As Medicare celebrates its 61st anniversary this month, it's a time to reflect on its accomplishments and also address its challenges. The program has come a long way since its inception in 1965, when only half of Americans over 65 had hospital insurance and nearly a third lived in poverty. Today, coverage for older Americans is nearly universal, with 69 million people relying on the program.
Medicare's success story is a testament to the government's ability to implement effective policies. However, the program is facing two major problems that require attention. The part of Medicare that can run out of money is on the verge of depletion, and the part that can't is quietly taking over the federal budget.
The first issue revolves around the financing of Medicare. Most Americans believe they prepaid for the program through a lifetime of payroll taxes, but this is not the case. In reality, payroll taxes, premiums, and other dedicated receipts cover only about half of what Medicare costs. The Hospital Insurance trust fund, which is financed by the payroll tax, is projected to run out of money in 2033, according to the trustees. This would trigger automatic cuts in what Medicare can pay providers, resulting in an immediate 11% cut in what Medicare pays hospitals.
The second problem is the ballooning cost of the program. Medicare spent about $1.2 trillion last year, and the trustees project roughly $2.5 trillion by 2035, a climb from 3.9% of the entire American economy today toward 6.5% by 2050. The cost of caring for each individual beneficiary is growing faster than the economy that funds it, with enrollment growth adding 20 percentage points to Medicare's spending growth over the coming decade and rising cost per beneficiary adding 41.
The Medicare trustees have been sounding the alarm for nine years, formally notifying Congress and the president that the program's spending and revenues are getting out of balance. However, Congress and the president have done nothing to address the issue. In 2003, Congress built an alarm system to warn when Medicare spending and revenues were getting dangerously out of balance, but it has been ignored.
The answer to Medicare's financial woes is not simply a bigger check or a smaller one. The program's finances will need both additional revenue and slower cost growth, as neither alone closes the gap. This requires confronting what actually drives spending per beneficiary, including how we pay providers, what we pay for drugs, and what we pay for Medicare Advantage plans. Protecting Medicare and practicing fiscal responsibility are not competing goals. They are the same goal.
