As I write this, the debate over America’s debt ceiling has reached a fever pitch, with dire predictions of mass layoffs, delayed Social Security checks, skyrocketing mortgage rates, and more.
All that sound and fury is not a bad thing, since the consequences of a default would be catastrophic – a “meteor” on a collision course with the U.S. economy, in the words of President Biden.
But here’s another meteor that no one is talking about: If Washington doesn’t act soon to prevent insolvency for Medicare Part A, providers could, in a worst-case scenario, see their payments cut by 6%. (The alternative isn’t much better: longer and longer lag times between service and payment as the Treasury Department juggles tax collections and disbursements in real time.)
Look at your Medicare revenue for the last year, and imagine what a 6% cut would mean for your margin. For any hospital that’s already struggling, that kind of financial blow would be fatal.
Losing Trust in the HI Trust Fund
So why is nobody talking about this? I see two major reasons:
First, most people don’t understand the “failsafe” that will occur if, as predicted, the Hospital Insurance (HI) trust fund reaches zero in 2026. Medicare is not authorized to pay its bills through borrowing or general revenue. Thus, as the Medicare Trustees have been warning for nearly a decade, “Under current law, payments would be reduced to levels that could be covered by incoming tax and premium revenues.”
For 2026, the Trustees project a shortfall of 6%, rising to 10% in the following years. In other words, once the failsafe kicks in, the gap between collections and payments keeps getting wider, forcing ever-steeper cuts.
Secondly, history might be lulling us into a false sense of security. After all, Medicare has faced insolvency before, and somehow Washington always seems to come through with a solution.
That might be true, but only once before has insolvency been this close, based on 30 years of uninterrupted projections from the Medicare Trustees. The last time it happened was in 1996-97, and lawmakers at that time responded with the sweeping Balanced Budget Act, which passed both houses of Congress margins of 85% or more.
The Balanced Budget Act was a monumental act of political compromise that saved Medicare for a generation – and it’s inconceivable that that kind of compromise could be reached today, given our current political polarization.
Where does that leave us? Without a major reform effort, we think Congress may soon begin tinkering at the edges to avoid the “meteor hit” of that 6% reimbursement cut. Again, partisanship will severely limit the options, but even the three cuts we see as most politically palatable are likely to inflict significant financial pain for hospitals and health systems.
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