How Medicare is Funded – and Why It Cannot Go Bankrupt

Warning:  This is Going To Come as a Shock

Medicare is going bankrupt. How do we know this?  Well everyone says that it is.  It’s right there on the video tape.  Well Medicare is not going bankrupt.  It will not run out of money and shut down.  Seniors are not going to be left without health care even if no changes are made. [There is a cost problem, more on that at another time.]

To understand this you need to understand the parts of Medicare and how those parts are funded.  A good place to start is the Trustees’ Report, something Rep. Ryan and his supporters have apparently never done.  Here it is, in all its glorifying boring prose.

Medicare is made up of three parts

Part A – Hospital Insurance – HI

Part B – Supplemental Medical Insurance – SMI

Part D – Prescription Drug Coverage

So Part A covers hospital care, Part B covers doctors’ visits and tests and other related procedures and Part D covers Prescription Drugs.  Here is what the Trustees say about Parts B and D.

The SMI trust fund is adequately financed over the next 10 years and beyond because premium and general revenue income for Parts B and D are reset each year to match expected costs.

Yes, that’s right, there is no problem with funding Parts B and D; they are not going bankrupt because the Congress is required to fund them out of general revenues and premiums.  So unless the Congress does not uphold the law seniors may rely on doctor care and prescription drug coverage for an unlimited amount of time.

The so-called “bankruptcy” problem is with Part A.  Part A is funded by payroll taxes.  In the past payroll taxes have been more than enough to pay Part A benefits, and the surplus has accrued in a Trust Fund.  The Trust Fund invests in government bonds and earns interest, just like any other well managed risk averse Trust Fund.  The surplus building of the Trust Fund has stopped. Now and going forward Medicare Part A costs will be more than the payroll tax revenue.  The Trust Fund will be slowly liquidated, and it is this Fund which has a projected zero balance in 2024.

So, what are the conclusions from all of this.

Physician Services, Diagnostic Services and Prescription Drug Coverage will continue indefinitely.  It is not going bankrupt.

Hospital Insurance will have only the payroll tax revenues to fund payments, which is expected to be less than the required payments.  One of several things will happen.

1.      Hospital will have to take lower payments

2.      Recipients will have to make greater co-payments for hospital services

3.      The Payroll Tax that funds Part A will have to rise

4.      Government will fund the shortfall out of general revenues.

5.      Ways will be found to reduce the growth in costs of the Hospital Insurance.

Notice that none of these options involve Medicare going bankrupt and ceasing to exist.  That is just a scary story that children tell their elderly parents to get them to eat their vegetables.