Biden Has Big Plans to Save Medicare. Here's How

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  • Biden's proposal would expand Medicare's power to negotiate drug prices on behalf of benefit recipients.
  • The program would receive additional funding as a result of expanded Medicare taxes on the wealthy.
  • The proposal will be dead on arrival, but may act as a starting place for negotiations on Capitol Hill.

The proposal would not include cuts to the program's benefits.

Medicare is in trouble. In response to the debt ceiling crisis, House Republicans have threatened to reduce government spending by gutting the program. And the problems don't end there. As reported by the program's trustees, Medicare is likely to become insolvent by 2028, in what may be a drastic blow to the personal finances of millions of Americans. It is against this backdrop that President Biden released his budget proposal, one that places an emphasis not on downsizing, but on bolstering the program.

Expanding negotiations

As Biden outlined in an opinion piece in the New York Times early this week, the first objective of his proposal is to give the Medicare program some new powers. If his proposal were to pass, it would mark a significant expansion in the program's ability to negotiate drug prices with manufacturers.

Although the program serves over 60 million Americans, Medicare was not allowed to negotiate drug prices prior to 2022.This led to significant spending on behalf of the Medicare program, with a relatively small number of name brand drugs costing the Medicare Part B program up to 80% of its annual budget in 2019. The Inflation Reduction Act of 2022, however, allowed the Medicare program to negotiate prices on a handful of drugs.

Biden's proposal would expand those powers of negotiation. Current legislation allows up to 60 Part D drugs and 35 Part B drugs to be negotiated. The rollout will begin in 2026, but is a far cry from a solution to lower costs of the 250 drugs that consume most of Medicare's prescription budget. President Biden's proposal would expand these powers and save the program $200 billion by his estimation.

Boosting funding

President Obama's landmark legislation, the Affordable Care Act, both introduced Medicare and found a way to pay for it without increasing the deficit. Now, a decade and a half later, the program is at risk of running out of money as it pays for increasingly costly care for an increasing number of Americans.

Unless you rake in nearly a quarter of a million dollars each year, you probably don't know about the Medicare surtax, President Obama's balanced budget's ballast. To be clear, every taxpayer is responsible for some amount of Medicare tax, often about 1.45% of taxable income. However, the Medicare surtax adds an additional tax to certain high earners, bringing their tax liability up to 3.8%.

Biden's proposal would further expand this Medicare surtax. His new budget bill would add an additional surtax tier for those earning above $400,000. Under his plan, taxpayers at this income level would see their Medicare tax rise from 3.8% to 5%.

A grounding exercise

Biden's budget bill will not pass, at least not in its current form. While the Democratic majority in the Senate will likely pass the measure, a Republican-held House is almost certain to kill the bill. However, it is important to note the greater game being played in Washington.

Against the backdrop of Treasury default risk, the debt ceiling crisis drags on without sign of a compromise between President Biden and House Speaker McCarthy. House Republicans have rejected measures to raise the debt ceiling, calling for fiscal responsibility and hinting at the cutting of entitlement programs, including Medicare. President Biden stands firm in not entertaining negotiations, and this budget bill appears to be a means of applying pressure to a Republican House which has so far offered no formal proposals. Biden's bill appears to be goading a divided House to counter with a budget bill of its own.

By his estimation, Biden's proposal would keep the Medicare program solvent beyond 2050. However, in its current form, the bill will not pass a Republican-controlled House. So far unable to counter Biden's proposal with one of their own, the ball appears to be in the Republicans' court.

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