Is Medicare Running Out of Money?

Medicare may be in trouble, but it is not going bankrupt. According to a 2021 report by the Biden administration, 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 2026, Medicare Part A may only be able to pay for 91% of the costs it covers today.

Doctors meeting with senior couple
 Tom Werner / Getty Images

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 Parts B, C, and D

Medicare Part A is funded by the Medicare HI trust fund but because Medicare Advantage plans (Part C) also cover Part A benefits, they receive partial funding from the Medicare HI trust fund too. Medicare Parts B and D have other sources of funding, the main one being what you pay in monthly premiums.

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 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 $274 per month ($3,288 per year) in 2022. For those working less than 30 quarters, the cost increases to $499 per month ($5,988 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 Biden administration report suggests these dollars may not be adequate to meet the demands of the growing Medicare population by 2026.

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 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. 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 April 1, 2019 could expect to live, on average, 84.2 years. A women who turned 65 on the same date could expect to live, on average, 86.7 years.

As people live longer, they are more likely to develop medical problems. Around one-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 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 2019, NHE averaged $11,582 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 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 had been made about the solvency for 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 their 2021 report, CMS explains there were several offsetting variables during the pandemic that helped maintain the previous projection of 2026.

Insolvent vs. Bankrupt

Bankruptcy is a legal process that declares a person, business, or organization unable to pay their debts. Medicare is not going bankrupt. It will have money to pay for health care.

Instead, it is projected to become insolvent. Insolvency means that Medicare may not have the funds to pay 100% of its expenses. Insolvency can sometimes lead to bankruptcy, but in the case of Medicare, Congress is likely to intervene and acquire the necessary funding.

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, 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. However, one of the positive outcomes of the Build Back Better Act is that hearing aids will be covered by Medicare starting in 2023.
  • 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 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 five years is a warning sign. Older Americans are at risk for having decreased access to health care when they need it most.

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. 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.

A Word From Verywell

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

19 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Centers for Medicare & Medicaid Services. Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

  2. Huang CC, Marr C, Horton E. House GOP health plan eliminates two Medicare taxes, giving very large tax cuts to the wealthy. Center on Budget and Policy Priorities.

  3. Medicare.gov. Medicare costs at a glance.

  4. United States Census Bureau. 2020 census will help policymakers prepare for the incoming wave of aging boomers.

  5. United States Census Bureau. By 2030, all baby boomers will be age 65 or older.

  6. 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

  7. Centers for Medicare & Medicaid Services. Chronic conditions charts.

  8. Centers for Medicare & Medicaid Services. National health expenditure fact sheet.

  9. Kaiser Family Foundation. How much do Medicare beneficiaries spend out of pocket on health care?

  10. Shulkin Solutions. Medicare’s insolvency problem just got a lot worse.

  11. Committee for a Responsible Federal Budget. Updated budget projections show fiscal toll of COVID-19 pandemic.

  12. Whitehouse.gov. President Biden announces the Build Back Better framework.

  13. Medicare Payment Advisory Commission (MedPAC). Report to the Congress: Medicare Payment Policy

  14. 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

  15. Miller M, Socker E. Addressing Medicare solvency will require both revenue and spending changes. The Commonwealth Fund.

  16. U.S. Department of Justice. United States intervenes and files complaint in False Claims Act suit against health insurer for submitting unsupported diagnoses to the Medicare Advantage Program.

  17. Hayford TB, Burns AL. Medicare Advantage enrollment and beneficiary risk scores: Difference-in-differences analyses show increases for all enrollees on account of market-wide changesINQUIRY. 2018;55. doi:10.1177/0046958018788640

  18. Congressional Research Service. Federal support for graduate medical education: An overview.

  19. Cubanski J, Neuman T. FAQs on Medicare financing and trust fund solvency. Kaiser Family Foundation.

Additional Reading

By Tanya Feke, MD
Tanya Feke, MD, is a board-certified family physician, patient advocate and best-selling author of "Medicare Essentials: A Physician Insider Explains the Fine Print."