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The Policy Implications of Medicare’s New Measure of Financial Health

Attention to the details of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) has largely focused on the new drug benefit and, to a lesser degree, to new payments and rules for private plan participation in Medicare. Less noticed is a provision in the law that created a new measure of financial health of the Medicare program to be included in the annual report of the Boards of Trustees of the Medicare Trust Funds.

The new financial measure established by the MMA assesses how much of Medicare spending is financed by general revenues (mainly made up of income taxes). When general revenues exceed 45 percent of total Medicare spending, general revenues are deemed to be used “in excess.” The intent of the measure is to treat a 45 percent contribution of general revenues to Medicare as the upper bound of reasonable support for the program from this one funding source.

This brief takes an in-depth look at the program’s new solvency test, how it differs from other commonly reported indicators of Medicare’s financial health, and some of the implications and issues it raises for the future.

It is authored by Marilyn Moon, who was a public trustee for the Social Security and Medicare trust funds and is now of the American Institute for Research.