Medicare: Financing the Part A Hospital Insurance Program

Publication Date: April 2005

Publisher: Library of Congress. Congressional Research Service

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Research Area: Health

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Abstract:

Medicare is the nation's health insurance program for individuals aged 65 and over and certain disabled persons. Medicare consists of four distinct parts: Part A (Hospital Insurance [HI]); Part B (Supplementary Medical Insurance [SMI]); Part C (Medicare Advantage [MA]); and Part D (the new prescription drug benefit added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 [MMA]). The Part A program is financed primarily through payroll taxes levied on current workers and their employers; these are credited to the HI trust fund. The Part B program is financed through a combination of monthly premiums paid by current enrollees and general revenues. Income from these sources is credited to the SMI trust fund. Beneficiaries can choose to receive all their Medicare services through managed care plans under the MA program; payment is made on their behalf in appropriate parts from the HI and SMI trust funds. A separate account in the SMI trust fund will account for the new Part D drug benefit; Part D is financed through general revenues and beneficiary premiums.

The HI and SMI trust funds are overseen by a board of trustees that makes annual reports to Congress. The 2005 report projects that under intermediate assumptions, the HI trust fund will become insolvent in 2020, one year later than projected in 2004. The revision reflects slightly higher income and slightly lower costs for 2004 than previously estimated. However, the 2005 projection is six years earlier than that projected in 2003, prior to the enactment of MMA. That law added to HI costs, primarily through higher payments to rural hospitals and to private plans under the MA program. The HI fund fails to meet both the short- and long-range tests for financial adequacy. Because of the way it is financed, the SMI fund does not face insolvency; however, the trustees are concerned with the program's continued rapid growth rate.

Stressing the importance of considering the Medicare program as a whole, the trustees note that Medicare expenditures are expected to grow from 2.6% of the gross domestic product (GDP) in 2004 to 7.5% in 2035. The difference between outlays and dedicated financing sources is estimated to reach 45% of outlays in 2012. This report will be updated upon receipt of the 2006 trustees' report.