Order Code RS20946
Updated May 4, 2006
CRS Report for Congress
Received through the CRS Web
Medicare: History of Part A Trust Fund
Insolvency Projections
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Summary
Medicare is the nation’s health insurance program for persons age 65 and older 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, 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 accounts 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 an annual report to
Congress concerning their financial status.
Almost from its inception, the HI trust fund has faced a projected shortfall. The
insolvency date has been postponed a number of times, primarily due to legislative
changes which had the effect of restraining growth in program spending. The 2006
report projects that, under intermediate assumptions, the HI trust fund will become
insolvent in 2018, two years earlier than projected in 2005. The revision reflects slightly
higher costs and an upward revision in short-range assumptions about utilization of HI
services. The 2006 projection is eight 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. This report is a
supplement to CRS Report RS20173, Medicare: Financing the Part A Hospital
Insurance Program, by Jennifer O’Sullivan. That report discusses the findings from the
2006 trustees’ report. Both reports will be updated upon receipt of the trustees’ 2007
report.
Congressional Research Service ˜ The Library of Congress

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CRS-2
Health Insurance (Part A) Trust Fund
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, and
Modernization Act of 2003 [MMA, P.L. 108-173]). 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. Financial operations
for Part A are accounted for through the HI trust fund while those for Part B (and the new
Part D) are accounted for through the SMI trust fund. Both funds are maintained by the
Department of the Treasury.1 Each fund is overseen by a board of trustees that reports
annually to Congress concerning the funds’ financial status.
Almost from its inception, the HI trust fund has faced a projected shortfall. When
observers refer to the impending insolvency of Medicare they are actually referring to the
pending insolvency of the HI trust fund. The SMI trust fund does not face exhaustion
because of the way it is financed. However, the SMI trustees continue to voice concern
about the rapid growth in program costs.
Part A Projections
The board of trustees projected insolvency for the HI fund beginning with the 1970
report (which was less than four years after the program went into effect). The insolvency
date was postponed a number of times, primarily due to legislative changes which had the
effect of restraining the growth in program spending. (See Table 1) The lower growth
rates were achieved largely through reductions in payments to providers, primarily
hospitals and physicians. Generally, these measures were part of larger budget
reconciliation laws which attempted to restrain overall federal spending.
Efforts to curtail program spending intensified as Congress considered legislation
to bring the entire federal budget into balance and culminated in the passage of the
Balanced Budget Act of 1997 (BBA 97, P.L. 105-33). This legislation achieved
significant savings in Medicare and extended the solvency of the Part A trust fund. A
number of observers contended that the savings achieved through the enactment of BBA
97 were greater than intended at the time of enactment and had unintended consequences
for health care providers. As a result of these concerns, Congress subsequently enacted
two measures (the Balanced Budget Refinement Act of 1999 [BBRA 99, P.L. 106-113]
and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000 [BIPA 2000, P.L. 106-554]). These measures were designed to restore some of the
BBA 97 spending reductions.
In early 1997, the trustees had projected that the Part A fund would become insolvent
in 2001. Following enactment of BBA 97, significant improvements were recorded in the
short-term projections. The new projections reflected a number of factors including BBA
97 and strong economic growth which generated more revenues to the trust fund from
1 The trust funds are an accounting mechanism; there is no actual transfer of money into and out
of the fund.

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CRS-3
payroll taxes. Despite enactment of both BBRA 99 and BIPA 2000, which increased
program spending, the 2001 and 2002 trustees’ reports continued to delay the projected
insolvency date. However, the 2003 report shifted direction again. Its projected
insolvency date was 2026, four years earlier than the 2030 date projected in the 2002
report. The revision was due to lower than expected HI-taxable payroll and higher than
expected hospital expenditures.
The 2004 report projected that, under intermediate assumptions, the HI trust fund
would become insolvent in 2019, seven years earlier than projected in 2003. The revision
of the projected insolvency date was due to a number of factors including slow wage
growth (on which payroll taxes are based) and faster growth in inpatient hospital benefits.
The enactment of MMA added significantly to HI costs, primarily through higher
payments to rural hospitals and to private plans under the MA program.
The 2005 report projected that, under intermediate assumptions, the HI trust fund
would become insolvent in 2020, one year later than projected in 2004. The revision
reflected slightly higher income and slightly lower costs in 2004 than previously
estimated.
2006 Projections
The 2006 report moves the insolvency date forward. Under the trustees’
intermediate assumptions, the HI trust fund will become insolvent in 2018, two years
earlier than projected in 2005. The revision reflects slightly higher costs and an upward
revision in short-range assumptions about utilization of HI services. The 2006 projection
is eight years earlier than that projected in 2003, prior to the enactment of MMA.
Table 1. Year in Which the Hospital Insurance Trust Fund Was
Projected to Become Insolvent in Past Trustees’ Reports
Year of
Year of
Year of
Year of
Year of
Year of
trustees’
trustees’
trustees’
insolvency
insolvency
insolvency
report
report
report
1970
1972
1983
1990
1995
2002
1971
1973
1984
1991
1996
2001
1972
1976
1985
1998
1997
2001
1973
none indicated
1986
1996
1998
2008
1974
none indicated
1986 amended
1998
1999
2015
1975
late 1990s
1987
2002
2000
2025
1976
early 1990s
1988
2005
2001
2029
1977
late 1980s
1989
— a
2002
2030
1978
1990
1990
2003
2003
2026
1979
1992
1991
2005
2004
2019
1980
1994
1992
2002
2005
2020
1981
1991
1993
1999
2006
2018
1982
1987
1994
2001
Source: Intermediate projections of various HI trustees’ reports, 1970-2003.
a. Contained no long-range projections.

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CRS-4
What Would Happen If the Fund Became Insolvent?
Payments cannot be made from the HI fund unless there are sufficient monies credited to it.
Neither the Social Security trust fund nor the Medicare trust fund has ever run out of money and there
are no provisions in the Social Security Act governing what would happen in such an event. There is
no authority in law for a general revenue funding of the shortfall. Of course, the fund would continue
to have payroll taxes credited to it though these would be insufficient to pay all the pending claims.
Long-Range Financing Issues
The projected insolvency date is only one measure of the financial soundness of the Part A
program. The 2006 trustees’ report states that the fund fails to meet both the short and long-range tests
for financial adequacy. For a further discussion of this issue, see CRS Report RS20173, Medicare:
Financing the Part A Hospital Insurance Program.
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