Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book 'The Reconnection Agenda: Reuniting Growth and Prosperity.'

(Andrew Harrer/Bloomberg)

There are three ways to increase the sustainability of Medicare, the deservedly much-loved program that provides affordable, quality health coverage to almost 50 million mostly older Americans: cut spending, raise more revenues and/or slow the growth of health costs. (Another way would be to deport the aging boomers who are increasingly coming onto the Medicare rolls, but while I should technically recuse myself from that solution, let’s just not go there.)

We’re actually doing a lot more of the latter — slowing cost growth — than you might realize, and I’ll get back to that below. But what I want to address first is a revenue issue. Specifically, a tax loophole — a seriously egregious one — that has evolved in recent years in a way that’s robbing Medicare of years of solvency. Moreover, like so many loopholes, it’s one that benefits those who have the means to structure their incomes in ways to avoid paying their fair share into this venerable social insurance program, i.e., the wealthiest few percent at the top of the income scale.

Back in 2013, as part of the Affordable Care Act’s effort to shore up Medicare, Congress passed the Net Investment Income Tax (NIIT, pronounced “nit”), a 3.8 percent tax on investment income (interest, stock dividends, capital gains) of those with incomes above $250,000, which, by the way, is the top 3 percent of households, according to the Census Bureau. At the same time, a 0.9 percent surtax on the earnings of high-income taxpayers (again, above $250,000) was added to the 2.9 percent Medicare tax already in place on wages and self-employment earnings, bringing that tax up to 3.8 percent as well.

So far, so good, and the NIIT has mostly been working as intended; along with other reforms discussed below, Medicare’s finances are in better shape because of it. But a problem with the NIIT has surfaced: A large share of income from pass-through businesses is not being taxed by the NIIT. For reasons having to do with their special status in the tax code, business income for “S-corporations,” LLCs and limited partnerships (basically, businesses that are not structured as standard corporate entities) claimed by the wealthiest taxpayers is escaping the NIIT. That’s costing the Treasury $200 billion over 10 years, which even in D.C. is real money.

As I noted in this column the other day, the cost of this loophole is going to keep growing, as the trend toward shifting (i.e., “passing-through”) business income to the individual side of the code is on the rise. In no small part, that’s to take advantage of the lower capital gains tax rate on the individual, but not the corporate, side of the code. In fact, pass-through income now accounts for half of all business income, and claimants pay a low average tax rate of just 19 percent.

That’s all a bunch of gnarly tax law, but here’s the bottom line: A small group of wealthy business owners is not contributing its fair share to help support the Medicare program. This both reduces the program’s sustainability and, like so many other loopholes, creates an inefficient incentive to organize your business in such a way as to avoid a tax. That may create work for tax lawyers, but trust me: It would be much better for our economy if our firms worked on producing what it is they produce rather than scrounging around for tax loopholes.

Budget expert Bob Greenstein asked the right question re the NIIT loophole: “How could policymakers, in the name of shoring up Medicare, consider increases in the Medicare payroll tax that regular workers pay or any trimming of the benefits or coverage Medicare provides, when a group of affluent individuals are engaging in tax avoidance to escape their share of Medicare taxes?”

The other way to sustain Medicare is to improve the efficiency of our uniquely expensive health-care system, thereby lowering the rate of cost growth. Here too, we’ve made real progress. Or, to be more accurate, and I’m sorry to go to the partisan place, but it’s the truth: President Obama and congressional Democrats have made progress.

In the figure below, each line represents CBO’s projected spending on major government health-care programs as a share of GDP. The top line shows the 2010 projection of Medicare, Medicaid, and CHIP costs. The lower line, from CBO’s 2015 forecast, includes the same programs as the earlier projection but adds in the ACA, which didn’t exist in 2010. Remarkably, even after including the ACA and even after large (and wonderful) increases in health coverage, total projected federal health-care costs have shrunk substantially. By 2023, the costs of these major health programs are down by 1 percent of GDP relative to the 2010 projection; by 2030 they are down 2 percent of GDP; and by 2038, by 3 percent of GDP.


Surely, there’s more going on here than just ACA reforms (costs began to slow even before the new law was in place), but just as surely, those reforms have helped by scaling back excessive payments to Medicare providers and accelerating the shift to new Medicare payment models that seek to reward quality of care rather than the volume of services. In addition, many analysts believe that health reform has encouraged changes in the health-care payment and delivery system that will generate further savings. For example, interventions like “bundled payments” (an overall fee covering all the care related to a procedure), “accountable care” models (providers have monetary incentives to reduce spending below a set level while maintaining quality), and bonuses for reducing re-hospitalizations may be helping to slow cost growth.

There are a lot of people around this town telling us how we can’t afford Medicare. To which I say, stop complaining and get to work. By closing tax loopholes, building on the cost savings shown above, and continuing to discover new efficiencies in how we deliver health services, we can and we must ensure that Medicare remains a solid, reliable touchstone at the heart of retirement security in America.