Analysis of the 2019 Medicare Trustees' Report
Highlights of the report include:
The Trustees show Medicare spending is projected to increase significantly as a share of GDP over the next few decades, with each part of Medicare contributing to the cost growth. In addition, lawmakers face a near-term financial challenge as the HI trust fund will be exhausted by 2026, just seven years from now. Lawmakers need to undertake reforms to Medicare to contain spending growth and ensure HI solvency.
Medicare Spending Is Growing Rapidly
As a share of GDP, gross Medicare spending is expected to grow significantly over the long term, especially over the next few decades.
The Trustees project gross Medicare spending will rise from 3.7 percent of GDP in 2018 to 5.0 percent in 2028 and 5.9 percent by 2040. Spending will continue to increase after that but more slowly, reaching 6.5 percent by 2090.
Medicare Part A is largely financed by a payroll tax, and other parts of Medicare are partially financed through beneficiary premiums. Net of these and other funding sources, spending is lower but still expected to grow significantly from 1.6 percent of GDP in 2018 to 2.6 percent in 2028 and 3.3 percent in 2040 before growing more slowly to 3.5 percent by 2090.
Per-capita increases in health care spending also play a role in Medicare spending increases, as nominal per-person Medicare spending is expected to increase by 65 percent – from $13,665 to $22,546 – between 2018 and 2028. This increase is larger than the 56 percent growth in the economy that is expected to occur over the same time period.
All Parts of Medicare Are Growing
The Medicare program comprises three main components: Part A covers inpatient care in hospitals and other facilities, Part B covers physician and outpatient care, and Part D covers prescription drugs.
Part A spending is projected to increase from 1.5 percent of GDP in 2018 to 2.2 percent in 2040 before growing more gradually to 2.3 percent by 2090. Part B follows a similar but faster-growing trend, increasing from 1.7 percent of GDP in 2018 to 3.0 percent in 2040 and 3.1 percent by 2090. Part D is the smallest but fastest-growing over the next 75 years, rising from 0.5 percent of GDP in 2018 to 0.8 percent in 2040 and 1.1 percent in 2090.
For the SMI trust fund, general revenue contributions and beneficiary premiums are set annually to cover program costs so the trust fund is always solvent by definition. Nevertheless, spending for Parts B and D is expected to grow significantly relative to GDP, putting pressure on the federal budget and on beneficiaries through higher premiums and out-of-pocket costs.
The Hospital Insurance Trust Fund Is Seven Years from Insolvency
The Trustees project the Part A Hospital Insurance (HI) trust fund will be exhausted in 2026, just seven years from now. At that time, spending would have to be reduced by 11 percent to be brought in line with revenue.
Both HI spending and revenue are expected to increase over time as a share of payroll, but spending will grow much more rapidly in the next few decades. HI spending will increase from 3.4 percent of payroll in 2018 to 4.2 percent by 2028 and 4.9 percent by 2040 before growing more slowly to 5.3 percent by 2090. Revenue will grow steadily from 3.3 percent in 2018 to 3.6 percent in 2028, 3.8 percent in 2040, and 4.4 percent by 2090.
Part B and D Spending Growth Will Put Pressure on the Budget
The Trustees project that both Parts B and D will grow faster than the economy because of growth in the eligible population and in spending per eligible beneficiary. As pointed out above, these parts are financed by general revenue as necessary, so they can’t become insolvent but their growth has other implications. The Trustees point out that absent changes in law, the growth in spending will require a growing share of federal income tax revenue and premiums and out-of-pocket spending will make up a growing share of beneficiary income.
The Trustees project spending for Parts B and D will increase from 2.1 percent of GDP in 2018 to 3.7 percent by 2040. We estimate this increase in program spending will cause beneficiary out-of-pocket costs to increase from 1 percent of GDP in 2018 to 1.8 percent by 2040.