Has Healthcare Reform Lowered Medicare Expenditures?

Kevin Schulman, MD


September 30, 2014

In This Article

Is Our Government Spending Less on Healthcare?

Experts in Washington have recently claimed that there will be a dramatic decrease in federal health spending in the coming years. The Congressional Budget Office (CBO) has reduced its projection of federal health spending for the next 15 years by 15%, from 9.6% of the gross domestic product (GDP) to 8% of GDP.

Does this mean that healthcare reform has been successful in lowering the costs of healthcare in the United States? Not necessarily. As in most areas of health policy, the actual story is slightly more complex than the headlines.

Kevin Schulman, MD

Let's review funding of the Medicare program and its future revenue and expenses, and see whether the CBO thinks that healthcare reform has actually tamed spending growth. Medicare, Medicaid, the Children's Health Insurance Program (CHIP), and the new healthcare reform population represent the majority of federal healthcare spending.

Medicare is big. Currently, 54 million people in the United States are enrolled in Medicare Part A, and the program is expected to grow to 70 million enrollees by 2023.

The economics of Medicare are complex. There are actually 3 different fiscal programs: hospital insurance (Part A), medical insurance (Part B), and the relatively new drug benefit (Part D). Each of these components of Medicare has different funding streams.

Medicare Part A is funded by the Medicare payroll tax. Medicare takes in the receipts from this tax, pays out the hospital expenses incurred in that year, and retains the balance in the Medicare Part A trust fund. Everyone who pays into the program for 40 quarters is eligible for this program, with no additional premium payment. Given the relatively large size of the workforce compared with the Medicare population, and the economics of the program itself based on tax receipts and expenses, the Medicare Part A trust fund has accumulated over $200 billion.

However, this fund is no longer growing, and this year is paying out more than it is receiving. When the headlines say that the Medicare program is bankrupt or will run out of cash, it is the Part A trust fund balance they are describing.

Funding of Part A and the trust fund has become a little more complicated by healthcare reform. In 2010, we increased the Medicare payroll tax, but then used this additional revenue to pay for the cost of the health insurance exchanges by writing an IOU from the Treasury to the Medicare Part A trust fund. We can now report on the statutory balance of the fund and the cash balance of the fund as a result.

Now, the paradoxical result: Because enrollment in subsidized health insurance exchanges has been slow, there is an increase in the cash resources of the Medicare Part A trust fund. Obviously, if Medicare hospital expenses increase, or if we increase enrollment in the healthcare reform insurance programs, the trust fund balance will decrease.


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