The two parts of traditional
Medicare are funded in very different ways. Part A, which covers
in-patient hospital bills, is financed by a trust fund known as
the Hospital Insurance Fund (HI Fund).
The 1.45 percent that the government deducts from
your paycheck -- and also from your employer -- is placed in the
HI Fund to cover Part A services. This payroll tax provides the
bulk of the money that flows into the HI Fund; that money is in
turn used to cover Part A expenses.
Part B, which covers doctor appointments, is run
by a separate trust fund, called the Supplemental Medical Insurance
Trust Fund (SMI Fund). Enrollee premiums and funds from the general
budget supply the SMI Fund, which then pays for Part B services.
The SMI Fund's premiums and federal tax revenues
are adjusted annually to cover the cost of Part B benefits; therefore,
the fund cannot be overdrawn. Payments into the HI Fund, by contrast,
are based on the number of workers paying into the system and
are not adjusted each year, so the fund can become insolvent.
HI Fund trustees meet annually to predict the fund's solvency.
In 2003, the trustees projected that the HI Fund
would run out of money by 2026. Because the SMI Fund can be covered
through additional spending by the federal government, the Congressional
Budget Office (CBO) uses the HI Fund to gauge Medicare's overall
At face value, Medicare appears healthy. Besides
the trustees' prediction that the HI Fund has enough money to
function until 2026, government spending and premium adjustments
guarantee the SMI Fund will remain solvent. The federal government
shows both Medicare trust funds running solid surpluses at a time
when the overall federal budget is in record deficit.
But there are problems on the horizon for both
funds. Most of the money in the funds for Parts A and B of Medicare
are credits from the government's general coffer. In other words,
despite the premiums and payroll taxes that flow into the funds
from employers and employees, the vast majority of Medicare's
income comes from other parts of the government, known as intragovernmental
transfers. For example, federal employees receive Medicare benefits,
so the federal government pays taxes to Medicare just like a private
employer would. Also, the SMI Fund is aided by spending from the
general federal government budget. Both of these sources arrive
in the trust funds via intragovernmental transfers.
In fact, without the government's promise to pay
itself through these intragovermental transfers, Medicare is actually
running a deficit in 2003.
The aging U.S. population presents another major
challenge to Medicare's financial future. There are currently
37 million Americans aged 65 and over, but the baby-boomer generation
will begin retiring in 2010. By 2050, the number is expected to
reach 82 million.
Because Medicare funds rely on employee payroll
taxes to pay for recipient services, the ratio of those employed
to those drawing on Medicare benefits is crucial to maintaining
future solvency. Currently, there are 3.7 workers for every person
receiving Medicare benefits. HI Fund trustees calculate that there
will be 2.4 workers for every retiree in 2030 and only 2 workers
per retiree in 2075; each individual employee will be responsible
for a far greater share in supporting each recipient.
With fewer workers to support Medicare recipients,
one of three things will have to happen -- either payroll taxes
on the working population will need to be increased, or the government
will need to pay a greater share, or the government will have
to limit or change benefits.
As it is structured now, the cost to keep Medicare
running will increase by 5.9 percent in 2003 and then 6.8 percent
annually over the next ten years. Considering Medicare in the
broader picture of the federal budget, the CBO sees Medicare costs
increasing from 2.5 percent of the 2002 GDP to 9.2 percent of
the GDP in 2075.
Medicare has other problems besides the shrinking
worker to beneficiary ratio. Not only will there be more people
who are 65 and older in the decades to come, but the number of
those people aged 85 and older, is slated to increase as well.
Today 4.3 million people fall into the "oldest-old"
category, but the number is expected to increase to more than
8.5 million by 2030.
These "oldest-old" will likely require
more expensive, long-term health care services, and such coverage
may increase Medicare's expenses. Also, as medical advances tend
to drive up health care costs, Medicare expenditures can reasonably
be expected to increase as more recipients receive such new treatments.
Medicare projections are based entirely on the assumption that
the Medicare program will remain as it is in its current form.
Adding new benefits, such as a prescription drug benefit, is likely
to exacerbate the situation unless an overhaul to Medicare's funding
-- By Emily Robinson, Online NewsHour