Medicare’s hospital insurance trust fund is projected to reach insolvency by 2026. While looming insolvency is, in a sense, nothing new for Medicare – the hospital trust fund has been within six years of insolvency five times in the last five decades – it has never been closer to insolvency than it is now. In response to prior threats of Medicare insolvency, Congress has always acted to avoid such crises. Yet, as Professor Lawrence explains in Medicare “Bankruptcy”, today’s Congress may be unwilling or unable to do anything more than a short-term fix at best. At worst, Washington’s extreme polarization may create a situation where even politically sacred Medicare runs out of funds.
Medicare “Bankruptcy” makes two key contributions to the literature on Medicare reform. First, it provides a detailed examination of the many legal and practical issues that would be raised by Medicare trust fund insolvency. Second, it proposes a more rational approach to periodic threats of Medicare insolvency than simply crisis/short-term patch/repeat. By setting out the rules for Medicare bankruptcy in law in advance, Professor Lawrence argues, insolvency will be less harmful, less likely, and more likely to promote compromise and cost control.
The first contribution, while perhaps not as intrinsically attention-grabbing as a proposed solution to Medicare’s funding problems, is of vital importance to both policymakers and Medicare stakeholders. Insolvency’s effects would not be limited to Medicare providers and beneficiaries, but would impact the U.S. healthcare system as a whole. As Lawrence explains, the reimbursement disruptions caused by Medicare insolvency likely would trigger provider consolidation, reduce charitable care, increase private insurance premiums, and result in more vigorous bill collection. But sorting out the legal and practical logistics of Medicare insolvency is no easy task. Professor Lawrence relies on his federal budget expertise to explain how much is unknown about the mechanics of insolvency and how the Department of Health and Human Services is likely to respond to a lack of funds. One of the most important take-aways from this part is that fact that Medicare insolvency would not involve a sudden shock to the system. Rather, it is likely to play out as either delayed payments or a pro rata reduction of all hospital trust fund payments. These reductions or delays would initially be modest in amount, but would become increasingly large as the insolvency grows. Because of this slow burning nature of Medicare insolvency, Congress may not feel particularly compelled to react, leaving affected providers with financial and legal uncertainty that could last years.
After establishing the potential shape of insolvency, Professor Lawrence makes the case for being more ambitious in our response to the current insolvency crisis than the sort of short-term fix that has become the norm in a fractured Washington. Specifically, he makes the case for setting forth, in advance, how Medicare trust fund insolvency would be administered. He argues that doing so would make such insolvency less unfair and harmful if it did occur, in large part through reducing the costs of uncertainty and allowing us to consider, in advance, whether certain providers who are particularly reliant on Medicare reimbursement, and who play an important role in providing critical health care access, might warrant protection in that process. Another advantage offered by this approach would be to allow such decisions to be made largely through the democratically accountable legislative process, rather than by an agency operating in crisis mode.
One of the most interesting arguments advanced by the article is that specifying a Medicare bankruptcy framework in advance could help to address some of Medicare’s problematic political economy. After all, the insolvency problem is not new, but the “fixes” enacted by Congress never seem to last and seem to involve a one-way ratchet that increases spending. As Lawrence explains, this outcome is not surprising given that Medicare presents a classic opportunity for rent-seeking by providers. Providers represent a concentrated interest with significant financial interests at play, while those who might seek better cost controls exert at best a diffuse counterpressure.
By enacting Medicare insolvency rules in advance, Congress could help shape future industry lobbying efforts towards ends that benefit the system as a whole. Under the current framework, wherein no rules for insolvency have been specified, large providers may not actually have a reason to push Congress to avoid insolvency or to control costs. As Lawrence explains, many large hospitals and care facilities would be well situated to ride out the effects of Medicare insolvency. In fact, some of these providers might gain further competitive advantages when their less financially stable competitors exit the market in the face of Medicare insolvency. But specifying an insolvency framework in advance allows Congress to choose who would bear the insolvency burden and to what extent. For example, Congress could choose to protect reimbursement levels for safety net or rural care facilities, leaving large healthcare systems to bear a majority of the reduced reimbursements brought on by insolvency. If Congress adopted such a framework, the largest and most powerful industry players would now have an interest in achieving Medicare fiscal sustainability in order to ensure that insolvency does not occur. By creating a clear possibility of future financial harm absent real reform, Lawrence’s specified-in-advance bankruptcy framework harnesses the problem of industry influence on the legislative process and redirects that influence toward productive ends.
The most difficult part of this sensible approach, it seems to me, will be convincing Congress to take action in advance of a true insolvency crisis, but Medicare’s “Bankruptcy” does an excellent job of making the case for why it might be in legislators’ interests to do so. Even for those who are skeptical of the proposed solution, the article makes an incredibly valuable contribution to the Medicare literature by explaining in detail the legal and practical issues that will inevitably arise if the Medicare trust fund reaches insolvency.
