Medicare Is Not “Bankrupt”
Health Reform Has Improved Program’s Financing

PDF of this report (3pp.)

By Paul N. Van de Water

Updated June 3, 2013

Claims by some policymakers that the Medicare program is nearing “bankruptcy” are misleading.  Although Medicare faces financing challenges, the program is not on the verge of bankruptcy or ceasing to operate.  Such charges represent misunderstanding (or misrepresentation) of Medicare’s finances. 

Medicare’s financing challenges would be significantly greater without the health reform law (the Affordable Care Act, or ACA), which substantially improved the program’s financial outlook.  Repealing the Affordable Care Act, a course of action promoted by some who simultaneously claim that the program is approaching “bankruptcy,” would make Medicare’s financial situation much worse.

The 2013 report of Medicare’s trustees finds that Medicare’s Hospital Insurance (HI) trust fund will remain solvent — that is, able to pay 100 percent of the costs of the hospital insurance coverage that Medicare provides — through 2026; at that point, the payroll taxes and other revenue deposited in the trust fund will still be sufficient to pay 87 percent of Medicare hospital insurance costs.[1]  (The Medicare hospital insurance program is considered insolvent when revenues and trust fund balances will not cover 100 percent of projected costs.)  The share of costs covered by dedicated revenues will decline gradually to 71 percent in 2047 and then rise to 73 percent by 2087.  This shortfall will need to be closed through the provision of additional revenues, program changes that slow the growth in costs, or most likely both.  But the Medicare hospital insurance will not run out of all financial resources and cease to operate after 2026, as the “bankruptcy” term may suggest.  

The 2026 date does not applyto Medicare coverage for physician and outpatient costs or to the Medicare prescription drug benefit; these parts of Medicare do not face insolvency and cannot run short of funds.  These parts of Medicare are financed through the program’s Supplementary Medical Insurance (SMI) trust fund, which consists of two separate accounts — one for Medicare Part B, which pays for physician and other outpatient health services, and one for Part D, which pays for outpatient prescription drugs.  Premiums for Part B and Part D are set each year at levels that cover about 25 percent of costs; general revenues pay the remaining 75 percent of costs.[2]  The trustees’ report does not project that these parts of Medicare will become insolvent at any point — because they can’t.  The SMI trust fund always has sufficient financing to cover Part B and Part D costs, because the beneficiary premiums and general revenue contributions are specifically set at levels to assure this is the case.  SMI cannot go “bankrupt.”

Health reform has significantly improved Medicare’s financial outlook.  The HI trust fund is now projected to remain solvent nine years longer than before the Affordable Care Act was enacted.  Under the trustees’ main projection, the Medicare hospital insurance program faces a shortfall over the next 75 years equal to 1.11 percent of taxable payroll — that is, 1.11 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period.  This is much less than the 3.88 percent of payroll that the trustees estimated before health reform. 

These projections underscore the importance of successfully implementing the cost-control provisions in the Affordable Care Act.  While history shows that most major Medicare savings measures have been implemented as scheduled, the Medicare actuary has expressed concern that some of the ACA’s savings provisions may not be sustainable.  The actuary urges reliance instead on an “illustrative alternative” projection for Medicare, which assumes that Congress will partially phase out the ACA’s reductions in Medicare payment rates between 2020 and 2034.  Under this alternative projection, the projected insolvency date of the Hospital Insurance trust fund remains at 2026, but the 75-year shortfall in the fund would rise to 2.17 percent of payroll — almost twice the trustees’ official estimate, but still a dramatic improvement over the outlook before health reform. 

The trustees’ finding that health reform has improved Medicare’s financial status is consistent with the Congressional Budget Office’s estimate that health reform will reduce federal budget deficits — modesty in its first ten years, but substantially in the following decade.[3]   Medicare is a part of the federal budget.  Therefore, spending cuts or tax increases that reduce projected deficits in Medicare also help reduce projected deficits in the overall budget.  Consequently, contrary to some claims, no “double-counting” is involved.[4]

The trustees’ latest projections are broadly in line with those that the trustees have issued for some time.  They do not represent a striking change in Medicare’s finances.  Since 1970, changes in the law, the economy, and other factors have brought the projected year of Medicare HI insolvency as close as two years away or pushed it as far as 28 years into the future.[5]   The latest projection falls near the middle of that spectrum.  Trustees’ reports have been projecting impending insolvency for four decades, but Medicare has always paid the benefits owed because Presidents and Congresses have taken steps to keep spending and resources in balance in the near term.  In contrast to Social Security, which has had no major changes in law since 1983, the rapid evolution of the health care system has required frequent adjustments to Medicare, a pattern that is certain to continue.

Despite the financial improvements the Affordable Care Act makes, Medicare continues to face substantial long-term financial challenges, stemming from the aging of the population and the continued rise in costs throughout the U.S. health care system.  The projected increase in long-term Medicare costs also contributes heavily to the challenging long-term fiscal outlook.  It is essential that policymakers take further steps to curb the growth of health costs throughout the U.S. health care system as we learn more about how to do so effectively in both public programs and private-sector health care.  The research and pilot projects that the ACA establishes should yield important lessons.  Until these efforts bear fruit, it will be difficult to achieve big additional reductions in Medicare expenditures.  

Some additional savings can be achieved over the next ten years, however, while preserving Medicare’s guarantee of health coverage and without raising the eligibility age or otherwise shifting costs to vulnerable beneficiaries.  Possible measures include ending Medicare’s overpayments to pharmaceutical companies for drugs prescribed to low-income beneficiaries, increasing funding for actions to prevent and detect fraudulent and wasteful Medicare spending, restructuring Medicare’s cost-sharing and Medigap supplemental insurance (while protecting low- and moderate-income beneficiaries), and raising premiums for better-off beneficiaries. 

Fiscal policy’s key goal should be to stabilize the federal debt relative to the size of the economy.  But it is neither necessary nor desirable to accomplish this by radically restructuring Medicare — such as through “premium support” proposals that would convert it to vouchers whose purchasing power fails to keep pace with the cost of health care — or by severely cutting Medicare or other programs that protect Americans with low and moderate incomes.[6]   Policymakers and the American public should not be driven into adopting such proposals by misleading claims that Medicare is on the verge of “bankruptcy.”  Instead, we should pursue a balanced deficit-reduction approach that puts all parts of the budget on the table, including revenues.

End notes:

[1] Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2013 Annual Report, May 31, 2013.

[2] Upper-income beneficiaries pay higher, income-related premiums.  Medicare also subsidizes the Part D premiums of low-income enrollees. 

[3] Douglas W. Elmendorf, Director, Congressional Budget Office, Letter to the Honorable John Boehner, July 24, 2012.

[4] Paul N. Van de Water, “Yes, Health Reform Strengthens Medicare and Reduces the Deficit,” Health Affairs Blog, April 20, 2012, http://healthaffairs.org/blog/2012/04/20/yes-health-reform-strengthens-medicare-and-reduces-the-deficit/

[5] Patricia A. Davis, Medicare: History of Insolvency Projections, Congressional Research Service, June 11, 2012.

[6] Paul N. Van de Water, Medicare in Ryan’s 2014 Budget, Center on Budget and Policy Priorities, March 15, 2013, http://www.cbpp.org/cms/index.cfm?fa=view&id=3922.

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