by Part of President Biden’s new budget, released last week, aims to make a key part of Medicare more affordable by raising taxes on those earning more than $400,000 and the cost of prescription drugs are reduced. The federal health insurance program for more than 65 million elderly and disabled Americans is heading for a crisis in 2028 when one of its four parts, Part A, the part of the trust fund that pays for hospital visits, will run out of money. Biden’s proposal to avoid the deficit is expected to face stiff opposition from Republicans in Congress. The Gazette spoke to health policy expert John McDonough, professor of public health at Harvard TH Chan School of Public Health, about the prospects of averting the dilemma.
GAZETTE: How urgent is the Medicare funding crisis?
McDonough: First, it’s not a Medicare funding crisis; it’s a Medicare Part A funding crisis. Part A is primarily the Medicare hospital program. And the crisis is intentional. The true architect of Medicare—in the mid-1960s—was Arkansas Congressman Wilbur Mills, then chairman of the House Committee on Ways and Means, who was never a big fan of Medicare. But when 1965 came along and Lyndon Johnson had supermajorities in the House and Senate and all Democrats wanted to create a health insurance program for the elderly, he had to go with the flow or he would have been washed away. But he knew the program to be created would be inherently unstable and financially vulnerable given the relentless pressure on medical supply growth. So they created that structure, which would force Congress to periodically go back and re-examine funding to guide growth going forward. This comes as no surprise to people familiar with the history of the program. This is one of its design features.
GAZETTE: And did they do so by building in a financial model the very nature of which requires care and diligence rather than re-approval by Congress?
McDonough: No re-authorization is required. Part A is funded by that Medicare payroll tax that’s written on your paycheck. Part B – Medical Services – is financed from student contributions and federal funds. So each part – A, B, C, D – has its own funding. When we talk about Medicare “going bust,” Medicare can’t go bust because it’s not a company in that sense. But it could run out of money, in which case the federal government wouldn’t be able to reimburse hospitals and other parts of Part A 100 percent of what they would otherwise have to pay. There would be gaps in reimbursement for services lawfully performed by hospitals and other parties in Part A.
GAZETTE: So the crisis as it is is mostly affecting the part of Medicare that pays for hospital services. Not Part B, which is medical services. What are parts C and D for?
McDonough: Part D was created in 2003 and is the Outpatient Prescription Drugs Program. It is funded primarily from federal funds and student grants. Part C is better known as the Medicare Advantage. Parts A and B are known as traditional Medicare and are what most people typically engage in. If you sign up for A and B and see a hospital or doctor, the hospital or doctor bills the federal government and gets a check back. With Parts C and D, you don’t enroll in a federal program, you enroll in a private insurance company, and the company performs all of your services and receives a single annual lump sum payment from the federal government for you — risk-adjusted for how old and how ill you are. This program was created because private insurers, mainly HMOs – health care organizations – said: “We can offer better care at a lower cost.” In some ways they offer better quality, in other ways they don’t. And it’s always been more expensive than traditional Medicare. There’s a big thing going on in Medicare right now that this year, for the first time, more people are enrolled in Part C than traditional Medicare Parts A and B. It’s like a dog with a tail, but this year that tail is going to be bigger than the dog itself. It creates all kinds of discomfort and awkwardness because all the money feeding part C is siphoned off from parts A and B.
GAZETTE: What is the consumer incentive for Part C? Is it to keep private health insurance instead of going into a government program?
McDonough: It’s a lot of things, but the most important thing is that most people can enroll in Medicare Advantage at a significantly lower premium cost than A and B. Parts A and B have many holes. So almost everyone above the poverty line buys a supplement called Medigap to pay for things traditional Medicare doesn’t cover. But many people — about half — participate in Medicare Advantage and don’t have to pay a premium. It’s very attractive. It also offers limited — they don’t use that word — dental, vision, and hearing benefits. But the emphasis is on “limited” because it’s a lot less than you might imagine. And there are armies of health insurance brokers who work for Medicare Advantage carriers and make money by enrolling people in Medicare Advantage plans they work for.
GAZETTE: What do you think of President Biden’s proposal to raise taxes on wealthier individuals and reduce the cost of prescription drugs? It seems simple, but is it a real proposition or just politics?
McDonough: It’s real in the sense that it could happen. There is nothing in it that is outside the realm of possibility, except that in this biennial Congress where Republicans control the House, there is no way the Republican majority would agree to it. The prime commandment for a Republican is, “Thou shalt never, anywhere, levy taxes on anyone,” especially taxes on wealthy people and corporations. That’s what Biden is proposing and something Democrats don’t mind. So if you have Democrats holding the White House and Senate and retaking the House in 2024, then it’s entirely possible that something like this could pass in the next Congress as part of a reconciliation bill that only requires 51 votes in the Senate and a majority in the Senate House of Representatives. That would be doable, and then Democrats could take credit for saving Medicare from bankruptcy by 2050.
GAZETTE: This is part of the President’s proposed budget, but is this issue too hot when Republicans are in control of the House of Representatives? Is that a can that just gets kicked out in the street?
McDonough: Yes. Because the trouble is that Democrats don’t mind raising taxes, especially on something like Medicare, and they don’t want to cut benefits. And Republicans are in a box because they haven’t publicly agreed to cuts and will philosophically refuse to support higher taxes. I look forward to any plan they might push, as there are only two ways to move forward: more taxes and/or more cuts.
GAZETTE: Politics aside, do you think there is the best solution?
McDonough: In 2010, when the ACA was passed, private plans in Medicare Advantage cost $1.20 for every dollar spent on traditional Medicare. Today it’s about $1.04 or $1.05 for every dollar spent on traditional Medicare. But 4 or 5 cents, because the program has gotten so big within Medicare, is a lot of money now too. An easy way to withdraw Medicare Advantage is to bring it into line with traditional Medicare. That would generate a lot of savings and help Part A’s solvency since Medicare Part C gets most of A’s money. So Part C – Medicare Advantage – has to be part of that solution one way or another. Insurers are making a tremendous amount of money with this program.
GAZETTE: When you say the money in Part C came from Part A, is that because the patients in Part C would otherwise be admitted to Part A, or is it a more direct transaction?
McDonough: Let’s say I have a Medicare Advantage plan and get service at Beth Israel Deaconess Medical Center. The insurance company essentially bills for Medicare Part A for this service.
GAZETTE: So Part A pays $1.04 for every dollar they would otherwise pay for someone enrolled directly in Part A, and Congress could just mandate that we only reimburse Part C dollar for dollar at the same rate as Part A ?
McDonough: It’s more complicated than that. The key point is that it’s all connected. When Democrats control the House, Senate, and White House in 2025, I expect they will pass legislation that will do many things, including extending the life of the Part A Trust Fund and giving it significant funding from the Establish parity between Medicare Advantage and traditional Medicare.
