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Drop in Payroll Tax Revenue Imperils Federal Health Initiatives

May 18, 2020, 10:24 AM

Health-care spending for vulnerable populations will likely be cut down the road as Covid-19 related job losses chip away at future tax revenue to fund programs like Medicare and Medicaid, policy analysts warn.

Unemployment is at 14.7%, according to the latest Labor Department statistics, the highest it’s been since the Great Depression. Many states are partially reopening their economies to stem job losses, but public health officials warn a second wave of the virus could rear its head in a few months.

That uncertainty, paired with existing job cuts, means the government won’t be able to rake in as much money as it previously could through payroll or income taxes. Consequently, at a time when access to health care for all Americans is needed to fight the new coronavirus, health initiatives for low-income adults and children are at serious risk to being cut in the near future, said Amitabh Chandra, a professor at the Harvard Kennedy School of Government and Harvard Business School.

Medicaid, which is funded by the federal government and states, is typically “the first thing on the chopping block,” Chandra said. Programs that “don’t have a large political constituency” typically get cut first, which makes the likelihood of Medicaid cuts “quite high,” he said.

Medicare’s ‘Day of Reckoning’

Lower payroll taxes also squeeze Medicare funding, and that could create pressure to cut payments to hospitals and programs that primarily serve low-income people. Facilities with that clientele, called Disproportionate Share Hospitals, will likely see lower payment rates from Medicare, as will community health centers, Chandra said.

Concerns about appropriately funding Medicare have been building for years, but the uncertainty of the pandemic raises new alarms. Every year a board of trustees releases a report outlining Medicare’s financial future. The last three reports anticipate that a funding source for one bucket of Medicare benefits will dry up by 2026, which means some enrollees could lose their coverage. That bucket pays for hospital care, home health care, and fighting Medicare fraud. It is primarily funded through payroll taxes.

Cutting benefits for Medicare’s 52.6 million elderly consumers is considered “political suicide,” Mark Mazur, director of the Urban-Brookings Tax Policy Center said, because older Americans have the highest voter turnout rates. That puts Congress in a bind when deciding how to deal with Medicare’s 2026 fiscal cliff. “The day of reckoning is moving closer” thanks in part to economic changes from Covid-19, he said.

Deficit Looms

The Congressional Budget Office projects that the federal budget deficit for fiscal year 2020 will be $3.7 trillion.

Republicans in Congress have suggested reducing Medicare spending, and President Donald Trump’s latest budget request includes roughly $500 billion in cuts to the program over ten years. The budget plan said the aim of reducing Medicare spending is “to eliminate wasteful spending, preserve benefits and access to care, and enhance choice and competition.”

Medicare’s rocky financial future is exacerbated by demographic shifts, too, said Elizabeth M. Mills, a former health policy analyst who practices health law in the greater Chicago area. In 2000 12.4% of the U.S. population was 65 years or older, and by 2019 that figure had increased to 16.3%, according to U.S. Census figures.

Although Covid-19 will mean less payroll revenue, fewer people are going to the doctor, too, which reduces how much Medicare is spending on care, Mills said.

“That is not exactly going to balance out, but I think that the reduced payroll tax collections are not going to immediately push the trust funds off the cliff,” she said.

To contact the reporter on this story: Jacquie Lee in Washington at jlee1@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Peggy Aulino at maulino@bloomberglaw.com

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