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Medicare Financial Status: In Brief
Patricia A. Davis
Specialist in Health Care Financing
September 19, 2014
Congressional Research Service
7-5700
www.crs.gov
R43122
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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 Trust Funds and Sources of Revenue ............................................................................... 2
Hospitalization Insurance (HI) Trust Fund ................................................................................ 3
Sources of HI Revenue ........................................................................................................ 3
HI Trust Fund Mechanics .................................................................................................... 3
Supplementary Medical Insurance (SMI) Trust Fund ............................................................... 4
Sources of SMI Revenue ..................................................................................................... 5
SMI Trust Fund Mechanics ................................................................................................. 5
Medicare Spending in 2013 ............................................................................................................. 5
2013 HI Operations ................................................................................................................... 6
2013 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 2013 Estimates ................................................................................................ 11
Alternative Projections ............................................................................................................ 12
Figures
Figure 1. Sources of Medicare Revenues: 2013 .............................................................................. 4
Figure 2. Projected Number of Years Until HI Insolvency .............................................................. 7
Figure 3. Historical and Projected Medicare Expenditures ............................................................. 9
Figure 4. Medicare Cost and Non-interest Income, by Source as a Percentage of GDP ............... 10
Tables
Table 1. Medicare Expenditures and Enrollment: CY2013 ............................................................. 6
Table 2. Current Value of Estimated Medicare Unfunded Obligations and General
Revenue Spending ...................................................................................................................... 11
Contacts
Author Contact Information........................................................................................................... 13
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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 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.
1 For additional information on the Medicare program, see CRS Report R40425, Medicare Primer, coordinated by
Patricia A. Davis and Scott R. Talaga. More detailed information on Medicare’s financial status may be found in CRS
Report R41436, Medicare Financing, and CRS Report RS20946, Medicare: Insolvency Projections, both by Patricia A.
Davis.
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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Enrollment in Part B is optional; however, most beneficiaries with Part A also
enroll in Part B.
• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries
that covers all Parts 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
28% of Medicare beneficiaries are enrolled in MA.
• Part D covers outpatient prescription drug benefits. This portion of the program
is optional. About 75% of Medicare beneficiaries are enrolled in Medicare Part D
or have coverage through an employer retiree plan subsidized by Medicare.
Beneficiary Costs
In addition to paying premiums for Medicare Parts B and D,4 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 Payments5
Under traditional Medicare, Parts A and B, the government generally pays providers directly for
services on a “fee-for-service” basis using different prospective payment systems or fee
schedules.6 Under Parts C and D, Medicare pays private insurers a monthly “capitated” per
person amount to provide coverage to enrollees. 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 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
4 Beneficiaries enrolled in a Medicare Advantage (Part C) plan must pay Part B premiums as well as any additional
premium required by the MA plan.
5 For additional information, see CRS Report RL30526, Medicare Payment Updates and Payment Rates, coordinated
by Paulette C. Morgan.
6 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 departments, 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.
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
(continued...)
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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
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 HI 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, 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
(...continued)
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, by Mindy R. Levit.
8 These reports may be found at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-
Reports/ReportsTrustFunds/index.html.
9 See archived CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care
Act (ACA), 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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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.
Figure 1. Sources of Medicare Revenues: 2013
Payroll Taxes
38%
General Revenues
73%
73%
Beneficiary Premiums
88%
Payments from States
41%
Taxation of Social
Security Benefits
14%
13%
25%
Interest and Other
2%
1%
2%
6%
13%
3%
5%
2%
TOTAL MEDICARE
HI - PART A
SMI - PART B
SMI - PART D
REVENUE
$251 Billion
$255 Billion
$70 Billion
$576 Billion
Source: 2014 Report of the Medicare Trustees, Table II.B1.
Notes: Totals may not add to 100% due to rounding.
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
current income and accumulated trust fund assets, it is considered to be insolvent.11
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 spending 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.
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Sources of SMI 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.12
The Part B portion of SMI is mainly funded through beneficiary premiums (set at 25% of
estimated program costs for the aged)13 and general revenues (most of the remaining amount,
approximately 73%). In 2014, 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.14
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 cover expenditures in the
upcoming year. If actual costs exceed those estimated when the funding was set, the amount of
financing in the next year (i.e., general revenues and beneficiary premiums) may be adjusted to
recover the shortfall. Similarly, if actual costs are less than expected in a given year, 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.
Medicare Spending in 201315
In calendar year (CY) 2013, Medicare provided benefits to about 52.3 million people (43.5
million age 65 and over, and 8.8 million disabled) at an estimated total cost of $583 billion.16
Most of that amount, $575 billion (99%), was spent on program benefits, with the remaining
amount used for program administration. (See Table 1.)
12 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.
13 For additional information, see CRS Report R40082, Medicare: Part B Premiums, by Patricia A. Davis.
14 This revenue source is included in “Interest and Other” for Part B in Figure 1. For additional detail, see archived
CRS Report R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act (ACA).
15 Data is from the 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, July 28, 2014.
16 This amount reflects Medicare total spending regardless of revenue source; it does not net out non-federal income
(e.g., premiums, state-transfers). By law, the Medicare Trustees report focuses on the financial status of the program’s
trust funds and does not examine the impact of Medicare spending on the overall Federal budget.
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Table 1. Medicare Expenditures and Enrollment: CY2013
SMI
HI - Part A
Part B
Part D
Total
Expenditures (billions)
Benefits
$261.9 $243.8
$69.3
$575.0
Hospital
136.8
41.8
—
178.6
Skilled Nursing
28.4
—
—
28.4
Home Health Care
6.8
11.5
—
18.4
Physician Services
—
68.6
—
68.6
Private plans (Part C)
73.2
72.7
—
145.9
Prescription Drugs
—
—
69.3
69.3
Other
16.7
49.2
—
65.8
Administrative Expenses
$4.3 $3.3
$0.4
$7.9
Total Expenditures
$266.2
$247.1
$69.7
$582.9
Enrollment (millions)
Aged
43.1
40.0
n/a
43.5
Disabled
8.8
7.9
n/a
8.8
Total Enrol ment
51.9
47.9
39.1
52.3
Average expenditures
$5,045 $5,092
$1,773
$11,910
per enrollee
Source: 2014 Report of Medicare Trustees, Table II.B1.
Notes: Totals do not necessarily equal the sums of rounded components; n/a = data not available.
2013 HI Operations
At the beginning of CY2013, the HI trust fund had an asset balance of a little over $220 billion.
During 2013, Part A expenditures were about $266 billion, and approximately $221 billion of that
amount was funded by payroll taxes and $30 billion by interest income and other sources.
Because expenditures exceeded revenue income, close to $15 billion was drawn out of
accumulated assets in the HI trust fund to make up the difference. At the end of 2013, the HI trust
fund had an asset balance of approximately $205 billion. This means that if or when HI spending
exceeds income in future years, the trust fund will be able to spend a total of $205 billion in
addition to what it receives in income.17
2013 SMI Operations
In CY2013, total spending for Part B was close to $247 billion, with general revenues financing
approximately $186 billion (73%) of that amount, and premiums covering most of the remainder.
Total spending for Part D reached about $70 billion in 2013, with over $51 billion (73%) of that
17 In years in which income exceeds expenditures, the surplus amount(s) would be added to this balance.
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amount paid for by general revenues. In addition, approximately $9 billion was covered by state
transfer payments, and $10 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 14% of program costs.
(See Figure 1.)
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 2014 Trustees report projects
slight surpluses in years 2015 through 2022,18 and then a return to deficits in 2023 and thereafter
until the HI trust fund becomes depleted (insolvent) in 2030. At that time, there will no longer be
sufficient funds to fully cover Part A expenditures; although HI would continue to receive tax
income, the funds would only be sufficient to pay for 85% of Part A expenses. The Trustees
suggest that, under these circumstances, beneficiary access to Part A services “would rapidly be
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 revenues 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
30
28 28
25
25
23
19
20
17
15
16
15 15
16
15
12 13 14
13
13 14
12 12
13 12 13
10
10
10
10
11
10
7 7
8
6 7 7
4
5
5 4
5
2 2
0
Source: Intermediate projections of various Medicare Trustees reports, 1970-2014.
Note: No specific estimates were provided by the trustees for years 1973-1977 and 1989.
18 The Trustees attribute this expected period of surplus to ACA provisions that are expected to reduce Part A spending,
to an assumed strengthening economy, and to the sequestration of 2% of Medicare benefit spending.
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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
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
Although the 2014 Medicare Trustees report notes a recent slowing in the growth of U.S. national
health expenditures,19 the Trustees still project that U.S. health care expenditures, including
Medicare spending, will grow faster than Gross Domestic Product (GDP) in most future years.
For Medicare, the projected growth in the prices of health services plus anticipated increases in
utilization rates and in the complexity of services provided are expected to contribute to rising
costs of Medicare relative to GDP. The aging of the baby boom population is also expected to
contribute to significant increases in benefit expenditures.20
Over the next 10 years, the Medicare Trustees estimate that total Medicare expenditures will
increase from $583 billion in 2013 to close to $1.1 trillion in 2023. Of the $1.1 trillion, about
$447 billion is expected to be spent on Part A services, $485 billion for Part B services, and
$172 billion for Part D. (See Figure 3.)
19 The Trustees are uncertain whether this slowing is of limited duration, e.g., due to recent economic downturns, or
whether this may be a longer term trend due to structural changes in the health care industry.
20 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 87 million in 2035, and to 117 million in 2085.
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Figure 3. Historical and Projected Medicare Expenditures
$1,200
Historical
Estimate
$1,000
Part D
$800
ns
io
ill
Part B
B $600
Part A
$400
$200
$0
7
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
3
196
196
197
197
197
197
197
198
198
198
198
198
199
199
199
199
199
200
200
200
200
200
201
201
201
201
201
202
202
Source: 2014 Report of the Medicare Trustees, Expanded and Supplementary Tables (historical data); and
Report Tables III.B4; III.C4; and III.D3 (projected data).
Growth in Medicare Expenditures Relative to GDP
A comparison of Medicare expenditures (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 3.5% of GDP in 2013 to about 5.3% of GDP
by 2035, mainly due to the rapid growth in the number of beneficiaries, and then to 6.9% of GDP
in 2088, 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 1.4% of GDP in 2014 to an estimated 3.3% in 2088 under
current law.21 Similarly, income from beneficiary premiums is expected to increase from 0.5% of
GDP in 2014 to 1.2% in 2088. In 2013, about 13.8% 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 21% in 2030, and to almost 31% in 2080.
This amount is in addition to the payroll taxes used to fund the Part A (HI) portion of the
program.
21 Total Part B outlays are expected to be about 1.5% of GDP in 2014, and the Trustees project that they will grow to
almost 3.2% by 2088. The Trustees also estimate that total Part D outlays will increase from 0.4% of GDP in 2014 to
about 1.4% in 2088.
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Figure 4. Medicare Cost and Non-interest Income, by Source as a Percentage of
GDP
7%
Historical
Estimated
Total Spending
HI Deficit
6%
5%
General Revenue
4%
State Transfers
3%
& Drug Fees
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 2014 Annual Reports of the Social Security and Medicare Boards of Trustees, Chart C,
http://www.ssa.gov/oact/TRSUM/index.html.
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. (See Table 2.) 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 $3.6 trillion. The
Trustees note that this financial imbalance could be addressed by immediately increasing payroll
taxes to 3.77% (from the current 2.9%) or by immediately decreasing expenditures by 19%.
The Trustees 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 $24.7 trillion. Adding the HI unfunded
obligation estimate and the present value of future SMI spending for the 75-year period yields a
total of $28.3 trillion.22 In other words, it would take about $28.3 trillion in current dollars to
cover the cost of Medicare not funded through dedicated sources over the next 75 years.
22 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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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
$3.6 trillion
General revenue
$17.9 trillion
$6.8 trillion
$28.3 trillion
through 2088
contributions through
2088
Unfunded obligations
$1.9 trillion
General revenue
$31.5 trillion
$14.2 trillion
$47.6 trillion
through infinite horizon
contributions through
infinite horizon
Source: 2014 Report of the Medicare Trustees, Tables V.G1, V.G3, V.G5.
Comparison to 2013 Estimates
In their 2014 report, the Medicare Trustees reported some improvement in Medicare’s financial
outlook from projections in their 2013 report. For example, the expected depletion date of the HI
trust fund (2030) is four years later than was projected in last year’s report (2026). 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 1.11% of taxable
payroll in last year’s report, to 0.87% of taxable payroll in the 2014 report. The main reasons
cited include (1) lower than expected spending in 2013 for most HI service categories, especially
for inpatient hospital services; (2) lower projected utilization of inpatient hospital services; and
(3) lower estimates of spending for skilled nursing facilities and home health agencies due to
changes in assumptions of the case-mix of individuals receiving those services. Taxable HI
earnings in 2013 were also slightly higher than expected.
As noted earlier, the Medicare Trustees generally make their projections based on current law.
However, in their 2014 report, the Trustees made an exception with regard to the sustainable
growth rate (SGR) formula for physician payments under Part B. Although under current law,
physician payments are scheduled to be reduced by close to 21% in April 2015, the Trustees
recognized that in almost every year, Congress has overridden these reductions. The Trustees
therefore used a “projected baseline” for Part B spending that assumed that physician payments
would remain at their current levels through the end of 2015, and then would be increased by
0.6% annually through 2023.23
Due to the above change in projection method, the expected growth rate of Part B costs is 0.3
percentage points higher over the next 75 years than the estimate in the 2013 report that was
based on current law (which assumed that the physician cuts would go into effect).24 However,
compared to similar baseline projections contained in the last year’s report “alternative to SGR”
scenario, the expected growth in Part B outlays projected in the 2014 report is slightly lower. This
decrease is attributed to (1) lower than expected spending in 2012 and 2013 for most types of Part
B services; (2) assumptions of reduced future volume and intensity for some types of services
based on recent experience; and (3) lower CPI assumptions. Part B expenditure growth rates
23 This is equal to the average of the SGR overrides over the most recent 10 years.
24 Under current law assumptions, projected 2023 Part B costs in the 2014 report are about 4% lower than projected in
the 2013 report.
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projections for 2013 through 2024 are also affected by the 2% sequestration of Medicare benefit
expenditures under current law.25
Additionally, the 2014 report projected slightly lower Part D outlays compared to last year’s
report due primary to (1) lower projected cost trends over the next 10 years, and (2) higher
expected rebates from drug manufacturers reflecting recent experience. Certain Part D
expenditures are also affected by the 2% sequestration of Medicare benefit expenditures through
2024.26 The Trustees, however, expect that per capita Part D spending will increase more quickly
that other types of medical spending due to a slowing in the growth in generic drug utilization and
an increase in the use and price of specialty drugs.
Even after accounting for the change in methodology used to determine the projected baseline for
Part B spending, this year’s total Medicare spending projections to year 2055 are lower than
equivalent projections in the 2013 report, primary due to lower recent spending and slower
expected growth rates in payments to Part A and Part B providers and Part D plans.
Alternative Projections
Throughout the 2014 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,27 and that Independent Payment Advisory Board
(IPAB) proposals to reduce Medicare costs will go into effect.28 (As noted above, unlike in
previous years, the Trustees assumed that future scheduled physician payment reductions under
the sustainable growth rate system (SGR) will be overridden.)
Because of concerns about the accuracy of these projections, the Medicare Trustees asked the
CMS Office of the Actuary to prepare an alternative projection based on the assumptions 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.29 Under this alternative scenario, long-
25 The Budget Control Act of 2011 (BCA; P.L. 112-25) provided for increases in the debt limit and established
procedures designed to reduce the federal budget deficit, including the creation of a Joint Select Committee on Deficit
Reduction. The failure of the Joint Committee to propose deficit reduction legislation by its mandated deadline
triggered automatic spending reductions (“sequestration” of mandatory spending and reductions in discretionary
spending) in fiscal years 2013 through 2021. The American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240)
delayed the automatic reductions by two months, while the Bipartisan Budget Act of 2013 (BBA, P.L. 113-67)
extended sequestration for mandatory spending for an additional two years—through FY2023. On February 15, 2014,
the President signed into law an amended version of S. 25 (P.L. 113-82), which, among other things, included a
provision to extend BCA’s sequester of mandatory spending through FY2024. Also see CRS Report R41965, The
Budget Control Act of 2011, by Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan, and CRS Report R43411,
The Budget Control Act of 2011: Legislative Changes to the Law and Their Budgetary Effects, by Mindy R. Levit.
26 See CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules, coordinated
by Karen Spar.
27 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.
28 For information on the IPAB, see CRS Report R41511, The Independent Payment Advisory Board, by Jim Hahn and
Christopher M. Davis.
29 John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under Current Law, the Projected Baseline,
and an Illustrative Alternative Scenario,” August 28, 2014, http://www.cms.gov/Research-Statistics-Data-and-Systems/
Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/2014TRAlternativeScenario.pdf.
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term Medicare costs are projected to reach 8.8% of GDP in 2080, instead of 6.8% under the
Trustees’ baseline projections. Additionally, under the alternative scenario, the HI actuarial deficit
would be 1.92% of taxable payroll (compared to 0.87% under the projected baseline), which
could be addressed by immediately increasing payroll taxes to 4.82% or by immediately
decreasing expenditures by 33% (compared to 3.77% and 19% respectively under current law).
The alternative scenario also projects that HI insolvency would occur one year earlier, in 2029.
Author Contact Information
Patricia A. Davis
Specialist in Health Care Financing
pdavis@crs.loc.gov, 7-7362
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