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Medicare Funding | Are We Headed for a Cost Crisis?

Medicare funding is largely misunderstood. Many people don’t know  here the financing comes from or how it’s changed over the years. Most are just happy to count on government-provided health insurance once they reach age 65.

Many believe that Medicare is financed by existing beneficiaries through premiums and future beneficiaries through payroll taxes. In reality, these sources only cover about 50% of the program’s costs – which are increasing every year. As concerns grow about Medicare funding, it’s essential to understand where the money comes from and how we can sustain this program going forward.

A Little History
Medicare’s history dates back to President Theodore Roosevelt, who advocated for national health insurance when he ran for office in 1912. This platform fizzled under political pressure but regained momentum with President Harry S. Truman. In 1945, Truman asked Congress to make a national health insurance fund open to all Americans. He wasn’t able to get a bill passed, nor was President John F. Kennedy. It wasn’t until 1965 when President Lyndon B. Johnson signed Medicare into law and the program gained its first enrollee – former President Truman.

Adding Things Up
In 1965, 19 million people were enrolled in Medicare, compared to almost 60 million in 2018 (with 52 million age 65 and older and 8 million under age 65). Medicare costs were $582 billion in 2018, which accounted for about 14% of total government spending. By 2048, this number is projected to increase by almost 60% (an estimate that doesn’t include participants under age 65). Given these numbers, we need to be concerned about the future of Medicare funding.

Here are some key facts to keep in mind:

  • Medicare is the second largest program in the federal budget.
  • In 2018, Medicare provided benefits to 18% of the U.S. population.
  • Medicare covers about one-fifth of all healthcare spending, including 30% of all prescription drugs and 40% of all home healthcare services.
  • Medicare has a big influence on long-term federal spending. It is projected to nearly double from its current 2.9% of gross domestic product (GDP) to 5.9% by 2048. This increase is driven by several factors, including baby boomers retiring, higher healthcare costs and longer life expectancies.

Budget Breakdown – Then and Now
Medicare funding has evolved over the years with a changing mix of premiums, payroll taxes and general fund support. In 1970, payroll taxes financed 65% of Medicare spending versus 36% in 2018. This decline occurred despite several measures, including:

  • A Medicare payroll tax increase from 0.6% to 1.45% in 1986.
  • The elimination of the Medicare earnings cap in 1994.
  • An additional payroll tax increase of 0.9% on higher wage earners due to the Affordable Care Act in 2013.

It’s important to note that Medicare premiums only funded 15% of the program’s overall cost in 2018, which is comparable to 1970 funding. The government’s general fund is now playing a larger role in covering costs. In 2018, the general fund paid 43% of Medicare’s expenses, almost doubling since 1970. By 2048, the fund will likely cover half of these costs.

Due to their expensive nature, it’s not surprising that hospital visits account for about 40% of the Medicare budget. In spite of this, the Medicare spending share for hospital care has decreased since 1965. This is mainly due to higher costs in other areas, most notably prescription drug plans (Part D), which didn’t exist until 2006.

SOURCE: Centers for Medicare and Medicaid Services, The 2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, April 2019. Compiled by PGPF.
NOTES: “Other” includes proceeds from the taxation of Social Security benefits, which help to finance Medicare hospital costs, as well as drug fees and state transfers. Medicare income does not include interest income. Numbers may not sum to 100% due to rounding.

A Program to Fight For
Medicare’s sustainability is crucial. The numbers tell us how much we need this program, but also how fragile its future looks. It is one of the largest and most important programs managed by the government. To keep it running, more reforms are needed to address the higher costs and how they affect the federal debt. Balancing fiscal responsibility and care for those 65 and older will be an ongoing challenge. As we approach another election year, expect Medicare funding to be a political plank in every party’s platform.

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