Want to shore up Medicare's hospital insurance fund? Raise payroll taxes by 28%

CMS recently announced Medicare’s hospital insurance (HI) fund will be depleted by 2026—three years earlier than previously projected. A new report from the American Academy of Actuaries examined the numbers—finding eliminating the HI deficit would require an immediate 28 percent increase in standard payroll taxes.

The actuarial academy’s issue brief, “Medicare’s Financial Condition: Beyond Actuarial Balance,” calls for significant changes to shore up Medicare long-range financial health.

“Medicare’s financial challenges could be more severe than projected under current law assumptions,” the report stated. “The report’s Medicare spending projections are considered understated to the extent that the ACA’s provisions for downward adjustments in non-physician provider payment updates to reflect productivity improvements and long-range physician payment updates being held below physician costs are unsustainable in the long term. If Medicare projections are calculated using assumptions that the productivity adjustments are phased down and physician updates are more in line with their costs, Medicare’s financial condition is shown to be even worse than under the projected baseline.”

Key findings by the AAA’s Medicare subcommittee include:

  • Expenditures are expected to outpace revenue. After two years of surpluses, HI is expected to run in the red in every year in the 75-year projection.
  • When the trust fund is depleted in 2026, revenues will cover 91 percent of costs, which will drop to 78 percent by 78 before increasing to 85 percent in 2092.
  • The 75-year deficit will be 0.82 percent of taxable payroll—which can be eliminated with a 28 percent increase in payroll taxes or a 17 percent decrease in expenditures.
  • Medicare expenditures will jump from 3.7 percent of GDP in 2017 to 5.9 percent in 2040 and 6.1 percent in 2070.

The report also questions how increasing Medicare spending can be sustained, considering it will consume more and more of economic growth.

“Aside from the addition of the prescription drug program in 2006, Medicare’s fee-for-service benefit package has remained mostly unchanged. Some services aren’t covered, and beneficiary out-of-pocket costs are not capped,” the study states. “Therefore, any changes aiming to improve Medicare’s financial condition should be considered in light of how the changes would impact the program’s ability to meet the health care needs of beneficiaries and whether the changes would encourage beneficiaries to seek cost-effective care.”