A funny thing happened in May. The Board of Trustees of the Medicare Trust Fund changed the date that the trust fund will run out of money from 2031 to 2036, five years later than was previously projected. So, what happened to improve the outlook for Medicare? Although there are several reasons, one of the most important was COVID. To understand how the COVID pandemic helped improve Medicare solvency, you must first understand how Medicare is funded.
Medicare beneficiaries are dependent on those Americans who are currently working
The overwhelming majority of Medicare funding comes from payroll taxes, Part B premiums, and federal government general funds (general funds are derived mainly from individual and corporate income taxes). To prevent insolvency, Medicare must always have an equal amount of money coming into the Medicare Trust Fund as spent by the Trust Fund every year. The implication of this is that the Medicare money spent on healthcare by today’s retirees did not come from the payroll taxes that they paid when they were still working, instead the money spent on current Medicare beneficiaries’ healthcare comes from the payroll taxes that people under age 65 are paying today. In other words, when you are working, the payroll taxes that you pay each year are not going toward your own future Medicare benefits, they are paying the Medicare benefits for people who are already retired.
In order to keep Medicare income and expenses equal, there must be a constant ratio of current workers to Medicare beneficiaries. Historically, this ratio was 4 workers for every Medicare beneficiary. With this 4:1 ratio, annual Medicare income was able to keep up with annual Medicare Part A expenditures (Part A is funded by the hospital insurance trust fund, or HI). However, since 2000, this ratio has been falling and is currently at 2.8 workers for every Medicare beneficiary. The graph below is from the 2024 Annual Report by the Board of Trustees of the Medicare Trust Funds.
The reasons for the fall in the ratio of current workers to Medicare beneficiaries over the past 20 years has been a combination of people living longer (more Medicare beneficiaries) and a relative decline in the the percentage of working age Americans (fewer current workers). The graph from the U.S. Census Bureau below shows the current population of the United States by age. There are two peaks in population, one at the age 60-64 range and a second at the age 30-34 range. There is a decline in population below ages 45-60 and another decline in the population younger than age 30. These changes in the age demographics of the U.S. population has resulted in fewer current worker for every person over age 65.
Americans were living longer… until COVID
Historically, Americans have been living longer (although not keeping up with the increased longevity in most other developed countries. From 1900 through 2018, U.S. life expectancy from birth increased from 47.3 years to 78.7 years, as shown in the graph from the CDC below. Note the 12-year dip in life expectancy in 1918 due to the influenza pandemic of 1918-1919.
The COVID pandemic beginning in 2020 has resulted in 1.2 million deaths in the U.S. This caused a significant decrease in life expectancy as shown in the graph from the CDC below. By 2021, U.S. life expectancy from birth had fallen to 76.4 years. This represents a 2.3 year decrease in life expectancy since 2018 – a 3% reduction.
A significantly shorter life expectancy results in fewer people living to age 65, when they would be eligible for Medicare. It also reduces the number of people over age 65 who are already on Medicare.
COVID preferentially killed Medicare beneficiaries
COVID was not an equal opportunity killer. Those who were most likely to die were those who were elderly, obese, or diabetic. COVID caused the death of 910,920 Americans over the age of 65. Given that the total number of Americans over 65 in 2019 was 54.1 million (the last year before the pandemic), approximately 1.7% of Medicare beneficiaries died from COVID. In contrast, there were only 76,215 deaths in Americans younger than age 50 (0.04% of those < 50 years old died of COVID). Americans who were close to retirement age, between the ages of 50-64, accounted for 206,786 COVID deaths (0.3% of those between 50-64 died of COVID).
As a result, Americans who are currently working were far less likely to die of COVID than those who were already on Medicare. Furthermore, young workers were less likely to die of COVID than older workers who would soon be eligible for Medicare. The net effect of this was to increase the ratio of current workers to Medicare beneficiaries and soon-to-be Medicare beneficiaries.
Medicare cost reductions
Dying from COVID is not cheap. Medicare Part A pays hospitals according to a patient’s diagnosis, regardless of how many days the patient is in the hospital. The three most common DRGs used to code for admissions with COVID as a primary diagnosis are 177, 207, and 208.
- DRG 177 – respiratory infection with major complication or comorbidity: hospital payment = $10,871
- DRG 207 – respiratory failure with mechanical ventilation for more than 4 days: hospital payment = $33,737
- DRG 208 – respiratory failure with mechanical ventilation for less than 4 days: hospital payment = $14,978
However, COVID was the primary diagnosis in only 52% of patients admitted with COVID and was a secondary diagnosis in 48% (and thus coded under a different DRG).
A study in JAMA in January 2024 found that the actual cost of a COVID hospitalization averaged $10,394 in 2020 and increased to $13,072 in 2022. However the average cost of hospitalization for patients with COVID who died was lower at $9,580.
Physician professional charges for inpatient care of patients with COVID are billed to Medicare separately under Medicare Part B. The typical Medicare expenditures for physician care for a non-ICU patient is about $100 per day and for an ICU patient is about $280 per day. When hospital costs and physician costs are combined, the total Medicare expenditures for a patient who dies of COVID in the hospital was about $11,000. Of course, not all patients who died of COVID died in the hospital; many died at home, in nursing homes, or in hospice. These non-hospitalized patients generated very little additional Medicare expenditures.
In 2019, the year before the pandemic, Medicare spent an average of $14,190 per beneficiary per year. Since COVID caused a 2.3 year reduction in life expectancy in the U.S., this implies a reduction in lifetime Medicare expenditures of $32,637 for every person who died of COVID ($14,190 x 2.3). Given the cost of care for a patient with COVID who dies in a hospital is about $11,000, the net savings to Medicare for each person who died of COVID in a hospital was about $21,600 ($32,637 minus $11,000). Those who died outside of the hospital saved Medicare even more money. This indicates that COVID deaths saved Medicare more than $20 billion from current Medicare beneficiaries and more than $6 billion from future Medicare beneficiaries. Adding these two number together, the total savings to Medicare from the United States’ 1.2 million COVID deaths was more than $26 billion.
A modest proposal…
In 1729, Jonathan Swift published his satirical essay “A Modest Proposal“. In the essay, he proposed that poor people in Ireland could ease their economic troubles by selling their children to the wealthy elite to eat as food. If Swift was alive today, he might have written that the solution to Medicare’s financial woes would be to eat the elderly. Although Swift’s writing was purely satire, the cold truth is that COVID has benefited the outlook for Medicare’s finances by killing off current and future Medicare beneficiaries at a relatively low cost and saving Medicare the much greater expenditures that would have been incurred had those patients not died.
July 20, 2024
