Medicare: History of Insolvency Projections
Patricia A. Davis
Specialist in Health Care Financing
June 1, 2011
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Medicare: History of Insolvency Projections

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, or HI);
Part B (Supplementary Medical Insurance, or SMI); Part C (Medicare Advantage, or MA); and
Part D (the outpatient 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. As an alternative, beneficiaries can choose to receive all their Medicare services through
private health plans under the MA program; payment is made on their behalf in appropriate parts
from the HI and SMI trust funds. The Part D drug benefit is funded through a separate account in
the SMI trust fund and is financed through general revenues, state contributions, and beneficiary
premiums. The HI and SMI trust funds are overseen by a board of trustees that makes an annual
report to Congress concerning the financial status of the funds.
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 that have had the
effect of restraining growth in program spending. The 2011 Medicare trustees report projects that,
under intermediate assumptions, the HI trust fund will become insolvent in 2024, five years
earlier than projected in the 2010 report. This earlier projected insolvency date is primarily due to
lower than previously anticipated revenues from payroll taxes. This report is a supplement to
CRS Report R41436, Medicare Financing, which discusses the findings from the 2011 trustees
report. Both reports will be updated upon receipt of the trustees 2012 report.
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Medicare: History of Insolvency Projections

Contents
Introduction...................................................................................................................................... 1
HI Financing .................................................................................................................................... 2
What Is the HI Trust Fund?.............................................................................................................. 2
History of HI Solvency Projections ................................................................................................. 3
Current Insolvency Projections........................................................................................................ 6
What Would Happen If the Fund Became Insolvent?...................................................................... 6
Financing Issues............................................................................................................................... 7

Figures
Figure 1. Projected Number of Years Until HI Insolvency.............................................................. 4

Tables
Table 1. Year of Projected Insolvency of the Hospital Insurance Trust Fund in Past
Trustees Reports ........................................................................................................................... 4
Table A-1. Operation of the Hospital Insurance Trust Fund, Calendar Years 1970-2020............... 8
Table B-1. Tax Rates and Maximum Tax Bases ............................................................................ 10

Appendixes
Appendix A. Operation of the Hospital Insurance Trust Fund ........................................................ 8
Appendix B. Historical Payroll Tax Rates ..................................................................................... 10


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Medicare: History of Insolvency Projections

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.
Medicare consists of four distinct parts, A through D. Part A covers hospital services, skilled
nursing facility (SNF) services, home health visits, and hospice services. Most persons aged 65 or
older are automatically entitled to premium-free Part A because they or their spouse paid
Medicare payroll taxes for at least 40 quarters (10 years) on earnings covered by either the Social
Security or the Railroad Retirement systems. 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 expenditures are driven by a variety of factors, including the level of enrollment, the
complexity of medical services provided, health care inflation, and expected life expectancy. In
2010, Medicare provided benefits to an estimated 47.5 million persons at an estimated total cost
of $523 billion.
The Medicare program has two separate trust funds—the Hospital Insurance (HI) trust fund and
Supplementary Medical Insurance (SMI) trust fund. The Part A program, which is financed
mainly through payroll taxes levied on current workers, is accounted for through the HI trust
fund. The Part B and D programs, which are primarily funded through general revenue and
beneficiary premiums, are accounted for through the SMI trust fund.2 Both funds are maintained
by the Department of the Treasury and are overseen by a board of trustees that reports annually to
Congress concerning the funds’ financial status.3 Financial projections are made using economic
assumptions based on current law, including estimates of consumer price index (CPI), workforce
size, wage increases, and life expectancy.
Almost from its inception, the HI trust fund has faced a projected shortfall and eventual
insolvency. Because of the way it is financed, the SMI trust fund does not face exhaustion;
however, the Medicare trustees continue to express concerns about the rapid growth in SMI
costs.4

1 For additional information on the Medicare program, see CRS Report R40425, Medicare Primer.
2 Payments are made for beneficiaries enrolled in Part C in appropriate portions from the HI and SMI trust funds.
3 Medicare trustee reports may be found at http://www.cms.hhs.gov/reportstrustfunds/.
4 For further information on Medicare financing and its financial outlook, see CRS Report R41436, Medicare
Financing, by Patricia A. Davis.
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Medicare: History of Insolvency Projections

HI Financing
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 The Patient
Protection and Affordable Care Act (PPACA, P.L. 111-148) 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 2013.6
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.
What Is the HI Trust Fund?
The HI trust fund is a financial account in the U.S. Treasury into which all income to the Part A
portion of the program is credited, and from which all benefits and associated administrative costs
of the program are paid. The trust fund is solely an accounting mechanism—there is no actual
transfer of money into and out of the fund.
HI operates on a “pay-as-you-go” basis; the annual revenues to the HI trust fund, primarily the
taxes paid by current workers and their employers, are used to pay Part A benefits for today’s
Medicare beneficiaries. 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
fund.) 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. When payments for Medicare Part A services 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.
In years in which the trust fund spends less than the income it receives, it has a cash-flow surplus;
the trust fund securities exchanged for any income in excess of spending show up as “assets” on

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.
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Medicare: History of Insolvency Projections

the financial accounting balance sheets and are available to the system to meet future
obligations.9 If, in a given year, the trust fund spends more than the tax income it receives, it has a
cash-flow deficit. In deficit years, Medicare can redeem any securities (including interest)
accumulated in previous years. When the securities are redeemed, monies are transferred from the
Treasury’s general fund to the HI trust funds. Unless the Treasury’s general fund is running a
surplus, Congress would need to cut overall spending, raise taxes, or increase borrowing during
years in which HI has cash-flow deficits. To illustrate, if HI expenditures exceed revenues in a
given year (as in years 2008 through 2010), then the government needs to raise the resources
necessary to pay for the securities as they are redeemed by the HI trust fund to meet expenses.
(See Appendix A for a discussion of recent and projected HI cash flows, and data on historical
and projected HI operations.)
History of HI Solvency Projections
The HI trust fund has never become insolvent. The Board of Trustees projected insolvency for the
HI fund beginning with the 1970 report, at which time the HI trust fund was expected to become
insolvent in only two years. See Table 1 and Figure 1. The insolvency date has been postponed a
number of times since the beginning of Medicare through a variety of methods. For example, the
payroll tax rate has been adjusted periodically by Congress as one of the mechanisms to maintain
the financial adequacy of the trust fund (see Appendix B).
Other legislative changes have been made at various times to restrain the growth in HI program
spending; generally, these measures were part of larger budget reconciliation laws that attempted
to restrain overall federal spending. To illustrate, in the mid-1990s, efforts to curtail Medicare
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). In early 1997, the trustees had projected that the HI trust fund would become insolvent
within four years, in 2001. Following the enactment of BBA 97, significant improvements were
made in the short-term projections. The new projections reflected a number of factors, including
lower expected expenditures as a result of changes made by BBA 97 (primarily resulting from
modifications in Medicare Part C payments,10 and the establishment of prospective payment
systems for certain Part A providers), continuing efforts to combat fraud and abuse, and strong
economic growth, which was expected to generate more revenues to the trust fund from payroll
taxes.
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 reverse some of the BBA 97 spending reductions. 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. This improvement in solvency

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 BBA 97 established the “Medicare+Choice” program under Part C. Medicare Part C was changed to “Medicare
Advantage” by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173).
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projections reflected both stronger-than-expected economic growth and lower-than-expected
program costs due to lower projected enrollment in Medicare Part C, heightened anti-fraud and
abuse initiatives, and lower than expected increases in health care costs.
Table 1. Year of Projected Insolvency of the Hospital Insurance Trust Fund in Past
Trustees Reports
Year of
Year of
Year of
Year of
Year of
Year of
trustees
projected
trustees
projected
trustees
projected
report
insolvency
report
insolvency
report
insolvency
1970
1972
1985
1998
1999
2015
1971
1973
1986
1996
2000
2025
1972
1976
1986 amended 1998
2001
2029
1973
none indicated
1987
2002
2002
2030
1974
none indicated
1988
2005
2003
2026
1975
late 1990s
1989
none indicated
2004
2019
1976
early 1990s
1990
2003
2005
2020
1977
late 1980s
1991
2005
2006
2018
1978
1990
1992
2002
2007
2019
1979
1992
1993
1999
2008
2019
1980
1994
1994
2001
2009
2017
1981
1991
1995
2002
2010
2029
1982
1987
1996
2001
2011
2024
1983
1990
1997
2001


1984
1991
1998
2008


Source: Intermediate projections of various HI trustees reports, 1970-2011.
Figure 1. Projected Number of Years Until HI Insolvency
30
28 28
25
25
23
19
20
17
16
15
15 15
14
14
15
13
13
13
13
12
12 12 11
10
10
10
10
10
8
7
7
7
7
6
5
5
4
4
5
2
2
0
1970 1971 1972 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Intermediate projections of various HI trustees reports, 1970-2011.
Notes: No specific estimates were provided by the trustees for years 1973-1977 and 1989.
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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. In addition, the enactment of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173)
added significantly to HI costs, primarily through higher payments to rural hospitals and to
private plans under the MA program.11
The 2005 trustees 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. The 2006 report moved
the insolvency date forward again. Under the trustees’ intermediate assumptions, the HI trust fund
would become insolvent in 2018. The revision reflected expectations of slightly higher costs and
increased utilization of HI services.
Both the 2007 and 2008 reports projected a 2019 insolvency date, though the 2008 report
indicated it would occur earlier in the year. The 2009 report moved the insolvency date forward to
2017, due primarily to the economic recession.
The 2010 report of the Medicare Boards of Trustees, issued on August 5, 2010,12 estimated that
the combination of lower Part A costs13 and higher tax revenues expected as a result of the Patient
Protection and Affordable Care Act (PPACA, P.L. 111-148) would postpone the depletion of HI
trust fund assets until 2029, 12 years later than the date projected in their 2009 report. Although
the Medicare trustees noted that the financial outlook for the Medicare program appeared to have
improved as a result of PPACA, they cautioned that the projections in the report were more
uncertain than normal, due to the potential for expenditure reductions not to materialize. As such,
the actuaries of the Centers for Medicare & Medicaid Services (CMS) issued a supplemental
memorandum that explained and quantified the potentially higher costs than those estimated in
the 2010 trustees report.14 This “illustrative alternative” projected that the HI trust fund would
become insolvent in 2028, one year earlier than that projected in the 2010 trustees report.

11 The Part D outpatient prescription drug program, which was created by MMA, is funded under SMI; the increased
expenditures associated with this new benefit therefore had little impact on projections of Medicare (HI) solvency.
12 2010 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/tr2010.pdf.
13 The expected reductions are primarily due to productivity adjustments to Part A provider payment updates and
reduced payments to Medicare Advantage plans.
14 Memo from John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures Under an Illustrative Scenario
with Alternative Payment Updates to Medicare Providers,” August 5, 2010, http://www.cms.gov/ReportsTrustFunds/
downloads/2010TRAlternativeScenario.pdf.
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Current Insolvency Projections
The 2011 Report of the Medicare trustees, issued on May 13, 2011,15 projects that the HI trust
fund will become insolvent in 2024, five years earlier than projected in the 2010 report. The
worsening financial outlook is primarily due to lower than expected payroll taxes stemming from
higher than expected unemployment and slow growth in wages in 2010. Over the next 10 years,
payroll tax revenue is projected to increase at a faster rate than expenditures (6.0% vs. 4.9%),
which will reduce the size of the annual deficits but will not completely eliminate them. Trust
fund assets will be used to make up the difference between income and expenditures, until the
assets are depleted in 2024. (See Appendix A for a discussion of expected HI cash flow through
2024.)
Similar to 2010, the CMS actuaries issued an alternative scenario that assumes that certain
PPACA changes that reduce Part A provider reimbursements would be made through 2019, and
then gradually phased out starting in 2020. Because the impact of these changes is expected to be
relatively minor in the short term, the expected trust fund exhaustion date provided in this
scenario is the same as that under the current law scenario, 2024; however, the trust fund is
expected to be depleted somewhat earlier in the year under the alternative scenario.
What Would Happen If the Fund Became Insolvent?
The practical function of the HI trust fund is that it permits the continued payment of bills in the
event of a temporary financial strain (e.g., lower income or higher costs than expected) without
requiring legislative action. As long as the HI trust fund has a balance (i.e., there are securities
credited to the fund), the Treasury Department is authorized to make payments for Medicare
Part A services. If the trust fund is not able to pay all of current expenses out of current income
and accumulated trust fund assets, it is considered to be insolvent.
To date, the HI trust fund has never 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.
In their 2011 report, the Medicare trustees project that the HI trust fund will be exhausted in 2024.
At that time, HI would continue to receive tax income from which some benefits could be paid;
however, there would be insufficient funds to pay for all Part A benefits. Unless action is taken
prior to that date to increase revenue or decrease expenditures (or some combination of the two),
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.

15 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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Financing Issues
Concern about the financial status of Medicare tends to focus on the HI trust fund exhaustion
date, when benefits scheduled under current law technically can no longer be paid in full. While
trust fund solvency issues are important, they present only part of the picture. When viewed from
the perspective of the entire federal budget, total Medicare spending obligations (HI and SMI
spending combined) are expected to place increasing demands on federal budgetary resources
well before the HI trust fund is expected to become insolvent. For example, changes to the
physician sustainable growth rate (SGR) payment system to prevent scheduled cuts in Medicare
payments to doctors beginning in 2012 would require significant additional federal funding.
However, because payments to physicians are made through the SMI trust fund, these additional
expenditures would have little to no effect on estimates of Medicare solvency (which reflects only
expected HI trust fund spending). For a further discussion of this issue, see CRS Report R41436,
Medicare Financing.
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Appendix A. Operation of the Hospital Insurance
Trust Fund
Beginning in 2004, expenditures began exceeding tax income (from payroll taxes and from the
taxation of Social Security benefits). Expenditures began to exceed total income (tax income plus
all other sources of revenue) in 2008. 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.
Expenditures have exceeded income every year since then and are expected to continue doing so
until 2024 when the asset balance is depleted. At that time, the trust fund will no longer have
sufficient funds to fully pay for Part A expenditures (see Table A-1 below).
Table A-1. Operation of the Hospital Insurance Trust Fund,
Calendar Years 1970-2020
($ in billions)
Year Income
Expenditures
Trust
Fund
Interest,
Payroll
Transfers,
Benefit
Admin.
Net
Balance at

Taxes
Other Total
Payments
Expenses Total Change
End of 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
2001 152.0 22.7 174.6 141.2 2.2 143.4 31.3 208.7
2002 152.7 25.8 178.6 149.9 2.6 152.5 26.1 234.8
2003 149.2 26.5 175.8 152.1 2.5 154.6 21.2 256.0
2004 156.5 27.5 183.9 167.6 3.0 170.6 13.3 269.3
2005 171.4 28 199.4 180.0 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 32 230.8 232.3 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
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Year Income
Expenditures
Trust
Fund
Interest,
Payroll
Transfers,
Benefit
Admin.
Net
Balance at

Taxes
Other Total
Payments
Expenses Total Change
End of Year
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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Appendix B. Historical Payroll Tax Rates
Table B-1. Tax Rates and Maximum Tax Bases


Tax rate (percentage of taxable earnings)
Employees and
Calendar Year
Maximum tax base
employers, each
Self-employed
Past experience



1966
$6,600
0.35%
0.35%
1967 6,600
0.50
0.50
1968-71 7,800
0.60
0.60
1972 9,000
0.60
0.60
1973 10,800
1.00
1.00
1974 13,200
0.90
0.90
1975 14,100
0.90
0.90
1976 15,300
0.90
0.90
1977 16,500
0.90
0.90
1978 17,700
1.00
1.00
1979 22,900
1.05
1.05
1980 25,900
1.05
1.05
1981 29,700
1.30
1.30
1982 32,400
1.30
1.30
1983 35,700
1.30
1.30
1984 37,800
1.30
2.60
1985 39,600
1.35
2.70
1986 42,000
1.45
2.90
1987 43,800
1.45
2.90
1988 45,000
1.45
2.90
1989 48,000
1.45
2.90
1990 51,300
1.45
2.90
1991 125,000
1.45
2.90
1992 130,200
1.45
2.90
1993 135,000
1.45
2.90
1994-2010 no
limit
1.45 2.90
Scheduled in current law



2011 and later
no limit
1.45
2.90
Source: 2011 Report of the Medicare Trustees, Table III.B2.
Notes: Beginning in 2013, workers will pay an additional 0.9% of their earnings above $200,000 (those who file
individual tax returns) or $250,000 (those who file joint tax returns).
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