Medicare’s 2026 Crisis (Part 1)

Medicare’s 2026 Crisis (Part 1)

We ended our last blog with the promise we would discuss a historic event that will affect all of us for generations to come. For the first time in history, there are more people aged 65 and older than those aged 5 years and under, worldwide. This is a dynamic that is not generally factored into the healthcare discussion.

To start this series of blogs, we will quote verbatim a report recently issued by Social Security and Medicare Boards of Trustees on the status of Medicare.

The Medicare program helps pay for health care services for the aged, disabled, and individuals with end-stage renal disease. It has two separate trust funds, the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. HI, otherwise known as Medicare Part A, helps pay for inpatient hospital services, skilled nursing facility and home health services following hospital stays, and hospice care. The SMI Trust Fund consists of separate accounts for Medicare Part B and Part D. Part B helps pay for physician, outpatient hospital, home health, and other services for individuals who have voluntarily enrolled. Part D provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries, as well as premium and cost-sharing subsidies for low-income enrollees.

The Trustees project that the HI Trust Fund will be depleted in 2026,1 the same year projected in last year’s report. At that time dedicated revenues will be sufficient to pay 89 percent of HI costs. The Trustees project that the share of HI cost that can be financed with HI dedicated revenues will decline slowly to 77 percent in 2046, and will then rise gradually to 83 percent in 2093. The HI fund again fails the test of short-range financial adequacy, as its trust fund ratio is already below 100 percent of annual costs, and is expected to decline continuously until reserve depletion in 2026.

The HI Trust Fund’s projected 75-year actuarial deficit is 0.91 percent of taxable payroll, which represents 0.4 percent of GDP through 2093, or 23 percent of non-interest income, or 19 percent of program cost. This estimate is up from 0.82 percent of taxable payroll projected in last year’s report. Several factors contributed to the change in the actuarial deficit, most notably lower assumed productivity growth (+0.10 percent of taxable payroll), slower projected growth in the utilization of skilled nursing home facilities (-0.10 percent), higher costs and lower income in 2018 than expected (+0.04 percent), lower real discount rates (+0.03 percent), and other factors (+0.02 percent).

For SMI, the Trustees project that both Part B and Part D will remain adequately financed into the indefinite future because current law provides financing from general revenues and beneficiary premiums each year to meet the next year’s expected costs2. However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 2.1 percent of GDP in 2018 to approximately 3.7 percent of GDP in 2038, and to then increase more slowly to 4.2 percent of GDP by 2093. General revenues will finance roughly three-quarters of SMI costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also

receives a small amount of financing from special payments by States, and from fees on manufacturers and importers of brand-name prescription drugs.

The Trustees project that total Medicare costs (including both HI and SMI expenditures) will grow from approximately 3.7 percent of GDP in 2018 to 5.9 percent of GDP by 2038, and then increase gradually thereafter to about 6.5 percent of GDP by 2093.

We will discuss in detail what this means for the state and cost of healthcare going forward, and why we need to make changes today in our next blog.