CBO’s Medicare Savings Options

Medicare – a federal program that provides health insurance to seniors and some individuals with disabilities – is one of the largest and fastest-growing parts of the federal budget. Medicare spending is projected to total $14 trillion, net of premiums, over the next decade. The Medicare Hospital Insurance (HI) or “Part A” trust fund – which makes up about two-fifths of the program – is projected to be insolvent by 2036. 

Recently, the Congressional Budget Office (CBO) released its Options for Reducing the Deficit: 2025 to 2034, which includes numerous options. Among these options are numerous policies to lower the cost of Medicare, strengthen the HI trust fund, and bring new revenue into the program.

As part of our Budget Offsets Bank, we have re-estimated CBO’s options over the Fiscal Year (FY) 2026-2035 budget window, and where applicable, we have estimated the effects on the HI trust fund over the next decade. We also estimate the share of the HI shortfall the policy would close in 2033 as a proxy for its effect on the program’s long-term shortfall.¹

Source: Committee for a Responsible Federal Budget estimates based on CBO projections.
*Assumes all net savings would go directly into the Medicare Hospital Insurance trust fund.

Some of the largest savings come from policy changes to Medicare Advantage (MA), a private insurance alternative to traditional fee-for-service Medicare that currently covers about half of Medicare-eligible seniors. Although the MA program can reduce health care costs by managing care, it costs the federal government far more than traditional Medicare due mainly to the practice of “upcoding” – where MA enrollees appear sicker than they are, so plans get higher “risk adjustments.” To help address upcoding, MA reimbursements are reduced by at least 5.9 percent. Expanding that reduction to 8 to 20 percent could save $200 billion to $1.3 trillion through 2035. Reducing MA’s benchmark, which is tied to projected spending for an average traditional Medicare beneficiary, by 10 percent overall could save over $600 billion. Directly reducing the plans’ ability to upcode their enrollees could save over $150 billion over a decade. About half of these savings would accrue to the Medicare Hospital Insurance (HI) program; a 20 percent reduction would be enough to fully close the program’s long-term solvency gap.

Additional savings could come from adopting site-neutral payments – paying the same rate for services provided in hospitals and hospital-owned clinics as those provided at private physicians’ offices. Adopting site-neutral payments for nearly all hospital outpatient department services could save $180 billion from 2026-2035. Narrower reforms could generate more modest savings.

CBO’s report also includes several other reforms to provider payments. Replacing Medicare payments for Graduate Medical Education – payments to hospitals and new doctors for their residency programs – could save up to $110 billion and close one-fifth of HI’s funding gap. Restricting or ending reimbursements for “bad debts” – uncollected cost sharing – could save up to $60 billion and close up to 7 percent of HI’s funding gap. Reducing reimbursements for physician-administered drugs to hospitals benefiting from the 340B drug discount program could save $85 billion over a decade.

On the beneficiary side, increasing Medicare Part B premiums from the current 25 percent of total costs to 35 percent could generate over $600 billion over a decade. Modernizing Part A and Part B cost-sharing to create a single annual deductible, with a 20 percent coinsurance and $8,500 out-of-pocket cap, could save $30 billion over a decade. This policy could be dialed up or down and close about 6 percent of the HI funding gap. Restricting private Medigap wraparound plans from providing first-dollar coverage could save $165 billion over a decade and close 14 percent of HI’s funding gap. Applying those same restrictions to TRICARE Life plans for military retirees would expand the savings to $210 billion through 2035.

Finally, CBO’s budget options include numerous revenue changes that could be used to strengthen the HI trust fund. Currently, most income above $200,000 ($250,000 for couples) is subject to either a 3.8 percent HI payroll tax (2.9 percent base and 0.9 percent surtax) or a 3.8 percent Net Investment Income Tax (NIIT) – but some pass-through income is not subject to either tax. Expanding the NIIT and/or self-employed payroll tax to apply to this income could generate $450 billion – which would close three-fifths of the HI gap if the net savings were transferred into the HI program.  

Meanwhile, raising the 2.9 percent base HI payroll tax would generate $135 billion and close one-fifth of the solvency gap per 0.1 percentage point increase. Raising taxes on alcohol and tobacco could raise a combined $140 billion and close nearly a fifth percent of HI’s shortfall if the net funding were dedicated to the trust fund.

Importantly, CBO’s budget options are far from comprehensive. When it comes to Medicare Advantage, additional savings could come from restricting unnecessary “quality bonuses.” Provider savings could come from reducing excessive post-acute care reimbursements, reforming reimbursements for uncompensated care, and other reforms. On the beneficiary side, lawmakers could increase Part D premiums, enact more targeted premium increases for high earners, or raise co-payments on certain services. There are also a number of options to reduce prescription drug costs, including by promoting drug price competition or expanding drug price negotiations. 

Lawmakers should weigh each of these options carefully – along with other policies in our Budget Offsets Bank – as they work to reduce deficits and fund new initiatives.