Status of the Medicare Trust Funds

KEY TAKEAWAYS

• The Medicare trustees estimate that the Part A trust fund will become insolvent in 2028.
• The trustees, in their annual report, highlighted several spending and revenue problems that pose risks to the program’s ability to provide beneficiaries’ health benefits.
• They expect Medicare spending to continue to rise and described the need to quickly address the financial issues to guarantee the program can pay full benefits as promised. 

On June 2, the Medicare trustees released their annual report detailing the status of the program’s trust funds. For years, the trustees have been warning of the need to make adjustments and address the financial standing of the program, which was designed to provide health care benefits to millions of older people. This year’s update is no different. Medicare spending is expected to continue rising, and solutions are needed to ensure the program can pay full benefits to current and future beneficiaries.

Spending Keeps Rising, and Insolvency Nears

The Medicare program provides health insurance for Americans aged 65 and older, as well as benefits for younger people with certain disabilities. In 2021, the program covered 63.8 million people and had total expenditures of $839 billion. Medicare has two separate trust funds: Hospital Insurance and Supplemental Medical Insurance. The HI trust fund manages revenues and payments for Medicare Part A services like stays at hospitals and skilled nursing facilities, some home health visits, and hospice care. The SMI trust fund manages revenues and payments for two accounts: Part B services, which include physician visits, physician-administered drugs, outpatient services, preventive services, and some home health visits; and Part D, which includes prescription drug benefits. Costs for Part C, the Medicare Advantage program, are paid from the HI and SMI trust funds on a proportional basis.

Medicare Part A is financed by a 2.9% payroll tax that is split between employers and employees. The Affordable Care Act mandated an additional 0.9% payroll tax for single filers earning more than $200,000 and couples above $250,000. The trust fund also earns interest on its reserves, which are invested in U.S. government securities.

The SMI trust funds’ two accounts are financed by general tax revenues and beneficiary premiums, but most of the fund’s income comes from automatic transfers from general tax revenue.

In the long term, spending by the HI trust fund is predicted to increase at a pace faster than the contributions made by working people. Increased spending is due to the baby-boom generation reaching eligibility age and health care costs continuing to rise. At the same time, there is a decrease in the number of workers per Medicare enrollee. This combination is weakening the program’s finances. To keep the HI trust fund solvent for the next 75 years, the trustees estimate the standard 2.9% payroll tax would need to increase to 3.6% or the program’s spending would need to be cut immediately by 15%. Once the fund becomes insolvent, the trustees expect it will have sufficient income to provide 90% of Part A claims. 

The trustees’ latest report estimated the HI trust fund will reach insolvency in 2028, two years later than last year’s prediction. The trustees moved the date back because there are now more workers paying into the trust fund and because spending is expected to be lower in Part A as a result of the COVID-19 pandemic, which affected patients’ use of health care services. While this estimate gives Congress a little extra time to address the financial issues, some policymakers have proposed legislation to expand the program rather than fix it, ignoring the increased spending projections for future years.

The SMI trust fund cannot become insolvent because the Treasury is required to make up any shortfall. But the rapid growth in its costs, which greatly exceed revenue from premiums and other funding sources, will continue to burden beneficiaries and taxpayers. As the trustees pointed out, financing for the trust fund “would have to increase faster than the economy to cover expected expenditure growth.”

Senator Bernie Sanders, chairman of the Budget Committee, recently held a hearing to discuss his Medicare for All proposal, which would add nearly every person in the United States to a centralized government health plan. The Biden administration and congressional Democrats also have been pushing to add services to the Medicare program, further straining its finances. Most of the services they want to add are already offered by Medicare Advantage plans. Since 2004, the HI trust fund has failed to meet the trustees’ financial test of financial adequacy and actuarial balance. Congress should focus on addressing the program’s shortfalls, rather than exacerbating them.