading to a potential loss of access to care for enrollees.1

The Medicare HI program finances inpatient hospital coverage for seniors and some workers with disabilities, funded mainly with a 2.9 percent payroll tax. As health care costs rise and the population continues to age, the gap between Medicare costs and revenue collections is continuing to grow.

Below, we catalogue ten potential options to improve the solvency of the Medicare HI trust fund by reducing costs, increasing payroll tax revenue, or identifying new revenue sources. These options are meant to serve as illustrative examples and, in most cases, represent relatively ambitious versions of policies that could be scaled up or down in a variety of ways. For each option, the overall effect on the unified budget would be different than the effect on Medicare Part A, since each would affect other parts of the budget like income tax revenues, Social Security payroll tax revenues, and spending on Medicare Parts B and D.

10 Options to Secure the Medicare Trust Fund

  Unified Budget (billions) HI Trust Fund
(billions) (% of funding gap) (% of deficit)
Spending Options        
Improve Medicare Advantage Coding Intensity Adjustments2 $370 $180 141% 63%
Establish Graduate Medical Education Fund Outside Medicare3 $105 $190 148% 66%
Modernize Medicare and Medigap Cost-Sharing Rules $140 $165 129% 58%
Eliminate Medicare Payments for Bad Debts4 $80 $60 47% 21%
Reduce and Reform Post-Acute Care Payments $90 $75 59% 26%
Revenue Options        
Increase the HI Payroll Tax Rate by 0.5 Percentage Points $455 $530 414% 185%
Broaden the HI Payroll Tax Base to Cover Employer Health Benefits $310 $365 285% 128%
Expand the Base of the Net Investment Income Tax, Dedicate Half of all NIIT Revenue to the HI Trust Fund5,6 $225 $350 273% 122%
Apply the Payroll Tax to Business Income for Self-Employed Workers to Reduce Tax Avoidance5 $200 $150 117% 52%
Impose an Excise Tax on Sugar-Sweetened Beverages, Dedicate the Revenue to the HI Trust Fund $80 $105 82% 37%

Source: Congressional Budget Office and CRFB calculations and estimates. 10-year savings are rounded to the nearest $5 billion. The HI Trust Fund faces a ten-year cumulative shortfall of $128 billion and a ten-year deficit of $286 billion.

Of the options focused on reducing Medicare costs, two would reduce payments to Medicare providers: one for post-acute care payments and the other for reimbursements of bad debts. Both President Obama and President Trump proposed similar reductions, which would generate savings for Medicare Parts A and B. Another option would overhaul “Graduate Medical Education” (GME) spending for medical residents and interns by creating a new, more cost-effective program outside of Medicare. A fourth option – recently proposed by our Health Savers Initiative – would adopt a better method for adjusting Medicare Advantage plan payments to fully account for diagnostic coding intensity, with savings split between Parts A and B. The final spending-focused option would modernize Medicare Part A and B cost-sharing by establishing a unified deductible and coinsurance rate, implementing restrictions on supplemental insurance plans like Medigap, and capping out-of-pocket spending for beneficiaries.

On the revenue side, three options would increase revenue from the Medicare payroll tax. One would raise the current 2.9 percent (3.8 percent for high earners) rate by half a percentage point, a second would apply the 2.9 percent tax to employee compensation from employer-provided health insurance, and a third would apply the payroll tax to a broader base of self-employment income. A fourth option would broaden the base of the existing 3.8 percent net investment income tax (NIIT) and dedicate half of the full revenue stream to Medicare Part A. The final revenue option would impose a federal excise tax of 3 cents per 12 ounces of “sugar-sweetened” beverages. All of these options would have effects on other revenue sources.

While these options are not necessarily additive due to interactions, they represent over $2 trillion in unified budget deficit reductions and $2.2 trillion in potential savings for the HI trust fund – enough to close the 10-year solvency gap several times over.

There are also many other options to secure the Medicare Trust Fund (see, for example, the recent Commonwealth Fund series). Through our Trust Funds Solutions Initiative, we will continue to put forward existing and new ideas to reduce Medicare costs and bring new funding into the program.

It is imperative that lawmakers start discussing these trust fund solutions sooner rather than later.

1 “The Coming Crisis For The Medicare Trust Fund, " Health Affairs Blog, December 15, 2020. DOI: 10.1377/hblog20201210.997063

2 This option would adopt a new method (the "Demographic Estimate of Coding Intensity" (DECI) method) for adjusting Medicare Advantage plan payments to account for the differential in diagnostic coding between Medicare Advantage plans and traditional Fee-For-Service Medicare. MedPAC has also developed a method to adjust for differential coding. It would yield about half the savings of the DECI method.

3 This represents President Trump's proposal to substantially reduce GME spending. Maintaining current spending levels and growing them with inflation would save roughly $40 billion overall.

4 This option would eliminate the coverage of all bad debt under Medicare. CBO has also estimated options that would reduce the percentage of allowable bad debt covered under Medicare to 45 percent and 25 percent, which would yield less savings.

5 These two options have a high level of overlap and are not additive.

6 We estimate expanding the base of the Net Investment Income Tax to include income of active participants in S Corporations and limited partnerships would increase NIIT tax revenue over the 2022-2031 period from $400 billion to $700 billion. Diverting half of this revenue to the Medicare HI trust fund would therefore increase trust fund revenue by roughly $350 billion. On net, after accounting for resultant reductions in other income and payroll taxes, we estimate this option would reduce the unified budget deficit by $225 billion.