Since 1965, Medicare has played a vital role in providing health care benefits to nearly all Americans age 65 and older. The program, however, faces long-term sustainability challenges. Medicare spending will increase dramatically over the next few decades as the Baby Boomer population ages into the program and health spending per beneficiary grows. At the same time, the number of workers supporting each enrollee will shrink. As a result, benefit payments are expected to exceed payroll taxes, threatening solvency of one of its major trust funds. In addition, increases in Medicare spending will increase the pressure on beneficiary household budgets and the federal budget, potentially reducing the resources available for other needs.
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Medicare’s challenges are not solely financial. Medicare beneficiaries are a diverse group with diverse health care needs. Certain beneficiary populations are particularly vulnerable to having high health care needs, such as those with a disability, multiple chronic conditions, or cognitive impairments. In addition, many beneficiaries have limited resources to rely upon if faced with high out-of-pocket health costs. Another issue is whether the Medicare benefit design, which has remained mostly unchanged since the program was enacted in 1965, is meeting the needs of beneficiaries.
Medicare could also be used as a platform to expand insurance coverage and contain health spending. Such approaches are discussed in a separate election guide, Health Insurance Coverage.
Medicare’s Financial Challenges
Medicare provides a wide range of health care benefits that are financed through two trust funds. The Hospital Insurance (HI) trust fund supports Medicare Part A, which covers inpatient hospital care and post-acute care services such as skilled nursing facility care and home health care services. The Supplementary Medical Insurance (SMI) trust fund supports Medicare Part B—hospital outpatient care, doctor visits, lab tests, and medical supplies—and Part D prescription drug coverage.
No current provision exists for general fund transfers to cover HI expenditures in excess of dedicated payroll tax revenues, so additional revenues would need to be raised, benefits cut, or some combination of the two in order to avoid the shortfall.
HI trust fund income falls short of the amount needed to pay HI benefits. Medicare’s HI trust fund receives payroll tax revenues from employees and employers and pays for beneficiaries’ inpatient hospital and post-acute care services. It had built up a surplus of $202 billion at the end of 2017 but is projected to be depleted in 2026. At that time, tax revenues are projected to cover only 89 percent of program costs, with the share declining to 77 percent in 2046 and then increasing to 83 percent in 2093.
No current provision exists for general fund transfers to cover HI expenditures in excess of dedicated payroll tax revenues, so additional revenues would need to be raised, benefits cut, or some combination of the two in order to avoid the shortfall. Eliminating the looming deficit over the 75 years projection window would require an immediate 31 percent increase in payroll taxes, an immediate 19 percent reduction in expenditures, or some combination of the two. Delaying action would require more severe changes in the future.
Higher SMI costs increase pressure on beneficiary household budgets and the federal budget. Medicare’s SMI trust fund receives about three-quarters of its funding from federal general tax revenues and one-quarter from beneficiary premiums. The SMI trust fund is expected to remain solvent because its financing is reset each year to meet projected future costs. But increases in SMI costs will require increases in beneficiary premiums and federal tax dollars, which will add pressure to the federal budget. SMI general revenue funding is scheduled to increase from 1.6 percent of gross domestic product (GDP) in 2019 to 3.0 percent in 2093.
SMI premium increases similarly will place pressure on beneficiaries, especially when considered in conjunction with increasing beneficiary cost-sharing expenses. The average beneficiary expenses (premiums and cost-sharing) for parts B and D combined currently equal 23 percent of the average Social Security benefit. These expenses will increase to 35 percent of the average Social Security benefit by 2093.
Increases in total Medicare spending threaten the program’s sustainability. Because Medicare spending is expected to continue growing faster than GDP, greater shares of the economy will be devoted to Medicare over time, meaning smaller shares of the economy will be available for other priorities. Medicare expenditures as a percentage of GDP are projected to grow from 3.7 percent of GDP in 2018 to 6.5 percent of GDP in 2093. However, under the CMS Office of the Actuary alternative scenario, total Medicare expenditures would increase to 9.0 percent of GDP in 2093.
Meeting the Needs of the Beneficiary Population
Medicare is not a “one-size-fits all” program; it serves diverse populations with diverse needs. Several paths can lead to Medicare eligibility, including turning age 65, becoming permanently disabled, or being diagnosed with end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS). Each of these avenues raise particular health care needs. And even within eligibility categories, beneficiary characteristics and needs can differ. As a result, any program changes should be considered in light of how they may impact the broad range of Medicare beneficiaries.
Certain Medicare beneficiary subgroups are particularly vulnerable. Many Medicare beneficiaries have characteristics associated with high health care needs, increasing the importance of access to affordable health care services. Twenty-two percent of Medicare beneficiaries have five or more chronic conditions, 25 percent percent report being in fair or poor health, and 32 percent have limitations with at least one activity of daily living, which include eating, bathing, toileting, dressing, and functional mobility. The increased need for health care services often is coupled with a reduced ability to pay for those services. In 2016, median income for the Medicare population was $26,200 and median assets were $74,540, indicating that many beneficiaries have limited resources to rely upon if faced with high out-of-pocket health costs. In addition, over 11 million Medicare beneficiaries are dually eligible for Medicaid.
Medicare spending varies by subgroup. Medicare spending is on average higher for disabled beneficiaries than beneficiaries aged 65 and older and for dual eligibles than for non-dual eligibles. Annual spending per beneficiary differs even more dramatically by the number of chronic conditions, increasing from about $2,000 for those with zero or one chronic health condition to over $30,000 for those with six or more conditions. The nature of the services received also differs by chronic condition, with a larger share of spending going toward inpatient hospital care and other Part A services for those with more chronic conditions.
A small share of Medicare beneficiaries accounts for a large share of Medicare spending. The most costly 5 percent of Medicare’s traditional fee-for-service (FFS) program beneficiaries account for 40 percent of Medicare FFS spending. The most costly 25 percent of beneficiaries account for 82 percent of spending. The least costly 50 percent of beneficiaries account for only 5 percent of spending.
Medicare benefit coverage has limitations. Medicare provides health insurance coverage for a broad range of health care services. With the notable exception of adding the prescription drug program in 2006, however, Medicare’s traditional fee-for-service benefit package has remained mostly unchanged since the program was enacted in 1965. There are calls for a restructuring to provide greater financial protection and also to encourage beneficiaries to seek cost-effective care.
The traditional Medicare benefit package doesn’t coordinate cost-sharing between Medicare parts A and B; doesn’t cap out-of-pocket costs; and doesn’t cover vision, dental, and hearing services. As a result, most beneficiaries enrolled in traditional Medicare have supplemental coverage that provides more protection against catastrophic costs. Medicare Advantage plans offer catastrophic protection and more benefit design flexibility and may also offer extra benefits not typically covered in traditional Medicare. Medicare provides only very limited coverage of long-term care services and supports, regardless of whether beneficiaries enroll in traditional Medicare or Medicare Advantage.
Revising the traditional Medicare benefit structure has been proposed to address the shortcomings of the current benefit structure as well as to help encourage Medicare beneficiaries to seek more cost-effective care. One such option is to include a new out-of-pocket cost-sharing limit along with unifying the Part A and Part B deductibles and restructuring the copayment and coinsurance requirements. In the longer term, moving to a value-based insurance design (VBID) and allowing supplemental benefits for beneficiaries with certain conditions could allow for better targeting of health care services.
Improving Medicare’s Sustainability
Putting Medicare on a more sustainable path for current and future generations of beneficiaries will require policymakers to make some choices regarding benefit coverage, provider and plan payments, and taxpayer funding.
Additional resources from the American Academy of Actuaries
- Medicare’s Financial Condition: Beyond Actuarial Balance (April 2019)
- Expanding Access to Public Insurance Plans (March 2019)
- Medicare at 50: Is It Sustainable for 50 More Years? (July 2015)
- Medicare at 50: Who Are the Beneficiaries? (July 2015)
- Medicare at 50: Does It Meet the Needs of the Beneficiaries? (July 2015)
- Medicare at 50: Medicare Advantage Plans (October 2015)
- Addressing Health Care Cost Growth in Medicare: A Framework (June 2015)
- A Guide to Analyzing Medicare Premium Support (February 2013)
- Revising Medicare’s Fee-For-Service Benefit Structure (March 2012)
 Medicare trust fund data throughout this section is from the 2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
 Kaiser Family Foundation; An Overview of Medicare; February 2019.
 Gretchen Jacobson, et al, Income and Assets of Medicare Beneficiaries, 2016-2035, Kaiser Family Foundation, April 2017.
 CMS Medicare-Medicaid Coordination Office; Data Analysis Brief: Medicare-Medicaid Dual Enrollment from 2006 through 2016; November 2017.
 CMS; Chronic Conditions Dashboard.Figures reflect Medicare spending in 2015.
 Medicare Payment Advisory Commission (MedPAC); A Data Book: Health Care Spending and the Medicare Program; June 2019.