Biden’s Medicare Proposals: Good Policy, Good Politics, Unlikely to Pass

President Biden’s proposed budget will increase taxes on the wealthy to protect Medicare and lower prescription drug costs for seniors. While unlikely to pass the Republican-controlled House, it reflects robust public policy and effective politics to keep Democrats from working with Republicans to harm the popular program.

While President Biden is set to release his full proposed budget later this week, the White House has released a fact sheet on how it will fund and change Medicare. First, the budget would fix the contemporary issue of Medicare solvency.

Medicare is the federal government program that provides medical coverage for all seniors aged 65 and above along with others with qualifying disabilities. The central components of Medicare are Part A and Part B, which provide hospital insurance for inpatient care (Part A) and medical insurance for outpatient care (Part B).

There is also Medicare Part C or Medicare Advantage, which offers private insurance plans that provide Part A and Part B coverage; although, they may not cover hospice care, may offer additional coverage, and can have different rules and costs associated with them.

Additionally, Congress created Medicare Part D in 2003, which provides coverage to help Medicare beneficiaries pay the costs of prescription drugs. While the original law prohibited Medicare from negotiating drug prices directly with manufacturers, Biden and congressional Democrats allowed Medicare to negotiate some drug prices to lower costs via the Inflation Reduction Act (IRA).

People may have heard the concern that Medicare will go bankrupt. This claim is false, but it regards how Medicare Part A will likely not be able to pay 100% of the cost of the hospital coverage it provides to all beneficiaries by 2028.

Medicare is an entitlement program, meaning that Congress does not need to annually approve and appropriate funds to it through the budget; rather, Medicare beneficiaries are guaranteed funding by the law that created it: the Social Security Amendments of 1965.

Guaranteed Medicare Part A funds come from the Hospital Insurance (HI) Trust Fund. The vast majority (88%) of the money in the HI Trust Fund comes from a 2.9% payroll tax, where the government taxes each employee 1.45% and each employer 1.45% while self-employed individuals pay the whole 2.9%.

However, single and married individuals pay an extra 0.9% if they make $200,000 and $250,000 in annual income respectively, bringing their total rate to 3.8%. There is also a 3.8% net investment income tax (NIIT) that applies to qualifying types of investment income, including but not limited to interest, dividends, royalties, rents, and capital gains (although this tax is not dedicated to the HI Trust Fund).

As the cost of healthcare in the United States has consistently increased and the population has aged with a growing percentage of retired Americans qualifying for Medicare, the HI Trust Fund will begin spending more than it receives in revenue starting this year. Thus, by 2028 according to Medicare Trustees and 2030 by the Congressional Budget Office (CBO), the HI Trust Fund will not be able to provide 100% coverage under Part A. It will still cover around 90% of benefits from 2028-2031 (so it will not be bankrupt).

According to the publicly released fact sheet, Biden’s proposed budget will solve the Medicare solvency issue at least into the 2050s without raising taxes on over 98% of Americans. More specifically, Biden proposes raising the tax on earned and unearned income above $400,000 annually from 3.8% to 5.0%. According to one estimate by the Tax Policy Center, this would raise more than $117 billion in revenue over a decade.

Additionally, Biden wants to guarantee that NIIT revenue is guaranteed for the HI Trust Fund in addition to closing loopholes that allow “high-paid professionals and other wealthy business owners” to exempt some of their income by claiming it is neither earned nor investment income. The NIIT change would raise over $350 billion in revenue over a decade according to the Center on Budget and Policy Priorities. 

Regarding the closing of loopholes, the fact sheet does not get into specifics; thus, we will have to wait to see the actual budget proposal to verify Biden’s claims of significant revenue increases. Although, Congress’ Joint Committee on Taxation estimated that a proposed loophole-closing rule in President Obama’s proposed budget for Fiscal Year 2017 would have raised $236 billion in revenue over a decade.

Overall, Biden’s proposed tax changes to fund Medicare are sound policy, as they protect a vital program that not only has guaranteed health coverage to millions of Americans but has also worked to reduce poverty. After Congress passed Medicare in 1965, the senior poverty rate fell from 29% to 10.5% in 1995. Ultimately, Biden’s proposal would protect Medicare without raising any taxes on the people who do not make above $400,000 annually and rely on it.

The proposal is also great politics for two key reasons. First, Medicare is an extremely popular program with 74% from all Americans and 84% support from those currently with Medicare benefits according to a 2023 YouGov poll. Support comes from across partisan lines, as 82% of Democrats, 69% of Independents, and 71% of Republicans hold favorable views of Medicare. 

Second, Biden’s move puts further pressure on Congress to not cut Medicare to deal with the solvency issue. Biden already played a smart move during his recent State of the Union speech, getting congressional Republicans to effectively agree in public that they will not cut Medicare or Social Security. However, Republican members of Congress have an extensive history of advocating and pushing proposals to cut both programs.

In addition to Republicans, Democratic Senator Joe Manchin from West Virginia has reportedly discussed with House Speaker Kevin McCarthy (R-CA) to create a bipartisan committee to address the solvency of Medicare and Social Security. Senators Manchin, Kyrsten Sinema (I-AZ), Mark Warner (D-VA), and Angus King (ME) cosponsored such legislation in 2021 with nine Republicans.

There is evidence to suggest that such a bipartisan committee would move to cut Medicare, as some senators–such as Senators King, Tim Kaine (D-VA), Bill Cassidy (R-LA), and Mitt Romney (R-UT)–are holding bipartisan talks on Social Security. One of the reported solutions they have discussed is raising the retirement age to 70, reducing the number of people qualifying for benefits. Raising the eligibility age for Medicare to 70 is a similar Republican-supported policy.

Thus, through proposing a budget that addresses Medicare solvency by increasing revenue on rich Americans rather than cutting benefits, Biden is putting public pressure on members of Congress, especially those in the Democratic caucus, to not work against him.

In addition to funding Medicare, Biden’s proposal will permit “Medicare to negotiate prices for more drugs” and bring “drugs into negotiation sooner after they launch,” expanding the limited number of drugs the IRA allowed Medicare to negotiate prices for.

This policy would reduce prescription drug prices for Medicare beneficiaries. Several CBO analyses have shown that allowing Medicare to negotiate drug prices produces billions in cost savings. Additionally, both the Veterans Health Administration and Department of Defense can currently negotiate drug prices, and they pay roughly half the price for prescription drugs compared to most Americans.

In the system most Americans find themselves in, where Medicare does not negotiate their drug prices, middlemen known as pharmacy benefit managers (PBMs) negotiate with drug manufacturers and actually incentivize them to hike prices. In fact, the Federal Trade Commission (FTC) announced higher enforcement scrutiny on the relationship between PBMs and manufacturers for illegally raising prices.

Biden’s proposal would also try to lower costs by extending the IRA’s requirement that drug companies pay rebates to Medicare when increasing drug prices faster than inflation to apply to commercial insurance companies. This requirement effectively requires drug manufacturers to refund Medicare and insurance companies for price hikes.

Additionally, Biden proposes to significantly cut the amount Medicare beneficiaries pay in cost-sharing for their prescriptions by capping Part D cost-sharing on specific generic drugs to $2 per prescription per month. The plan also “eliminates cost-sharing for three mental health or other behavioral health visits per year.” 

Cost-sharing payments are simply the amount a covered individual has to pay for the drug that their insurance (in this case Medicare) covers. The standard Medicare Part D cost-sharing arrangement is that individuals pay 25% of the cost; thus, the $2 per prescription per month cap could produce significant savings depending on what drugs are applicable (which the fact sheet does not specify).

Similar to his funding of Medicare, expanding the reach of Medicare drug price negotiation and lowering costs is great politics on top of robust policy. A 2021 Kaiser Family Foundation (KFF) poll found that 83% of Americans–including 92% of Democrats, 85% of Independents, and 76% of Republicans–support allowing the federal government to negotiate drug prices. Additionally, a 2023 Axios poll showed that the top health concern that Americans want the government to address is the high cost of health care and prescription drugs.

All in all, we do not know the specifics of Biden’s budget proposal yet; however, the highlights regarding Medicare that he has released reflect wise policy and politics. In an opinion piece supporting his proposal, Biden also lambasted Republicans for opposing his agenda, supporting big pharmaceutical companies, and wanting to raise costs. Republicans may not pass his agenda, but delivering this message at the same time as actually pushing policies that aid most Americans while taxing only the wealthy should at the very least boost his political image and electoral prospects.