Have you ever heard something nice about Medicare in the last few years?
It’s the behemoth among our country’s fragmented medical systems. We also pay for it with taxes. So why is it always close to running out of money? Today you’ll learn what insolvency means, how our national coverage actually works, and what we should do about their unintended consequences.
Patients have a right to know what they’re paying for. Medicare, our national insurance for seniors, is no exception. Knowing that an entitlement will be weaker by the time you age into it is the first step in preparing for other coverage ahead of time. As of this year, the Medicare Board of Trustees still estimates our national insurance for seniors will become insolvent in 2028. That’s an improvement from last year’s report claiming 2026 as the doomsday. I’ll spend a bit of time later on the economics behind that, but what does insolvency mean? What happens when Medicare runs out of money? It’s best to start with how the program’s funded. It turns out taking care of the country’s seniors isn’t cheap. The full cost of Medicare is 12% of our federal budget. However, Medicare did make a surplus in 2021 behind $888B of revenues. ~80% of that is funded by a combo of general income taxes and payroll taxes. The Medicare and Social Security taxes draining your paycheck now make up your safety net at 65. Anyone younger than 65 might wonder if there’s any point to giving Uncle Sam that money if there’s no pot of gold at the rainbow’s end. Breaking down Medicare’s four sections (part A, B, C, and D) tells another story.
Part A, AKA the hospital insurance trust fund, is what you inherit upon turning 65. That pays for the kind of inpatient, overnight care I discussed in a recent episode. Part B is health insurance for all the usual medical work you can think of, but you have to sign up and pay a monthly premium to get those benefits. Part C is a bit of a zebra among the horses because that section of Medicare makes deals with insurance companies to sell private coverage. Last but not least, part D is for drugs. Because of these choices you have to make, do not take your foot off the gas pedal at 65 for healthcare or anything else. Each section has different funding streams, but income taxes are the overall support beams. When the government says that Medicare’s becoming insolvent, part A (i.e. the hospital care) is the specific area that’s running dry. Parts B and D are within a different trust fund supported by taxes and premiums from its members—both those programs are projected to stay in place for several decades. That doesn’t mean they’re invincible, but government accounting can be flexible. Math works differently for federal entitlements.
Let’s think about a classic equation: revenue minus costs equals profit. A regular business can’t lose money forever unless they have unlimited cushion from a venture capitalist or institutional investor. Medicare’s hospital insurance (i.e. part A), among other parts of the government, can ignore this. Part A operates on a ‘paygo’ basis, meaning that every new expense has to be offset by revenue at some point. This is similar to what the government tried to do with major bills like the $1.9T American Rescue Plan. The taxes Medicare brings are credited to the US Treasury as government securities (like bonds) that sit on the trust fund’s books and generate interest. When inpatients get their benefits, the treasury makes the real payment and then Medicare writes off a corresponding amount of their government securities.
All is well when payments stay below taxes and interest income. That doesn’t happen very often. From 2008 thru 2021, there have been only three years where Medicare part A had a surplus. Medicare then redeems bonds to plug those multi-billion-dollar holes. But what if there are no accessible government investments? The treasury has to keep borrowing to make up those gaps for Medicare alongside the rest of our country’s needs. It turns out that Medicare can’t escape a different but also timeless bit of math: equity equals assets minus liabilities. Because of this, insolvency happens when an entitlement can’t pay benefits with tax revenue, interest-bearing assets, and redeeming bonds (i.e. the ratio of asset reserves to annual program costs goes negative).
For now, let’s step away from the finance. Insolvency is no revelation: the government publishes their historical Medicare insolvency projections. Why is hospital insurance going through a near-constant state of money trouble? Overall demand for healthcare is rising faster than workers can pay for it with taxes. More of our population is elderly and needs extended care. The economy plays a role too—weakening GDP expectations invites more unemployment leading to less payroll taxes. The government already borrows heavily and can’t add more reserves to Medicare part A forever. In order to keep back insolvency for a while longer, Congress may adjust taxes and budgeting, Medicare could reduce physician fees, or a public health transformation needs to happen. But since Congress has trouble agreeing what today is, and given the fact that our country is getting older, major change is slow. That being said, Medicare won’t disappear; that’s not what insolvency is. If the worst comes to pass in 2028, inpatient benefits would fall 10% through 2046 and then 20% through 2096. There is no Social Security Act provision declaring what happens next; at this time, the treasury can’t use general revenues (i.e. giving the money directly rather than paying interest on bonds) to cure the shortfall without legislation. Patient benefits and physician payments would be delayed. The rest of Medicare that enrollees sign up for remains the same. Medicare’s hospital insurance and SMI fund combined will still grow from 3.9% of GDP now to 6.2% by 2046. There are ~64M seniors on Medicare today, and those using parts B and D pay $204 a month on average for those benefits. The government also has more latitude for allocating taxes to backstop the fund, but the Congressional Research Service estimates that personal and corporate income tax dollars would need to climb ~20% to maintain the current share of part A/B/D contributions. The Social Security Administration’s 2022 report details these outlooks a bit more—that source among others will be on my page at rushinagalla.substack.com.
There’s no shortage of politicians and economists throwing possible solutions at the wall of Medicare’s problems, hoping one will stick. It’s easy to look outward for proposals, whether they be from our elected officials, hospitals, physicians, or pharmacies. Fiscal policy can help bridge the funding gap but the unintended consequences of changing our tax code or budget might a cure worse than disease. Keeping physician and hospital payments below inflation just incentivizes our country’s providers to shun Medicare patients, who may get sicker due to deferred care. The young have to budget even more now to compensate for reduced benefits in the decades to come. You get the idea—the externalities go on and on. Not to mention that medical conditions can be out of our control. Let’s still accept those facts, but work to improve ahead of an obstacle rather than be a victim of it. We human beings have incredible adaptation skills. There’s no reason to let ourselves grow old and be resigned to withering away. Unpopular doctors tell you to eat well, sleep more, and move more. They’re correct, but that framing doesn’t work. People respond to incentives. Think of it like this: spending a little time every day to eat better, sleep better, and think better will cut your future Medicare premium and liabilities by $X. Now patients can create a positive butterfly effect helping both themselves and their fellow Americans in old age with a less-strained medical system. Enough big-picture stuff. At the ground level, doctors are trying to reach more patients and streamline medicine by using more physician assistants and nurse practitioners. Is this good for your local healthcare? You’ll find out in next week’s pod. Stay tuned and subscribe to Friendly Neighborhood Patient for all the healthcare commentary you need. I’ll catch you at the next episode.
