Why It Matters
A recent Congressional Research Service report on Medicare’s financial outlook shows that the program’s Hospital Insurance Trust Fund, which finances Medicare Part A, is projected to become insolvent in 2033. Medicare covers approximately 70.7 million beneficiaries, while the HI Trust Fund is expected to exhaust its reserves in the second quarter of 2033. At that point, incoming revenues are projected to cover 89% of Part A expenses.
The insolvency projection applies specifically to Medicare Part A, which covers inpatient hospital services, skilled nursing facility care, hospice care and certain home health services. Parts B and D are financed primarily through general revenues and beneficiary premiums and therefore are not subject to the same insolvency constraint.
The Big Picture
The HI Trust Fund is financed primarily through payroll taxes paid by workers and employers. Additional revenue comes from sources including taxes on Social Security benefits, premiums paid by certain beneficiaries and interest on trust fund assets. The Medicare Board of Trustees annually projects the fund’s financial condition and the point at which its reserves would be depleted.
The trustees project that the HI Trust Fund will exhaust its reserves in 2033, unchanged from the previous year’s projection. Although the depletion date did not change, the program’s long-range financial outlook worsened. The actuarial deficit increased from the previous trustees report, meaning a larger change in revenues or expenditures would be required to bring the fund into actuarial balance over the 75-year projection period.
The deterioration reflects several factors affecting both Medicare revenue and spending. Lower projected fertility and immigration reduce the future number of workers paying Medicare payroll taxes relative to beneficiaries. Changes in federal tax law also affect revenue flowing into the trust fund because a portion of federal income taxes on Social Security benefits helps finance Medicare Part A.
The HI Trust Fund can continue paying scheduled Part A benefits while it has sufficient assets and incoming revenue. Once those reserves are depleted, however, incoming revenue would initially cover only about 89% of Part A expenditures.
No provisions in the Social Security Act specifically govern what would happen if the HI Trust Fund became insolvent. Medicare would continue receiving dedicated tax and other income, but the program would lack sufficient resources to pay all scheduled Part A expenditures. CRS notes that uncertainty remains over how the Centers for Medicare & Medicaid Services would administer payments under those circumstances.
Congress could address the shortfall by increasing revenues, reducing expenditures, providing another source of financing or combining those approaches. Historically, changes in Medicare spending and financing have repeatedly altered the projected date of HI Trust Fund insolvency.
The Bottom Line
The projected depletion of the HI Trust Fund does not mean Medicare or Part A would cease operating in 2033. Dedicated revenues would continue flowing into the trust fund, but those revenues would initially be sufficient to cover only about 89% of scheduled Part A expenses.
The 2033 projection therefore represents the point at which Medicare Part A would no longer have sufficient trust fund resources to pay scheduled benefits in full under current financing. Because federal law does not establish a specific procedure for administering Part A after trust fund depletion, congressional action before insolvency could determine how the program addresses the financing shortfall.
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