MEDICARE'S REAL FISCAL CRISIS IS MUCH WORSE THAN TRUST FUND INSOLVENCY

The following information was released by the Cato Institute:

Romina Boccia and Ritvik Thakur

Medicare1 isn't just facing a trust fund shortfallit's threatening America's entire fiscal future. While headlines warn that the Hospital Insurance (HI) Trust Fund2 will run out in 2033, the real danger comes from a different part of the program: Supplementary Medical Insurance (SMI). SMI refers to Medicare spending by Part B (doctors' visits and outpatient services) and Part D (prescription drugs). Unlike the HI fund, SMI is set up to take whatever it needs from taxpayersno limits, no debate. In 2024 alone, Medicare Parts B and D financed under SMI added $498 billion straight onto the national credit card. Unless Congress makes fundamental reforms to Medicare, federal healthcare spending will drive the US toward a catastrophic fiscal crisis.

The SMI "Credit Card" Problem

Per the latest projections, the HI fund will only be able to pay 89 percent of its promised benefits in 2033, resulting in automatic benefit reductions. Make no mistake, Congress should work to avoid trust fund insolvency and adopt benefit reforms now to avert more draconian cuts or punishing tax increases later. However, reforms to Medicare must extend far beyond the HI Trust Fund if the US hopes to improve its worsening fiscal position meaningfully.

As seen in the figure below, SMI is the real budgetary challenge. Part B (doctors' visits and outpatient services) is the largest and fastest-growing portion of Medicare, drawing most of its resources from the general fund of the Treasury. In 2024, SMI received 73 percent of its revenue from transfers from the Treasury. The total was $498 billion compared to $170 billion from premium payments.

If the federal government were running a surplus, transfers from the Treasury to SMI would come from other sources of government revenue (i.e., income tax, corporate tax, etc.). However, because the federal government is consistently running deficits, SMI contributes directly to government borrowing.

Think of SMI like a credit card with no spending limit. Furthermore, this spending occurs automatically without the need for reauthorization or action-forcing legislative limits, such as the Hospital Insurance (Part A) trust fund insolvency deadline. Congress has abdicated fiscal responsibility for Medicare's doctors' services and outpatient care (Part B) and prescription drug coverage (Part D) by putting this spending on autopilot through a direct (mandatory) spending designation in the budget.

Over the next decade, SMI expenditures are expected to continue growing as healthcare spending increases. In 2025, total SMI spending is 2.5 percent of GDP. By 2035, it is projected to grow to 3.6 percent of GDP. And by 2045, it could soar past 4.1 percent of GDP.

This rapid and unsustainable growth in Medicare expenditures results in significant federal borrowing. Over just the next decade, transfers from the Treasury (borrowing) to finance SMI spending will result in $8.1 trillion in additional federal debt, or an estimated $9.5 trillion if interest costs are included. In other words, SMI accounts for about 45 percent of the entire federal deficit of $21.1 trillion over the next decade3 (see Figure 3 below). Terrifyingly, Medicare's deficit impact will continue to grow over subsequent decades, again, largely due to the SMI Fund's Part B expenditures.

Reform Options

Congress can strengthen Medicare by shifting power away from Washington and allowing market forces to work. A market-based system would give seniors more choices while putting downward pressure on prices. Michael Cannon suggests Medicare should operate like Social Security: instead of paying hospitals and insurers directly through fee-for-service, Medicare would provide seniors with a fixed cash benefit. Beneficiaries could then use that subsidy to buy insurance and pay for care directly.

A similar option is "premium support," where Medicare provides seniors with a voucher to shop for private health insurance. Both reforms create real competition andcruciallyput a cap on Medicare's spending.

If Congress won't go that far, a second-best approach is to place Medicare on a strict budget. Under this model, fee-for-service payments would be limited to a sustainable growth path, forcing the program to live within its means. American Enterprise Institute scholar James Capretta suggests combining HI and SMI into one unified Medicare trust fund.

In any case, the status quounlimited, open-ended commitmentsis unsustainable.

Structural reforms are essential, but smaller fixes can still help narrow the gap between Medicare spending and revenues. Options include adopting site-neutral payments, reducing Medicare Advantage overpayments, raising the eligibility age, and raising Part B premiums. Together, these changes could save more than a trillion dollars over the next decade. Yet even combined, they fall far short of making Medicare financially sustainable.

Ultimately, only market-based reform can put Medicare on a sustainable, long-term path. The danger isn't just the Hospital Insurance trust fund running dry in 2033Medicare is already adding hundreds of billions to the debt each year through its Supplementary Medical Insurance program. Waiting for the trust fund deadline would recklessly accrue another $8.4 trillion in debt (including interest costs and HI cash flow deficits), and even then, it is not clear that Congress would be willing to modernize the Medicare program beyond plugging the hospital insurance (Part A) trust fund hole. As federal borrowing grows, the costs will be steep: higher interest payments, slower economic growth, the crowding out of investments, and eventually a fiscal crisis. Congress should act nowwell before the deadlineto modernize Medicare with seniors and working Americans in mind.

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1 Medicare is a federal health insurance program that primarily serves US residents over the age of 65. Medicare has four parts (A, B, C, and D). Part A (Hospital Insurance) covers inpatient hospital services and is mainly financed through payroll taxes via the HI Trust Fund. Part B covers doctors' services and outpatient care, while Part D covers prescription drugs. Part C refers to private plans that deliver Part A and B benefits, more commonly referred to as Medicare Advantage. Parts B and D fall under the so-called Supplementary Medical Insurance (SMI) Fund, financed via beneficiary premiums and automatic general revenue transfers from the Treasury. The SMI "Fund," however, is not a trust fund at all. It is a no-limit credit card mislabeled as a "fund."

2 Michael Cannon argues that the Hospital Insurance Trust Fund is not a 'trust fund' at all and should be called the "Medicare spending authorization countdown clock." Its structure is just like the Social Security trust fund myth.

3 This 21.1 trillion deficit over the next decade is according to the January 2025 Congressional Budget Office Baseline. While it is the most recent baseline, it fails to account for the 4.1 trillion deficit increase from the passage of the One Big Beautiful Bill Act.

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