Medicare is marking its 61st anniversary as both a landmark achievement in American social policy and an increasingly urgent fiscal problem, with federal projections showing the program's costs rising faster than the economy that finances it and its hospital insurance fund facing depletion within the next decade.
President Lyndon B. Johnson signed Medicare into law on July 30, 1965, when only about half of Americans over 65 had hospital insurance and nearly one in three older adults lived in poverty. The program now provides coverage to approximately 69 million people, and coverage for older Americans is essentially universal. It has been called one of the most successful things the federal government has ever done.
Despite that record, Medicare's finances are deteriorating. Most Americans believe they prepaid for the program through decades of payroll taxes, but those taxes, along with premiums and other dedicated receipts, cover only about half of Medicare's total cost. The payroll tax funds only Part A, which covers hospital care. Parts B and D, which cover outpatient services and prescription drugs, are financed differently: beneficiary premiums are set by statute to cover roughly a quarter of those costs, though they covered about 22 percent last year, and general federal revenue covers nearly all of the rest. Because the government borrows heavily, a meaningful share of that general revenue is debt.
The most immediate concern is the Hospital Insurance trust fund. The Medicare trustees project that the fund will be depleted in the second quarter of 2033, while the Congressional Budget Office estimates under its assumptions it would last until 2040. When the trust fund runs out, incoming payroll taxes would cover only 89 percent of scheduled Part A benefits, triggering an automatic 11 percent cut in what Medicare pays hospitals. Some hospitals, particularly in rural and underserved parts of the country, already operate on extremely thin margins.
The trustees have also priced out what it would take to keep the program solvent for 75 years. Options include raising the Medicare payroll tax from 2.9 percent to 3.46 percent today, cutting Part A provider reimbursements by 12 percent today, or combining the two. Waiting does not make that menu easier or cheaper.
The broader financial picture is also worsening. Medicare spent about $1.2 trillion last year, and the trustees project that figure will reach roughly $2.5 trillion by 2035. Measured against the economy, Medicare is projected to climb from 3.9 percent of gross domestic product today to about 6.5 percent by 2050. Demographics explain part of the pressure: at the program's start, 4.5 workers paid into the system for every beneficiary; today fewer than three workers do. But the larger driver is the rising cost of caring for each individual beneficiary, which is growing faster than the economy. In the Congressional Budget Office's latest outlook, enrollment growth adds 20 percentage points to Medicare's spending growth over the coming decade, while rising cost per beneficiary adds 41 points.
Within the federal budget, Medicare is set to become the single largest source of spending growth over the next decade other than interest on the national debt. It stands in contrast to other major federal health programs, which are projected to shrink as a share of the economy while Medicare continues to expand.
This is not a newly discovered problem. The Medicare trustees have formally notified Congress and the president in writing for nine consecutive years, and lawmakers have not acted. A statutory alarm system created in 2003 requires the trustees to issue a formal determination when projected general revenues would need to cover more than 45 percent of Medicare costs within seven years. Two such determinations in a row trigger a formal «Medicare funding warning». That warning imposes deadlines: the president must submit remedial legislation to Congress within 15 days of the next budget, and Congress must consider it on an expedited basis. The trustees issued the warning again in June, and this time the 45 percent threshold is crossed in fiscal 2026, the first year of the projection. Only one president has ever responded to such a warning, in 2008, and no remedial legislation has ever been enacted.
Closing the gap will require both additional revenue and slower growth in costs, since neither approach alone is enough. That means reconsidering how Medicare pays hospitals and other providers, what it pays for prescription drugs, and what it pays for Medicare Advantage plans. Protecting Medicare and practicing fiscal responsibility are not competing goals; they are the same goal. Medicare has kept its promise for 61 years, but the arithmetic that sustained it now demands attention from a Congress that has spent nearly a decade treating a statutory warning as background noise.