The White House on Tuesday proposed raising taxes on Americans earning more than $400,000 and reducing what Medicare pays for prescription drugs in an attempt to ensure that the health-care program for seniors is funded for the next two decades, challenging Republicans over an imminent funding crisis.
Roughly 60 million seniors depend on Medicare for their health insurance. Because the program is spending money at a much faster clip than it brings in funding, it faces automatic federal cuts starting in 2028, raising the nightmare scenario of medical providers refusing care to senior citizens if Congress and the White House don’t address the looming shortfall first.
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The administration is introducing the measures as part of the White House’s broader 2024 budget proposal, but it faces an unlikely path to passage through a Republican-controlled House of Representatives. The budget is set to be released Thursday.
President Biden’s introduction of a Medicare financing plan aims for a direct contrast with the GOP, which has weighed cuts to the program while also criticizing the administration for approving legislation last year aimed at reining in spending on prescription drugs. The White House’s plan amplifies the high political stakes of Medicare and Social Security — by far the two biggest federal programs — ahead of the 2024 presidential election. Details of the plan were first reported Tuesday morning by The Washington Post.
“The budget I am releasing this week will make the Medicare trust fund solvent beyond 2050 without cutting a penny in benefits. In fact, we can get better value, making sure Americans receive better care for the money they pay into Medicare,” the president wrote in a separate New York Times op-ed. “If the MAGA Republicans get their way, seniors will pay higher out-of-pocket costs on prescription drugs and insulin, the deficit will be bigger, and Medicare will be weaker.”
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The White House’s proposal would raise the net investment income tax, created by the Affordable Care Act, from 3.8 percent to 5 percent for all Americans earning more than $400,000 per year, in line with Biden’s pledge not to raise taxes for anyone under that threshold. The tax applies to capital gains and investment income. The plan also would expand this tax by applying it to more kinds of income from pass-through firms — businesses in which the owners pay taxes on their personal income taxes. Currently, these kinds of business owners do not pay this tax.
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Additionally, the plan calls for expanding new rules reducing Medicare prescription drug payments beyond the measures approved last year as part of the Inflation Reduction Act. The plan would give the administration authority to negotiate what price the federal government pays for more drugs than the limited number approved as part of Democrats’ legislative package last year, while also speeding up the process for negotiations. The prescription drug changes would bring in an additional $200 billion for the Medicare trust fund, the plan states. The proposal would also cap co-pays for some generic drugs, such as those used to treat hypertension and high cholesterol, to $2 per prescription per month.
“The Budget’s expansion of Medicare drug negotiations will not only save money for the federal government — it will also cut beneficiaries’ out-of-pocket costs by billions of dollars,” the plan states.
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Republicans are sure to rule out all of the new proposed taxes in the administration’s plan, and some budget hawks are adamant that the White House should be pushing spending cuts as well. Biden’s plan is also likely to elicit further rebuke from the pharmaceutical industry, which has alleged restrictions on federal spending discourage research and innovation in groundbreaking medicine.
Also unclear is if the White House will address in its budget the looming shortfall facing Social Security, the pension program for the elderly, which faces its own funding crisis starting in 2033. Biden promised in his State of the Union address that he would introduce a plan funding Medicare for two decades, but he made no similar pledge for Social Security. Sen. Bernie Sanders (I-Vt.) and some Democrats have urged Biden to expand payroll taxes for high earners to fund the pension program, but the administration has thus far avoided that approach.
Conservatives have said raising the net investment income tax is a bad way to fund Medicare. Kyle Pomerleau, a senior fellow at the American Enterprise Institute, a conservative-leaning think tank, said a more efficient approach would be to raise what workers pay into the Medicare trust fund from dedicated payroll taxes, rather than rely on a tax base — investment income — that can jump up and down depending on the year.
Right now, workers pay 6.2 percent for Social Security and 1.45 percent for Medicare, and employers pay the same amounts.
“It can distort savings and investment decisions, which a payroll tax does not do,” Pomerleau said. “And capital gains can be a somewhat unreliable tax base.”
Estimates vary for when Medicare and Social Security will face funding crises. The most recent estimate from the Medicare trustees was that the program’s “Part A,” which reimburses hospital care, will be insolvent by 2028. The nonpartisan Congressional Budget Office more recently estimated that date would not be until 2030.
“The challenge here is that many, many people are getting old, and the cost of health care is going way up. Medicare is spending far more money than anybody ever anticipated, and without action will be unable to pay benefits,” said Howard Gleckman, a senior fellow at the Urban Institute, a D.C.-based think tank. “It has been decades since a president came out with a policy plan that really confronted this issue.”