What is the Medicare trust fund, and how is it financed?
The Medicare trust fund finances health services for beneficiaries of Medicare, a government insurance program for the elderly, the disabled, and people with qualifying health conditions specified by Congress. It is financed by payroll taxes, general tax revenue, and premiums paid by enrollees.
The Medicare trust fund comprises two separate funds. The hospital insurance trust fund is financed mainly through payroll taxes on earnings and income taxes on Social Security benefits. The Supplemental Medical Insurance trust fund is financed by general tax revenue and premiums paid by enrollees.
Hospital Insurance Trust Fund
The hospital insurance (HI) trust fund, also known as Part A of Medicare, finances health care services related to stays in hospitals, skilled nursing facilities, and hospices for eligible beneficiaries, who are mainly people over age 65 with a sufficient history of contributions to the program.
The HI trust fund had receipts of $275 billion and a balance of $205 billion in 2015 (table 1). The fund’s chief revenue sources are payroll taxes and income from the taxation of Social Security benefits. Interest payments on trust fund balances, premiums from voluntary enrollees who are not eligible for Medicare coverage based on their earnings records, transfers from the general fund and the Railroad Retirement account, and miscellaneous receipts supply the remainder of revenues.
Supplemental Medical Insurance Trust Fund
The Supplemental Medical Insurance (SMI) trust fund finances two voluntary Medicare programs: Part B, which mainly covers physician services and medical supplies, and Part D, the newer prescription drug program.
The SMI trust fund received $369 billion in revenues and had $69.5 billion in assets in 2015 (table 2). Unlike the HI fund, there are no dedicated payroll taxes for SMI. Instead, the fund’s chief revenue sources are contributions from the general fund (receipts from other sources, such as individual income taxes, corporate taxes, and excise taxes), premiums from participants (there are separate premiums for Parts B and D), and a small amount of interest on trust fund balances and miscellaneous receipts. Because the bulk of SMI’s funding comes from the general fund, the trust fund balance mainly serves to cover temporary shortfalls, and is kept relatively low. High reserves are not required as long as general fund revenues and borrowing automatically rise with costs.
Solvency and Budget Pressures
Like the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds, the HI trust fund faces long-term deficits (figure 1). (The SMI fund, primarily financed by the general revenue, does not face these trust fund imbalances, though it still adds growing pressure to the overall budget.) As the number of Medicare beneficiaries increases from about 55 million in 2015 to 81 million by 2030, the number of workers per beneficiary will decline from 3.1 to 2.4. The cost of health care has increased rapidly as well—though this dynamic has slowed but not stopped in recent years, during and following the Great Recession—putting further pressure on program costs. The HI trust expenditures exceeded taxes for several years up to 2014, and though its outflows and inflows have roughly stabilized for a few years, it is projected to be exhausted by 2028. These pressures now and in the future will force lawmakers to find ways to finance promised benefits or make cuts in services or provider payment rates.
Centers for Medicare and Medicaid Services. 2016. “2016 Expanded and Supplemental Tables.” Washington, DC: Centers for Medicare and Medicaid Services.
Social Security Administration. 2016. Annual Statistical Supplement to the Social Security Bulletin, 2015. Table 8.A1. “Hospital Insurance, Calendar Years 1966–2014 (in Millions of Dollars)” and Table 8.A2. “Supplementary Medical Insurance, Calendar Years 1966–2014 (in Millions of Dollars).”
Centers for Medicare and Medicaid Services. 2016a. 2016 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Washington, DC: Centers for Medicare and Medicaid Services.
———. 2016b. “2016 Expanded and Supplemental Tables.” Washington, DC: Centers for Medicare and Medicaid Services.
Congressional Budget Office. 2016. The 2016 Long-Term Budget Outlook. Washington, DC: Congressional Budget Office.
Shatto, John D., and M. Kent Clemens. 2016. “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers.” Washington, DC: Centers for Medicare and Medicaid Services.