Medicare Financial Status: In Brief
Patricia A. Davis
Specialist in Health Care Financing
June 24, 2013
Congressional Research Service
7-5700
www.crs.gov
R43122
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Medicare Financial Status: In Brief
Contents
Overview of the Medicare Program ................................................................................................. 1
Four Parts of Medicare .............................................................................................................. 1
Beneficiary Costs ....................................................................................................................... 2
Provider and Plan Payments ...................................................................................................... 2
Medicare Spending in 2012 ............................................................................................................. 2
Medicare Trust Funds and Sources of Revenue ............................................................................... 3
Hospitalization Insurance (HI) Trust Fund ................................................................................ 4
Sources of Revenue ............................................................................................................. 4
HI Trust Fund Mechanics .................................................................................................... 4
2012 HI Operations ............................................................................................................. 5
Supplementary Medical Insurance (SMI) Trust Fund ............................................................... 5
Sources of Revenue ............................................................................................................. 6
SMI Trust Fund Mechanics ................................................................................................. 6
2012 SMI Operations .......................................................................................................... 6
Estimated Date of HI Trust Fund Insolvency .................................................................................. 7
Projected Medicare Spending Growth ............................................................................................. 8
Growth in Medicare Expenditures Relative to GDP ................................................................. 9
Unfunded and General Revenue Obligations .......................................................................... 10
Comparison to 2012 Estimates ................................................................................................ 10
Alternative Projections ............................................................................................................ 11
Figures
Figure 1. Sources of Medicare Revenues: 2012 .............................................................................. 5
Figure 2. Projected Number of Years Until HI Insolvency .............................................................. 7
Figure 3. Historical and Projected Medicare Expenditures ............................................................. 8
Figure 4. Medicare Cost and Non-interest Income, by Source as a Percentage of GDP ................. 9
Tables
Table 1. Medicare Expenditures and Enrollment: 2012 ................................................................... 3
Table 2. Current Value of Estimated Medicare Unfunded Obligations and General
Revenue Spending ...................................................................................................................... 10
Contacts
Author Contact Information........................................................................................................... 12
Congressional Research Service
Medicare Financial Status: In Brief
Overview of the Medicare Program
Medicare, administered by the Centers for Medicare & Medicaid Services (CMS), is the nation’s
federal insurance program that pays for covered health services for most persons age 65 years and
older and for most permanently disabled individuals under the age of 65.1 As a health insurance
program, Medicare reimburses health care providers and suppliers, such as hospitals, physicians,
and medical equipment companies, for the services and products they provide to Medicare
beneficiaries. Medicare is prohibited by law from interfering in the practice of medicine or
controlling the manner in which medical services are provided, and is required to pay for covered
services provided to eligible persons so long as specific criteria are met. As such, the growth in
per person Medicare expenditures largely reflects the medical practices, use of technology, and
underlying costs in the broader health care system. Spending under the program (except for a
portion of the administrative costs) is considered mandatory spending and is not subject to the
appropriations process. Thus, there are generally no limits on annual Medicare spending.
Since its enactment in 1965, the Medicare program has undergone considerable change. Because
of its rapid growth, both in terms of aggregate dollars and as a share of the federal budget, the
Medicare program has been a major focus of deficit reduction legislation passed by Congress.2
With a few exceptions, reductions in program spending have been achieved largely through
freezes or reductions in payments to providers, primarily hospitals and physicians, and by making
changes to beneficiary premiums and other cost-sharing requirements. Most recently, the Patient
Protection and Affordable Care Act (ACA, P.L. 111-148 as amended) made numerous changes to
the Medicare program that modify provider reimbursements, provide incentives to improve the
quality and efficiency of care, and enhance certain Medicare benefits.3
Four Parts of Medicare
Medicare consists of four distinct parts, A through D:
• Part A covers inpatient hospital services, skilled nursing care, home health and
hospice care. Most persons aged 65 and 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.
1 For additional information on the Medicare program, see CRS Report R40425, Medicare Primer, coordinated by
Patricia A. Davis and Scott R. Talaga.
2 For a brief history of changes to the Medicare program, see CRS Report R40425, Medicare Primer, coordinated by
Patricia A. Davis and Scott R. Talaga, and the Medicare chapter of the House of Representatives, Committee on Ways
and Means Greenbook at http://greenbook.waysandmeans.house.gov/2012-green-book/chapter-2-medicare.
3 For details on individual Medicare provisions in the ACA, see CRS Report R41196, Medicare Provisions in the
Patient Protection and Affordable Care Act (PPACA): Summary and Timeline, coordinated by Patricia A. Davis.
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Medicare Financial Status: In Brief
• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries
that covers all Part A and B services, except hospice. Individuals choosing to
enroll in Part C must be eligible for Part A and must also enroll in Part B. About
27% of Medicare beneficiaries are enrolled in MA.
• Part D covers outpatient prescription drug benefits. This portion of the program
is optional. About 74% of Medicare beneficiaries are enrolled in a Medicare Part
D plan or have coverage through an employer retiree plan subsidized by
Medicare.
Beneficiary Costs
In addition to premiums for Medicare Parts B and D, beneficiaries must also pay other out-of-
pocket costs, such as deductibles and coinsurance, for services provided under all parts of the
Medicare program. There is no limit on beneficiary out-of-pocket spending, and most
beneficiaries have some form of supplemental insurance through private Medigap plans,
employer-sponsored retiree plans, or Medicaid to help cover a portion of their Medicare
premiums and/or cost-sharing.
Provider and Plan Payments4
Under traditional Medicare, Parts A and B, services are generally paid directly by the government
on a “fee-for-service” basis, using different prospective payment systems or fee schedules.5 Under
Parts C and D, private insurers are paid a monthly “capitated” per person amount to provide
coverage to enrollees.6 The capitated payments are adjusted to reflect the differences in the
relative cost of sicker beneficiaries with different risk factors including age, disability, or end-
stage renal disease.
Medicare Spending in 2012
In 2012, Medicare provided benefits to about 50.7 million people (42.1 million age 65 and over,
and 8.5 million disabled) at an estimated total cost of $574 billion. Most of that amount, $566
billion (99%), was spent on program benefits, with the remaining amount used for program
administration. (See Table 1.) Growth in Medicare expenditures is driven by a variety of factors,
including the level of Medicare enrollment, the complexity of medical services provided, health
care inflation, and life expectancy.
4 For additional information, see CRS Report RL30526, Medicare Payment Updates and Payment Rates, coordinated
by Paulette C. Morgan.
5 Under a prospective payment system (PPS), Medicare payments are made using a predetermined, fixed amount based
on the classification system for a particular service. CMS uses separate PPSs to reimburse acute inpatient hospitals,
home health agencies, hospice, hospital outpatient, inpatient psychiatric facilities, inpatient rehabilitation facilities,
long-term care hospitals, and skilled nursing facilities. A fee schedule is a listing of fees used by Medicare to pay
doctors or other providers/suppliers. Fee schedules are used to pay for physician services, ambulance services, clinical
laboratory services, and durable medical equipment, prosthetics, orthotics, and supplies in certain locations.
6 Medicare pays Parts C and D plans a set monthly per person amount to provide covered benefits.
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Medicare Financial Status: In Brief
Table 1. Medicare Expenditures and Enrollment: 2012
SMI
HI - Part A
Part B
Part D
Total Medicare
Expenditures (billions)
Benefits
$262.9 $236.5 $66.5
$565.9
Hospital
139.7
39.1
—
178.8
Skilled Nursing
28.0
—
—
28.0
Home Health Care
6.8
11.8
—
18.6
Physician Services
—
69.6
—
69.6
Private plans (Part C)
70.2
66.0
—
136.2
Prescription Drugs
—
—
66.5
66.5
Other
18.1
50.1
—
68.2
Administrative Expenses
$3.9 $3.9 $0.4 $8.3
Total Expenditures
$266.8
$240.5
$66.9
$574.2
Enrollment (millions)
Aged
41.8
38.7
n/a
42.1
Disabled
8.5
7.7
n/a
8.5
Total Enrol ment
50.3
46.4
37.4
50.7
Average expenditures
$5,227 $5,097 $1,779 $12,103
per enrollee
Source: 2013 Report of Medicare Trustees, Table II.B1.
Notes: Totals do not necessarily equal the sums of rounded components; n/a = data not available.
Medicare Trust Funds and Sources of Revenue
The Medicare program has two separate trust funds—the Hospital Insurance (HI) trust fund for
Part A and the Supplementary Medical Insurance (SMI) trust fund for Parts B and D.7 (For
beneficiaries enrolled in Medicare Advantage (Part C), payments are made on their behalf in
appropriate portions from the HI and SMI trust funds.) Both the HI and SMI trust 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.8 Financial projections are
7 Many government programs are financed through trust funds. Despite the name, federal trust funds are not the same
as private sector trust funds. A trust in the private sector is “a fiduciary relationship in which one person (the trustee)
holds property for the benefit of another (the beneficiary).” The trustee must follow the express terms of the trust
instrument and administer the trust for the benefit of the beneficiary. Most federal trust funds are not based on a legal
fiduciary relationship. Congress creates trust funds that involve a commitment to use monies for a specific purpose, but
can alter the terms (e.g., receipts, outlays, or purpose) of the trust fund at any time. For additional information on how
federal trust funds operate within the context of the federal budget, see CRS Report R41328, Federal Trust Funds and
the Budget.
8 These reports may be found at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-
Reports/ReportsTrustFunds/index.html.
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Medicare Financial Status: In Brief
made using economic assumptions based on current law, including estimates of consumer price
index (CPI), workforce size, wage increases, and life expectancy.
The Medicare trust funds are financial accounts in the U.S. Treasury into which all income to the
program is credited, and from which all benefits and associated administrative costs of the
program are paid. The trust funds are solely accounting mechanisms—there is no actual transfer
of money into and out of the funds. As long as a trust fund has a balance, the Treasury
Department is authorized to make payments for it from the U.S. Treasury.
Hospitalization Insurance (HI) Trust Fund
The Part A portion of Medicare is financed through the HI trust fund.
Sources of Revenue
The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally
between employers and workers. (See Figure 1.) Unlike Social Security, there is no upper limit
on wages subject to Medicare payroll taxes. Beginning in 2013, the ACA imposes an additional
tax of 0.9% on high-income workers with wages over $200,000 for single tax filers, and over
$250,000 for joint filers.9 Other sources of income to the HI trust fund include 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, and interest on federal securities held by the trust fund.
HI Trust Fund Mechanics
HI operates on a “pay-as-you-go” basis; 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 HI trust fund in the
form of special issue interest-bearing government securities.10 (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, the trust fund securities
exchanged for any income in excess of spending show up as “assets” on the financial accounting
balance sheets and are available to the system to meet future obligations. 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). From a unified budget perspective, these “assets” represent future budget obligations
and are treated as liabilities. If the HI trust fund is not able to pay all of current expenses out of
9 See archived CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care
Act (ACA), by Janemarie Mulvey, for more detail.
10 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 Financial Status: In Brief
current income and accumulated trust fund assets, it is considered to be insolvent.11 (See
“Estimated Date of HI Trust Fund Insolvency.”)
Figure 1. Sources of Medicare Revenues: 2012
Payroll Taxes
38%
General Revenues
72%
75%
Beneficiary Premiums
85%
Payments from States
40%
Taxation of Social
Security Benefits
12%
13%
1%
26%
Interest and Other
2%
8%
3%
13%
4%
6%
2%
TOTAL MEDICARE
HI - PART A
SMI - PART B
SMI - PART D
REVENUE
$243 Billion
$227 Billion
$67 Billion
$537 Billion
Source: 2013 Report of the Medicare Trustees, Table II.B1.
Notes: Totals may not add to 100% due to rounding.
2012 HI Operations
At the beginning of CY2012, the HI trust fund had an asset balance of a little over $244 billion.
During 2012, Part A expenditures were about $267 billion, and approximately $206 billion of that
amount was funded by payroll taxes and $37 billion by interest income and other sources.
Because expenditures exceeded revenue income, close to $24 billion was drawn out of
accumulated assets in the HI trust fund to make up the difference. At the end of 2012, the HI trust
fund had an asset balance of approximately $220 billion. This means that if or when HI spending
exceeds income in any future years, the trust fund will have up to $220 billion in spending
authority in addition to what it receives in income.12
Supplementary Medical Insurance (SMI) Trust Fund
The SMI trust fund consists of two accounts: Part B and Part D.
11 From time to time, it is reported that Medicare is on the verge of “bankruptcy,” however, in the context of federal
trust funds, this term is not meaningful. It is true that a trust fund’s outgo can be greater than its income and trust funds
can have a zero balance, but, unlike private businesses, the federal government is not in danger of “going out of
business” or having its assets seized by creditors.
12 In years in which income exceeds expenditures, the surplus amount(s) would be added to this balance.
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Medicare Financial Status: In Brief
Sources of Revenue
Unlike the HI portion of Medicare, the SMI program was not intended to be supported through
dedicated sources of income. Instead, it relies primarily on general tax revenues and beneficiary
premiums as revenue sources.13
The Part B portion of SMI is mainly funded through beneficiary premiums (set at 25% of
estimated program costs for the aged)14 and general revenues (most of the remaining amount,
approximately 72%). Most enrollees pay a monthly premium of $104.90; however, certain low-
income enrollees receive assistance with their premiums from Medicaid (joint federal-state
funding), and since 2007, high-income enrollees pay higher premiums. Beginning in 2011,
additional revenues from an annual fee imposed on certain manufacturers and importers of
branded prescription drugs are also credited to the SMI trust fund.15
Part D is financed through a combination of beneficiary premiums (set at 25.5% of the estimated
cost of the standard benefit), general revenues, and state transfer payments (to cover a portion of
the costs of beneficiaries enrolled in both Medicare and Medicaid—the “dual-eligibles”). Actual
Part D premiums may vary depending on which plan the enrollee selects. Low-income enrollees
may receive premium assistance through the Part D low-income subsidy (all federal funding), and
starting in 2011, higher income enrollees pay higher premiums.
SMI Trust Fund Mechanics
The level of SMI funding is automatically updated each year to to cover expenditures in the
upcoming year. If actual costs exceed those estimated when the funding was set, future financing
rates can include adjustments to recover the shortfall. Similarly, if actual costs are less than
expected, income levels needed for the next year may be adjusted downward. Because of these
automatic adjustments, the SMI trust fund is always kept in balance and cannot become insolvent.
2012 SMI Operations
In CY2012, total spending for Part B was close to $241 billion, with general revenues financing
approximately $164 billion (72%) of that amount, and premiums covering most of the remainder.
In CY2012, total spending for Part D reached about $67 billion, with over $50 billion (75%) of
that amount paid for by general revenues. An additional $8 billion was covered by state transfer
payments, and $8 billion by beneficiary premiums. It should be noted that although beneficiary
premiums are set at a rate to cover 25.5% of the costs of their standard Part D benefits, the
program pays for the premiums of about one-third of enrollees because they qualify for low-
income assistance. As a result, Part D premiums only cover about 12% of program costs. (See
Figure 1.)
13 There have been reports that Medicare beneficiaries receive more from the program than what they have paid
throughout their working years in payroll taxes; however as noted, unlike Part A, the costs of Medicare Parts B and D
were designed in the original statute to be subsidized by the government and not through dedicated taxes.
14 For additional information, see CRS Report R40082, Medicare: Part B Premiums, by Patricia A. Davis.
15 See archived CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care
Act (ACA), by Janemarie Mulvey, for more detail.
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Medicare Financial Status: In Brief
Estimated Date of HI Trust Fund Insolvency
Since 2008, Part A expenditures have exceeded HI income each year, and the assets credited to
the trust fund have been drawn down to make up the deficit. The 2013 report of the Medicare
Trustees estimates that under current law the HI trust fund will become insolvent in 2026 (i.e., the
balance of the trust fund will reach $0), at which time there will no longer be sufficient funds to
fully cover Part A expenditures.16 At that time, HI would continue to receive tax income from
which some benefits could be paid; however, funds would only be sufficient to pay for 87% of
Part A expenses. The Trustees suggest that, under these circumstances, beneficiary access to
Part A services “would be rapidly curtailed.”
Almost from its inception, the HI trust fund has faced a projected shortfall and eventual
insolvency (see Figure 2), with insolvency dates ranging from 2 to 28 years from the year of the
projection. However, 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 revenues to fund Part A
services in the event of such a shortfall. Unless action is taken prior to the expected date of
insolvency to increase HI revenue or decrease expenditures, Congress may need to appropriate
additional funding to make up for these deficits and to allow for full and on time payments to
Part A providers.
Figure 2. Projected Number of Years Until HI Insolvency
Medicare Trustee Report Estimates 1970-2013
30
28 28
25
25
23
19
20
17
16
15
15 15
14
14
15
13
13
13
13
13
12
12 12
12
11
10
10
10
10
10
8
7 7
7
7
6
5
5
4
4
5
2
2
0
Source: Intermediate projections of various Medicare Trustees reports, 1970-2013.
Note: No specific estimates were provided by the trustees for years 1973-1977 and 1989.
Because income (general revenue and premiums) to the SMI trust fund is automatically updated
each year to ensure that the program has enough money to continue operating, the SMI trust fund
16 To illustrate the sensitivity and uncertainty inherent in developing future projections, the Trustees provide both low-
cost and high-cost estimates, in addition to their intermediate projections (the figures most often cited). Under low-cost
assumptions, trust fund assets would begin accumulating in 2014, and the HI trust fund would continue to run a surplus
over the next 10-years. Under the high-cost assumption, the Trustees estimate that the HI trust fund would become
insolvent seven years earlier, in 2019 rather than in 2026.
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Medicare Financial Status: In Brief
is kept in balance and is always solvent. However, the Medicare trustees continue to express
concerns about the rapid growth in SMI costs.
Projected Medicare Spending Growth
The rising costs 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. When Medicare first began, there were
about 19 million beneficiaries. This number has grown to about 52 million enrollees in 2013, and
is expected to increase to about 86 million in 2035, and 116 million in 2085. The Trustees expect
that demographic trends will be the primary driver of cost growth for Medicare over the next
couple of decades, with most of the growth occurring by 2035, by which time all the baby
boomers will have aged into Medicare.17
Over the next 10 years, the Medicare Trustees estimate that total Medicare expenditures will
increase from $574 billion in 2012 to close to $1.1 trillion in 2022. Of the $1.1 trillion, about
$458 billion is expected to be spent on Part A services, $465 billion for Part B services, and
$165 billion for Part D. (See Figure 3.)
Figure 3. Historical and Projected Medicare Expenditures
$1,200
Historical
Estimate
$1,000
Part D
$800
ons
lli
Part B
Bi $600
Part A
$400
$200
$0
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
2017
2022
Source: 2013 Report of the Medicare Trustees, Expanded and Supplementary Tables (historical data); and
Report Tables III.B4; III.C4; and III.D3 (projected data).
17 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds, p. 21.
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Medicare Financial Status: In Brief
Growth in Medicare Expenditures Relative to 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. Under current law, the trustees expect total Medicare
expenditures to increase from 3.6% of GDP in 2012 to about 5.6% of GDP by 2035, mainly due
to the rapid growth in the number of beneficiaries, and then to 6.5% of GDP in 2087, with growth
in health care cost per beneficiary becoming the more significant factor in those years. (See
Figure 4.)
Over the next 75 years, general revenues and beneficiary premiums are expected to play an
increasing role in financing the program. For example, the level of general revenues needed to
fund SMI is expected to increase from 1.5% of GDP in 2013 to an estimated 2.9% in 2087 under
current law.18 Similarly, income from beneficiary premiums is expected to increase from 0.5% of
GDP in 2013 to 1.0% in 2087. In 2012, about 14.5% of total federal income taxes collected that
year were used to fund the general revenue portion of SMI. It is expected that the portion of
income taxes needed to fund SMI will increase to about 19% in 2030, and to almost 26% in 2080.
This amount is in addition to the payroll taxes used to fund the Part A (HI) portion of the
program.
Figure 4. Medicare Cost and Non-interest Income, by Source as a Percentage of
GDP
7%
Total Cost
Historical
Estimated
6%
HI Deficit
5%
4%
General Revenue
3%
State Transfers
Premiums
2%
1%
Taxes on Benefits
Payroll Taxes
0%
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
Source: Summary of the 2013 Annual Reports of the Social Security and Medicare Boards of Trustees, Chart C,
http://www.ssa.gov/oact/TRSUM/index.html.
18 Total Part B outlays were 1.5% of GDP in 2012, and the Trustees project that they will grow to about 2.6% by 2087.
The Trustees also estimate that total Part D outlays will increase from 0.4% of GDP in 2012 to about 1.4% in 2087.
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Medicare Financial Status: In Brief
Unfunded and General Revenue Obligations
The Trustees’ report provides estimates of the present value of the HI deficit—the “unfunded
obligation” over both a 75-year horizon and an “infinite” horizon. This unfunded obligation
represents the dollar amount by which expenditures would need to be reduced or revenue
increased to maintain the financial soundness of the program over a period of time. The Trustees
estimate that the current value of funding needed to cover the expected difference between
income to the HI trust fund and expenditures over the next 75 years is $4.6 trillion. The Trustees
note that this financial imbalance could be addressed by immediately increasing payroll taxes to
4.01% (from the current 2.9%) or by immediately decreasing expenditures by 22%.
The report also provides estimates of the present value of future SMI spending. Although SMI is
automatically funded and does not face a shortfall, the general revenue portion represents
obligated federal spending. The present value of expected general revenues needed to pay for
Medicare Parts B and D over the next 75 years is $22.6 trillion. Adding the HI unfunded
obligation estimate and the present value of future SMI spending for the 75-year period yields a
total of $27.2 trillion.19 In other words, it would take about $27.2 trillion in current dollars to
cover the cost of Medicare not funded through dedicated sources over the next 75 years.
Table 2. Current Value of Estimated Medicare Unfunded Obligations and General
Revenue Spending
Present Value of SMI General Revenues
Present Value of HI Deficit
Part B
Part D
Total
Unfunded obligations
$4.6 trillion
General revenue
$15.7 trillion
$6.9 trillion
$27.2 trillion
through 2087
contributions through
2087
Unfunded obligations
$3.5 trillion
General revenue
$25.0 trillion
$14.4 trillion
$42.9 trillion
through infinite horizon
contributions through
infinite horizon
Source: 2013 Report of the Medicare Trustees, Tables V.G1, V.G3, V.G5.
Comparison to 2012 Estimates
In their 2013 report, the Medicare Trustees reported some improvement in Medicare’s financial
outlook from projections in their 2012 report. For example, the expected depletion date of the HI
trust fund (2026) is two years later than had been projected in last year’s report (2024).
Additionally, over the next 75 years, the estimated HI actuarial deficit (the amount that would
need to be added to the payroll tax to maintain HI solvency for this period) decreased from 1.35%
of taxable payroll in last year’s report, to 1.11% of taxable payroll in the 2013 report. The main
reasons cited include (1) lower projected spending for most services covered under Part A,
especially for skilled nursing facilities, to reflect lower than expected spending in 2012 and other
recent data; (2) lower projected Medicare Advantage (Part C) costs that reflect data suggesting
that provisions of the ACA will reduce growth in these costs by more than had been estimated;
19 The Trustees note that while SMI general revenue transfers represent formal budget commitments under current law,
no provision exists for covering the HI trust fund once assets are depleted.
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and (3) a refinement in certain projection methods that reduces long-term per beneficiary cost
growth. These positive changes were somewhat offset by lower projected levels of payroll tax
income reflecting lower than expected 2012 tax income.
Part B outlay projections are slightly higher than in last year’s report, mostly due to a change in
how Medicare Advantage payment rates will be determined beginning in 2014.20 Projected Part D
expenditures are slightly lower than in last year’s report mainly due to a greater than expected
impact of expirations of the patents for several major drugs in 2012, and the increase in use of
generic drugs.
Alternative Projections
Throughout the 2013 report, the Medicare Trustees caution that actual costs are likely to be higher
than their intermediate projections. For example, because the Trustees are required to base their
estimates on current law, their assumptions assume that the ACA-required Medicare plan and
provider payment reductions are maintained;21 that scheduled physician payment reductions of
approximately 25% under the sustainable growth rate system (SGR) will occur beginning in
2014;22 that the Independent Payment Advisory Board (IPAB) proposals to reduce Medicare costs
will go into effect;23 and that the 2% reduction in Medicare benefit spending under the Budget
Control Act of 2011 sequestration requirements, which began in April 2013,24 will continue
through 2021.
Because of concerns about the accuracy of these projections, the Medicare Trustees asked the
CMS Office of the Actuary to prepare alternative projections based on the assumptions that the
physician payment reductions would not occur, that some of the ACA provider payment
adjustments would be phased out beginning in 2020, and that some reductions proposed by the
IPAB would not occur.25 Under this alternative scenario, long-term Medicare costs are projected
to reach 9.8% of GDP in 2087, instead of 6.5% under current law.26 Additionally, under the
alternative scenario, the HI actuarial deficit would be 2.17% of taxable payroll (compared to
1.11% under current law), which could be addressed by immediately increasing payroll taxes to
20 The determination of future payments will take into account expected future legislative overrides of physician
payment reductions. For additional information, see “Announcement of Calendar Year (CY) 2014 Medicare Advantage
Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter,” April 1, 2013, at
http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2014.pdf.
21 See CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA):
Summary and Timeline, coordinated by Patricia A. Davis for more information.
22 For additional information on the Medicare physician payment system, see CRS Report R40907, Medicare Physician
Payment Updates and the Sustainable Growth Rate (SGR) System, by Jim Hahn and Janemarie Mulvey.
23 For information on the IPAB, see CRS Report R41511, The Independent Payment Advisory Board, by Jim Hahn and
Christopher M. Davis.
24 See CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules, coordinated
by Karen Spar.
25 John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under Illustrative Scenarios with
Alternative Payment Updates to Medicare Providers,” May 31, 2013, http://www.cms.gov/Research-Statistics-Data-
and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/2013TRAlternativeScenario.pdf.
26 Under the illustrative alternative projections, Part B costs would be 4.3% of GDP in 2087, compared to 2.6% under
current law. This is mainly due to the assumption that future physician payment rates would not be reduced as
scheduled under current law.
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Medicare Financial Status: In Brief
5.07% or by immediately decreasing expenditures by 36% (compared to 4.01% and 22%
respectively under current law). Similar to current law projections, the alternative scenario also
projects an HI insolvency date of 2026, although it expects it to occur earlier in the year.
Author Contact Information
Patricia A. Davis
Specialist in Health Care Financing
pdavis@crs.loc.gov, 7-7362
Congressional Research Service
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