Medicare at 60: Suggestions for balancing access to care and financial protections with fiscal concerns

Abstract

For 60 years, Medicare has been a cornerstone of the American social insurance system, protecting millions of aged, blind, and disabled people from high health care costs and ensuring access to necessary services. Prior to the creation of Medicare, nearly half of all people aged 65 and older were uninsured.¹ Today, less than 1% of the elderly population is uninsured.² More broadly, Medicare influences the U.S. health care system, affecting provider supply, payment rates and methods, and care delivery institutions.

Recent news about Medicare's fiscal situation has been encouraging. Since 2021, the projected date of depletion of the Medicare Part A trust fund has been pushed back by 10 years, from 2026 to 2036.³ More importantly, Medicare spending per beneficiary has grown relatively slowly over the last 10 to 15 years, due to factors such as smaller increases in payment rates for many services, slower-than-expected growth in the volume of services, demographic changes in the Medicare population, better treatment of cardiovascular disease, a decline in new drug introductions, and a shift to generic medications.^{4, 5}

Despite these positive trends, Medicare still faces significant fiscal challenges. The program's demographic challenges are well known. Since Medicare's founding, the worker-to-beneficiary ratio has dropped from 4.6 to 2.9 and is projected to fall to 2.5 by 2030.^{6, 7} Medicare spending as a share of GDP has grown from around 0.7% to 3.7% since the program's inception and now accounts for 14% of the federal budget.^{8, 9} More concerning to those worried about the fiscal burden of Medicare, is that, while forecasting spending is inherently challenging, projections suggest a significant increase in Medicare spending over the next decade.

Moreover, some of the factors contributing to the slower recent growth in per-beneficiary spending may not be sustainable. For example, inflation-adjusted physician fees have declined significantly in recent years.¹⁰ Access to physician services has remained adequate during this period, but the relatively low increases in payment rates that physicians are slated to receive in the future may not be sustainable as concerns about access to primary care grow and payment rates reduce the viability of independent practice, encouraging physicians to seek employment from larger organizations.¹¹ When certain physician practices are purchased by health systems, Medicare's payments commonly shift from the physician fee schedule to the outpatient prospective payment system, which increases spending. Similarly, because of the productivity adjustments to the payment systems adopted in the Affordable Care Act, inflation-adjusted hospital payment rates have grown slowly relative to hospitals' costs which has contributed to negative Medicare margins for many hospitals as well as some hospital closures. These low payment rate trajectories may not be sustainable.¹² Additionally, the recent introduction of new medications for conditions such as cancer, Alzheimer's disease, and diabetes may lead to higher spending growth for drugs in the future than in the past decade.

Overall, CMS projects that, under current law, after adjusting for inflation, spending for Part A and Part B services will rise by an average of 4.5% annually between 2023 and 2032, driven entirely by growth in the number of beneficiaries and growth in the volume and intensity of services used. Medicare's prices, under current law, are projected to decline by 0.7% annually over this period after adjusting for inflation.¹³

In short, the tension between a desire to limit Medicare spending growth and the twin goals of providing financial protection and access to care for beneficiaries is as salient today as ever. The ability of the Medicare program to address growing fiscal pressures while continuing to meet its objectives will require reforms in many areas of the program.

Below, we highlight some of the recommendations from the Medicare Payment Advisory Commission (MedPAC), an independent congressional agency that advises Congress on issues affecting the Medicare program, aimed at addressing Medicare's challenges and their implications for future policymaking for this critically important program. Though the different parts of Medicare are interrelated, we first present recommendations related to the traditional Medicare program (TM), followed by recommendations for the Medicare Advantage program, which enrolls about half of all Medicare beneficiaries in private health plans. We do not emphasize policies related to prescription drugs because major reforms (including the redesign of part D and other policies included in the Inflation Reduction Act) have recently been enacted, and it will take to time to assess the effects of these reforms. That said, MedPAC has recommended reforms related to Medicare's payments for drugs approved through the accelerated approval process due to concerns around the completion of confirmatory trials. Similarly, we do not discuss options for raising revenue for Medicare, such as tax increases, because MedPAC has not made related recommendations. However, given projected changes in demographics, policymakers may choose to include revenues as part of shoring up Medicare's solvency. This underscores the need for efficient use of Medicare resources.

The TM program gives beneficiaries a broad choice of providers (the vast majority of hospitals and physicians participate) but does not provide any additional benefits beyond the standard package. By contrast, private Medicare Advantage (MA) plans can require enrollees to obtain care from in-network providers and employ utilization management tools such as prior authorization, but they also offer a wide array of extra benefits that TM does not cover. MA enrollment has grown substantially over the past decade and a majority of beneficiaries with both Part A and Part B coverage are now in MA plans. In some markets, MA participation exceeds 80%.

When private plans were added to the Medicare program, they were viewed as a way to produce both program savings (by managing service use and potentially negotiating more favorable payment rates) and provide extra benefits to enrollees (which would be financed using a portion of the savings that plans achieved). However, MedPAC has found that the Medicare Advantage program (and its predecessors), in aggregate, have never saved Medicare money—payments to plans have always been higher than the amount Medicare would have spent to cover the same beneficiaries in TM. In March 2024, the Commission estimated that payments to MA plans are 22% higher than TM costs, stemming largely from relative coding intensity and favorable selection into MA of beneficiaries with lower-than-expected spending.²⁴ These higher payments have allowed MA plans to offer increasingly generous supplemental benefits and better financial protection for MA enrollees, such as lower cost sharing and reduced premiums. This has led to steady growth in MA enrollment.²⁵

Apart from these recommendations, MedPAC acknowledges that if enrollment in MA continues to grow, a more fundamental redesign of the MA program will be needed because setting MA benchmarks based on a shrinking TM program will become increasingly problematic. Policy makers may need to consider options such as competitive bidding, using MA data to set payments, or using administrative benchmarks.³¹

For 60 years, Medicare has been a pillar of the American social insurance system. It has provided generations of Americans with financial protection from illness and enabled them to access needed care. Yet, as the baby boomers age into the program and medical science continues to produce important, health-improving innovations that must be financed, the Medicare program needs to continue evolving to promote efficient care delivery while continuing to ensure access and financial protection. There are no silver bullet solutions, but the approaches above suggest ways to improve incentives for efficient delivery of care, improve beneficiary access to high-quality care, increase competition, and improve the program's fiscal situation.