Order Code RS20173
Updated April 11, 2005
CRS Report for Congress
Received through the CRS Web
Medicare: Financing the Part A
Hospital Insurance Program
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Summary
Medicare is the nation’s health insurance program for individuals aged 65 and over
and certain disabled persons. Medicare consists of four distinct parts: Part A (Hospital
Insurance [HI]); Part B (Supplementary Medical Insurance [SMI]); Part C (Medicare
Advantage [MA]); and Part D (the new prescription drug benefit added by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 [MMA]). The Part A
program is financed primarily through payroll taxes levied on current workers and their
employers; these are credited to the HI trust fund. The Part B program is financed
through a combination of monthly premiums paid by current enrollees and general
revenues. Income from these sources is credited to the SMI trust fund. Beneficiaries can
choose to receive all their Medicare services through managed care plans under the MA
program; payment is made on their behalf in appropriate parts from the HI and SMI trust
funds. A separate account in the SMI trust fund will account for the new Part D drug
benefit; Part D is financed through general revenues and beneficiary premiums.
The HI and SMI trust funds are overseen by a board of trustees that makes annual
reports to Congress. The 2005 report projects that under intermediate assumptions, the
HI trust fund will become insolvent in 2020, one year later than projected in 2004. The
revision reflects slightly higher income and slightly lower costs for 2004 than
previously estimated. However, the 2005 projection is six years earlier than that
projected in 2003, prior to the enactment of MMA. That law added to HI costs, primarily
through higher payments to rural hospitals and to private plans under the MA program.
The HI fund fails to meet both the short- and long-range tests for financial adequacy.
Because of the way it is financed, the SMI fund does not face insolvency; however, the
trustees are concerned with the program’s continued rapid growth rate.
Stressing the importance of considering the Medicare program as a whole, the
trustees note that Medicare expenditures are expected to grow from 2.6% of the gross
domestic product (GDP) in 2004 to 7.5% in 2035. The difference between outlays and
dedicated financing sources is estimated to reach 45% of outlays in 2012. This report
will be updated upon receipt of the 2006 trustees’ report.
Congressional Research Service ˜ The Library of Congress

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Health Insurance Trust Fund
What It Is. Medicare’s financial operations for Part A are accounted for through
the HI trust fund maintained by the Department of the Treasury. The trust fund is an
accounting mechanism; there is no actual transfer of money into and out of the fund.
Income to the trust fund (primarily payroll taxes) is credited to the fund in the form of
interest-bearing government securities. Expenditures for services and administrative costs
are recorded against the fund. The securities represent obligations that the government
has issued to itself. As long as the trust fund has a balance, the Treasury Department is
authorized to make payments for it from the U.S. Treasury.
Income and Outgo. The primary source of income credited to the HI trust fund
is payroll taxes paid by employees and employers. Each pays a tax of 1.45% on earnings;
the self-employed pay 2.9%. Unlike Social Security, there is no upper limit on earnings
subject to the tax.1 Additional income consists of (1) premiums paid by voluntary
enrollees who are not automatically entitled to Medicare Part A through their (or their
spouse’s) work in covered employment; (2) government credits; and (3) interest on
federal securities held by the trust fund. Since 1994, the HI fund has had an additional
funding source: the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) increased
the maximum amount of Social Security benefits subject to income tax from 50% to 85%
and provided that the additional revenues would be credited to the HI trust fund.
Payments are made from the trust fund for covered Part A benefits, namely, hospital
services, skilled nursing facility services, some home health services, and hospice care.
Payments are also made for administrative costs associated with operating the program.
Board of Trustees. By law, the six-member Board is composed of the Secretary
of the Treasury, the Secretary of Health and Human Services, the Secretary of Labor, the
Commissioner of Social Security, and two public members (not of the same political
party) nominated by the President and confirmed by the Senate.2 The Secretary of the
Treasury is the Managing Trustee. The Administrator of the Centers for Medicare and
Medicaid Services (CMS), the agency that administers Medicare, is designated Secretary
of the Board.
Annual Trustees’ Report. The Board makes an annual report on the operations
of the trust fund. Financial projections included in the report are made by CMS actuaries
using major economic and other assumptions selected by the trustees. The report includes
three forecasts ranging from pessimistic (“high cost”) to mid-range (“intermediate”) to
optimistic (“low cost”). The intermediate projections represent the Trustees’ best
estimate of economic and demographic trends; they are the projections most frequently
cited. The 2005 report was issued March 23, 2005.
1 Prior to 1991, the upper limit on taxable earnings was the same as for Social Security. OBRA
90 raised the limit in 1991 to $125,000. Under automatic indexing provisions, the maximum was
increased to $130,200 in 1992 and $135,000 in 1993. OBRA 93 eliminated the upper limit
entirely beginning in 1994.
2 Public members serve four-year terms. Public members John L. Palmer and Thomas Savings
were appointed in October 2000 and continued serving through issuance of the 2005 report.

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2005 Health Insurance Trustees Report — Key Findings
2004 Operations. In calendar year (CY) 2004, total income to the HI trust fund
was $183.9 billion. Payroll taxes of workers and their employers accounted for $156.5
billion (85.1%), interest and government credits for $17.0 billion (9.2%), premiums (from
those buying into the program) for $1.9 billion (1.0%), and taxation of Social Security
benefits for $8.6 billion (4.7%). The program paid out $170.6 billion — $167.6 billion
(98.2%) in benefits and $3.0 billion (1.8%) for administrative expenses. The balance at
the end of 2004 was $269.3 billion. In FY2004, total income was $180.8 billion, and total
disbursements were $167.0 billion; the distribution of income sources and expenditures
was similar to those recorded for CY2004. (See Table 1)
Table 1. Operation of the Hospital Insurance Trust Fund,
Calendar and Fiscal Years 1970-2014
($ billions)
Year
Calendar Year
Fiscal Year
Balance at
Balance at
Income
Disbursements
end of year
Income
Disbursements
end of year
Historical data
1970
$6.0
$5.3
$3.2
$5.6
$5.0
$2.7
1975
13.0
11.6
10.5
12.6
10.6
9.9
1980
26.1
25.6
13.7
25.4
24.3
14.5
1985
51.4
48.4
20.5
50.9
48.7
21.3
1990
80.4
67.0
98.9
79.6
66.7
95.6
1995
115.0
117.6
130.3
114.8
114.9
129.5
2000
167.2
131.1
177.5
159.7
130.3
168.1
2001
174.6
143.4
208.7
171.0
141.7
197.4
2002
178.6
152.5
234.8
179.8
148.0
229.1
2003
175.8
154.6
256.0
175.8
153.8
251.1
2004
183.9
170.6
269.3
180.8
167.0
264.9
Intermediate estimate
2005
195.0
182.5
281.8
192.6
179.9
77.7
2006
206.6
194.5
293.8
204.7
188.7
293.6
2007
218.4
208.0
304.3
215.8
204.4
305.0
2008
230.6
219.4
315.6
227.6
215.6
317.1
2009
242.7
233.3
325.0
239.2
229.2
327.1
2010
254.3
248.5
330.8
251.9
244.1
334.9
2011
268.0
264.8
334.0
265.9
265.5
335.3
2012
281.9
283.2
332.8
279.2
272.3
342.3
2013
295.3
303.2
324.8
292.7
297.4
337.6
2014
308.4
323.9
309.3
305.7
317.8
325.4
Source: 2005 HI and SMI Trustees’ Report. Sums may not equal totals due to rounding.
Projected Insolvency Date. The 2005 report projects that, under intermediate
assumptions, the HI trust fund will become insolvent in 2020, one year later than

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projected in 2004.3 The revision reflects slightly higher income and slightly lower costs
in 2004 than previously estimated. However, the 2005 report projects insolvency six
years earlier than does the 2003 report, issued prior to the enactment of MMA.4 That law
added to HI costs, primarily through higher payments to rural hospitals and to private
plans under the MA program.
The 2005 report states that beginning in 2004, tax income (from payroll taxes and
from the taxation of Social Security benefits) began to be less than expenditures.
Expenditures will exceed total income beginning in 2012. If income falls short of
expenditures, costs are met by drawing on HI fund assets through transfers from the
general fund of the Treasury until the fund is depleted.
Short- and Long-Range Financial Soundness. The 2005 report states that
the fund fails to meet the short-range (i.e., 10-year, 2005-2014) test of financial adequacy
since total HI assets at the start of the year are estimated to decline to below 100% of
expenditures during 2014.
Further, a substantial actuarial deficit exists over the full long-range projection
period (2005-2080). For projections beyond 2014, the trustees do not use actual dollar
figures due to the difficulty of comparing dollar values for different time periods. Instead,
they measure long-range financial soundness by comparing the fund’s “income rate” (the
ratio of tax income to taxable payroll) with its “cost rate” (the ratio of expenditures for
insured persons to taxable payroll).5 Under the 2005 intermediate assumptions, the
trustees state that cost rates are projected to exceed income rates by a steadily and rapidly
growing margin. In 2005, the income rate and the cost rate are projected to be 3.06%.
In 2006, the income rate is projected at 3.07 while the cost rate is projected at 3.09, a
negative gap of 0.02 percentage points. This gap is projected to widen to 0.33% in 2014,
0.89% in 2020, and 9.61% in 2080. By 2080, expenditures are expected to be 3.8 times
the level of tax revenues. In other words, tax income, will cover only about one-fourth
of projected expenditures in 2080. Looked at another way, the trustees estimate the value
of unfunded HI obligations through 2079 at $8.6 trillion.
The trustees state that substantial changes would be required to maintain financial
soundness over the 75-year projection period. For example, income could be increased
through immediately increasing the payroll tax rate for employees and employers
combined from 2.90% to 5.99%. Alternatively, expenditures could be reduced by a
corresponding amount, but this would require an immediate decrease in benefits of 48%.
These changes could be implemented more gradually throughout the 75-year period, but
they would ultimately have to be more stringent.
3 Generally, total income to the trust fund has exceeded expenditures; however, this trend was
reversed from 1995 to 1997. In 1998, income again began exceeding expenditures. In addition,
expenditures actually declined from the previous year’s levels for each of three fiscal years
(FY1998, FY1999, and FY2000) and for two calendar years (1998 and 1999).
4 For a history of projections, see CRS Report RS20946, Medicare: History of Part A Trust Fund
Insolvency Projections
, by Jennifer O’Sullivan.
5 The cost rate calculations exclude expenditures for the relatively small number of persons who
buy into Part A.

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Projection Factors. The trustees’ projections of income and outgo reflect several
demographic and economic variables. These include the consumer price index, fertility
rate, workforce size and wage increases, and life expectancy. They also include estimates
specific to the HI program including the use of inpatient hospital, skilled nursing facility,
and home health services. A key variable is the estimated growth rate in the cost of
services. Over the long-term, the trustees assume that per-beneficiary expenditures will
grow at the rate of per capita GDP plus one percentage point.
Beginning in 2011, the program will also begin to experience the impact of major
demographic changes. First, baby boomers (persons born between 1946 and 1964) begin
to turn age 65 and become eligible for Medicare. The baby boom population is likely to
live longer than previous generations. This will mean an increase in the number of “old”
beneficiaries (i.e., those 85 and over). The combination of these factors is estimated to
contribute to the increase in the size of the HI population from 41.2 million in 2004 to
47.1 million in 2011 and 70.2 million in 2025. Accompanying this significant increase
is a shift in the number of covered workers supporting each HI enrollee. In 2004, there
were nearly 4.0. This number is predicted to decrease to 2.4 in 2030 and 2.0 by 2079.
The combination of expenditure and demographic factors results in an increase in
the size of the HI program relative to other sectors of the economy. According to the
2005 report, if no changes are made in current Medicare law, the HI program’s cost is
expected to rise from 1.45% of GDP in 2005 to 2.90% in 2035, and 5.48% of GDP in
2080.
Congressional Budget Office (CBO) Estimates. The CBO March 2005 10-
year baseline estimates are more optimistic than those made by the trustees. On a year-to-
year basis over the FY2005-FY2014 period, CBO projects slightly higher amounts of total
income and lower amounts of total outlays. The impact is cumulative. By FY2014,
CBO’s end-of-year balance estimate is $192.7 billion more than the trustees’ ($510.5
billion versus $317.8 billion).
Issues
Status of Program as a Whole. As noted, HI and SMI are financed very
differently. HI is funded by current workers through a payroll tax, while SMI is funded
by premiums from current beneficiaries and federal general revenues. Because of this
financing, the SMI trust fund’s income is projected to equal expenditures for all future
years. Historically, therefore, the major focus of concern was the HI fund. More recently
attention has also turned to the rapid increase in SMI costs, which have been growing
significantly faster than GDP. For a number of years, the trustees have been emphasizing
the importance of considering the program as a whole and the fact that the projected
increases are unsustainable over time. To further emphasize this point, in 2002 they
began issuing a single report covering the entire program.
The enactment of MMA made the consideration of the future of the total program
more critical. The legislation increased spending under Parts A, B, and C. In addition,
it added a new prescription drug benefit under Part D; spending for this new benefit will
be recorded as a separate account in the SMI trust fund. The trustees note that these
changes have important implications. In 2004, total Medicare expenditures represented
2.6% of GDP. In 2006 (the first year of the new drug benefit), total expenditures are
expected to be 3.3% of GDP. The percentage is expected to increase to 7.5% by 2035 and

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13.6% by 2079. The trustees note that over the past 50 years, total federal tax receipts
have averaged 11% of GDP. They further note that projected Medicare costs will exceed
those for Social Security by 2024 and represent nearly twice the cost of Social Security
by 2079.
There will also be a shift in the sources of Medicare income. In 2004, HI payroll
taxes accounted for 52% of non-interest income to the program; general revenues
represented 34%; and beneficiary premiums accounted for 11%. By 2019 (just prior to
the projected exhaustion of the HI fund), payroll tax income will account for a smaller
portion (31%) while the portion paid for by general revenues will grow to 49% and the
portion paid by premiums will grow to 14%.
Required Response. There is concern that over time the economy will be unable
to support the increasing reliance on general revenues which in large measure comes from
taxes paid by the under-65 population. In response, MMA (Section 801) requires the
trustees report to include an expanded analysis of Medicare expenditures and revenues.
Specifically, a determination must be made as to whether general revenue financing will
exceed 45% of total Medicare outlays within the next seven years. General revenues
financing is defined as total Medicare outlays minus dedicated financing sources (i.e., HI
payroll taxes; income from taxation of Social Security benefits; state transfers for
prescription drug benefits; premiums paid under Parts A, B, and D; and any gifts received
by the trust funds). The trustees project that the 45% trigger will first be exceeded in
2012 which is beyond the required seven-year test period (i.e., 2005-2011). The 2005
report, therefore, does not include a determination of excess general revenue funding.
However, the 2012 estimate suggests that such a determination could be included in the
2006 report. (CBO projects the trigger will be reached in FY2014.)
MMA (Sections 802-804) further requires that if an excess general revenue funding
determination is made for two successive years, the President is required to submit a
legislative proposal to respond to the warning. The Congress is required to consider the
proposal on an expedited basis. However, passage of legislation within a specific time
frame is not required.
Prospects. The issues confronting Medicare are unlikely to get any easier. There
are no simple solutions to address the problems raised by the aging of the population, the
rapid rise in health care costs, and the advances in health care delivery and medical
technology. Trustees and many other observers continue to warn that the magnitude of
the impending deficit and the expanding drain on the federal budget need to be addressed.
At the same time, observers express concern about the impact of any solution on
beneficiaries’ out-of-pocket costs, particularly since the current program only covers one-
half of an aged person’s total health care bill.
Some persons in fact have suggested that the problems facing Medicare are more
urgent than those facing Social Security. It is, however, uncertain whether Congress will
consider major Medicare legislation this year.