The fund covering Medicare's hospital-insurance benefits is now projected to run out of money in 2031, according to a new report by Medicare trustees.
This new insolvency date gives policymakers three more years than previously estimated to address impending financial setbacks that are facing the social safety net program, which provides health care benefits to tens of millions of Americans.
The ultimate insolvency date will likely change, the trustees say, due to difficulties in accurately projecting program expenditures. That leaves the exact timeline unclear for lawmakers to hash out a plan to mend Medicare's finances, which could require an increase in taxes, a cut in benefits or a combination of both to keep benefits paying out in full.
What the report says
In a report released Friday, Medicare’s Board of Trustees provided the latest snapshot of the program’s finances. On the whole, Medicare is on sounder financial footing than indicated in last year’s trustee report, though financial shortfalls still loom.
- Medicare hospital insurance benefits, aka Medicare Part A, are expected to fully pay out until 2031, a three-year improvement from the last trustee report.
- Medicare Part B and Part D do not face insolvency, the report said, because they are funded separately — partially by premiums and general revenue from the U.S. Department of the Treasury. These benefits help cover typical health-insurance and prescription-drug expenses, respectively.
- By contrast, Medicare Part A, which generally covers inpatient hospital care, skilled-nursing facility care, home-health care and hospice care, uses a separate reserve that’s funded by a 2.9% Medicare payroll tax. This is the trust fund at risk of insolvency.
- In 2022, Medicare’s balance sheet looked better than previous years, the report shows. The hospital-insurance trust fund had a surplus of $54 billion, and Medicare overall brought in about $84 billion more than it paid out.
- Nearly every year since 2008, the Part A trust fund has run a deficit, the report notes, with the exception of 2021 and 2022. The fund ran a steep shortfall in 2020 of more than $60 billion, largely because Medicare began making loans to health care providers to increase their cash flow as they grappled with the COVID-19 crisis. Then in 2021, providers began to repay Medicare, leading to the current surpluses.
The surpluses aren’t expected to last, however. Medicare trustees say the Part A program will begin running deficits again in 2025, drawing down the trust fund until it depletes in 2031. After that date, the program would not be bringing in enough money to fully pay out Part A benefits.
Medicare covered 65 million Americans last year. The vast majority of those people, about 88%, were 65 or older, though the program also provides health coverage to millions of disabled Americans.
- Medicare — particularly Part A — has long faced financial issues. The nation’s changing demographic makeup is a big reason why. Because Medicare Part A relies on payroll taxes, it is more susceptible to insolvency when a growing share of the population is older, ultimately changing the worker-to-beneficiary ratio. In other words: less money coming in and more money going out. These demographic changes are also leading to insolvency issues for Social Security.
- Compared to Social Security, projections for Medicare’s insolvency are less certain because it’s difficult for the trustees to accurately predict future health care expenditures. This can lead to some larger swings in the predicted insolvency date. By contrast to the trustee’s estimate, the Congressional Budget Office estimates the fund will remain solvent until 2033.
- According to the nonprofit Center on Budget and Policy Priorities (CBPP), if Medicare Part A went insolvent, it would still be able to pay out almost all benefits. This leads some experts to call for tempered reactions to the newly projected insolvency date.
- “Medicare does not face a financing ‘crisis’ and is not ‘bankrupt,’ as some critics charge,” tweeted Paul Van de Water, a senior fellow at the CBPP who specializes in Medicare. “Even if policymakers took no further action … tax revenues would still cover 89 percent of scheduled benefits" after the insolvency date.
Avoiding Medicare insolvency
Policymakers have several options to avoid impending insolvency headed for Medicare Part A. The trustees note two options that could immediately solve the issue:
- The standard 2.9% payroll tax could be immediately raised to 3.52%, which would be enough to plug any financial shortfalls over the next 75 years.
- In lieu of a tax increase, expenditures (read: benefits) would need to be reduced immediately by 13%, the trustees say.
Realistically, a combination of the two could work and the benefits cuts and/or tax increases could be implemented over a longer period of time.
Additionally, President Joe Biden released a plan last month to push the insolvency date back by 25 years.
- The central change under the president’s plan would be a Medicare payroll tax increase on Americans earning more than $400,000.
- Currently, earnings over $200,000 for individuals are taxed at 3.8% (while income under that amount is taxed at the standard 2.9% rate). These rates are split 50-50 between employees and employers.
- The president’s plan introduces a new tier for income over $400,000, a tax rate of 5%.
The president’s Medicare proposal — part of a larger 2024 budget plan — is not expected to make it through the Republican-controlled House of Representatives.