Solvency extensions to the Medicare Hospital Insurance Trust Fund: what is driving them?

Abstract

Every year, the Medicare Trustees publish a report evaluating the financial status of the Federal Hospital Insurance (HI) and Supplementary Medical Insurance Trust Funds. Hospital Insurance Trust Fund solvency, measured by a projected 75-year actuarial balance and year that the balance goes negative, is commonly referenced when discussing the fiscal health of the Medicare program. The HI Trust Fund, which supports Part A benefits including inpatient hospital care, skilled nursing facility (SNF) care, home health care, and hospice care, is currently projected to be depleted in 2036.¹ This represents a large shift in the projected depletion date; the 2012 report estimated that the HI Trust Fund would be completely exhausted by now. The latest 2024 report has pushed that date back another 12 years.

Over the years, the Trust Fund balance has fluctuated, directly influencing the projected depletion year of the Fund. The actuarial balance of the HI Trust Fund is calculated as a percentage of future taxable payroll over a 75-year period. The current year value of the balance represents the difference between the projected income and cost of the Trust Fund summed over the following 75-year period.² A negative actuarial balance suggests that the current financing trajectory is not sufficient to meet projected costs.

In creating the actuarial balance estimate, the Medicare Trustees rely on estimates of demographic, enrollment, and economic changes and future utilization patterns and payment rates. Annual changes in the Trust Fund projections are largely due to the latter—changes in projected care utilization and Medicare payment rates—which can be attributed directly to legislative actions or attributed to evolving assumptions about care patterns and rates. Table A1 and Figure A1 detail the changes underlying each annual update to the projections and classify them by type. During the first three decades of projections, the most substantial extensions in Medicare solvency stemmed from legislative actions. The past 10 years have been marked by iterative refinements to the Trustees' model assumptions not directly attributed to major legislation. From 2015 to 2024, these refinements have extended the projected solvency date four times. These revisions to assumptions, however, reflect the unfolding of the full effects of prior policy decisions.

Methods

We analyzed Medicare Trustees' Reports from 1985 to 2024, collating data on adjustments to the assumptions underlying the HI actuarial balance. We focused on the scenarios under intermediate assumptions, which reflect current law in a given report year. We categorized these adjustments as either changes attributed to legislative action or changes in assumptions. Changes in assumptions included updates to the valuation period, projection base, economic and demographic population information, and revisions to assumptions about utilization and spending by private health plans, hospitals, and post-acute care facilities. We grouped adjustments into four 10-year time periods, ending with the most recent report. Within each period, we calculated the unweighted cumulative change in actuarial balance attributed to assumption changes vs legislative changes for each period. Because the value of the forecasted 75-year taxable payroll is updated every year, the Trustees report the annual change in the actuarial balance as a percentage of the taxable payroll which has the effect of standardizing this measure over time.¹

Institutional review board approval was not sought because no human subjects data were used.

Legislative action extends solvency directly and indirectly

There were 20 extensions to the HI Trust Fund’s projected depletion year over the last 40 years. The longest extensions to solvency occurred around 1985, 1998-2000, and 2010 (Figure 1). These major solvency extensions are attributable to enacted legislative changes in or around those years. These legislative changes also affected key assumptions made by the Trustees in subsequent years, sustaining the HI Trust Fund's solvency further after the immediate effects of enacting legislation.

Figure 1.

Medicare Hospital Insurance Trust Fund insolvency projections, 1980-2024. Source: Medicare Trustees Reports, 1980-2024. The report published in 1989 did not provide a depletion year estimate.

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Deficit Reduction Act

Due to the Deficit Reduction Act of 1984, the 1985 report reduced projected increases in prospective payment rates, which resulted in positive changes to the actuarial balance, as did other reductions in market basket increases over the following decade. Changes to the estimation period to include outyears with larger portions of the population covered by Medicare contributed to negative changes to the balance, as did some changes in assumptions about utilization of home health care and hospital coding. By the end of the decade, the balance of the Fund as a percentage of taxable payroll had declined (Figure 2) and the number of solvency years remaining with it.

Figure 2.

Relative effects of changes on the Medicare Hospital Insurance Trust Fund's actuarial balance by decade, 1985-2024. Source: Authors' analysis of Medicare Trustees Reports, 1985-2024. Published reports in 1980-1984 and 1989 did not quantify impacts of major contributors to annual changes in the 75-year actuarial balance. The value of the Medicare Hospital Insurance Trust Fund's actuarial balance is measured as a percent of the annually projected 75-year taxable payroll. Bars indicate the unweighted cumulative percent point of change on the actuarial balance resulting from changes due to either implemented legislative policy measures or changes in key assumptions of the Trustees.

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Balanced Budget Act

In the following decade, the Balanced Budget Act of 1997 (BBA) and subsequent Balanced Budget Refinement Act of 1999 (BBRA) were the most significant legislative changes. The BBRA and BBA reduced Medicare spending through payment reductions to providers and managed care plans. In the 2000 Report, the Trustees extended the Trust Fund’s projected solvency by 10 years to 2025 (Figure 1) due to lower-than-expected spending in 1999 and robust economic growth. This was the largest projected extension to Medicare solvency prior to the Affordable Care Act (ACA).

Medicare Advantage

Of the notable changes introduced by the BBA was the formal creation of the Medicare + Choice program, based on the risk-based contracting system established by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. Now known as Medicare Advantage (MA), payment rates to these MA plans are benchmarked to traditional Medicare payment rates. The TEFRA payment formula was risk adjusted using only basic demographic factors. After the BBA reworked TEFRA's payment formula, the actuaries noted that even with the improved risk adjustment methods, per enrollee MA costs were assumed to be higher than fee-for-service (FFS) costs. Each year from 1995 to 2004, the Trustees decreased projected levels of MA enrollment relative to initial overestimates of enrollment growth; the assumed costs for MA beneficiaries were also higher than their counterparts in traditional Medicare. From 2007 to 2024, projections of MA enrollment grew as the actual share of eligible Medicare beneficiaries enrolled in MA jumped from 19% to 54%.³ This increased enrollment growth was paired with evolving assumptions about costs per enrollee with lower FFS cost projections in traditional Medicare bringing down projected MA benchmarks, followed by higher rates in 2018 driven by increased MA risk scores and coding increases. Over the last decade, the higher assumed MA enrollment growth had a negative effect on the actuarial balance but it was offset in part by the lower projected payment rates to private health plans.

Affordable Care Act

In 2010, the passage of the ACA extended the Trust Fund’s projected depletion year by 12 years, to 2029 (Figure 1). The ACA introduced changes to Medicare Part A payments, resulting in lower projected payments to FFS providers and lower payments to private health plans. High-income workers were required to pay additional HI payroll taxes beginning in 2013. An excise tax on employer-provided health plans was assumed to cause an increase in the portion of compensation subject to the HI payroll tax. Medicare Advantage plan bid assumptions were lowered to reflect data, suggesting that certain provisions of the ACA would reduce growth in these costs by more than was previously projected. Legislative actions account for the overall positive change in the estimated actuarial balance between 2005 and 2014 (Figure 2).

Although the 2015-2024 period saw less change in the actuarial balance directly attributable to legislative change compared with previous periods, the predicted year of insolvency was still cumulatively extended by 6 years over the last decade (Figures 1 and 2). The largest change in the actuarial balance in the last 10 years occurred in 2024 due to a legislative change which excluded indirect medical education and direct graduate medical education costs for MA enrollees from the MA spending calculations. However, many assumption changes in the last decade were results of adjustments made to more accurately capture the full effects of policy decisions made in prior years.

The ACA took important steps toward incentivizing care that was more value-based. New initiatives, including Accountable Care Organizations and the Comprehensive Care for Joint Replacement Model, that promoted bundling payment and aimed at improving care quality, reducing costs, and lowering Medicare cost growth rates were put in place. Although evaluations have shown mixed results, there is evidence some significantly reduced spending mostly due to lower use of post-acute care, and lower rates of spending growth overall may be due to the focus on value-based care.^4,5

In addition, post-acute care payment reforms enacted under the ACA contributed to significant effects on the Trust Fund's actuarial balance in later years. For example, SNF payment rates were lowered by 3.3% and home health agency (HHA) outlier payments in 2010 were capped at 10% of total payments for each agency. From 2011 to 2012, utilization of SNF and HHAs was assumed to increase in the short term. Starting in 2013, however, real expenditure data for SNFs indicated that these projected estimates were unduly high. The Trustees then lowered these assumptions, along with assumptions about case mix, over the next decade to correct this projection error.

Legislative action that worsened projected solvency

While legislation has often improved the Trust Fund’s solvency, it is equally important to consider how some legislative changes have worsened the fiscal outlook. The 2004 Trustees report predicted a decrease of seven solvency years from the prior year’s projection—the most significant decrease in projected solvency by the Trustees in the last four decades (Figure 1). This substantial shift was largely attributed to the 2003 Medicare Modernization Act, which increased payments to rural health providers and private managed care plans.

In subsequent years, other legislative changes negatively impacted the actuarial balance, although to a lesser extent. These included the elimination of the Independent Payment Advisory Board and repeal of the individual mandate in 2018, which increased the estimated number of the uninsured and led to a large increase in projected uncompensated care payments. Other legislation passed in 2008 and 2009 included the Supplemental Appropriations Act, the Medicare Improvements for Patients and Provider Act, the QI Program Supplemental Funding Act, and the American Recovery and Reinvestment Act. Although these Acts had negative impacts on the actuarial balance, it is important to note that they all had provisions to improve care access and quality for Medicare beneficiaries, such as the establishment of a Medicare Improvement Fund available to the Secretary of Health and Human Services to make improvements to the original FFS program under Parts A and B.

Implications for the future

The 1980 Report of the Medicare Trustees projected that the HI Trust Fund would be insolvent in 1994; the 2024 report projects it will be solvent until 2036. Trustees Reports have attributed most of the solvency extensions to the program to major legislative changes. Although the last major legislative change extending the solvency of the Medicare program occurred 15 years ago, the projected Trust Fund balance has continued to grow due to modifications to key assumptions about the pace of cost growth.

These data counter the common misconception that postponements of projected depletion dates indicate the HI Trust Fund’s insolvency is self-stabilizing. Improved solvency reflects legislative actions that push back Trust Fund exhaustion. Our findings demonstrate that major legislative changes often have larger and more sustained effects than originally estimated. Such legislative actions include changes to provider payments that have lasting downstream effects and indirectly restrain growth in other parts of the program, including payments to private health plans, and improvements in risk adjustment to better align per enrollee costs in MA and traditional Medicare.

Consequently, proactive strategies are necessary to sustain Trust Fund solvency. The challenge for policymakers seeking to improve Medicare's financial outlook is to enact and sustain substantial legislative changes rather than short-term solutions, such as temporary payment changes and shifts across budget categories. Such policies can take time to develop, time that policymakers should not take for granted given the recent uptick in cost growth in the United States.⁶

Supplementary material

Supplementary material is available at Health Affairs Scholar online.

Acknowledgements

The authors are grateful to Xintong Xu for excellent research assistance.

Funding

This project was funded by grant ID #23-23525 from the Commonwealth Fund.

Notes

Author notes