Medicare Won’t Be Bankrupt by 2026 – But It’s Not in Good Shape


June 8, 2018

Medicare Won’t Be Bankrupt by 2026 – But It’s Not in Good Shape

Headlines this week proclaimed that Medicare would be insolvent by 2026, three years earlier than predicted in last year’s Trustees report from Social Security. Per this year’s report on the state of finances for both Social Security and Medicare, both programs are facing financial problems in the next decade and a half. Medicare’s hospital fund, which funds Part A coverage, will run out of money in 2026. Social Security funding will follow in 2034. But as at least one analyst has pointed out, Medicare isn’t bankrupt – nor is it likely to become bankrupt even after 2026.

It comes down to Medicare’s financing and the larger picture of the program. It’s true that Medicare Part A, which covers hospital services, skilled nursing care and other related care, will be in trouble once its funding gets depleted. But the program itself isn’t slated to run out of money altogether. In fact, if the hospital fund did become insolvent, Medicare would still be able to cover 91 percent of promised benefits. It’s not an attractive proposition for the millions of Americans who depend on Part A coverage, but it’s not the all-out disaster that headlines might lead people to believe.

Medicare Part B, which covers medical care and equipment, isn’t expected to run out of money because it draws funding from other sources, primarily a separate trust account and beneficiary premiums. These premiums fluctuate, usually increasing to accommodate yearly changes in benefit payouts. Part D, Medicare’s prescription drug benefit, is also expected to remain stable for the foreseeable future.

Still, there are problems on the horizon for the senior entitlement program. Medicare costs are expected to increase from 3.7 percent of gross domestic product (GDP) in 2017 to 6.2 percent by 2092. Without adequate funding to offset rising healthcare costs among the senior population, the program will likely hit some brick walls when trying to manage cost of care.

Different factors have contributed to Medicare’s funding issues, starting with the demographic makeup of its members. Baby Boomers are getting older, and as the name of the generation suggests, it’s a large population that’s slated to flood the Medicare market with expensive health conditions over the next few years.

Several administrative changes have also made it harder for Medicare to draw the funding it needs from taxpayers. The tax bill signed into law at the end of 2017 lowered the corporate tax rate for American workers, meaning that most people will have less withheld from their paychecks. While this is a win for taxpayers, it’s a lose for long-term Medicare funding since payroll taxes help fund its hospital trust account. A higher paycheck means lower taxes, which translates into less funding to support higher healthcare costs.

Republicans, for their part, argue that the new tax law will stimulate economic growth and offset some of the financial problems that Medicare and Social Security face. Conservative lawmakers are also proposing drastic solutions – such as privatizing a portion of these programs, raising the minimum age for enrollment or cutting benefits – to stabilize these programs. Democrats have also proposed drastic solutions, but their proposals typically come in the form of higher payroll taxes. Neither party wants to be the one to mess with Medicare, a popular program regardless of political affiliation.

Whatever the solution, Congress must act quickly to address Medicare’s financial shortcomings. Medicare may not go bankrupt anytime soon, but its money problems won’t go away without legislative intervention. Republican and Democratic lawmakers will need to get on board with a plan to safeguard the future of this program for the millions of seniors and those with disabilities who depend on it for healthcare.