July 2017 | Issue Brief What Are the Implications for Medicare of the American Health Care Act and the Better Care Reconciliation Act? Juliette Cubanski and Tricia Neuman An important question in the debate over proposals to repeal and replace the Affordable Care Act (ACA) is what might happen to the law’s many provisions affecting the Medicare program. The American Health Care Act (AHCA), which was passed by the House of Representative on May 4, 2017, and the Better Care Reconciliation Act (BCRA), released by Senate Republicans on June 22, 2017, would leave most ACA changes to Medicare intact, including the benefit improvements (no-cost preventive services and closing the Part D coverage gap), reductions to payments to health care providers and Medicare Advantage plans, the Independent Payment Advisory Board, and the Center for Medicare and Medicaid Innovation. However, both bills would repeal the Medicare payroll surtax on high-income earners that was added by the ACA, effective January 2023. That provision, which took effect in 2013, provides additional revenue for the Part A trust fund, which pays for hospital, skilled nursing facility, home health and hospice benefits. The Part A trust fund is financed primarily through a 2.9 percent tax on earnings paid by employers and employees (1.45 percent each). The ACA increased the payroll tax for a minority of taxpayers with relatively high incomes—those earning more than $200,000/individual and $250,000/couple—by 0.9 percentage points. In addition to repealing the ACA’s Medicare payroll surtax, both bills would repeal virtually all other tax and revenue provisions in the ACA, including the annual fee paid by branded prescription drug manufacturers, which would decrease revenue to the Part B trust fund. The bills would also reinstate the tax deduction for employers who receive Part D Retiree Drug Subsidy (RDS) payments, which would increase Medicare Part D spending. According to the Congressional Budget Office, the provision in the AHCA and the BCRA to repeal the Medicare payroll surtax would reduce revenue for Part A benefits by $58.6 billion between 2017 and 2026. Proposed changes to the ACA’s marketplace coverage provisions and to Medicaid financing in both bills would Figure 1 also increase the number of uninsured, putting Repealing the Medicare payroll tax on high-income earners, plus other additional strain on the nation’s hospitals to provisions affecting Medicare spending and financing, would deplete the Part A trust fund in 2026, 2 years earlier than under current law provide uncompensated care. As a result, Trust Fund Depletion Date: Medicare’s “disproportionate share hospital” (DSH) payments would increase, leading to 2016 Trustees Report Under AHCA and BCRA higher Part A spending between 2018 and 2026 2028 of more than $40 billion, according to CBO. 2026 Altogether, changes to Part A spending and financing in the AHCA and BCRA would weaken Medicare’s financial status by depleting the Part A trust fund two years earlier than under current law, moving up the projected insolvency date from 2028 to 2026, according NOTE: The trust fund depletion date under AHCA and BCRA is based on repealing the payroll surtax effective January 2023. SOURCE: Intermediate projections from 2016 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and to Medicare’s actuaries (Figure 1). Federal Supplementary Medical Insurance Trust Funds; AHCA and BCRA estimate from Centers for Medicare & Medicaid Services Office of the Actuary, “Estimated Financial Effects of the ‘American Health Care Act of 2017’”, June 13, 2017. Reducing the flow of revenues to the Part A trust fund by repealing the payroll surtax paid by high-income earners and increasing Part A spending due to higher DSH payments has direct implications for the ability of Medicare to pay for Part A benefits on behalf of Medicare beneficiaries. When spending on Part A benefits exceeds revenues, and assets in the Part A trust fund account are fully depleted, Medicare will not have sufficient funds to pay all Part A benefits (although the Medicare program will not cease to operate). Figure 2 In addition to the impact on Medicare’s The projected depletion of the Medicare Part A trust fund has solvency in the short term, repealing the high- varied over time as a result of changes in policy and the income earner payroll surtax and other economy affecting both revenues and spending proposed changes affecting Part A spending Years to trust fund depletion: and revenues would also worsen the program’s 30 BBA ACA long-run financial status, increasing the 75-year 25 28 28 25 shortfall in the Part A trust fund from 0.73 23 20 percent of taxable payroll to 1.18 percent, 19 according to Medicare’s actuaries. 15 16 15 15 16 15 14 13 13 13 10 12 12 12 12 11 The projected date for depletion of the 10 10 8 7 Medicare Part A trust fund has varied over time 5 6 6 5 4 as a result of changes in policy and the economy 0 affecting both revenues and spending (Figure Year of Medicare Trustees Report 2). In the past, looming insolvency has NOTES: BBA is Balanced Budget Act of 1997. ACA is Affordable Care Act. SOURCE: Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance prompted policymakers to debate and pass Trust Funds, various years. legislation that reduced Medicare spending, Figure 3 thereby improving the financial status of the The Medicare Hospital Insurance trust fund gained additional Part A trust fund. For example, during the mid- years of solvency with enactment of the ACA 1990s, when the Medicare actuaries were 2005 15 2020 # years of solvency projecting trust fund insolvency by 2001, 2006 12 2018 Congress enacted the Balanced Budget Act 2007 11 2018 (BBA) of 1997, which reduced Medicare 2008 11 2019 spending and extended the solvency of the Part 2009 Pre-ACA 8 2017 A trust fund by an additional seven years. With 2010 Post-ACA 19 2029 the enactment of the ACA in 2010, Part A trust 2011 13 2024 12 fund solvency was extended by several years as 2024 2012 2013 13 2026 a result of the law’s provisions to increase the 2014 16 2030 Medicare payroll tax on high-income earners 2030 2015 15 and reduce provider and plan payments 2016 12 2028 (Figure 3). 2005 2010 2015 2020 2025 2030 SOURCE: Intermediate projections from 2005-2016 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Whether the Part A trust fund remains solvent for an additional 11 years, as projected under current law, or 9 more years, under proposed changes affecting Medicare Part A spending and financing in the AHCA and BCRA, Medicare faces long-term financial pressure associated with higher health care costs and an aging population. Even if the payroll surtax on high earners is retained, the Part A trust fund is likely to need additional revenue to finance care for an aging population, unless policymakers choose instead to reduce Part A spending by cutting benefits, restricting eligibility, or reducing payments to providers and plans. By cutting taxes on high-income earners and thereby reducing revenue to the Medicare Part A trust fund, the AHCA and BCRA would increase pressure on policymakers to take some type of action sooner rather than later. The Henry J. 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