The 2024 Medicare Trustees Report contains good news: It projects that the date of depletion of the Medicare Part A Hospital Insurance (HI) Trust Fund will be 2036, five years later than the report issued last year. Trust fund depletion dates are a common way of tracking the status of the trust funds since, if annual income is not sufficient, full scheduled benefits in the law cannot be paid after trust fund asset reserves are depleted. The Trustees also observe that lawmakers have never allowed reserves held in the Medicare HI trust fund to become fully depleted.
Like many previous reports, the 2024 Trustees report finds that long-term financial challenges for Medicare remain, since spending is rising as a percentage of Gross Domestic Product (GDP). The 2024 report therefore urges policymakers in the legislative and executive branches to take action as soon as possible to adjust revenues and provider payment rates. Encouragingly, the Trustees point to the positive impact that a strong economy has on the program, observing that “HI income is projected to be higher than last year’s estimates because both the number of covered workers and average wages are projected to be higher.”
Starting with the Affordable Care Act (ACA) enacted in 2010, improvements to the financial health of Medicare have been realized through implementation of Medicare payment and delivery system reforms that emphasize coordinated care especially for people with multiple chronic conditions. For example, ACA incentives to reduce the rate of hospital readmissions and protocols are helping practitioners to more seamlessly coordinate care for Medicare beneficiaries across multiple settings. But the Trustees report calls for additional action.
The 2024 Trustees report notes that “a transformation of health care in the U.S., affecting both the means of delivery and the method of paying for care is…a possibility. Private health insurance and Medicare are taking important steps in this direction by initiating programs of research into innovative payment and service delivery models, such as Accountable Care Organizations, patient-centered medical homes, improvement in care coordination for individuals with multiple chronic health conditions, better coordination of post-acute care, payment bundling, pay for performance, and assistance for individuals in making informed health choices. Such changes have the potential to reduce health care costs and cost growth rates and could, as a result, help lower health care spending.”
With regard to long-range fiscal projections over 75 years, the Trustees Report observes that “total Medicare expenditures were $1.037 trillion in 2023, and forecasts that “expenditures will increase in future years at a faster pace than either aggregate workers’ earnings or the economy overall.” As a percentage of Gross Domestic Product (GDP), the report projects that spending will increase from 3.8 percent in 2023 to 6.2 percent by 2098 (based on an intermediate set of assumptions).
Background
Each year, the Trustees report on the current status and projected condition of Medicare’s two trust funds over the next 75 years – the Hospital Insurance (HI) Trust Fund that finances Part A inpatient hospital and related care, and the Supplementary Medical Insurance (SMI) Trust Fund that finances both Part B physician and outpatient care, and Part D that pays for outpatient prescription drugs. Data for 2023 shows in that year that Medicare covered 66.7 million people: 59.1 million aged 65 and older and 7.6 million disabled. About 48 percent of all beneficiaries were enrolled in Part C private health plans that contract with Medicare to provide Part A and Part B health services, which are known as “Medicare Advantage” plans.
The Trustees project small annual surpluses for the HI Trust Fund in 2024 through 2029. However, deficits will resume in 2030, requiring redemption of special issue U.S. government bonds held in the trust fund until the fund’s projected depletion in 2036. This pattern is not new: The HI Trust Fund has not been adequately financed in the short range (10 years) since 2003. Over the intermediate term, Medicare’s costs will grow faster as compared to Social Security: In 2024, Medicare’s annual cost is about 74 percent of Social Security’s annual cost. But by 2045, Medicare’s cost will nearly equal that of Social Security. The costs of both programs are assumed to grow faster than GDP through the mid-2030’s, fueled by the rapid aging of the U.S. population brought about by the baby boomer generation’s mass retirement, and by a trend of lower birth rates. Thereafter, expenditures will continue to increase at a slower rate through 2076.
The Medicare Part A (HI Trust Fund) is primarily financed by payroll taxes on earnings that are paid by employees, employers and the self-employed. Employees and employers each pay 1.45 percent in taxes on all earnings. The self-employed contribute 2.9 percent, the equivalent of the combined employer and employee tax rates.
Starting in 2013, high-income workers began paying an additional 0.9 percent of their earnings above $200,000 (for single workers) or $250,000 (for married couples filing joint income tax returns). Since income thresholds for determining eligibility for the additional HI tax are not indexed, the Trustees note that over time, an increasing proportion of workers will pay a higher HI tax rate.
Medicare Parts B and D (SMI Trust Fund) are financed by payments from federal general fund revenues (about 75 percent) and by monthly premiums charged to beneficiaries (about 25 percent). Because Medicare Part B and Part D are automatically financed through general revenues and beneficiary premiums to meet estimated program costs each year, the SMI Trust Fund is adequately financed in both the short and long term.
Financial Outlook of the Medicare Program
The Medicare Part A (HI) Trust Fund will be actuarially solvent until 2036, which is five years later than the estimate made last year of asset depletion. Absent legislative fixes to shore up the HI Trust Fund, HI revenues starting in 2036 are projected to be able to cover 89 percent of incurred program costs. Under current law, Medicare’s costs are forecast to increase steadily from their current level of 3.8 percent of GDP in 2023, to 5.8 percent in 2048. Costs then rise more slowly before leveling off at around 6.2 percent.
The HI trust fund’s assets were $208.8 billion at the beginning of 2024, with recent growth in HI expenditures averaging 5.5 percent annually. Over the next 5 years, the Trustees project average annual growth rates for expenditures will be 5.8 percent. Due to expenditures rising more quickly than income and as compared to measures of general economic growth, the report argues that “policymakers should determine effective solutions to the long-range HI financial imbalance.” It continues that “when assuming that current-law provider payment rates will be adequate, the HI program does not meet either the Trustees’ short-range test of financial adequacy or long-range test of close actuarial balance. HI revenues would cover 89 percent of estimated expenditures in 2036 and 87 percent in 2048.”
Medicare’s actuarial shortfall has improved. Medicare’s HI Trust Fund now has a long-range actuarial deficit equal to 0.35 percent of taxable payroll, compared to 0.62 in the 2023 report. According to the Trustees, several factors are contributing to the favorable change in actuarial balance, most notably “changes to private health plan assumptions (primarily a policy change to exclude medical education expenses associated with Medicare Advantage (MA) enrollees from the fee-for-service per capita costs used in the development of MA spending); lower-than-estimated 2023 HI expenditures; and higher-than-estimated 2023 payroll tax income. The overall impact is that “the actuarial status for the HI Trust Fund has improved, with a 0.27 percentage point increase in the actuarial balance. Still, the Trustees are clear that looking forward, Medicare expenditures will increase in future years at a faster pace than either aggregate workers’ earnings or the economy overall, thus necessitating further prudent adjustments.
The Trustees note that a one-time, uniform increase in the payroll tax rate starting in 2024 would be sufficient to achieve an actuarial balance of zero for the OASI and HI trust funds. The Biden Administration sent proposals to Congress to increase revenue in its FY 2025 budget submission earlier this year, but these revenue-focused proposals are not expected to advance due to a divided 118th Congress.
With regard to current out-of-pocket hospital costs for beneficiaries, in 2024, Medicare’s hospital deductible is $1,632. The daily hospital coinsurance amount is $408 for days 61-90, and for beneficiaries who are discharged to skilled nursing facilities, the daily coinsurance amount is $204 for days 21-100.
Costs for Part B (SMI Trust Fund) are growing due to the aging population and rising health care costs. Part B outlays were 1.8 percent of GDP in 2023, and the Trustees projects that they will grow to about 3.6 percent by 2098 under current law. The long-range projections as a percentage of GDP are lower than those projected last year through 2056 and higher thereafter. This is due to lower projected spending for outpatient hospital and home health agency services, and updated GDP projections.
Medicare Part B Premium and Deductible
The Part B program, which covers outpatient services provided by physicians and is financed with general revenues and beneficiary premiums. The Trustees reported that the standard Part B premium will rise next year from $174.70 in 2024 to $185 per month in 2025. High-income beneficiaries have paid an income-related premium for their Part B coverage since 2007, and for Part D since 2011. Accordingly, higher-income beneficiaries with incomes exceeding $103,000 for an individual and $206,000 for a couple, pay Part B premiums ranging from $244.60 to $594 in 2024. Since 2019, individuals at the highest income levels — at or above $500,000 a year (or couples at or above $750,000) — have paid premiums that cover 85 percent of program costs.
The Trustees project that the Part B annual deductible in 2025 will be $257.
Overall, Part B cost growth rates have averaged 8.3 percent annually over the last 5 years, and the Trustees estimate that Part B cost growth over the next five years will average 8.8 percent, which is faster than the projected average annual GDP growth rate of 4.3 percent.
In a noteworthy trend, the 2024 Trustees Report finds that as HI sources of revenue become “increasingly inadequate to cover HI costs, SMI revenues will represent a growing share of total Medicare revenues. Government contributions are projected to gradually increase from 43 percent of Medicare financing in 2023 to about 50 percent in 2045, stabilizing thereafter. Growth in these contributions as a share of GDP adds significantly to the Federal budget pressures. SMI premiums will also increase at the same rate as SMI expenditure growth, placing a growing burden on beneficiaries.”
Medicare Part C
The report says little about Medicare Advantage, though it does note that “two policy changes are assumed to be phased in over three years beginning in 2024. The first is a change to exclude medical education expenses associated with MA enrollees from the fee-for-service per capita costs that are used in the development of the MA benchmarks; this change will reduce Part A MA payments in all future years. The second policy change is an updated risk adjustment model that slows the growth in the MA benchmark.”
Medicare Part D
The Part D program pays for outpatient prescription drugs and, similar to Part B, is financed with federal contributions together with beneficiary premiums and other copayments. The 2024 Trustees Report forecasts that Part D outlays will increase from 0.5 percent of GDP in 2023 to about 0.7 percent by 2098. While the expenditure share of GDP over the long term is similar to last year’s report, revisions reflect several years of faster drug spending growth, higher enrollment and updated GDP projections.
In 2024, the Part D base beneficiary premium is $34.70. Actual premium amounts charged to Part D beneficiaries vary depending on the specific plan they have selected. High-income Part D enrollees (individuals with adjusted gross incomes over $103,000) must pay an income-related adjustment amount, ranging from $12.90 to $81.00 per month in 2024. In 2025, the Trustees project that the standard Part D premium will be only slightly higher, at $36.78, and the Part D deductible will be $590.
The Inflation Reduction Act (IRA) included a groundbreaking provision to essentially close the gap between initial coverage and catastrophic coverage. The result is that in 2025, the threshold for catastrophic coverage will be $2,000, dovetailing with the end of the initial coverage period. The cost growth of catastrophic coverage will be held to program growth for purposes of annual updates.
Other provisions included in IRA, the report notes, will affect the ultimate long-range growth rates for Part B drug spending and Part D drug spending differently. For Part B drugs administered in physicians’ offices, the report projects per capita spending growth rates will be similar to those for overall per capita national health expenditures (NHE). In contrast, for outpatient drugs covered under Part D, the report projects per capita spending will grow 0.2 percentage point more slowly than NHE due to the impact of the IRA, bringing growth closer to the Consumer Price Index (CPI). Overall, Part D costs are projected to grow on average by 8.2 percent annually over the next five years, which like Part B, is a higher growth rate as compared projected annual GDP growth of 4.3 percent.
Parts B and D Out-of-Pocket Costs
The Trustees find that the cost burden for Medicare beneficiaries in out of pocket costs are rising. Specifically, the “combination of premium and cost-sharing amounts for Parts B and D would equal about 26 percent of the average Social Security benefit in 2024,” increasing to an estimated 34 percent in 2098, according to the Trustees.
National Committee Concerns
Medicare faces a long-term financial challenge due to the large increase in the number of beneficiaries as the large baby boomer cohort reaches age 65 and retires, combined with a longstanding trend of low birth rates, including extremely costly prescription drugs, and persistent health care cost growth that continues to outstrip measures of general economic growth.
Accordingly, it is critical that we continue to implement reforms included in the Inflation Reduction Act and the Affordable Care Act that are containing costs and promoting access to quality health care. This includes supporting coordinated care through Accountable Care Organizations (ACOs), medical homes, bundled payments, and reducing hospital readmissions and hospital-acquired infections, as well as efforts to further reduce spending due to waste, fraud and abuse. We support policy to strengthen traditional Medicare, including the mission of ACOs that can coordinate care and better manage chronic conditions. But we oppose the participation of private insurers and private equity firms and any affiliated entities in ACO governance and management. Private investors should not inform health care decision-making.
The National Committee supports strengthening Medicare’s financing without shifting additional costs to beneficiaries. For example, we support continued gradual expansion of the Inflation Reduction Act’s provisions that allow the Department of Health and Human Services to negotiate fair prices for Part D prescription drugs with manufacturers, putting inflation controls on drugs used under Medicare Part B, and ending pay-for-delay deals, among other gaming of prices by pharmaceutical makers, which have the effect of limiting access to generics and driving up drug costs.
We also support the Administration’s efforts to place more stringent controls on the marketing practices of Medicare Advantage (MA) plans, and to make bolder adjustments to payment policies in order to rein in soaring MA payments relative to traditional Medicare. Devising additional requirements to reduce overpayments to MA plans will continue to be necessary to prevent Medicare costs from becoming unsustainable for both beneficiaries and the federal government.
Finally, the National Committee believes that Medicare benefits should be expanded to cover vision, dental and hearing health services and equipment because they are important for healthy aging. And, we support adding an out-of-pocket limit on beneficiary spending throughout the entire program.
Conclusion
Older Americans and people with disabilities should not have to choose between paying for health care, food or utilities. Medicare benefits must be improved, not cut. Medicare’s long-term solvency must be strengthened, and access to health care providers and benefits must be enhanced and preserved.