Building Back a Better Medicare Program

Every US administration since 1966 has had to engage in Medicare policymaking. The program covers 61 million elderly and disabled Americans, accounts for 14% of all federal spending, and, unlike the larger Social Security program, requires myriad legislative and regulatory tweaks each year to continue its operations. The Biden administration, like its predecessors throughout the program’s 55-year history, will need to perform this regular program maintenance. In addition, Congress and the administration will face two kinds of policy challenges. Some prominent Democrats, including many of Biden’s former competitors in the Democratic primary, see Medicare as a critical stepping stone to a unified system of health insurance coverage for all Americans. They will want to see changes to the program that extend its reach. On the other hand, Medicare actuaries and many conservative members of Congress see the program as an underfunded giant hurtling toward insolvency by 2024. While the administration will need to respond to the insolvency problem, it should try to leverage that response to simultaneously achieve progressive gains.

The Democrats’ January Senate victories in Georgia, which gave them control (barely) of both Houses of Congress, increase the likelihood that Medicare legislation under the Biden administration will go beyond routine housekeeping. Yet, the scope of this broader action is likely limited. Most structural changes to the program (including lowering the eligibility age to 60) would likely require an improbable 60 votes in the Senate, so actionable changes will be limited to those that can be advanced through the narrower budget reconciliation process. Even ambitious proposals that fit the complex technical rules governing reconciliation may be difficult to pass because of razor-thin House and Senate majorities. The most conservative Democrats in each house of Congress will have effective veto power. They are more likely to accede to limited proposals that strengthen the existing program’s viability than to projects that would extend its benefits to other populations.

Short of major Medicare policy changes that would require filibuster repeal (also unlikely to appeal to veto-holding conservative Democrats), what’s left? More than one might imagine. The administration can make substantial progress, even given the current composition of Congress, using budget reconciliation, regulatory changes, and executive actions.

Job number one is to fix the coming Trust Fund budget hole. The Part A Hospital Insurance Trust Fund, funded primarily through the Medicare payroll tax, periodically faces financial shortfalls as costs rise faster than revenues and new enrollees join at an escalating pace. The Affordable Care Act (ACA) of 2010 included provider payment cuts and new taxes that extended Trust Fund solvency from 2016 to 2030. However, during the past four years, actions by the Trump administration and Congress, such as the 2017 tax cut law, shortened the solvency period to 2026. COVID-19 and the economic downturn have further shortened Fund solvency to 2024 – and continuing economic decline may cut it to 2023 or even 2022. If the Trust Fund is exhausted, income from ongoing dedicated taxes will be sufficient to fund only about 90% of expenditures.

While almost all Americans support Medicare’s survival and solvency, neither of the obvious options for achieving that objective – new taxes or funding cuts – is popular. There are a few financing options that involve strategically moving existing revenues from one fund to another, but these forfeit the opportunity to use the urgency of maintaining Trust Fund solvency to achieve long-term objectives. Instead, the most successful Trust Fund fixes, such as those in the 2010 ACA and in 1983 (when Medicare first launched prospective payment), make solvency a side-benefit of broader reforms rather than the core policy. The new administration would do well to follow this path and use the need to assure Trust Fund solvency as an opening to get more ambitious reforms through a thin Congressional majority.

A key win-win would be action on prescription drug pricing, a policy goal that the Trump Administration pursued aggressively, but with limited success. Some drug price containment strategies can be achieved through Executive branch regulatory actions, but such regulatory savings will not fill the Trust Fund hole. One problem is that Medicare prescription drugs are funded through Parts B (inpatient) and D (outpatient) of the program, which means that savings achieved through lower prices for drugs would not directly improve Part A solvency. A more comprehensive legislative strategy will be needed. For example, imposing effective controls on prices for inpatient hospital and outpatient drugs, which can be achieved legislatively within reconciliation rules, could be combined with a shift of, say, home health services from the Part A to the Part B benefit as David Cutler and co-authors have recommended. This combination would improve the Trust Fund balance while simultaneously offsetting new costs in general revenue-funded Part B with drug cost savings.

The Trust Fund solvency crisis could be a vehicle to go even further on drug costs. In 2019 and 2020, House and Senate leaders demonstrated interest in lowering prescription drug costs, though with different strategies. Sen. Grassley narrowed his proposed reforms solely to Medicare while a House-approved bill would have implemented price controls for all consumers and employers. Zeke Emanuel and co-authors found that the most successful national approaches to drug cost control treat all consumers the same regardless of their coverage source, a finding that supports the House approach. Extending drug price controls beyond the Medicare program would be difficult to fit into Senate reconciliation rules, but perhaps the promise of Trust Fund solvency could facilitate its inclusion in broader legislative negotiations.

Another health policy area in which savings, and program improvements, may be possible is Medicare Advantage (Part C). Currently, 38% of all Medicare enrollees are enrolled in Medicare Advantage private plans, and the fraction has been increasing steadily. Throughout the program’s history, there have been concerns that private plans have been overpaid. In 2010, the ACA made substantial structural changes to Medicare Advantage to reduce such overpayments. The resulting savings helped to extend the fiscal life of the Part A Trust Fund from 2016 to 2030 and also funded a portion of the ACA’s coverage expansions.

Despite the ACA’s reforms, concerns about overpayment in Medicare Advantage (MA) persist. Recent research documents that many MA plans aggressively code their enrollees’ diagnoses to generate higher risk-adjusted payments from the Centers for Medicare and Medicaid Services. Most of the benefits of these coding adjustments, which cost the federal government billions every year, accrue to plans, not beneficiaries. Because Medicare Advantage plans cover both Part A and Part B benefits, legislative changes in the payment formula for Medicare Advantage would contribute to Trust Fund solvency. These could be combined with improvements to traditional Medicare that would enhance the financial protection available to those who do not participate in Medicare Advantage, such as a cap on out-of-pocket spending.

Beyond pricing adjustments for drugs and Medicare Advantage plans, the administration also may want to double down on efforts to improve the efficiency of health care delivery in the Medicare program. The ACA included a suite of delivery system reforms (Title III), managed mostly by the Center for Medicare and Medicaid Innovation, such as accountable care organizations, bundled payments, penalties for high rates of preventable hospital readmissions and hospital-acquired conditions, and more. Ten years later, the results of these experiments in terms of cost containment and quality have been modestly positive, though far less than hoped for. But these efficiency-oriented reforms have one important asset – both Democrats and Republicans largely support them. Indeed, the redesign of Medicare Part B physician payment in the 2015 Medicare and CHIP Reauthorization Act, passed under a Republican-controlled House and Senate and signed by President Barack Obama, further expanded these efforts. Little has been done legislatively since 2010 to enhance and improve Title III outside physician payment, though many credible and non-partisan reform ideas are available. Delivery system reform can be combined with coverage improvements in Medicare (such as catastrophic drug cost protections) in bipartisan legislation.

Slim majorities in Congress will make it hard for the Biden administration to pursue plans that expand Medicare eligibility. But improving the existing program may advance progressive agendas. A curious feature of the Democratic presidential primary debate around “Medicare for All” is that the “Medicare” option promoted by candidates was not the existing Medicare program. The existing program’s flaws make it a less-than-ideal base for expansion. Fixing the Trust Fund budget hole, improving the efficiency of program payments, and, most importantly, extending financial protections that traditional Medicare offers its beneficiaries would make the existing Medicare program a more viable option and framework for future expansion.

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