It was hard to miss the headlines coming from yesterday’s Medicare Trustees report:
Let’s get right to the point: Medicare is not going “broke” and recipients are in no danger of losing their benefits in 2026.
Not broke, but not healthy
However, that does not mean Medicare is healthy. Largely because of the inexorable aging of the Baby Boomers, program costs continue to grow. And, as the Trustee’s report forthrightly acknowledges, long-term costs could well increase even faster than the official predictions. The main risks: scheduled limits on payments to doctors and other providers may never be implemented and unknown future medical technologies are likely to increase all health costs, including for Medicare.
This will inevitably mean that either premiums and/or taxes will rise; payments to doctors, hospitals, and other providers will grow more slowly; some benefits may be trimmed; or a combination of all three.
So what is the Trustee’s report, and what does it really say?
The report is an annual exercise designed to review the health of the nation’s biggest health insurance program. It looks in detail at each of Medicare’s pieces, including Part A inpatient hospital insurance; Part B coverage for outpatient hospital care, physician services, and the like; Part C Medicare Advantage plans; and Part D drug insurance.
Those “going broke” headlines are all about Part A Hospital insurance (HI), which accounted for about 40 percent of the program’s $710 billion in spending in 2017. HI mostly is funded by the Medicare tax that is withheld from worker paychecks and paid by the self-employed. And that tax—as well as other smaller sources of revenue– is not sufficient to pay the bills. It hasn’t been for years.
Because it anticipated the aging Boomers, Medicare built up a trust fund while its costs were relatively low. But that reserve is rapidly being drained, and, in 2026, will be out the money. That is the source of all those “going broke” headlines.
What will Congress do?
It doesn’t mean Medicare will stop paying hospital insurance benefits in eight years. We don’t know what Congress will do—though the answer is probably nothing until the last minute. Lawmakers could raise the payroll tax. But my bet is they’ll use general revenue to support the HI program, which is another way to say they’ll borrow the money and further raise the national debt.
Medicare Parts B and D are funded very differently, and are at no risk of “going broke.” Unlike Part A, there is no dedicated tax for these programs. Rather, they are funded through a combination of enrollee premiums (which support only about one-quarter of their costs) and general revenues—another way of saying the government borrows most of the money it needs to pay for Medicare.
The coming political debate
As more Boomers age and health care prices increase, Medicare costs will continue to rise. Under the current system, that means premiums will continue to increase and so will government borrowing. The big political debate in coming years will be over how to divvy up those future costs. Will more of the burden fall on beneficiaries or will it fall on taxpayers at large who, eventually, will have to pay off the burgeoning government debt.
Because Medicare costs (like all health care costs) are rising faster than the overall economy is growing, the program will eat up more of the nation’s total economic output. And here is where the news really is scary.
Today, Medicare expenses are approaching about 4 percent of Gross Domestic Product. Under current law, the Trustees project it will increase to about 6 percent in two decades, then level off.
But that forecast is built on several key assumptions that are unlikely to occur. In the 2010 Affordable Care Act, Congress adopted a package of cost-cutting measures. In 2015, in a law called the Medicare Access and CHIP Reauthorization Act (MACRA), it began to change the way Medicare pays physicians, shifting from a system that pays by volume to one that is intended to pay for quality. As part of the transition, MACRA increased payments to doctors until 2025.
But what if key ACA cost-cutting measures never take effect, the transition to the new physician payment system is delayed, and the temporary doctor payments continue indefinitely? In that case, the trustees forecast Medicare costs will not flatten out in the mid-2030s, and instead keep rising—to 8 percent of GDP by 2070 and 9 percent of the entire economy by 2090.
That’s a long way away, you may say, and a lot can happen in the next 75 years. That’s true, but remember that whenever new medical technologies are adopted, overall health care costs tend to rise. So we face what the economists like to call an asymmetric risk: It is possible that future Medicare costs will grow more slowly than predicted, but it is more likely that they’ll be significantly higher than the trustees forecast.
The question is: What are we going to do about it?