Is Medicare Running Out of Money?

Medicare may be in trouble. According to a 2020 report by the Trump administration, the Medicare Trust Fund, also known as the Hospital Insurance Trust Fund, is running out of funds. Starting in 2026, Medicare Part A will only be able to pay for 90% percentage of the costs. Unfortunately, these projections do not take into account the fiscal ramifications of the COVID-19 pandemic which could make Medicare insolvent even sooner.

Doctors meeting with senior couple
 Tom Werner / Getty Images

How the Medicare Trust Fund Works

The Medicare Hospital Insurance 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, home health care services.

Medicare payroll taxes account for the majority of dollars that finance the Medicare Trust Fund. Employees are taxed 2.9% on their earnings, 1.45% paid by themselves, 1.45% paid by their employers. People who are self-employed pay the full 2.9% tax. The Additional Medicare Tax puts an extra 0.9% tax for any income beyond $200,000 if you are single or $250,000 if you are married.

Monthly premiums account for a smaller proportion of Medicare 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 that 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 $252 per month ($3,024 per year) in 2020. For those working less than 30 quarters, the cost increases to $458 per month ($5,496 per year).

The money collected in taxes and in premiums make up the Medicare Trust Fund. These dollars may not be adequate to meet the demands of the growing Medicare population by 2026, according to the Trump administration report.

The Impact of Aging Baby Boomers

The United States 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 evolution. Consider the fact that not all baby boomers will live to 65 years old and that "new" boomers in this age group 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. In 2029, 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 April 1, 2019 could expect to live, on average, until 84.0. A women who turned 65 on the same date could expect to live, on average, until 86.5. As people live longer, they are more likely to develop medical problems. Around a third of people between 65 and 84 years of age have at least two to three chronic medical conditions. A little less than a quarter of them will have four to five.

More people living longer means more medical problems and higher costs. Will the Medicare Trust Fund be able to keep up?

The Cost of Chronic Medical Conditions

As the number of chronic medical conditions goes up, the Centers for Medicare and 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 2018, NHE averaged $11.172 per person, accounting for 17.7% of the Gross Domestic Product. That number is expected to increase by 5.4% every year through 2028.

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 will deplete the Medicare Trust Fund at a rate not matching the dollars coming in. If Medicare runs out of money, how will senior citizens be able to afford health care when they are already footing a hefty bill?

The Impact of COVID-19

Unemployment rates increased dramatically during the pandemic with job losses into the millions. This has decreased direct financing for the Medicare Trust Fund through payroll taxes. Also, funds have been directed from the Medicare Trust Fund to combat the pandemic as part of the Coronavirus Aid, Relief, and Economic Security Act, aka CARES.

With these costs in mind, updated projections have been made about the solvency for Medicare. David J. Shulkin, MD, ninth Secretary of the US Department of Veterans Affairs, projected Medicare could become insolvent by 2022 or 2023. The Committee for a Responsible Federal Budget is somewhat more optimistic with expected solvency by 2023 or 2024. Regardless, money is running out faster than expected.

Proposals to Save Medicare

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:

  • Decrease how much Medicare pays doctors and hospitals. Health care 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.
  • 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, dentures, or hearing aids even though the most common things that happen as we age are changes in vision, dental health, and hearing. This leaves many Americans without the basic health services they need.
  • 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 that 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 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 Trust Fund dollar-wise but can seniors afford it? The majority of seniors are on a fixed income as it is and health care costs are disproportionately rising.
  • Increase Medicare payroll taxes. More taxes? This is what 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?

The problem with many of these proposals is that they shift more and more of the costs onto seniors who are already living on a fixed income. As it stands, Social Security benefits have been flat. With marginal increases in the Cost of Living Allowance (COLA) the past several years, seniors are already forced to stretch their dollars.

The announcement by CMS that the Medicare Trust Fund may be insolvent within a decade is a warning sign. Elderly Americans are at highest risk for losing access to health care when they are fragile and need it most. Now that we see the problem fast approaching, how should we deal with it? Better yet, how can we solve it? The answers are up for debate but one thing is clear: Health care reform needs to become a national priority and now.

A Word From Verywell

With an aging baby boomer population, Medicare is at risk for insolvency by 2026 or even sooner. Specifically, hospital and hospice benefits are at risk. If we continue down the current path, beneficiaries will face an increase in out of pocket costs. Policy changes are needed to protect Medicare and to those who need it.

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Article Sources
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  1. Centers for Medicare & Medicaid Services. 2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. April 22, 2020. cms.gov

  2. Pollard KM, Scommegna P. Just How Many Baby Boomers Are There? Population Reference Bureau. April 16, 2014. prb.org

  3. America Counts Staff. By 2030, All Baby Boomers Will Be Age 65 or Older. United States Census Bureau. December 10, 2019. census.gov

  4. Gaudette É, Tysinger B, Cassil A, Goldman DP. Health and Health Care of Medicare Beneficiaries in 2030Forum Health Econ Policy. 2015;18(2):75–96. doi:10.1515/fhep-2015-0037

  5. Centers for Medicare and Medicaid Services. Chronic Conditions among Medicare Beneficiaries, Chartbook, 2012 Edition. 2012. cms.gov

  6. Centers for Medicare & Medicaid Services. National Health Expenditure Fact Sheet. Updated March 24, 2020. cms.gov

  7. Cubanski J, Koma W, Damico A, Neuman T. How Much Do Medicare Beneficiaries Spend Out of Pocket on Health Care? Kaiser Family Foundation. November 4, 2019. kff.org

  8. Shulkin D. Medicare's Insolvency Problem Just Got A Lot Worse. Shulkin Solutions. July 7, 2020.

  9. Committee for a Responsible Federal Budge. Updated Budget Projections Show Fiscal Toll of COVID-19 Pandemic. June 24, 2020. crfb.org

  10. Aaronson WE, Zinn JS, Rosko MD. The success and repeal of the Medicare Catastrophic Coverage Act: a paradoxical lesson for health care reformJ Health Polit Policy Law. 1994;19(4):753–771. doi:10.1215/03616878-19-4-753

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