Medicare Is in Deep Trouble: Here’s How to Rescue It
Medicare’s trust fund will run out of money in just over 10 years, according to a new report from the program’s trustees. Once that happens, the federal government won’t collect enough in payroll taxes to cover beneficiaries’ hospital bills.

Medicare’s trust fund will run out of money in just over 10 years, according to a new report from the program’s trustees. Once that happens, the federal government won’t collect enough in payroll taxes to cover beneficiaries’ hospital bills.

Congress could hike taxes to cover the shortfall. Or it could ration care to save money.

Or it could modernize and restructure Medicare — by giving beneficiaries means-tested vouchers to buy private insurance. Doing so would protect taxpayers now, preserve the program for future generations and even provide higher-quality care to seniors.

Medicare actually consists of multiple programs that pay for health care for 57 million seniors and people with disabilities.

Beneficiaries don’t pay premiums for Part A, which covers inpatient hospital care. It’s funded primarily by payroll taxes.

For much of the program’s history, the government collected more in payroll taxes than it paid out to hospitals. These surpluses went into a “trust fund,” where they were invested in U.S. government bonds.

But with Part A spending per beneficiary rising 3.5 percent annually — faster than tax revenue is growing — those surpluses have turned into deficits. Since 2010, Part A has spent $105 billion more than it collected in taxes. The trust fund has covered these deficits.

By 2029, the fund will be exhausted. Payroll taxes will only cover about 88 percent of Part A costs.

Costs in Medicare Part B, which pays for doctors’ visits, are also surging. The trustees estimate that Part B spending per beneficiary will increase 5.2 percent annually for the next decade.

Unlike Part A, beneficiaries pay premiums for Part B coverage. But these premiums account for only 23 percent of the program’s costs. The rest comes out of the federal Treasury.

Last year, Medicare cost $349 billion more than it collected in payroll taxes and premiums. This spending squeezes funding for other priorities, like defense and scientific research.

These deficits will explode in the future. Medicare faces $65 trillion in unfunded liabilities.

Despite its astronomical price tag, Medicare actually underpays health care providers. It reimburses hospitals at just 60 percent of private insurers’ reimbursement rates. In 2016, hospitals lost 9 cents for every dollar they spent treating Medicare beneficiarie s, according to the Medicare Payments Advisory Commission.

By 2040, half of doctors will lose money treating Medicare patients. Seventy percent of skilled nursing facilities and 80 percent of home health agencies will be in the same position.

That doesn’t bode well for patients. The trustees’ report notes that providers will either have to “withdraw from serving Medicare beneficiaries ” or “shift substantial portions of Medicare costs” to other patients — like those with private insurance.

Medicare desperately needs a revamp. Its biggest problem is that seniors have no incentive to control their health care spending, since the government picks up most of the tab.

Vouchers would enable poor and middle-income seniors to pick from a variety of private health plans, with different premiums, deductibles, and co-pays. They’d have an incentive to choose wisely, since they’d be spending their own money on top of whatever they received as a voucher.

And by means-testing the vouchers, the government would no longer waste billions subsidizing health insurance for the rich, who don’t need taxpayer-funded assistance.

This idea has attracted bipartisan support in the past. Indeed, three decades ago, a group of congressmen from both sides of the aisle proposed the concept — but were one vote short of being able to make a recommendation to Congress. The Bipartisan Policy Center and Committee for a Responsible Federal Budget have also voiced support for a voucher system.

Furthermore, it’s already working in another part of Medicare — the Part D prescription drug program. Under Part D, seniors shop for the privately administered drug coverage that meets their needs and budget. Competition among insurers helps keep costs low. The federal government subsidizes the plans to keep them affordable for beneficiaries.

From 2004 to 2013, the program cost $349 billion less than initially projected. Ninety-five percent of seniors report that their Part D coverage meets their needs.

Medicare‘s spending isn’t sustainable. Congress can stave off massive tax hikes and benefit cuts by voucherizing the program — and injecting some much-needed competition into the health care market.



Sally C. Pipes is president, CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.

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