Is Medicare Running Out of Money?

Medicare may be in trouble, but it is not going bankrupt. According to a 2023 report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance trust funds, the Medicare Hospital Insurance (HI) trust fund will be depleted if healthcare expenses continue to exceed money flowing in. Without new legislation, it’s estimated that by 2031, Medicare Part A may only be able to pay for 89% of the costs it covers today.

How the Medicare Trust Fund Works

The Medicare HI trust fund supports Medicare Part A. This part of Medicare pays for inpatient hospital care as well as hospice. For people who are discharged from the hospital, it also covers short-term stays in skilled nursing facilities or, as an alternative for people who choose not to go to a facility, it covers home healthcare services.

Medicare payroll taxes account for the majority of dollars that finance the Medicare HI trust fund. Employees are taxed 2.9% on their earnings—1.45% paid by themselves and 1.45% paid by their employers. People who are self-employed pay the full 2.9% tax.

The Additional Medicare Tax for high-income workers puts an extra 0.9% tax (3.8% total) on earned or invested income beyond $200,000 if you are single, or $250,000 if you are married.

Monthly premiums account for a smaller proportion of Medicare HI trust fund financing. The majority of Americans do not pay a monthly premium for Part A, though they will pay deductibles, coinsurance, and copayments for services rendered.

Premiums are free for people who have contributed 40 quarters (10 years) or more in Medicare payroll taxes over their lifetime. They have already paid their fair share into the system, and their hard work even earns premium-free coverage for their spouse.

People who have worked less than 40 quarters, on the other hand, will be charged a monthly premium, and those dollars add up quickly.

The Part A premium for people who worked between 30 and 39 quarters is $278 per month ($3,336 per year) in 2024. For those working less than 30 quarters, the cost increases to $505 per month ($6,060 per year).

The money collected in taxes and in premiums makes up the bulk of the Medicare HI trust fund. Other sources of funding include income taxes paid on Social Security benefits and interest earned on trust fund investments.

Altogether, the Medicare Trustee report suggests these dollars may not be adequate to meet the demands of the growing Medicare population by 2031.

The Impact of Aging Baby Boomers

The Census Bureau reported 76 million births between 1946 and 1964, the so-called baby boom. Of course, the number of baby boomers will always be in flux: Not all native-born boomers will live to 65 years old, and “new” boomers will enter the country by way of immigration.

With all factors considered, it is estimated that 8,000 to 10,000 Americans turn 65 years old every day and will do so through 2029. By 2030, it is expected that 20% of the U.S. population will be eligible for Medicare.

Not only are thousands of people reaching Medicare age every day, but life expectancy is also on the rise. A Social Security Administration calculator notes a man who turned 65 on November 1, 2023. could expect to live, on average, to 84.2 years. A woman who turned 65 on the same date could expect to live, on average, to 86.8 years.

As people live longer, they are more likely to develop medical problems. An analysis from the National Center for Health Statistics estimates that about 24% of people 65 or older have at least one chronic condition and about 64% have two or more chronic conditions.

More people living longer means more medical problems and higher healthcare spending.

The Cost of Chronic Medical Conditions

As the number of chronic medical conditions goes up, the Centers for Medicare & Medicaid Services (CMS) reports higher utilization of medical resources, including emergency room visits, home health visits, inpatient hospitalizations, hospital readmissions, and post-acute care services like rehabilitation and physical therapy.

This is reflected in the National Health Expenditures (NHE) every year. In 2021, NHE averaged $12,914 per person, accounting for 18.3% of the Gross Domestic Product. Medicare accounted for 21% of the NHE.

Medicare beneficiaries have high out-of-pocket costs too. In 2016, people on Original Medicare (Part A and Part B) spent 12% of their income on health care. People with five or more chronic conditions spent as much as 14%, significantly higher than those with none at 8%, showing their increased need for medical care.

Taken together, these factors could deplete the Medicare HI trust fund at a rate not matching the dollars coming in.

The Impact of COVID-19

Unemployment rates increased dramatically during the pandemic, with job losses into the millions. This decreased direct financing for the Medicare HI trust fund through payroll taxes, at least for the short term. Also, funds have been directed from the Medicare HI trust fund to combat the pandemic as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

With these costs in mind, updated projections were made about the solvency of Medicare. Near the peak of unemployment in 2020, David J. Shulkin, MD, ninth secretary of the Department of Veterans Affairs, projected Medicare could become insolvent by 2022 if pandemic conditions persisted.

The Committee for a Responsible Federal Budget was somewhat more optimistic, with expected solvency by 2023. However, in the 2022 Trustees’ report, CMS explained there were several offsetting variables during the pandemic that extended the previous projection to 2028. The 2023 Trustees’ report changed the projection to 2031.

Proposals to Make Medicare Solvent

If Medicare is going to care for American seniors over the long run, something is going to have to change. Ideas on how to accomplish this have been controversial and have included the following:

• Close tax loopholes. Not everyone pays their fair share of Medicare taxes. When establishing businesses, many people take advantage of tax loopholes that legally allow them to avoid those taxes. Closing those loopholes could prevent businesses from sheltering their earnings and could increase the amount of dollars coming into the Medicare HI trust fund.
• Decrease excess payments by Medicare for after-hospital care. When you leave the hospital, you may require care in a skilled nursing facility or rehabilitation facility. Alternatively, you may receive care through a home health agency. The 2021 report from the Medicare Payment Advisory Commission (MedPAC) shows that Medicare payments to providers and agencies of after-hospital care have “consistently and substantially exceeded costs” for the past decade. Correcting these overpayments will save the Medicare HI trust fund billions of dollars.
• Decrease Medicare benefits: No one wants to pay the same amount for less. As it stands, many people argue that Medicare does not cover enough. For example, Medicare does not cover the cost of ​corrective lenses (except in special circumstances), dentures, or hearing aids even though the most common things that happen as we age are changes in vision, dental health, and hearing. This already leaves many Americans without some of the basic health services they need most.
• Increase the age for Medicare eligibility: Republicans like former congressman Paul Ryan have proposed increasing the Medicare age to 67 years. While this would decrease the number of people who become eligible for Medicare in any given year, this would put a burden on seniors to pay for more expensive private insurance plans in the meantime. This could affect not only personal savings but also when seniors would be able to afford retirement.
• Increase out-of-pocket expenses for beneficiaries: Increases in Medicare premiums, deductibles, coinsurance, or copayments could help bolster the Medicare HI trust fund dollar-wise, but can seniors afford it? The majority of seniors are on a fixed income as it is, and healthcare costs are disproportionately rising.
• Increase Medicare payroll taxes: More taxes? This is what former President Ronald Reagan did with the Medicare Catastrophic Coverage Act of 1988. The law aimed to add a prescription drug benefit and to prevent seniors from catastrophic health costs after hospitalizations, but the law was repealed within a year due to a lack of public support and an uproar regarding associated tax hikes. Are Americans going to feel differently about tax increases today?
• Reform how Medicare Advantage plans work. Medicare Advantage plans do not run the same way Original Medicare does. Insurance companies have to make proposals to the government to be able to offer their plans. If their plans are approved, the government will pay them a fixed amount every month for each beneficiary, paying more for people who have more chronic conditions. These insurance companies are also offered quality bonuses if they adhere to federal standards. The government could decrease Medicare costs if they adjusted the criteria for bonuses, and increased overall competition between plans.
• Decrease Medicare fraud, waste, and abuse: Private insurance companies run Medicare Advantage (Part C) and prescription drug plans (Part D). The Department of Justice has filed lawsuits against some of these insurers for inflating Medicare risk adjustment scores to get more money from the government. Essentially, they make it look as if you are sicker than you are so that the government will increase how much it pays them. Some healthcare companies and providers have also been involved in schemes to defraud money from Medicare. Identifying causes of fraud, waste, and abuse could save Medicare hundreds of millions of dollars every year.
• Decrease how much Medicare pays doctors: Healthcare access is the biggest concern with this proposal. Would fewer doctors accept Medicare for payment if they thought they would not be fairly compensated? As it stands, there is already an impending doctor shortage because of limited Medicare funding to support physician training.
  

Summary

The announcement by CMS that the Medicare HI trust fund could be insolvent within a few years is concerning. Older Americans are at risk of having decreased access to health care when they need it most. Specifically, hospital and after-hospital care benefits could be decreased.

As it stands, Social Security benefits have been flat. With marginal increases in the Cost of Living Allowance over the past several years, seniors are already forced to stretch their dollars. Many legislative proposals are in the works to protect Medicare but some of them shift more of the costs onto seniors who are already living on a fixed income.