Medicare Financing
Patricia A. Davis
Specialist in Health Care Financing
June 1, 2011
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown above, for inclusion in its 2011 Green Book website. CRS works
exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of
both the House and Senate, regardless of party affiliation.

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R41436
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repared for Members and Committees of Congress

Medicare Financing

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, or Hospital Insurance (HI);
Part B, or Supplementary Medical Insurance (SMI); Part C, or Medicare Advantage (MA); and
Part D, the prescription drug benefit. 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, except hospice, 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 Part D drug benefit;
Part D is financed through general revenues, beneficiary premiums, and state contributions. The
HI and SMI trust funds are overseen by a board of trustees that makes annual reports to Congress.
The 2011 report of the Medicare Board of Trustees estimates that the HI trust fund will become
insolvent in 2024, five years earlier than it had predicted in the 2010 report. This is due primarily
to expectations of lower payroll tax income. These more recent projections still postpone
depletion further in the future than the year of 2017, as projected in the 2009 report prior to the
passage of the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), as amended by
the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation Act,” or HCERA,
P.L. 111-152). Because of the way it is financed, the SMI fund can not face insolvency; however,
the trustees project that SMI expenditures will continue to grow rapidly, and thus place increasing
demands on Medicare beneficiaries and all taxpayers.
Although the Medicare trustees report that the financial outlook for the Medicare program
appears to have improved as a result of PPACA, they caution that the projections in the report are
more uncertain than normal, due to the potential for future expenditure reductions not to
materialize. In addition, the report projections assume that reductions in physician payment rates
scheduled under current law will occur, although these reductions have usually been overridden
by Congress. As such, similar to last year, the Centers for Medicare and Medicaid Services
(CMS) Office of the Actuary issued a supplemental memorandum that provides projections based
on an “illustrative alternative” to current law.
This report will be updated upon receipt of the 2012 trustees’ report or as circumstances warrant.

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Contents
Introduction ................................................................................................................................ 1
Medicare Trust Funds.................................................................................................................. 2
Hospital Insurance (HI) Trust Fund ....................................................................................... 2
Supplementary Medical Insurance (SMI) Trust Fund............................................................. 4
Part B Financing ............................................................................................................. 4
Part D Financing ............................................................................................................. 4
Board of Trustees .................................................................................................................. 5
Annual Trustees’ Report ........................................................................................................ 5
2010 Medicare Program Operations ............................................................................................ 6
Hospital Insurance Trust Fund Operations in 2010................................................................. 6
Supplementary Medical Insurance Trust Fund Operations in 2010......................................... 8
Short-Range Financial Soundness (10 Years)............................................................................... 8
HI Short-Range Financial Status ........................................................................................... 9
SMI Short-Range Financial Status....................................................................................... 10
Projected Date of HI Insolvency................................................................................................ 11
Long-Range Financial Soundness (75 Years) ............................................................................. 12
HI Income and Costs Relative to Payroll Taxes ................................................................... 12
Year-by-Year Estimates ................................................................................................. 13
Actuarial Balance.......................................................................................................... 14
Unfunded Obligations ......................................................................................................... 14
HI Long-Term Obligations ............................................................................................ 14
SMI Long-Term Obligations ......................................................................................... 15
Medicare Costs as a Percentage of GDP .............................................................................. 16
Medicare Funding Warning (“Medicare Trigger”)...................................................................... 17
Medicare Expenditures and the Federal Budget ......................................................................... 18
Concluding Observations .......................................................................................................... 20

Figures
Figure 1. Sources of Medicare Revenue: 2010............................................................................. 2
Figure 2. Medicare Expenditures ................................................................................................. 9
Figure 3. Short-Term HI Expenditures and Income .................................................................... 10
Figure 4. HI Trust Fund Assets at Beginning of Year as a Percentage of Annual
Expenditures .......................................................................................................................... 11
Figure 5. Long-Range HI Income and Cost as a Percentage of Taxable Payroll .......................... 13
Figure 6. Medicare Cost and Non-interest Income by Source as a Percentage of GDP................ 17

Tables
Table 1. Medicare Data for Calendar Year 2010........................................................................... 7
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Table 2. Unfunded HI Obligations ............................................................................................. 15
Table 3. Unfunded Part B and Part D Obligations ...................................................................... 16
Table 4. SMI General Revenues as a Percentage of Personal and Corporate Federal
Income Tax ............................................................................................................................ 19
Table A-1. Medicare Enrollment, 1970 - 2085 ........................................................................... 22
Table B-1. Medicare Income and Expenditures, Calendar Years 1970-2020 ............................... 24
Table C-1. Average Medicare Benefit Costs Per Beneficiary, Calendar Years 1970-2020............ 25
Table D-1. Operation of the Hospital Insurance Trust Fund, Calendar Years 1970-2020 ............. 26
Table E-1. Operation of the Part B Account of the SMI Trust Fund, Calendar Years 1970-
2020 ...................................................................................................................................... 27
Table F-1. Operation of the Part D Account in the SMI Trust Fund, Calendar Years 2004-
2020 ...................................................................................................................................... 28
Table G-1. Projected HI and SMI Expenditures as a Percentage of GDP .................................... 29

Appendixes
Appendix A. Medicare Enrollment ............................................................................................ 22
Appendix B. Total Medicare Income and Expenditures (HI and SMI Combined) ....................... 24
Appendix C. Medicare Per Capita Expenditures ........................................................................ 25
Appendix D. Operation of the Hospital Insurance Trust Fund .................................................... 26
Appendix E. Operation of the Supplementary Insurance Trust Fund, Part B Account ................. 27
Appendix F. Operation of the Supplementary Insurance Trust Fund, Part D Account ................. 28
Appendix G. Medicare Expenditures as a Percentage of GDP .................................................... 29


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Introduction
Medicare is a federal insurance program that pays for covered health care services of qualified
beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act as a federal
entitlement program to provide health insurance to individuals 65 and older, and has been
expanded over the years to include permanently disabled individuals under 65. Generally,
individuals are eligible for premium-free Part A of Medicare if they or their spouse worked for at
least 40 quarters in Medicare-covered employment, are 65 years old, and are a citizen or
permanent resident of the United States. Individuals under 65 may also qualify for coverage if
they have a permanent disability, have End-Stage Renal disease (permanent kidney failure
requiring dialysis or transplant), or have amyotrophic lateral sclerosis (Lou Gehrig’s disease).
Medicare consists of four parts—A through D. Part A covers hospital services, skilled nursing
facility services, home health visits, and hospice services. Part B covers a broad range of medical
services, including physician services, laboratory services, durable medical equipment, and
outpatient hospital services. Enrollment in Part B is voluntary, however most beneficiaries with
Part A also enroll in Part B. Part C provides private plan options, such as managed care, for
beneficiaries who are enrolled in both Parts A and B. Part D provides optional outpatient
prescription drug coverage.1
Medicare serves approximately one in seven Americans and virtually all of the population aged
65 and over. In 2010, the program covered 47.5 million persons (39.6 million aged and 7.9
million disabled) at a total cost of $523 billion, accounting for about 21% of national health
spending and 3.6% of Gross Domestic Product (GDP). Medicare is an entitlement program,
which means that it is required to pay for covered services provided to enrollees so long as
specific criteria are met.
Since 1965, the Medicare program has undergone considerable change. Most recently, the Patient
Protection and Affordable Care Act (PPACA, P.L. 111-148), as amended by the Health Care and
Education Reconciliation Act of 2010 (“the Reconciliation Act” or HCERA, P.L. 111-152), made
numerous changes to the Medicare program that modify provider reimbursements, provide
incentives to increase the quality and efficiency of care, and enhance certain Medicare benefits.2
For example, under the new legislation, annual updates of the prices paid by Medicare for almost
all non-physician categories of health services will be reduced by the growth in economy-wide
productivity (productivity adjustments). The legislation did not, however, make changes to the
physician sustainable growth rate (SGR) payment system; therefore, unless Congress takes
action, reductions in physician payment rates of close to 30% will be required in 2012.3
This report provides an overview of how the Medicare program is financed, including a
description of the Medicare trust funds and a summary of key findings and estimates from the

1 For additional information on the Medicare program, see CRS Report R40425, Medicare Primer, coordinated by
Patricia A. Davis and Paulette C. Morgan.
2 See CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA):
Summary and Timeline
, coordinated by Patricia A. Davis, for additional detail.
3 Congress has overridden these required reductions in every year since 2003, most recently by the Medicare and
Medicaid Extenders Act of 2010 (P.L. 111-309), signed into law December 15, 2010. See CRS Report R40907,
Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System, by Jim Hahn.
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2011 Report of the Medicare Board of Trustees regarding 2010 program operations and future
financial soundness.4
Medicare Trust Funds
Medicare’s financial operations are accounted for through two trust funds maintained by the
Department of the Treasury—the Hospital Insurance (HI) trust fund for Part A and the
Supplementary Medical Insurance (SMI) trust fund for Parts B and D. For beneficiaries enrolled
in Medicare Advantage (Part C), payments are made on their behalf in appropriate portions from
the HI and SMI trust funds. HI is primarily funded by payroll taxes, while SMI is primarily
funded through general revenue transfers and premiums (see Figure 1). The HI and SMI trust
funds are overseen by a board of trustees that provides annual reports to Congress.
Figure 1. Sources of Medicare Revenue: 2010
Payroll Taxes
37%
General Revenue
74%
84%
83%
Beneficiary
Premiums
Payments from
42%
States
Taxation of Social
Security Benefits
13%
2%
25%
Interest and
6%
11%
1%
Other
3%
8%
7%
4%
2%
TOTAL MEDICARE
HI -
SMI -
SMI -
REVENUE
PART A
PART B
PART D
$486 Billion
$216 Billion
$209 Billion
$62 Billion

Sources: 2011 Report of the Medicare Trustees, Table II.B1, and the Kaiser Family Foundation.
Notes: Totals may not add to 100% due to rounding.
Hospital Insurance (HI) Trust Fund
Covered Part A benefits, namely, inpatient hospital services, skilled nursing facility services,
some home health services, and hospice care are paid for out of the HI trust fund. Payments are
also made for administrative costs associated with operating this part of the program.

4 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, http://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf.
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Similar to the Social Security system, the HI portion of Medicare was designed to be self-
supporting, and is financed through dedicated sources of income rather than relying on general
tax revenues. 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.5 PPACA imposes an
additional tax of 0.9% on high-income workers with wages over $200,000 for single filers, and
$250,000 for joint filers effective for taxable years beginning in 2013. PPACA also imposes an
additional tax on unearned income, beginning in 2013.6
Additional income to the HI trust fund consists of: premiums paid by voluntary enrollees who are
not entitled to premium-free Medicare Part A through their (or their spouse’s) work in covered
employment; a portion of the federal income taxes paid on Social Security benefits;7 and interest
on federal securities held by the trust fund.
The HI trust fund is solely an accounting mechanism—there is no actual transfer of money into
and out of the fund. When the government receives Medicare revenues (payroll taxes), income is
credited by the Treasury to the appropriate trust fund in the form of special issue interest-bearing
government securities.8 (Interest on these securities is also credited to the trust funds.) The tax
income exchanged for these securities then goes into the general fund of the Treasury and is
indistinguishable from other cash in the general fund; this cash may be used for any government
spending purpose.9 When payments for Medicare Part A benefits are made, the payments are paid
out of the general treasury, and a corresponding amount of securities is deleted from (written off)
the HI trust fund.
As long as the HI trust fund has a balance, the Treasury Department is authorized to make
payments for Medicare Part A services. To date, the HI trust fund has never run out of money
(i.e., become insolvent), and there are no provisions in the Social Security Act that govern what
would happen if that were to occur. For example, there is no authority in law for the program to
use general revenue to fund Part A services in the event of such a shortfall. Since the beginning of
the Medicare program, the payroll tax rate has been adjusted periodically by Congress as one of
the mechanisms to maintain the financial adequacy of the HI trust fund.10

5 Prior to 1991, the upper limit on taxable earnings was the same as for Social Security. The Omnibus Budget
Reconciliation Act of 1990 (OBRA 90, P.L. 101-508) 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. The Omnibus Budget
Reconciliation Act of 1993 (OBRA 93, P.L. 103-66) eliminated the upper limit entirely beginning in 1994.
6 See CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act
(PPACA
), by Janemarie Mulvey, for additional detail.
7 Since 1994, the HI fund has had an additional funding source—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.
8 Unlike marketable securities, special issues can be redeemed at any time at face value. Investment in special issues
gives the trust funds the same flexibility as holding cash.
9 The trust fund surpluses are not reserved for future Medicare benefits, but are simply bookkeeping entries that
indicate how much Medicare has lent to the Treasury (or alternatively, what is owed to Medicare by the Treasury).
10 Historical Medicare payroll tax rates may be found in Appendix B of CRS Report RS20946, Medicare: History of
Insolvency Projections
, by Patricia A. Davis.
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Supplementary Medical Insurance (SMI) Trust Fund
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-
173), which created the Part D outpatient prescription drug benefit, created two separate accounts
within the SMI trust fund: one for Part B, to cover physician services, outpatient hospital care,
durable medical equipment, diagnostic tests and other services; and one for Part D, to cover
outpatient prescription drug benefits. Unlike the HI program, the SMI program was not intended
to be fully supported through dedicated sources of income. Instead, it relies primarily on general
tax revenues and beneficiary premiums as revenue sources. Beginning in 2011, additional
revenues from an annual fee imposed on certain manufacturers and importers of branded
prescription drugs (including biological products and excluding orphan drugs) are credited to the
SMI trust fund.11
Because contributions (general revenue and premiums) into the SMI trust fund are automatically
updated each year to ensure that the program has enough money to continue operating, the SMI
trust fund is kept in balance and will remain in financial balance indefinitely. Income from these
sources is credited to the SMI trust fund, and similar to the HI trust fund, any SMI revenues that
exceed SMI spending accumulate in the SMI trust fund; however, SMI trust fund balances are
generally small. Also, similar to HI, the basic structure of the SMI financing system can be
changed only through an act of Congress.
Part B Financing
Medicare Part B is financed mostly from federal general revenues, with beneficiaries’ premiums
set to cover 25% of estimated Part B program costs for the aged. The 2011 monthly premium is
$96.40 for most Medicare Part B enrollees who are being “held harmless” to the 2009 Part B
premium amount.12 Individuals receiving Social Security benefits have their Part B premium
payments automatically deducted from their Social Security benefit checks. Since 2007, higher-
income enrollees pay higher premiums. As a result of PPACA, the income thresholds used to
determine which beneficiaries are subject to higher Part B premium rates will be frozen at 2010
levels through 2019. Over time, this freeze will result in a larger number of beneficiaries paying
the higher premiums and is expected to bring in increased revenue to the SMI trust fund.
Part D Financing
Medicare Part D is primarily financed through a combination of beneficiary premiums and
federal general revenues. In addition, certain transfers are made from the states. These transfers,
referred to as “clawback payments,” represent a portion of the amounts states could otherwise

11 See CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act
(PPACA
), by Janemarie Mulvey, for more detail.
12 About 75% of Part B enrollees were not subject to Part B premium increases in 2010 and 2011. The Social Security
Act includes a provision that holds most Social Security beneficiaries harmless for increases in the Medicare Part B
premium; affected beneficiaries’ Part B premiums are reduced to ensure that their Social Security checks do not decline
from one year to the next. Those not protected by the “hold harmless” provision pay a premium of $115.40 in 2011;
these include those who pay the high income premium, those eligible for both Medicare and Medicaid (dual-eligibles),
those who do not participate in Social Security, and new Part B enrollees. For additional detail, see CRS Report
R40561, Interactions Between the Social Security COLA and Medicare Part B Premiums, by Jim Hahn and Alison M.
Shelton.
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have been expected to pay for drugs under Medicaid if drug coverage for the dual-eligible
population (those who qualify for both Medicare and Medicaid) had not been transferred to
Part D.
In 2011, the base monthly premium is $32.34; however, beneficiaries pay different premiums
depending on the plan they have selected (and whether they are entitled to low-income premium
subsidies). Part D premium payments may be automatically deducted from Social Security
benefit checks, paid directly to the prescription drug plan sponsor, or made through an electronic
funds transfer.13 Premiums for the Part D program are required to cover approximately 25.5% of
standard benefit costs; however, as recipients of the Part D low-income subsidies are not required
to pay premiums, premiums covered only about 11% of Part D program costs in 2010 (see Figure
1
). As required by PPACA, beginning in 2011, high-income Part D prescription drug program
enrollees are required to pay higher premiums similar to high-income Part B enrollees; the
income thresholds are also frozen in the same manner as those under Part B through 2019.
Board of Trustees
The Medicare Board of Trustees was established under the Social Security Act to oversee the
financial operations of the HI and SMI trust funds. 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.14 The Secretary of the Treasury is
the Managing Trustee. The Administrator of the Centers for Medicare and Medicaid Services
(CMS) is designated Secretary of the Board.
Annual Trustees’ Report
The Medicare Board provides an annual report to Congress on the operations of the trust funds.
Financial projections included in the report are made by CMS actuaries using major economic
and other assumptions selected by the trustees based on current law. Among the variables used are
such things as estimations of consumer price index (CPI), fertility rate, mortality rate, workforce
size, wage increases, and life expectancy. The assumptions are reviewed annually and updated as
warranted by new analyses of trends and data. 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 2011 report of the Medicare trustees was issued May 13, 2011.15 However, the 2011 Report
warned that estimates based on current-law assumptions may not be realistic. As such, actuaries
of CMS issued a separate memorandum that provides projections based on an “illustrative

13 The “hold harmless” provision described in the previous footnote does not apply to Part D; beneficiaries are not
protected from Part D premium increases.
14 The nominations of Charles P. Blahous III and Robert D. Reischauer to be public members of the Medicare and
Social Security Boards of Trustees were confirmed by the Senate on September 16, 2010. The seats for the two public
members had been vacant since 2008.
15 The 2011 report includes data on actual expenditures and income through 2010, and projections for years 2011 and
beyond.
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alternative” to current law.16 The alternative estimates are based on the assumption that the
productivity adjustments mandated by PPACA would be made through 2019, but then would be
phased out over the following 16 years. The alternative scenario also assumes that, instead of
being cut, physician payments will grow annually based on the Medicare Economic Index.17
The Board of Trustees also convened an independent panel of expert actuaries and economists to
make recommendations to the Board regarding the most appropriate long-range growth
assumptions for Medicare projections. The panel members convened in November and issued an
interim report in February 2011;18 however, the panel was not able to recommend changes in time
for use in the development of the 2011 Medicare trustees report. In particular, the panel noted
“the extreme difficulty involved in developing a long-range average per capita growth
assumption, due to the many uncertainties that surround not only the long-term evolution of the
U.S. health care system but also its interaction with the provisions of (PPACA).” The panel will
continue to discuss the methodology and assumptions used to project long-term Medicare growth
rates over the next year.
2010 Medicare Program Operations
In calendar year (CY) 2010, Medicare provided about 47.5 million beneficiaries with benefits at a
total cost of $523 billion, or $11,762 per enrollee. (See Appendix A, Appendix B, and Appendix
C
for historical and projected enrollment, total Medicare income and expenditures, and per capita
expenditures.) Because HI and SMI have different funding mechanisms, a description of each
fund’s 2010 operations is presented separately below.
Hospital Insurance Trust Fund Operations in 2010
As shown in Table 1, in CY2010, total income to the HI trust fund was $215.6 billion. Payroll
taxes of workers and their employers accounted for $182.0 billion (84.4%), with the remainder
from interest and government credits, premiums (from those buying into the program), and
taxation of Social Security benefits. The HI program paid out $247.9 billion; most of which was
for benefit costs, and about 1.4% was for administrative expenses. Similar to 2008 and 2009,
expenditures exceeded income in 2010, and the trust fund balance was reduced to $271.9 billion
at the end of 2010 (a loss of $32.3 billion).19 (See Appendix D for funding amounts in prior years
and estimates for future years.)

16 Memo from John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under an Illustrative Scenario
with Alternative Payment Updates to Medicare Providers,” May 13, 2011, http://www.cms.gov/ActuarialStudies/
Downloads/2011TRAlternativeScenario.pdf.
17 The Medicare Economic Index is an inflation measure used to determine reimbursement to Medicare physicians. It
includes such factors as the costs of a physician’s time and time of medical staff, and overhead costs such as rent and
medical equipment.
18 2010 Technical Review Panel on the Medicare Trustees Report, “Review of the Long Range Assumptions of the
Medicare Trustees’ Projections Interim Report,” February 2011, http://aspe.hhs.gov/health/medpanel/2010/
interim1103.shtml.
19 In comparison, in CY2009, total income was $225.4 billion, and total disbursements were $242.5 billion, with an end
of the year trust fund balance of $304.2 billion; this represents a growth in expenditures of $5.4 billion (increase of
2.2%) from 2009 to 2010 and a decrease in income of $9.8 billion, (decrease of 4.3%).
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Table 1. Medicare Data for Calendar Year 2010

HI - Part A
SMI - Part B
SMI - Part D
Total Medicare
Enrollment (millions)




Aged
39.2
36.7
n/a
39.6
Disabled
7.9
7.1
n/a
7.9
Total 47.1
43.8
34.5
47.5
Average expenditures
$5,187 $4,786 $1,789 $11,762
per enrollee
Trust Fund Balance at
$304.2 $75.5
$1.1 $380.8
end of 2009 (billions)





Total Income
$215.6
$208.8
$61.7
$486.0
Payroll Taxes
182.0


182.0
Interest
13.8
3.1
0.0
16.9
Taxation of Benefits
13.8


13.8
Premiums
3.3
52.0
6.5
61.8
General Revenue
0.1
153.5
51.1
204.7
Transfers from States


4.0
4.0
Other
2.7
0.2

2.9





Total Expenditures
$247.9
$212.9
$62.0
$522.8
Benefits
244.5
209.7
61.7
515.8
Hospital
136.1
31.9

168.0
Skilled Nursing
26.9


26.9
Home Health Care
7.0
12.1

19.1
Physician Services

64.5

64.5
Private plans (Part C)
60.7
55.2

115.9
Prescription Drugs


61.7
61.7
Other
13.8
46.1

59.9
Administrative Expenses
3.5
3.2
0.4
7.0





Net Change
-32.3
-4.1
-0.4
-36.8
Trust Fund Balance at
$271.9 $71.4
$0.7 $344.0
end of 2010
Source: 2011 Report of Medicare Trustees, Table II.B1.
Notes: Totals do not necessarily equal the sums of rounded components; n/a = data not available.
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Supplementary Medical Insurance Trust Fund Operations in 2010
In CY2010, the SMI trust fund (Part B and Part D accounts combined) brought in $270.5 billion
in revenue ($208.8 billion from Part B and $61.7 billion from Part D), and expended
$274.9 billion ($212.9 billion from Part B and $62.0 from Part D). General revenues accounted
for 75.6% of total revenues, and premiums accounted for 21.6%.20 (See Table 1 for 2010 Parts B
and D operations data.)
Of the $208.8 billion in income to Part B, general revenues accounted for $153.5 billion (73.5%),
premiums accounted for $52.0 billion (24.9%), and interest and other income made up the
remaining $3.3 billion (1.6%). The program paid out $212.9 billion; similar to HI, almost all of
this amount was used to cover benefits and 1.5% covered administrative expenses.21 (See
Appendix E for historical and projected income and expenditures in the SMI Part B account.)
Of the $61.7 billion in Part D income, general revenues accounted for $51.1 billion (82.8%),
premiums accounted for $6.5 billion (10.5%), and transfers from states for $4.0 billion (6.5%).
Almost all of the 2010 Part D program expenditures of $62.0 billion were used to pay benefit
costs and 0.6% was used for administrative expenses.22 (See Appendix F for historical and
projected income and expenditures in the SMI Part D account.)
Short-Range Financial Soundness (10 Years)
The 2011 Medicare trustees report predicts a slightly higher growth rate of Medicare expenditures
compared to their projections in last year’s report. Over the next 10 years, Medicare expenditures
are projected to increase at an average annual rate of 6.0% compared to 5.8% as projected in the
prior report.23 The 2011 report estimates that Medicare spending will grow from $523 billion in
2010 to $932 billion in 2020 (see Figure 2 and Appendix B). The average growth rate reflects
the expected growth in the number of individuals eligible for Medicare as well as expected
increases in utilization and complexity of services per beneficiary and in the prices of those
services. The growth rate also factors in PPACA changes that affect cost growth rates, such as the
productivity adjustments to the annual payment updates to certain providers and changes in
payments to Medicare Advantage plans. These growth rates also assume that the scheduled
physician payment reductions of 29.4% in 2012 will go into effect.

20 In comparison, in CY2009, total income for SMI was $282.8 billion and total expenditures were $266.5 billion. This
represents a growth in SMI expenditures of $8.4 billion, or an increase of 3.2%, from 2009 to 2010.
21 This represents an expenditure increase of 3.5% over the $205.7 billion in Part B expenditures in 2009.
22 The 2010 Part D expenditures represent a 2.0% growth over the 2009 expenditures of $60.8 billion.
23 By comparison, Medicare expenditures grew at an average annual rate of 8.2% from 1985 to 2010.
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Figure 2. Medicare Expenditures
Comparison of Estimates of 2009, 2010 and 2011 Medicare Trustees Reports
1000
900
2009 Report
2010 Report
800
2011 Report
700
600
500
llions
$ bi
400
300
200
100
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Data from the 2009, 2010, and 2011 Reports of the Medicare Boards of Trustees, Table III.A1.
Note: The 10-year projection window for the 2009 report only extended to 2018; there is no corresponding
2019 or 2020 estimate. Similarly, the 2010 report projections only extend to 2019, and there is no estimate for
2020.
HI Short-Range Financial Status
In the short term, the adequacy of the HI trust fund is determined by comparing its assets at the
beginning of the year to expected costs for that year. The trustees consider the fund to be adequate
if the level of assets is expected to be at least equal to projected costs in a year.24 The trustees note
that the HI fund is not adequately financed over the next 10 years. Specifically, the new report
states that the fund fails to meet the short-range (i.e., 10-year, 2011-2020) test of financial
adequacy because total HI assets at the start of the year are expected to decline below 100% of
expenditures during 2011. Expenditures have exceeded income every year since 2008 and are
projected to continue doing so under current law over the next 10 years. In 2009 and 2010,
income from payroll taxes decreased substantially due to higher unemployment and slow growth
in wages. In 2010, the HI trust fund experienced a deficit of $32.3 billion. Income from payroll
taxes is expected to increase at a faster rate than expenditures during 2011 through 2018 due to
the projected economic recovery and the application of an additional 0.9% HI payroll tax for
high-income enrollees beginning in 2013; however, income will still be insufficient to cover
projected HI expenses during this period (see Figure 3).

24 This amount is considered a sufficient contingency reserve to allow Congress enough time to address any anticipated
short-term financing problems.
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Figure 3. Short-Term HI Expenditures and Income
450
Total Income
400
Payroll Taxes
350
Expenditures
Assets
300
)
s
n
250
lio
il
b
200
(
$

150
100
50
0
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
0
0
0
0
0
0
0
0
0
0
1
1
1
1
1
1
1
1
1
1
2
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

Source: Data from 2011 Report of Medicare Trustees, Table III.B4.
Note: The trustees report does not project dol ar figures beyond 2020.
SMI Short-Range Financial Status
As premium and general revenue income for Medicare Parts B and D are reset each year to match
expected costs, the SMI trust fund is deemed to be adequately financed over the next 10 years and
beyond. However, over the past five years, Medicare Part B costs have been increasing rapidly—
by an average of 6.9% annually, exceeding GDP growth by 3.9 percentage points. If the physician
payment cuts are allowed to go into effect at the end of 2011, Part B expenditures (and
corresponding income) are expected to grow at a slower average growth rate of 4.7% annually
over the next five years (2011-2015), about the same as GDP growth. However if Congress
overrides these reductions, as it has done in the past, the Part B growth rate during this period is
projected to instead average about 7.5% each year. For Part D, in part due to the costs associated
with the gradual elimination of the coverage gap,25 the average annual increase in expenditures
and income is estimated to be 9.7% through 2020. (By comparison, GDP is projected to grow at
an average annual rate of 5.2% during this 10-year period.) Part D cost estimates are somewhat
lower than projected in the prior trustees report due to lower than expected spending in 2009 and
2010, and future expectations of increased use of generic drugs and a decline in the number of
new drug products.

25 After the beneficiary and the prescription drug plan have spent a certain amount of money for covered drugs during a
year, there is a gap in Part D coverage. During the coverage gap (also known as the “doughnut hole”), the beneficiary
pays a large portion of his or her prescription drug expenditures. Once a certain threshold is reached, Medicare again
begins providing coverage.
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Projected Date of HI Insolvency
Medicare’s fiscal health is often gauged by the projected solvency of the HI trust fund.26 The 2011
trustees report estimates that the HI trust fund will become insolvent in 2024, five years earlier
than projected in last year’s report (see Figure 4). The estimated date of exhaustion has been
moved up to 2024 from 2029 (projected in the 2010 report) due to expectations of higher HI
expenditures and lower payroll tax revenues. As noted above, HI taxable earnings in 2010 were
considerably lower than projected in last year’s report, but expenditures were close to the prior
estimate. For the 2011 through 2024 period, total projected HI payroll taxes are expected to be
lower by 1.3% and expenditures higher by 3.6% compared to last year’s projections. The
financial status of the HI trust fund, however, has still improved from the 2009 report, which
estimated that HI insolvency would occur in 2017; the more favorable projections in more recent
reports are primarily due to the lower expenditures and higher tax revenues expected as a result of
PPACA.
Because the impact of the PPACA productivity adjustments is relatively modest in the short term,
the expected trust fund exhaustion date provided in the alternative illustration is the same as that
under the current law scenario, 2024; however, the trust fund is projected to be depleted slightly
earlier in the year under the alternate scenario.
Figure 4. HI Trust Fund Assets at Beginning of Year as a Percentage of Annual
Expenditures
Estimates from 2009, 2010, and 2011 Trustees Reports
150%
2009 Estimates
2010 Estimates
130%
2011 Estimates
110%
90%
70%
50%
30%
10%
-10%
9
2
5
8
1
4
7
0
3
6
9
9
0
0
0
1
1
1
2
2
2
2
9
0
0
0
0
0
0
0
0
0
0
1
2
2
2
2
2
2
2
2
2
2

Sources: Data from the 2009 Medicare Trustees Report, Table II.E1, and Summaries of the 2010 and 2011
Annual Reports of the Social Security and Medicare Boards of Trustees, Chart D.

26 For a history of projections of insolvency dates, see CRS Report RS20946, Medicare: History of Insolvency
Projections
, by Patricia A. Davis.
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Beginning in 2004, tax income (from payroll taxes and from the taxation of Social Security
benefits) began to be less than expenditures. Expenditures began to exceed total income (tax
income plus all other sources of revenue) in 2008. (Refer to Figure 3 for illustration of
expenditure and income trends through 2020.) At that time, HI assets (the balance of the HI trust
fund at the beginning of the year) were used to meet the portion of expenditures that exceeded
income (the HI deficit). The trustees project that expenditures will exceed income through 2024.
The HI trust fund will need to redeem its assets (U.S. government securities) in order to pay for
benefits each year until the trust fund is exhausted in 2024. At that time, there will be insufficient
funds to fully pay for Part A benefits. Unless action is taken prior to that date to increase revenue
or decrease expenditures, Congress would need to pass legislation that would provide for another
source of funding (e.g., general revenues or increased taxes) to make up for these deficits.
Long-Range Financial Soundness (75 Years)
For projections beyond 2020, the Medicare trustees do not provide actual dollar figures due to the
difficulty of making meaningful comparisons of dollar values for different time periods over a
long timeframe. Instead, the long-term financial soundness of the Medicare program is generally
determined using one or more of the following measures:
• A comparison of the program’s income and its cost as a percentage of taxable
payroll (how much would need to be added to the payroll tax to keep HI solvent;
this measure is only applicable to the HI trust fund);
• A determination of the present value of the program’s unfunded liabilities over a
particular period (the amount in today’s dollars that would be needed to be in the
trust fund for the program to remain financially sound for a specified period);
and/or
• A comparison of expected benefit costs with GDP, the most frequently used
measure of the total output of the U.S. economy (the amount spend on Medicare
compared to the economy in general).
The trustees caution that while these estimates can provide indications as to whether the trust
funds are in adequate financial condition, financial outcomes are inherently uncertain, especially
over a very long time period.
HI Income and Costs Relative to Payroll Taxes
Long-range financial soundness of the HI trust fund is often determined by comparing the fund’s
income rate
(the ratio of tax income to taxable payroll) with its cost rate (the ratio of program
expenditures to taxable payroll). The term taxable payroll refers to the total amount of wages,
salaries, and self-employment income in the economy that is subject to the HI tax. By relating
income and expenditure projections to expected future taxable payroll, comparisons can be made
for long periods of time without distortions caused by the changing value of the dollar (e.g.,
through inflation). Additionally, it indicates the relative amount of the nation’s earnings that may
be needed to cover the program’s commitments in the future when compared to what is needed
today.
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Year-by-Year Estimates
In the past, cost rates have generally increased over time, rising from 0.94% in 1967 to 3.39% in
1996 (see Figure 5). This growth reflects both the more rapid rate of increase in medical care
costs than in average earnings subject to HI taxes and the higher rate of increase in the number of
HI beneficiaries than in the number of covered workers. Cost rates since that time have fluctuated
primarily due to the passage of legislation affecting Medicare expenditures including the
Balanced Budget Act of 1997 (P.L. 105-33) and the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA, P.L. 108-173), as well as favorable economic
performance. Rates increased again in 2008, 2009 and 2010 (3.28%, 3.68% and 3.76%
respectively) due to the lower amount of taxable payroll reflecting the impact of the recession.
The 2011 trustees report projects that over the long run expenditures as a percentage of taxable
payroll will increase, from 3.76% in 2010 to 4.90% in 2085. (Under the alternative illustration,
the expected HI cost rate for 2085 is 9.39%, more than twice the rate projected under current
law.)
The HI income rate is projected to increase gradually from 3.15% in 2010 to 4.32% in 2085 due
to PPACA’s increase in payroll taxes for high income earners starting in 2013. As the thresholds
are not indexed to grow with inflation, it is expected that more workers will be subject to this
higher tax rate over time. Additionally, it is expected that income from taxation of Social Security
benefits will increase as the number of recipients increases over time. (Because the alternative
illustration
only assumes changes in payments, the income rate is the same as that in the trustees
report.)
As indicated earlier, expenditures in future years are expected to exceed tax income, resulting in a
negative difference between cost and income rates. In 2024, payroll taxes are expected to cover
90% of HI expenditures, decline to 75% by 2045; and by the end of the 75-year period, taxes are
expected to cover 88% of the expected costs. The decreasing cost rate beyond 2045 is due to the
expected compounding of the PPACA reductions in provider payment updates.
Figure 5. Long-Range HI Income and Cost as a Percentage of Taxable Payroll
6.00%
5.00%
4.00%
3.00%
HI Income Rate
2.00%
HI Cost Rate
1.00%
0.00%
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080

Source: Data from Summary of the 2011 Annual Reports of the Social Security and Medicare Boards of
Trustees, http://ssa.gov/OACT/TRSUM/index.html, Chart B.
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The 2011 trustees report estimates that at the end of the 75-year period (in 2085), there will be an
HI deficit of 0.58% of taxable payroll. Under the illustrative alternative scenario, which assumes
that the PPACA productivity adjustments will eventually be phased out, the HI deficit at the end
of the 75-year period is expected to be about 5.07% of taxable payroll. Both estimates are still
lower than the 2009 report estimate of 8.55%, which was based on law prior to PPACA.
Actuarial Balance
The actuarial balance can be interpreted as the percentage that would need to be added to the
current-law income rates and/or subtracted from the current-law cost rates in each of the next 75
years in order for the financing to support HI costs and to meet the targeted trust fund balance at
the end of the projection period. The actuarial balance of the HI trust fund is defined as the
difference between the sum of the income rate expected for each year in the 75-year projection
period (including the beginning trust fund balance) and the sum of the cost rates for each year,
expressed as a percentage of taxable income. This summarized rate is based on the present values
of future income, costs, and taxable payroll.
The 2011 trustees report estimates that the summarized HI income rate for the entire 75-year
period is 3.84% of taxable payroll and the summarized cost rate is expected to be 4.63%. The
difference, the actuarial balance, is -0.79%. Because this is a negative number, the HI trust fund
fails to meet the trustees’ long-range test of actuarial balance. This means that the income rate
would need to increase by 0.79% of taxable payroll throughout the next 75 years for the trust fund
to reach actuarial balance, program spending would need to be reduced by a corresponding
amount, or some combination of the two would need to occur. The HI actuarial balance estimated
in the 2011 report has decreased from -3.88% of taxable payroll projected in the 2009 report, but
higher than the -0.66% projected in the 2010 report. If the productivity adjustments to HI
provider payment updates cannot be continued in the long run, the CMS actuaries estimate that
the actuarial deficit would be much higher, -2.15% of taxable payroll, under their illustrative
alternative
scenario.
Unfunded Obligations
The unfunded obligation is a measure of the long-term funding shortfall (or surplus) of the
Medicare program. It is defined as the difference between the present value of the expected cost
of the Medicare program over a specified time period and the present value of projected income
(including the initial value of the trust fund). Put another way, the unfunded obligation is the
amount of money that would have to be added to the trust fund today to make the program
financially sound over a specified time period.
HI Long-Term Obligations
The 2011 trustees report estimates that the unfunded obligation of the HI trust fund is
$3.0 trillion, or 0.3% of GDP over the next 75 years. This means that if $3.0 trillion were added to
(or expenditures reduced from) the trust fund at the beginning of 2011, the program could meet
the projected cost of current-law expenditures over the next 75 years. This is substantially lower
than the 2009 estimate of $13.4 trillion, but higher than the $2.4 trillion in the 2010 estimate.
(Under the illustrative alternative projections, the 75-year HI unfunded obligation is expected to
be about $8.3 trillion.)
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The trustees note that limiting the estimates of HI unfunded obligations to 75 years understates
the full magnitude of these obligations because the 75-year measures only reflect the full amount
of taxes paid by the next few generations of workers, but not the full amount of their expected
benefits. Therefore, since 2004, the trustees report has included a measure of unfunded
obligations that extends indefinitely (through infinity). Such extended projections can help
indicate whether the HI financial imbalance would be improving or continuing to worsen beyond
the 75-year period. In making these estimates, the trustees assume that the current-law HI
program, demographic, and economic trends used for the 75-year projection will continue
indefinitely, except that average HI expenditures per beneficiary will increase at the same rate as
GDP per capita less the productivity adjustments beginning in 2085. Under these assumptions,
over the infinite horizon, the HI program is projected to have a surplus of $0.1 trillion (see Table
2
). (Under the illustrative alternative scenario, the HI unfunded obligation thorough the infinite
horizon is estimated to be $8.3 trillion.)
Table 2. Unfunded HI Obligations
(Present values as of January 1, 2011)

Present Value
% of GDP
Unfunded obligations through 2085
$3.0 trillion
0.3%
Unfunded obligations through
-$0.1 trillion
0.0%
infinite horizon
Source: 2011 Medicare Trustees’ Report, Table III.B10.
SMI Long-Term Obligations
Due to its automatic financing provisions, the SMI account is expected to be adequately financed
into the indefinite future; therefore the unfunded obligations are considered to be $0 (see Table
3
). However, the 2011 trustees report estimates that SMI expenditures of $28.8 trillion over the
next 75 years will exceed premium revenues and state payments by $21.3 trillion; general fund
transfers of this amount will be needed to keep the SMI trust fund in balance for the next 75
years.27
The estimated present value of Part B expenditures through the infinite horizon is $30.7 trillion,
of which $18.9 trillion would occur during the first 75 years. Approximately 27% of expenditures
for each time period would be financed through beneficiary premiums, and a fraction of a percent
would be financed through fees collected related to brand-name prescription drugs. The
remaining 73% is expected to be paid by general revenues. (However, as noted previously, the
trustees consider Part B expenditures after 2010 to be substantially understated due to the large
physician payment reductions scheduled under current law.) Similarly, the estimated present
value of Part D expenditures through the infinite horizon is $21.5 trillion, of which $9.9 trillion
would occur during the first 75 years. Approximately 16% of expenditures would be financed
through beneficiary premiums, 9% through state transfers, and the remaining 75% paid by
general revenues.

27 These transfers represent a formal budget requirement under current law.
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Table 3. Unfunded Part B and Part D Obligations
(Present values as of January 1, 2011; dollar amounts in trillions)
SMI—Part B
SMI—Part D

Present Value
% of GDP
Present Value
% of GDP
Unfunded obligations through 2085
$0.0 0.0%
$0.0 0.0%
Expenditures through 2085
$18.9
2.1%
$9.9
1.1%
General Revenue Contributions
13.9
1.6
7.5
0.8
Beneficiary Premiums
5.0
0.6
1.6
0.2
State Transfers


0.9
0.1
Fees related to brand-name drugs
0.1
0.0


Unfunded obligations through
$0.0 0.0%
$0.0 0.0%
infinite horizon
Expenditures through infinite horizon
$30.7
2.1%
$21.5
1.5%
General Revenue Contributions
22.4
1.5
16.1
1.1
Beneficiary Premiums
8.2
0.6
3.4
0.2
State Transfers


2.0
0.1
Fees Related to brand-name drugs
0.1
0.0


Source: 2011 Medicare Trustees’ Report, Tables III.C15 and III.C23.
Note: Totals may not add due to rounding.
Medicare Costs as a Percentage of GDP
A comparison of Medicare costs (for Medicare Parts A through D combined) to GDP provides a
measure of the amount of financial resources that will be necessary to pay for Medicare services
relative to the output of the U.S. economy. The rising cost of health services, increasing
utilization rates, and anticipated increases in the complexity of services are expected to contribute
to the rising costs of Medicare relative to GDP. Additionally, it is expected that as increasing
numbers of people become eligible for Medicare, there will be a significant growth in benefit
expenditures. Under current law, the trustees expect Medicare costs to increase from 3.6% in
2010 to 5.6% of GDP in 2035 and to 6.2% in 2085.28 Under the illustrative alternative, similar to
estimates made under prior law, projected Medicare costs are expected to represent about 10.7%
of GDP in 2085. (See Appendix G for a comparison of projections of Medicare expenditures as a
percentage of GDP from the 2009 Trustees Report, the 2010 Trustees Report, the 2011 Trustees
report, and the 2011 Illustrative Alternative Scenario.)
Over the next 75 years, general revenues and beneficiary premiums are expected to play an
increasing role in financing the program. Figure 6 shows actual and projected expenditures and
non-interest revenues for HI and SMI combined as a percentage of GDP.

28 By comparison, last year’s report projected that Medicare costs would increase to 5.5% of GDP by 2035 and reach
6.4% by the end of the 75-year projection period.
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Figure 6. Medicare Cost and Non-interest Income by Source as a Percentage of GDP

Source: Summary of the 2011 Annual Reports of the Social Security and Medicare Boards of Trustees,
http://ssa.gov/OACT/TRSUM/index.html, Chart C.
General revenue transfers to the SMI trust fund are projected to increase from 1.5% of GDP in
2011 to 3.1% in 2085, and beneficiary premiums from 0.5% of GDP in 2011 to 1.0% in 2085. As
shown, the share of Medicare income from payroll taxes and taxation of benefits is expected to
fall substantially during that period (from 41% to 30%), while the share of general fund revenue
is expected to rise (from 44% to 51%) as are premiums (from 13% to 17%). Any excess in
projected spending over revenues represents the HI deficit; in 2085, the HI deficit is projected to
represent 0.2% of GDP.
Medicare Funding Warning (“Medicare Trigger”)
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. However, 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, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173) required 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 (on a fiscal year basis). The law specifies that if an
excess general revenue funding determination is made for two successive years, a “Medicare
funding warning” is triggered, and the President is to submit a legislative proposal to respond to
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the warning.29 The Congress is required to consider the proposals on an expedited basis.
However, passage of legislation within a specific time frame is not required.
The 2006 trustees report projected that the 45% level would first be exceeded in FY2012; the
2007 report projected that it would first be exceeded in 2013, and both the 2008 and 2009 trustees
reports projected the first year at 2014. In the 2010 trustees report, the level of general revenue
financing was projected to exceed 45% in FY2010; the 2011 report confirmed that the threshold
was breached in FY2010 and is expected to do so again in FY2011 and FY2012.30 This represents
the sixth consecutive time that the threshold was estimated to be exceeded within the first seven
years of the projection. However, changes made by PPACA affecting future Medicare spending
are expected to reduce the ratio below 45% in years 2013 through 2021. (This is assuming that
the physician payment rate reductions go into effect.)
Proponents of the 45% threshold measurement believe that it can serve as an effective early
warning system and that it forces fiscal responsibility. Opponents of the measure suggest that it
doesn’t adequately recognize a shift towards the provision of more services on an outpatient basis
or the impact of the Part D program on general revenue increases, and that other measures, such
as Medicare spending as a percentage of GDP, Medicare spending as a portion of total federal
spending, or the number of workers subject to payroll taxes per Medicare beneficiary, are better
ways to measure the health of the Medicare program. On January 6, 2009, the House approved a
rules package (H.Res. 5) that nullified the trigger provision for the 111th Congress.31 The 112th
Congress has not passed a similar measure; therefore, the trigger provision has gone back into
effect in 2011 in the House.32
Medicare Expenditures and the Federal Budget
By law, the annual Medicare trustees reports focus on the financial status of the Medicare HI and
SMI trust funds. Trust fund accounting methods are used to determine whether dedicated sources
of Medicare revenue, together with any asset balances, are sufficient to pay expected expenditures
on a timely basis. In contrast, when examining Medicare finances under budget accounting
methods, the total flow of money into and out of the U.S. Treasury is typically examined
regardless of the source of revenue.33
The expected shortfall in payroll taxes needed to fully cover HI expenses and the rapid growth of
SMI, which relies primarily on general revenues for financing, have made it increasingly
important to look at Medicare expenditures from the perspective of the federal budget as a whole.
To illustrate, over the next 75 years, revenues from payroll taxes are projected to fall short of HI

29 See CRS Report RS22796, Medicare Trigger, by Hinda Chaikind and Christopher M. Davis.
30 The trustees estimate that additional revenues of at least $25 billion or expenditure reductions of at least $46 billion
(or some combination of the two) would be needed to reduce the ratio below 45% in 2011 and 2012.
31 H.Res. 5 declared that the accelerated legislative procedures required by MMA for a presidential legislative proposal
in response to a Medicare funding warning shall not apply during the 111th Congress.
32 The President did not submit a legislative proposal in 2011 to address the funding warning issued in the 2010 trustees
report.
33 Spending is normally categorized either as mandatory (not subject to the appropriations process) or discretionary
(must be appropriated). Medicare benefit spending is mandatory, while some administrative costs are discretionary.
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expenditures by $3.3 trillion in present value terms.34 This is the additional amount that is
expected to be needed in order to pay HI benefits at the level expected under current law over the
next 75 years. Additionally, general revenue transfers in present value terms of $21.3 trillion are
expected to be needed to cover SMI expenditures (Parts B and D combined) over the next
75 years.35 The Medicare trustees estimate that, assuming personal and corporate income taxes in
the future maintain their historical average level relative to the national economy, the portion of
income taxes that will be needed to fund the general revenue portion of SMI will grow from
19.2% in 2010 to 26.3% in 2080 (see Table 4).
Table 4. SMI General Revenues as a Percentage of Personal and Corporate Federal
Income Tax
Percentage of Income
Percentage of Income
Percentage of Income
Fiscal Year
Taxes - 2009 Report
Taxes - 2010 Report
Taxes - 2011 Report
Historical



1970
0.8% 0.8% 0.8%
1980
2.2 2.2 2.2
1990
5.9 5.9 5.9
2000
5.4 5.4 5.4
2008
10.9 12.0 12.0
2009
n/a
17.7
17.7
2010
12.2 18.6 19.2
Intermediate Estimates



2011 n/a
n/a
18.0
2020
15.8 15.0 17.1
2030
24.0 19.5 19.9
2040
28.9 21.8 22.1
2050
31.9 22.7 23.0
2060
35.1 24.6 24.7
2070
38.1 25.7 25.7
2080
40.5 26.6 26.3
Source: 2009, 2010, and 2011 Medicare Trustees reports, Table III.C4.
Note: Includes the Part D prescription drug benefit beginning in 2006; n/a = not available.
As previously described, PPACA contains numerous provisions that are expected to reduce
Medicare spending growth (both HI and SMI) in future years. From the trust fund perspective, the
slower growth in HI spending, coupled with payroll tax increases, is expected to extend the

34 The federal liability from a budget perspective includes the beginning accumulated assets in the HI trust fund
($0.3 trillion, as of January 1, 2011) as they represent federal payment obligations. The net 75-year unfunded liability
from the trust fund perspective of $3.0 trillion in present value terms, does not include the trust fund assets. (See
“Unfunded Obligations”.)
35 This amount could be substantially higher than that if Congress modifies the physician payment system to eliminate
scheduled payment reductions.
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solvency of the HI trust fund for an additional seven years beyond 2017, the insolvency date that
was projected in the 2009 report prior to the enactment of PPACA (but five years earlier than the
insolvency date of 2029 projected in the 2010 report; see “Projected Date of HI Insolvency ”).
Under federal budget accounting rules (used by CBO when scoring legislation) these expected
savings represent a reduction in expected future federal spending compared to spending levels
estimated before the passage of PPACA. If total federal spending is expected to stay at the same
level as under prior law, then funds that are no longer expected to be needed to pay for Medicare
expenditures (savings) become available to fund new, or supplement existing, government
programs.
Both CBO and the CMS Office of the Actuary caution against combining trust fund accounting
conventions with budget accounting rules. For example, reductions in Medicare Part A
expenditures can be used to extend the solvency of the HI trust fund or used to offset other costs
of the federal government; using both accounting methods at the same time would result in
double-counting a large share of those savings. CBO concluded that “(i)n effect, the majority of
the HI trust fund savings under [PPACA] and [the Reconciliation Act] would be used to pay for
other spending and therefore would not enhance the ability of the government to pay for future
Medicare benefits.”36
Concluding Observations
As shown in this report, a wide array of measures can be used to describe the short- and long-
term financial status of the Medicare program. While trust fund solvency issues are important,
they only present part of the picture. When viewed from the perspective of the entire federal
budget and the economy, Medicare spending obligations, even under the more optimistic scenario
presented in the 2011 Medicare trustees report, are expected to consume an increasing portion of
federal budgetary resources over time. Budget experts have expressed concern about the long-run
implications of Medicare expenditures on federal deficits; for example, CBO noted that the
growth in spending on federal health care programs, including Medicare, remains the “central
fiscal challenge facing the nation.”37
The Medicare trustees caution that it is difficult to forecast health and economic indicators over
an extended period of time. For example, forecasts are based on the assumption that health
spending will outpace GDP growth in the future because it has consistently done so in the past. It
is possible that in the future, advances in medical technology, changes in consumer preferences,
shifts in the health status of the population, or changes in the way health services are delivered
could result in very different financial outcomes from those estimated in the trustees report.38
Further, as evidenced by the issuance of an illustrative alternative to the 2011 trustees report, if
changes to current health care policies are enacted (most notably these affecting physician
reimbursement or productivity adjustments), future Medicare costs could be significantly
different from current projections.

36 CBO letter to Rep. Paul Ryan, March 19, 2010, http://www.cbo.gov/ftpdocs/113xx/doc11376/RyanLtrhr4872.pdf.
37 “Long-Term Budget Outlook,” Congressional Budget Office Director’s Blog, June 30, 2010, http://cboblog.cbo.gov/
?p=1112.
38 For example, information learned from pilot programs and demonstrations mandated by recent legislation, such as
changing financial incentives of health care providers and improving the care coordination of beneficiaries with chronic
conditions, could lead to long-term changes in how health care is delivered and in the cost of that care.
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Medicare Financing

There are no simple solutions to address the problems raised by the rapid growth in health care
costs, the economic conditions, and the aging of the population. Additionally, as an entitlement
program, Medicare must pay for all medically necessary covered benefits for enrollees; except for
constraints placed on the program by the HI financing mechanism, there are no limits on overall
Medicare spending. As such, policy options to restrain the growth of Medicare spending will
continue to attract considerable interest.
Proposals to reduce Medicare spending generally fall into one of two categories: (1) those that
would reduce the federal share of Medicare spending (for example, by increasing beneficiary
premiums and/or cost-sharing; changing Medicare eligibility criteria such as age; reducing the
range of covered benefits; establishing defined federal contributions;39 or setting federal spending
limits), and (2) those that would reduce the total amount of health care spending regardless of
who is paying (e.g., reducing prices paid for items and services;40 decreasing medical errors;
reducing unneeded, duplicative and/or ineffective care; and eliminating fraud and abuse). On the
revenue side, options to increase program income may include modifying dedicated Medicare
payroll taxes or general income taxes, and/or imposing new fees.41 Some of the above changes
could be made while still retaining Medicare’s current structure, while others could only be made
in the context of major program restructuring. Many of the proposals could be combined as part
of an overall reform package.
The challenge to policy makers will be to slow the growth in Medicare spending over the long-
term, to establish fair levels of contributions from beneficiaries and taxpayers, and to ensure
continued beneficiary access to needed health care services. The Medicare trustees suggest that
prompt action is needed to address both the short- and the long-range financial challenges of the
Medicare program; the sooner that solutions can be enacted, the more flexible these solutions can
be, and the more gradually they may be phased in.

39 See CRS Report R41767, Overview of Health Care Changes in the FY2012 Budget Offered by House Budget
Committee Chairman Ryan
, by Patricia A. Davis, Alison Mitchell, and Bernadette Fernandez, for a description of the
premium support model proposed in H.Con.Res. 34.
40 Some may argue that reducing prices for some payers, such as Medicare, can lead to shifting costs to other payers,
such as private insurers, and thus not decrease the overall cost of health care.
41 Additionally, broadening the tax base through increased levels of employment and/or wages (e.g. through economic
recovery) would also result in increased Medicare payroll tax income.
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Medicare Financing

Appendix A. Medicare Enrollment
Table A-1. Medicare Enrollment, 1970 - 2085
(in thousands)
Year
HI - Part A
SMI - Part B
SMI - Part D
Part C
Total
Historical
1970
20,104
19,496


20,398
1975
24,481
23,744


24,864
1980
28,002
27,278


28,433
1985
30,621
29,869

1,271
31,081
1990
33,747
32,567

2,017
34,251
1995
37,175
35,641

3,467
37,594
2000
39,257
37,335

6,856
39,688
2001
39,669
37,667

6,166
40,103
2002
40,065
37,982

5,538
40,508
2003
40,738
38,584

5,302
41,188
2004
41,485
39,123
1,217
5,375
41,902
2005
42,233
39,752
1,841
5,794
42,606
2006
43,065
40,361
30,536
7,292
43,436
2007
44,010
41,093
31,217
8,667
44,368
2008
45,150
41,975
32,413
10,009
45,500
2009
46,220
42,879
33,484
11,101
46,575
2010
47,134
43,816
34,465
11,688
47,492
Estimated
2011
48,549
45,102
35,427
12,380
48,908
2012
50,224
46,589
37,318
12,478
50,584
2013
52,006
48,179
38,467
12,119
52,365
2014
53,619
49,619
39,490
11,356
53,977
2015
55,197
51,020
40,528
10,292
55,554
2016
56,754
52,406
41,567
9,640
57,111
2017
58,344
53,817
42,677
9,272
58,701
2018
59,994
55,283
43,788
9,203
60,350
2019
61,714
56,817
44,939
9,372
62,072
2020
63,499
58,467
46,504
9,653
63,858
2025
72,608
66,700
53,146
11,211
72,979
2030
80,410
73,816
58,836
12,381
80,791
2035
85,254
78,170
62,367

85,640
2040
87,872
80,649
64,275

88,260
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Medicare Financing

Year
HI - Part A
SMI - Part B
SMI - Part D
Part C
Total
2045
89,740
82,333
65,637

90,130
2050
92,396
84,766
67,576

92,793
2055
95,643
87,720
69,945

96,046
2060
99,411
91,200
72,694

99,820
2065
103,025
94,511
75,326

103,434
2070
106,941
98,106
78,175

107,346
2075
111,037
101,869
81,153

111,436
2080
115,065
105,572
84,076

115,449
2085
119,131
109,318
87,023

119,496
Source: 2011 Medicare Trustees Report, Table III.A3.
Notes: The trustees report did not provide enrollment projections separately for Part C beyond 2030.
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Medicare Financing

Appendix B. Total Medicare Income and
Expenditures (HI and SMI Combined)

Table B-1. Medicare Income and Expenditures,
Calendar Years 1970-2020
($ in billions)
Income
Expenditures
Interest
Payroll
General
State
and
Benefit
Admin
Year
Taxes
Revenue Premiums Transfers
Other Total
Payments
Expenses Total

Historical Data
1970
$4.9
$1.1
$1.1
-
$1.2
$8.2
$7.1
$0.4
$7.5
1975
11.5
2.6
1.9
-
1.5
17.7
15.6
0.8
16.3
1980
23.8
7.5
3.0
-
2.5
37.0
35.7
1.1
36.8
1985
47.6
18.3
5.6
-
5.1
76.5
70.5
1.7
72.3
1990
72.0
33.0
11.4
-
9.9
126.3
108.7
2.3
111.0
1995
98.4
39.0
20.7
-
17.3
175.3
181.4
2.8
184.2
2000
144.4
65.9
22.0
-
24.9
257.1
217.4
4.4
221.8
2005
171.4
119.2
39.9
-
27.0
357.5
330.3
6.1
336.4
2006
181.3
171.9
49.0
$5.5
29.4
437.0
402.0
6.3
408.3
2007
191.9
178.4
53.6
6.9
31.3
462.1
425.4
6.3
431.7
2008
198.7
184.1
58.1
7.1
32.7
480.8
461.6
6.6
468.1
2009
190.9
209.9
65.2
7.6
34.7
508.2
502.4
6.6
509.0
2010
182.0
204.6
61.8
4.0
33.6
486.0
515.9
7.1
522.8
Intermediate Estimate
2011
196.6
222.9
68.5
6.9
34.5
529.6
550.7
6.8
557.4
2012
211.0
232.0
74.6
8.2
35.8
561.7
564.9
7.3
572.2
2013
228.3
261.4
82.2
8.8
38.6
619.2
598.5
8.1
606.6
2014
244.1
280.0
90.2
9.3
43.6
667.2
634.5
8.9
643.4
2015
257.8
315.1
104.4
9.8
48.7
735.7
666.0
9.8
675.8
2016
271.9
306.9
100.2
10.5
54.0
743.4
705.4
10.7
716.1
2017
285.9
347.9
115.4
11.3
61.1
821.7
749.0
11.5
760.3
2018
301.1
376.6
125.6
12.3
68.3
883.9
797.2
12.5
809.6
2019
315.8
408.1
137.0
13.3
74.9
949.2
851.1
13.4
864.5
2020
330.0
450.4
149.1
14.4
83.8
1,027.9
917.8
14.3
932.1
Source: Data from 2011 Medicare Trustees Report, Tables III.A1, III.B4, III.C8, and III.C19.
Notes: Totals do not necessarily equal the sums of rounded components.
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Medicare Financing

Appendix C. Medicare Per Capita Expenditures
Table C-1. Average Medicare Benefit Costs Per Beneficiary,
Calendar Years 1970-2020
SMI
Year HI Part B
Part D
Total
Historical Data
1970
$255
$101

$356
1975
462
180

642
1980
895
390

1,285
1985
1,554
768

2,322
1990
1,963
1,304

3,267
1995
3,130
1,823

4,953
2000
3,272
2,381

5,653
2005 4,262
3,754

8,016
2006 4,388
4,111 $1,709
10,209
2007 4,548
4,293 1,563
10,404
2008 5,145
4,296 1,511
10,952
2009 5,177
4,725 1,805
11,707
2010 5,187
4,786 1,789
11,762
Intermediate Estimates
2011
5,337
4,973
1,886
12,195
2012
5,402
4,666
2,038
12,105
2013
5,446
4,781
2,208
12,436
2014
5,513
4,999
2,299
12,811
2015
5,483
5,163
2,463
13,109
2016
5,573
5,335
2,635
13,544
2017
5,673
5,541
2,803
14,017
2018
5,807
5,765
2,975
14,547
2019
5,964
6,006
3,149
15,119
2020
6,159
6,337
3,358
15,855
Source: 2011 Report of Medicare Trustees, Table V.B1.
Notes: These amounts do not include administrative costs. The expenditure figures do not net out premiums
and state transfers.
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Medicare Financing

Appendix D. Operation of the Hospital Insurance
Trust Fund

Table D-1. Operation of the Hospital Insurance Trust Fund,
Calendar Years 1970-2020
($ in billions)
Income Expenditures
Trust
Fund
Interest,
Balance at
Payroll
Transfers,
Benefit
Admin.
Net
End of
Year
Taxes
Other
Total
Payments
Expenses
Total
Change
Year
Historical Data
1970
$4.9 $1.2 $6.0 $5.1 $0.2 $5.3 $0.7 $3.2
1975
11.5 1.4 13.0 11.3 0.3 11.6 1.4 10.5
1980
23.8 2.1 26.1 25.1 0.5 25.6 0.5 13.7
1985
47.6 3.9 51.4 47.6 0.8 48.4 4.8 20.5
1990
72.0 8.4 80.4 66.2 0.8 67.0 13.4 98.9
1995
98.4 16.7 115.0 116.4 1.2 117.6 -2.6 130.3
2000
144.4 22.9 167.2 128.5 2.6 131.1 36.1 177.5
2005
171.4 28.0 199.4 180.0 2.9 182.9 16.4 285.8
2006
181.3 30.2 211.5 189.0 2.9 191.9 19.6 305.4
2007
191.9 31.9 223.7 200.2 2.9 203.1 20.7 326.0
2008
198.7 32.0 230.8 232.3 3.3 235.6 -4.7 321.3
2009
190.9 34.5 225.4 239.3 3.2 242.5 -17.1 304.2
2010
182.0 33.6 215.6 244.5 3.5 247.9 -32.3 271.9
Intermediate Estimate
2011
196.6 32.2 228.7 259.1 3.7 262.8 -34.1 237.9
2012
211.0 32.5 243.5 271.3 4.0 275.3 -31.8 206.1
2013
228.3 33.9 262.2 283.2 4.4 287.7 -25.5 180.6
2014
244.1 36.8 280.8 295.6 4.9 300.5 -19.7 160.9
2015
257.8 39.6 297.3 302.7 5.4 308.1 -10.7 150.2
2016
271.9 42.3 314.1 316.3 5.9 322.2 -8.1 142.1
2017
285.9 45.5 331.3 331.3 6.4 337.4 -6.0 136.0
2018
301.1 48.6 349.7 348.4 6.9 355.3 -5.6 130.5
2019
315.8 51.6 367.5 368.1 7.4 375.5 -8.0 122.5
2020
330.0 54.9 384.9 391.1 7.9 399.0 -14.1 108.4
Source: 2011 Medicare Trustees Report, Table III.B4.
Notes: Sums may not equal totals due to rounding.
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Medicare Financing

Appendix E. Operation of the Supplementary
Insurance Trust Fund, Part B Account

Table E-1. Operation of the Part B Account of the SMI Trust Fund,
Calendar Years 1970-2020
($ in billions)
Income Expenditures
Trust
Fund
Interest
Balance
General
and
Benefit
Admin.
Net
at End of
Year
Premiums Revenue
Other
Total
Payments
Expenses
Total
Change
Year
Historical Data
1970 $1.1 $1.1 $0.0 $2.2 $2.0 $0.2 $2.2 -$0.0 $0.2
1975
1.9 2.6 0.1 4.7 4.3 0.5 4.7 -0.1 1.4
1980 3.0 7.5 0.4 10.9 10.6 0.6 11.2 -0.4 4.5
1985 5.6 18.3 1.2 25.1 22.9 0.9 23.9 1.2 10.9
1990 11.3 33.0 1.6 45.9 42.5 1.5 44.0 1.9 15.5
1995 19.7 39.0 1.6 60.3 65.0 1.6 66.6 -6.3 13.1
2000 20.6 65.9 3.4 89.9 88.9 1.8 90.7 -0.8 44.0
2005 37.5 118.1 1.4 157.0 149.2 3.2 152.4 4.6 24.0
2006 42.9 132.7 1.8 177.3 165.9 3.1 169.0 8.3 32.3
2007 46.8 139.6 2.2 188.7 176.4 2.5 178.9 9.7 42.1
2008 50.2 146.8 3.6 200.6 180.3 3.0 183.3 17.3 59.4
2009 56.0 162.8 3.1 221.9 202.6 3.1 205.7 16.2 75.5
2010 52.0 153.5 3.3 208.8 209.7 3.2 212.9 -4.1 71.4
Intermediate Estimates
2011 57.5 170.4 5.7 233.8 224.8 2.8 227.6 6.2 77.6
2012 61.5 173.5 6.8 241.8 217.5 3.0 220.5 21.3 99.0
2013 66.9 196.6 8.3 271.7 230.3 3.4 233.7 38.0 137.0
2014 73.4 211.3 10.5 295.2 248.1 3.7 251.8 43.4 180.4
2015 85.2 240.1 12.9 338.2 263.5 4.1 267.6 70.6 251.0
2016 80.2 223.6 15.6 319.4 279.6 4.5 284.1 35.3 286.3
2017 93.0 257.6 19.7 370.4 298.1 4.8 303.0 67.4 353.7
2018 101.2 278.4 23.9 403.4 318.5 5.2 323.7 79.8 433.5
2019 110.5 301.6 27.7 439.7 341.5 5.6 347.1 92.6 526.1
2020 119.7 332.9 33.6 486.3 370.5 6.0 376.5 109.8 635.9
Source: 2011 Medicare Trustees Report, Table III.C8.
Notes: Sums may not equal totals due to rounding.
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Appendix F. Operation of the Supplementary
Insurance Trust Fund, Part D Account

Table F-1. Operation of the Part D Account in the SMI Trust Fund,
Calendar Years 2004-2020
($ in billions)
Income Expenditures
Trust
Fund
Transfers
Balance
General
from
Benefit
Admin.
Net
at End of
Year
Premiums
Revenue
States
Total
Payments
Expenses
Total
Change
Year
Historical Data
2004 — $0.4 — $0.4 $0.4 — $0.4 — —
2005
— 1.1 — 1.1 1.1 — 1.1 — —
2006 $3.5 39.2 $5.5 48.2 47.1 $0.3 47.4 $0.8 $0.8
2007 4.0 38.8 6.9 49.7 48.8 0.9 49.7 0.0 0.8
2008 5.0 37.3 7.1 49.4 49.0 0.3 49.3 0.1 0.9
2009 6.3 47.1 7.6 60.9 60.5 0.3 60.8 0.1 1.1
2010 6.5 51.1 4.0 61.7 61.7 0.4 62.0 -0.4 0.7
Intermediate Estimates
2011 7.6 52.5 6.9 67.0 66.8 0.3 67.1 -0.0 0.6
2012 9.6 58.5 8.2 76.4 76.1 0.3 76.3 0.0 0.7
2013
11.7 64.8 8.8 85.3 85.0 0.3 85.2 0.0 0.7
2014
13.1 68.7 9.3 91.1 90.8 0.3 91.1 0.0 0.8
2015 15.4 75.0 9.8 100.2 99.8 0.3 100.2 0.0 0.8
2016 16.1 83.3 10.5 109.9 109.5 0.3 109.9 0.1 0.9
2017 18.3 90.3 11.3 120.0 119.6 0.3 120.0 0.1 1.0
2018 20.2 98.2 12.3 130.7 130.3 0.4 130.6 0.1 1.0
2019 22.1 106.5 13.3 142.0 141.5 0.4 141.9 0.1 1.1
2020 24.7 117.5 14.4 156.6 156.2 0.4 156.6 0.1 1.2
Source: 2011 Medicare Trustees Report, Table III.C19.
Notes: Sums may not equal totals due to rounding.




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Appendix G. Medicare Expenditures as a Percentage of GDP
Table G-1. Projected HI and SMI Expenditures as a Percentage of GDP
Comparison of 2009, 2010 and 2011 Medicare Trustees Reports and 2011 Alternative Scenario
HI
SMI-B
SMI-Da
Total Medicare
2009
2010
2011
2011
2009
2010
2011
2011
2009
2010
2011
2009
2010
2011
2011
Year Report Report Report Altern. Report Report Report Altern. Report Report Report Report Report Report Altern.
2009 1.71% 1.67% 1.67% 1.67% 1.44% 1.45% 1.46% 1.46% 0.43% 0.41% 0.41% 3.59% 3.53% 3.54% 3.54%
2010 1.71 1.66 1.69 1.69 1.38 1.49 1.46 1.46 0.45 0.43 0.43 3.54 3.59 3.58 3.58
2020 2.05 1.63 1.70 1.70 1.76 1.61 1.63 1.95 0.71 0.67 0.67 4.53 3.91 3.99 4.31
2030 2.75 1.99 2.03 2.14 2.30 2.10 2.15 2.77 1.08 1.02 0.98 6.43 5.11 5.16 5.88
2040 3.43 2.24 2.27 2.66 3.15 2.30 2.34 3.33 1.28 1.21 1.15 7.96 5.76 5.77 7.14
2050 3.85 2.27 2.30 3.00 3.47 2.33 2.36 3.68 1.42 1.35 1.28 8.74 5.94 5.94 7.96
2060 4.21 2.23 2.26 3.29 3.82 2.39 2.40 4.08 1.57 1.50 1.42 9.60 6.12 6.09 8.79
2070 4.61 2.21 2.24 3.63 4.16 2.45 2.44 4.47 1.69 1.63 1.55 10.46 6.29 6.22 9.65
2080 4.96 2.17 2.16 3.92 4.43 2.47 2.43 4.78 1.80 1.75 1.66 11.18 6.37 6.25 10.36

Sources: Projected Medicare Expenditures under an Il ustrative Scenario with Alternative Payment Updates to Medicare Providers, May 13, 2011, Tables 2, 4, and 5; and
2009, 2010 and 2011 Reports of the Medicare Trustees, Table III.A2.
a. Alternative Scenario assumed no changes to current law affecting Part D; alternative projection same as projections in 2011 Report.
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