Medicare Payment and Reimbursement

Annual report on Medicare financing could reduce the immediate impetus to address longstanding issues

Even though the latest actuarial analysis arguably diminishes the short-term urgency surrounding the program, stakeholders see ample reason to act quickly.

May 9, 2024 4:10 pm

New data on the state of Medicare funding show short-term improvement while keeping the stakes high for ensuing decades.

The annual report from Medicare’s trustees shows the Hospital Insurance Trust Fund (i.e., Medicare Part A) has enough money to keep beneficiaries covered and providers paid through 2036. That’s an increase of five years from the 2023 report and eight years from the 2022 projection.

In the unlikely event policymakers ever allow insolvency to happen, providers would incur an immediate 11% reduction in Medicare payments. From there, “Medicare could pay health plans and providers of Part A services only to the extent allowed by ongoing tax revenues — and these revenues would be inadequate to fully cover costs,” the trustees’ report states. “Beneficiary access to healthcare services could rapidly be curtailed.”

The improved short-term outlook is based on higher income stemming from increases in the number of covered workers and in average wages. In addition, expenditures are lower than previously projected, in part because of a change instituted by CMS to constrain Medicare Advantage (MA) payments by excluding MA-associated medical education expenses from benchmark calculations.

Updated number-crunching also has resulted in lower projections for spending on inpatient care and home health services as the trustees phase out some of the mathematical adjustments that were applied during the COVID-19 pandemic.

Nonetheless, Medicare fee-for-service (FFS) inpatient payments are anticipated to rise by 2.3% this year, 2% in 2025, and then by 5.4%-5.5% per year through 2029. The jump during the latter part of that window partially would be linked to a projected deceleration in the shift from FFS to MA.

A drag on the economy

Medicare costs are projected to comprise 3.9% of GDP in 2025, up from 2.19% in 2000, although the 2025 number is down from a projected 4.13% in last year’s report. Within a decade, the figure is expected to reach 5.3%.

“I wouldn’t put that much stock in the trust fund number per se,” Michael Chernew, PhD, professor of healthcare policy at Harvard Medical School, said during a May 7 webinar hosted by the Committee for a Responsible Federal Budget (CRFB). “I think the bigger issue with Medicare is just the overall burden that the program is placing on the economy.”

That strain is expected to grow over the long term, reaching 6.2% at the end of the 75-year window examined in the latest report.

Much of the projected increase can be traced to the Supplementary Medical Insurance (SMI) Trust Fund, which subsidizes Medicare Part B and draws its funding from beneficiary premiums and congressional allocations. Part B funding is estimated to account for 1.85% of GDP this year and reach 2.82% in 2035 (compared with a jump from 1.46% to 1.91% for Part A, which is funded by payroll taxes).

The ongoing shift of care from inpatient to outpatient settings puts more pressure on the Part B fund. One way Congress has looked to restrict outpatient expenditures is by implementing site-neutral payments.

A recent effort to incorporate such a policy for drug administration services was part of price transparency legislation that passed the House in December but did not gain immediate traction in the Senate. The bill still could become law this year during the lame-duck session of Congress, congressional staff have indicated.

A bigger challenge

The report also describes an alternative scenario in which policymakers raise provider payments beyond levels established in current law. That step would be taken with an eye toward maintaining beneficiary access by ensuring payments more closely track rising costs.

“If the health sector cannot transition to more efficient models of care delivery and if the provider reimbursement rates paid by commercial insurers continue to be based on the same negotiated process used to date, then the availability, particularly with respect to physician services, and quality of healthcare received by Medicare beneficiaries would, under current law, fall over time compared to that received by those with private health insurance,” the report states.

Theoretical steps to bolster Medicare payment include a mitigation of the productivity adjustment that annually reduces hospital payment updates, plus transition of physician payments to a new methodology that accounts for inflation.

In such a scenario, “long-range costs could be substantially higher than shown throughout much of the report,” the trustees wrote.

Even over the next decade, Medicare expenditures as a share of taxable payroll would jump more sharply. For example, the trustees’ base estimate is for that ratio to increase by 3.4% year-over-year in 2033. If steps are taken to make reimbursement levels more aligned with projected costs, the increase would be 5.4%.

Thus, the trustees see a need to develop policies that can both protect Medicare funding and support sustainable provider operations. They call on Congress to implement solutions quickly, noting that acting sooner rather than later would allow for more flexible and gradual changes.

MA under the microscope

The report findings indicate “the urgency around acting and going after sources of unnecessary spending,” Andrea Ducas, MPH, vice president for health policy with the Center for American Progress (CAP), said during the CRFB webinar.

She cited overpayments to MA plans that, per CAP’s estimates, total at least $83 billion in 2024 due to practices such as upcoding and selection bias by insurers, among various factors. Some of that money could be reinvested in the traditional Medicare program.

One advantage of MA is that, along with alternative payment models and improved chronic-care management, the program may nudge more beneficiaries to visit lower-cost care settings than was projected in previous annual Medicare reports, Chernew noted.

“A lot of efficiencies that are hard to forecast are coming out,” he said.

Yet Ducas said consideration should be given to “the tradeoffs associated with some of the care management and utilization techniques that might be leveraged especially heavily by Medicare Advantage plans — what that means not only for spending, but also for the beneficiary experience.”


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