Medicare has a money problem. Or it will in about 10 years. It’s the sort of problem Dwight Eisenhower might have called important but not urgent, like a balloon payment on a mortgage or a roof that only leaks once in a while. Such problems are easy to ignore until it’s too late to fix them.
Yet anything costing $1 trillion a year will inevitably become urgent soon enough, and Medicare’s funding shortfall will demand attention and action by 2036 to prevent a crisis.
But that’s a decade away. For now, the HI Trust Fund has a surplus of more than $200 billion, according to the latest report. And Medicare Part B, which covers things such as doctor visits and diagnostic tests, had reserves of over $180 billion.
Medicare is not insolvent, but there is an increasingly large gap between the revenue generated by the program and its total expenses. And that requires an increasingly large transfer of cash from the U.S. Treasury to make the program work.
In 2023, revenue coming into Medicare through payroll taxes, premiums, and interest covered about 57 percent of the program’s expenses. The other 43 percent, about $43 billion, had to be paid from the government’s general fund. This gap between income and expenses has always existed, but it’s growing rapidly. By 2053, the general fund will have to cover fully half of program costs.
President Donald Trump, like former President Joe Biden before him, has promised to protect Medicare, though neither articulated a plan for doing so.
Medicare, which will have its 60th birthday in July, chugged along for decades without attracting much attention. Why is it now falling further and further behind expenses?
That’s partly due to the way Medicare was designed, and it’s partly a result of changing demographics, American innovation, and decisions that were made along the way.
It’s Not a Business
Medicare provides medical care for people who are age 65 and older, or disabled, or have end-state renal disease or ALS, also known as Lou Gehrig’s disease.Medicare is called an insurance program but it wasn’t designed to be fully self-sustaining. It has always operated more like a federally subsidized health payment program.
Medicare Part A, which pays for hospitalization, is the most like traditional insurance and the closest to being financially stable. The lion’s share of funding for Part A comes from a 2.9 percent payroll tax. The rest comes from a tax on Social Security benefits, interest on the fund balance, and premiums paid by some beneficiaries.
It’s a mistake to think of the HI Trust Fund as an endowment or a pension, according to Jon Kingsdale, an adjunct associate professor of health care policy at Brown University.
“It’s simply like a checking account, which is filled up by payroll taxes throughout the year and is drawn down by spending for hospitals and nursing homes and other facilities,” Kingsdale told The Epoch Times.
Like a checking account, the HI Trust Fund can reach a zero balance. The trustees predict that will happen in 2036. After that, the income it receives will cover only about 79 percent of Part A obligations.
Medicare Part B is a little different. Its expenses are paid through the Medicare Supplemental Medical Insurance (SMI) Trust Fund, as are expenses for Medicare Part D, prescription drug coverage.
People who qualify for Medicare can opt into Parts B and D by paying a premium. Part B also receives some income from interest on the fund balance, and states contribute to support Part D.
But that income covers only a fraction of the expenses. More than 70 percent of the funding for the SMI Trust fund comes from the general budget. Every year, Congress estimates upcoming expenses, then adds money to cover the gap.
Increases in premiums have not kept pace with expenses, so the share paid by the general fund has grown larger.
When the HI Trust Fund is depleted, it will cause an urgent problem because the government currently has no legal mechanism for adding more money to it. But the larger issue is that the primary funding sources for Medicare are not keeping pace with rising costs, requiring the government to pay a larger and larger share of the nation’s wealth to keep the program going.
Medicare now consumes about 3.8 percent of the country’s gross domestic product, the total value of all goods and services produced. By 2048 it will be 5.8 percent, according to the Medicare trustees.
Three main factors are driving that.
Demographics, Innovation, Medicare Advantage
Two population events coincided in the 20th century that resulted in financial pressure on Medicare. First, the 76 million baby boomers who were born between 1946 and 1964. They started to retire in 2011. That caused Medicare enrollment, which had been growing by about 500,000 a year, to add 1.3 million beneficiaries a year for the next 14 years.
Additionally, long before the baby boomers signed up for Medicare, the birth rate fell significantly. Americans have gone from having 123 births per 1,000 women aged 15 to 44 at the height of the baby boom to having 56.1 births per 1,000 by 2022.
Taken together, those events created a situation in which fewer workers are paying the Medicare payroll tax compared with the number of people receiving benefits. When the program was created in 1965, the ratio of workers to beneficiaries was 4 to 1. Today it’s 2.8 to 1 and will continue to decrease through 2040.
The rise in obesity, addiction, diabetes, and other chronic illnesses costs all Americans, including Medicare beneficiaries, more now. Americans spent about $8,500 per person, adjusted for inflation, on health care in 2000. Today the amount is more than $14,500.
The second factor in the cost of Medicare is innovation in the health care industry. Medicare pays for far more diagnostic tools and treatments than it did in 1965, including things such as CT scans, MRIs, and joint replacement surgery. But the biggest recent cost increase has come from prescription drugs, which were not covered by Medicare until 2006. By 2022, prescription drugs accounted for 14 percent of all Medicare spending.
A third factor is Medicare Part C, or Medicare Advantage. That’s an optional program started in 1997 to allow private insurance companies to manage benefits for Medicare beneficiaries.
People who opt into Medicare Advantage continue to pay their Part B premium to Medicare. Then the government pays the insurer a lump sum to pay for their treatment. An analysis by KFF, a health policy research group, found that Medicare Advantage cost $321 per year more per enrolled beneficiary than traditional Medicare did in 2019. That amounted to $7 billion.
Now, more than half of Medicare’s 68 million beneficiaries are enrolled in Medicare Advantage plans.
What Now?
The Medicare trustees reported to Congress in May 2024 that Medicare spending was nearing a critical point. It was the seventh consecutive year the trustees issued that warning. They also called for action.“There is no provision under current law to finance projected long-range HI deficits,” they wrote. “The trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust their expectations and behavior.”
That seems to suggest the possibility of either a tax increase or a cut in benefits. Neither option seems likely in the short term, though there could be other approaches to solving the problem.
Trump has said he would not cut Medicare benefits, adding that a growing economy could resolve the funding of Medicare and other programs. “What we have to do, and the way we solve our problems is to build a great economy,” Trump said when running for office in 2016.
House Speaker Mike Johnson (R-La.) has also vowed not to cut Medicare benefits but has suggested that money could be saved through more efficient operations.
“No one is coming in with the intention of cutting benefits in any way. ... The Republican Party is not going to cut benefits,” Johnson said in response to a reporter’s question on Jan. 7.
“There are many, many areas of fraud, waste and abuse. The government is too large. The agencies are too many,” Johnson said, before mentioning the newly created Department of Government Efficiency (DOGE) headed by Elon Musk.
Musk has said DOGE might be able to cut $2 trillion in federal spending, nearly one-third of the budget, which would free more tax dollars to fund Medicare.
Some observers doubt that savings within the program itself will be enough to right the ship. “We’re already, frankly, paying at a rate that’s well below what commercial health plans pay,” Kingsdale said.
As for cutting the fat from the Centers for Medicare and Medicaid Services; it employs about 6,700 people, less than half the number employed by Congress. Most of the work in Medicare is done by contractors.
As the Medicare trustees put it, the looming deficit “is large enough that averting trust fund depletion under current-law financing is extremely unlikely.”
A significant change in public health could reduce demand for medical services and Medicare costs along with it. If successful, the Trump administration’s Make America Healthy Again initiative, driven by Robert F. Keennedy Jr., and that aims to reduce the rate of chronic illness among Americans, could benefit the Medicare system within a few years.
Failing those solutions, few options remain: increasing taxes, raising the age of eligibility for Medicare, or reducing benefits.
“Each of those three is extremely painful,” Kingsdale said.
