Download What Are the Implications for Medicare of the American Health Care

March 2017 | Issue Brief
What Are the Implications for Medicare of the American
Health Care Act?
Juliette Cubanski and Tricia Neuman
An important question in the debate over repealing and replacing the Affordable Care Act (ACA) is what will happen
to the law’s many provisions affecting the Medicare program. The American Health Care Act (AHCA), which recently
passed the House Energy & Commerce and Ways & Means Committees, would leave most ACA changes to Medicare
intact, including the benefit improvements (no-cost preventive services and closing the Part D coverage gap),
reductions to payments to health care providers and Medicare Advantage plans, the Independent Payment Advisory
Board, and the Center for Medicare and Medicaid Innovation.
revenue provisions in the ACA.1 Repealing
this surtax would reduce revenue to the
Medicare Hospital Insurance (Part A) trust
fund by $117 billion between 2017 and 2026,
according to the Joint Committee on
Taxation. It would also weaken Medicare’s
financial status by depleting the Part A trust
fund three years sooner than under current
law, moving up the projected insolvency date
from 2028 to 2025, based on estimates by
Medicare’s actuaries2 (Figure 1).
Figure 1
Repealing the Medicare payroll tax on high-income earners
would deplete the Medicare Part A trust fund in 2025, 3 years
earlier than under current law
Trust Fund Depletion Date:
2016 Trustees Report
Years to trust fund depletion
However, the AHCA would repeal the
Medicare payroll surtax on high-income
earners, along with virtually all other tax and
11
10
9
8
7
6
5
4
3
2
1
0
Under AHCA
2028
2025
SOURCE: Intermediate projections from 2016 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Funds; American Health Care Act (AHCA) estimate from Letter from CMS Acting
Administrator to Senator Ron Wyden, January 10, 2017.
The Medicare Part A trust fund pays for
hospital, skilled nursing facility, home health and hospice benefits. Under current law, Part A is financed primarily
through a 2.9% tax on earnings paid by employers and employees (1.45% each). The ACA increased the payroll tax
for a minority of taxpayers with relatively high incomes—those earning more than $200,000/individual and
$250,000/couple—by 0.9 percentage points.
The AHCA’s changes to the ACA’s marketplace coverage provisions and the per capita cap proposal for Medicaid
would also increase the number of uninsured, according to the Congressional Budget Office, putting additional
strain on the nation’s hospitals to provide uncompensated care. This would increase Medicare “disproportionate
share hospital” (DSH) payments as a result, which would increase Medicare Part A spending by $43 billion between
2018 and 2026, according to CBO.
Reducing the flow of revenues to the trust fund by repealing the Part A payroll surtax paid by high-income earners
and increasing Part A spending due to higher DSH payments has direct implications for the ability of Medicare to
pay for Part A benefits on behalf of Medicare beneficiaries. When spending on Part A benefits exceeds revenues, and
assets in the Part A trust fund account are fully depleted, Medicare will not have sufficient funds to pay all Part A
benefits (although the Medicare program will not cease to operate).
In addition to the impact on Medicare’s
solvency in the short term, repealing the
high-income earner payroll surtax would also
worsen the program’s long-run financial
status. Cutting off this revenue stream would
increase the 75-year shortfall in the Part A
trust fund from 0.73% of taxable payroll to
1.12%.
Figure 2
The projected depletion of the Medicare Part A trust fund has
varied over time as a result of changes in policy and the
economy affecting both revenues and spending
Years to trust fund depletion:
30
BBA
25
25
23
20
19
15
The projected date for depletion of the
Medicare Part A trust fund has varied over
time as a result of changes in policy and the
economy affecting both revenues and
spending (Figure 2). In the past, looming
insolvency has prompted policymakers to
debate and pass legislation that reduced
Medicare spending, thereby improving the
financial status of the Part A trust fund. For
example, during the mid-1990s, when the
Medicare actuaries were projecting trust fund
insolvency by 2001, Congress enacted the
Balanced Budget Act (BBA) of 1997, which
reduced Medicare spending and extended the
solvency of the Part A trust fund by an
additional seven years. With the enactment
of the ACA in 2010, Congress added several
years to Part A trust fund solvency as a result
of the law’s provisions to increase the
Medicare payroll tax on high-income earners
and reduce provider and plan payments
(Figure 3).
ACA
28 28
10
16
13
16
15 15
14
12 12
10
5
10
6
7
13
11
12
15
13
12
8
6
5
4
0
Year of Medicare Trustees Report
NOTES: BBA is Balanced Budget Act of 1997. ACA is Affordable Care Act.
SOURCE: Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance
Trust Funds, various years.
Figure 3
The Medicare Hospital Insurance trust fund gained additional
years of solvency with enactment of the ACA
2020
15
2005
12
2006
11
2007
2018
11
2008
2009
Pre-ACA
2010
Post-ACA
# years of solvency
2018
2019
8
2017
19
2029
13
2011
2024
12
2012
2024
2026
13
2013
2030
16
2014
2030
15
2015
12
2016
2005
2010
2015
2020
2028
2025
2030
SOURCE: Intermediate projections from 2005-2016 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Funds.
Whether the Part A trust fund remains solvent for an additional 11 years as projected under current law, or only 8
years if the payroll tax is repealed, Medicare faces long-term financial pressures associated with higher health care
costs and an aging population. Even if the ACA payroll tax on high earners is retained, the Medicare Part A trust
fund is likely to need additional revenue to finance care for an aging population, unless policymakers choose instead
to reduce Part A spending by cutting benefits, restricting eligibility, or reducing payments to providers and plans. By
cutting taxes on high-income earners and thereby reducing revenue to the Medicare Part A trust fund, the AHCA
would increase pressure on policymakers to take some type of action sooner rather than later.
What Are the Implications for Medicare of the American Health Care Act?
2
Endnotes
1
The AHCA would also repeal the annual fee paid by branded prescription drug manufacturers, which would decrease revenue to the
Part B trust fund, and reinstate the tax deduction for employers who receive Part D Retiree Drug Subsidy (RDS) payments to provide
creditable prescription drug coverage to Medicare beneficiaries, which would increase Medicare Part D spending.
2
The Congressiona Budget Office estimates trust fund insolvency by 2025 under current law, according to the January 2017 Medicare
baseline. According to estimates from the Committee for a Responsible Federal Budget based on CBO projections, repealing the payroll
surtax would move up the insolvency date to 2024; http://www.crfb.org/blogs/house-aca-replacement-would-accelerate-medicareinsolvency.
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