How Medicare Cuts Will Hurt Seniors

What You Need to Know About Medicare Funding

Senior man taking medication
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President Trump made promises on the campaign trail to preserve Medicare. Under no circumstances would he cut Medicare benefits. Unfortunately, thus far, his words are not in line with his actions. The GOP has Medicare and Medicaid in its crosshairs and is taking steps to decrease funding to what it sees as entitlement programs. This is what you need to know about Medicare funding going into 2018 and beyond.

What Is an Entitlement?

Many people do not see Medicare as an "entitlement". After all, they pay taxes into the Medicare Trust Fund through their tax contributions with the promise of access to affordable health care when they are seniors or should they become disabled.

However, while the word entitlement has pejorative connotations in some circles, Medicare and Medicaid are by definition entitlement programs. According to the Merriam Webster dictionary, an entitlement is a government program providing benefits to members of a specified group or are the funds supporting or distributed by such a program.

Understanding the Medicare Trust Fund

There are two pools of Medicare funds. The first is Medicare’s Hospital Insurance [HI] Trust Fund, referred to more colloquially as the Medicare Trust Fund. This fund pays for your Medicare Part A services, namely your inpatient hospital stays, short-term nursing home stays after hospital stays, home health care, and hospice care. This fund is where your payroll tax dollars go.

Unfortunately, the Hospital Insurance Trust is expected to be insolvent by 2029. That means it will not have enough funds to pay for all the services it does today. At that point, it may only be able to afford 88 percent of those services.

The second Medicare fund is the Supplementary Medical Insurance (SMI) Trust. This trust is based on the premiums you pay for Medicare Part B and Part D. These parts of Medicare pay for blood work, doctor visits, imaging studies, physical/occupational/speech therapy, prescription medication, preventive screening, surgery (certain procedures), and other ambulatory services.

Medicare, The Federal Deficit, and the 2018 Fiscal Budget

In 2016, total National Health Expenditures (NHE) cost $3.3 trillion dollars, accounting for 17.9 percent of the Gross Domestic Product (GDP).

Medicare spending cost $672.1 billion, representing 20 percent of total NHE and 3.58 percent of GDP. Medicaid spending accounted for $565.5 billion, 17 percent of total NHE, and 3.03 percent of GDP.

The GOP is looking to decrease how much GDP is spent on entitlement programs.

To that end, the U.S. House of Representatives passed a budget resolution for fiscal year 2018 in August 2017. In a party-line vote, the GOP proposal included $487 billion in cuts to Medicare, an increase in the Medicare eligibility age from 65 to 67 years old, and privatization of Medicare with a voucher program. As for Medicaid, federal contributions would be changed to per capita payments or block grants, significantly decreasing funding to the program by nearly $1 trillion.

The budget resolution then moved on to the Senate where it passed on October 19. The Senate-approved version then went back to the House where it passed on October 26. At this point, the proposed changes to the entitlement programs are not set in stone because there is no specific legislation to enact them. The GOP reports plans to address legislation on those issues in the new year. Instead, what the 2018 fiscal year budget did was lay the framework for the GOP Tax Bill.

The GOP Tax Bill

The GOP Tax Bill, also known as The Tax Cuts and Jobs Act, raised considerable controversy over favoring tax cuts for rich Americans over the poor and middle class. The bill is also estimated to increase the national deficit by $1.5 trillion over 10 years.

What you need to understand is how the law affects Medicare. At first glance, the Senate tax bill does not directly cut Medicare spending. You will not find those words written into the bill. However, it will still lead to cuts of at least $28 billion from Medicare annually over the next ten years.

Blame it on the PAYGO provision.

The “pay-as-you-go” law, a bipartisan law enacted as part of the Omnibus Budget Reconciliation Act of 1990, was designed to keep the deficit in check. It works this way. When Congress passes any measure that increases the deficit over five to 10 years but that doesn’t include offsetting revenues, PAYGO kicks in. The administration is then required to institute spending cuts to certain non-exempt federal programs (Medicare, Agricultural Subsidies and Supports, Affordable Care Act's Risk Adjustment Program, Operations and Support for Customs and Border Patrol, Student Loan Administration, and other programs). The decision on where specifically to cut spending would be made in a sequester.

Unfortunately, that is exactly what we are looking at with the GOP Tax Bill:

PAYGO would require that Congress reduce spending in fiscal year 2018 by $136 billion. The amount that is allowed to be cut from non-exempt mandatory federal programs is estimated to be $114 billion. That means that the full allowable amount would be cut from all programs, including Medicare.

PAYGO allows some programs to be cut by 100 percent but Medicare has a cap. Cuts to Medicare are restricted to 4 percent of the program's budget. For 2018 that would be $28 billion. By 2027, thanks to inflation and the increasing costs of medical care, that 4 percent value is expected to increase to $56 billion per year.

Since the GOP had already intended significant cuts to Medicare in the 2018 Fiscal Budget, it is unlikely that the administration would look to circumvent the required cuts under PAYGO. Even if they wanted to, they could not change or waive the PAYGO rule in a budget resolution. They would have to change the PAYGO law itself. At this time, there are no reports that the administration intends to do so.

A Word From Verywell

Despite promises to the contrary, the Trump administration has legislation in place that will cut funding to Medicare. The GOP has outlined plans to change Medicare as we know it. The 2018 Fiscal Year Budget aims to decrease Medicare funding, to increase the eligibility age for care, and to privatize the program using a voucher program. The GOP Tax Bill will cut Medicare funds by at least $28 billion per year starting in 2018.

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