Congressional Research Service

Medicare Financing Congressional Research Service

Publisher Marketing: Medicare is the nation's health insurance program for individuals aged 65 and over and certain disabled persons. Medicare consists of four distinct parts: Part A, or Hospital Insurance (HI); Part B, or Supplementary Medical Insurance (SMI); Part C, or Medicare Advantage (MA); and Part D, the outpatient prescription drug benefit. The Part A program is financed primarily through payroll taxes levied on current workers and their employers; these are credited to the HI trust fund. The Part B program is financed through a combination of monthly premiums paid by current enrollees and general revenues. Income from these sources is credited to the SMI trust fund. Beneficiaries can choose to receive all their Medicare services, except hospice, through managed care plans under the MA program; payment is made in appropriate parts from the HI and SMI trust funds. A separate account in the SMI trust fund accounts for the Part D drug benefit; Part D is financed through general revenues, beneficiary premiums, and state contributions. The HI and SMI trust funds are overseen by a Board of Trustees that provides annual reports to Congress. The 2014 report of the Medicare Board of Trustees estimates that the HI trust fund will become insolvent in 2030, four years later than it had predicted in the 2013 report. Because of the way that it is financed, the SMI fund cannot face insolvency; however, the Trustees project that SMI expenditures will continue to grow rapidly, and thus place increasing demands on Medicare beneficiaries and all taxpayers. Additionally, unlike in prior years, the projections in the 2014 report assume that reductions in physician payment rates scheduled under current law will not occur, because these reductions have usually been overridden by Congress. The Trustees estimate that total Medicare costs will increase from 3.5% of GDP in 2013 to 6.9% in 2088. Although the Medicare Trustees report that the financial outlook for the Medicare program appears to have improved as a result of changes made by the Patient Protection and Affordable Care Act as amended (ACA, P. L. 111-148), they caution that the projections in the report are somewhat uncertain, due to the potential for future expenditure reductions not to materialize. As it has done each year subsequent to the enactment of ACA, the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary issued a supplemental analysis that provides illustrative alternative projections based on the assumption that certain ACA provisions affecting Medicare provider payments will be phased out.