MEDICARE IN NEBRASKA: Addressing Solvency Issues Without Cutting Benefits

Medicare is a vital program ensuring millions of individuals, including hundreds of thousands of Nebraskans, access to essential medical services. However, as demographic shifts and rising health care costs put a strain on Medicare’s finances, the program faces imminent solvency challenges. Proposed policy solutions aim at securing Medicare’s future amidst fiscal pressures and threatened cuts. Policies that aim to shore up Medicare’s main source of revenue – in part by closing tax loopholes for the wealthy – will assure the longevity of Medicare, as opposed to policies that would move the administration of Medicare to the private sector, eroding benefits over time.

Background on Medicare

Medicare plays a crucial role in keeping 67 million Americans healthy and financially secure. Established in 1965 and expanded over the decades, Medicare is the federal health insurance program for Americans who are 65 and older, as well as certain younger Americans with disabilities.

Medicare is divided into four parts: Part A (hospitalization), Part B (medical insurance), Part C (Medicare Advantage) and Part D (prescription medication). Medicare Advantage combines Part A, Part B, and usually Part D coverage into one plan provided by a private company that follows rules set by Medicare. Together, Part A and Part B are often referred to as Original Medicare. Most people who receive Social Security payments and are 65 or over are entitled to Medicare Part A.

In Nebraska, Medicare is a lifeline. Over 372,000 residents are covered by Medicare – about 19% of the state’s population. About a third of beneficiaries in Nebraska are enrolled in Medicare Advantage plans. Additionally, Nebraska residents have 22 Medicare Part D standalone plans to choose from.

With the Inflation Reduction Act, Medicare is now required to negotiate prices with drug companies for certain brand-name drugs. The Inflation Reduction Act also caps out-of-pocket spending for Part D. Due to the Inflation Reduction Act, roughly 13,365 Medicare Part D enrollees in Nebraska will benefit from a yearly cap of $2,000 on their out-of-pocket prescription drug expenses. More than 17,000 Nebraskans will see their insulin copays limited to $35 per month.

How Medicare Works

Understanding how Medicare operates is essential given its critical role in ensuring health care access for millions of Americans.

In 2023, funding for Medicare totaled $1 trillion. The funding comes from a variety of sources that feed into two U.S. Treasury trust funds called the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund.

The HI Trust Fund is funded mostly through payroll taxes, meaning Medicare is a benefit earned by taxpayers who pay into it. The HI Trust Fund Medicare Part A and Medicare Program administration.

The SMI Trust Fund is funded by funds authorized by Congress, in addition to premiums from people enrolled in Medicare Part B and D. It pays for Part B and D benefits, as well as administrative costs. 

Upcoming Solvency Issues

As Medicare funding faces ongoing challenges stemming from demographic shifts and rising health care costs, the program's long-term sustainability hinges on necessary policy adjustments.

To date, the HI trust fund has never been fully depleted – but the way things are going, that might be the case by 2036. Beginning in 2030, Part A spending is projected to exceed revenues, and by 2036, the reserves will be fully depleted.

The deficit is due in part to our country’s aging population. As more people become eligible for Medicare due to aging, there are fewer workers paying into the system relative to the number of beneficiaries drawing benefits, partially due to the decline of birth rates since 1965. In addition, the cost of health care has increased rapidly, further contributing to the solvency crisis.

While short-term projections have improved slightly, Medicare faces ongoing challenges due to increasing health care costs and demographic changes. Long-term sustainability may require policy changes.

Policy Solutions

As policymakers address Medicare's looming solvency challenges, various legislative proposals aim to bolster the program’s financial stability.

President Biden’s Budget Proposal

President Biden’s budget proposal for the year 2025 lays out several key provisions aimed at funding Medicare. Perhaps most crucially, the budget proposal takes steps to ensure the solvency of the HI trust fund. Currently, high-income earners can utilize loopholes to avoid paying Medicare taxes on certain types of income, such as profits from pass-through businesses. President Biden proposes closing this loophole by subjecting all incomes over $400,000 to Medicare taxes, increasing the Medicare tax rate from 3.8% to 5% on earned and unearned income for those high-earning individuals.

Another loophole addressed in the budget relates to the Net Investment Income Tax (NIIT), established under the Affordable Care Act, which imposes an additional 3.8% tax on certain investment income for individuals with high incomes. The Biden budget proposes to direct revenue from the NIIT into the HI Trust Fund. Currently, there are concerns that loopholes allow wealthy business owners to avoid profits they get from passtrhough businesses. By closing these loopholes, the budget aims to ensure that the NIIT contributes fully to funding Medicare.

Overall, these measures are part of broader efforts in the Biden budget to strengthen Medicare's financial sustainability.

H.R. 34

Introduced in Congress in 2022, H.R 34, the “Assuring Medicare’s Promise Act,” takes a similar tact to Biden’s budget, proposing to redirect current NIIT revenue into the HI Trust Fund. It would also close the loophole that allows wealthy individuals to avoid paying the NIIT – wealthy business owners of pass-through businesses would have to pay either the 3.8% Medicare employment tax or the 3.8% Net Investment Income Tax. The bill was estimated to generate $650 billion, extending Medicare solvency for a decade or more.

… And Policy Trojan Horses

While some policymakers propose measures to fortify Medicare’s financial stability through tax reforms and funding reallocations, other legislative initiatives threaten to cut enrollees’ vital benefits.

In January, lawmakers introduced H.R. 5779, a bill to create a bipartisan commission on federal debt and make policy recommendations to Congress that would then be fast-tracked for a vote. What programs will be subject to cuts to ameliorate the debt? According to the House Budget Committee chairman, “everything’s on the table.” The closed-door process could be a way to fast-track cuts to vital programs including Medicare.

Some lawmakers support moving to a fully privatized model for Medicare. Project 2025, the conservative policy blueprint, advocates for “mak[ing] Medicare Advantage the default enrollment option” for people who are newly eligible for Medicare. Privatization would usher in an end to Medicare as we know it, undermining the premise that seniors can go to any doctor or provider they choose. It would also funnel revenue to private health insurers, who benefit financially from Medicare Advantage plans – putting the future of the American health care system in the hands of corporations.

In March, the Republican Study Committee – a conservative house caucus – released a budget proposal calling for restructuring Medicare. The group of lawmakers rejected possible options to address the insolvency crisis – raising taxes and transferring money from the general fund –  leaving cuts to benefits as the only option. The new budget proposes converting Medicare to a “premium support model,” requiring Medicare to compete with private plans, and give beneficiaries subsidies to shop around for policies – thereby incentivizing more Medicare beneficiaries to funnel revenue to private corporations. The payments that beneficiaries would receive to help them buy coverage would likely fail to keep pace with health care costs, thereby shifting substantial costs to Medicare beneficiaries rather than protecting them from cost increases.

Legislative initiatives like President Biden’s budget proposal and H.R. 34 The stakes are high, but we have the ability to shore up Medicare's financial foundations by protecting the solvency of the HI Trust Fund. It’s important to be cautious against policies that could undermine Medicare's core principles or jeopardize essential benefits. By pursuing responsible reforms, policymakers can safeguard Medicare for decades to come, assuring the continuity of its critical role in America’s health care system, and protect our most vulnerable Americans’ ability to retire with dignity.