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Social Insecurity: 4. The Growing Cost of Medicare

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Social Insecurity: 4. The Growing Cost of Medicare

The US has an aging population that is forecast to drive Medicare costs higher in the years ahead: much higher.

Each year, the Medicare Trustees forecast total Medicare costs for both 10-year and 75-year periods. They prepare low, intermediate and high cases that take into account the expected number of beneficiaries, life expectancy, the growth rate of medical expenses, the growth of the underling labor market and many other factors that drive Medicare costs.

Based on the evidence today, the Medicare Trustees believe that two key factors will drive Medicare expenses higher on an accelerated basis in the years ahead.

First, given the Baby Boom, they expect the number of Medicare beneficiaries to grow faster than both GDP and the workforce paying Medicare payroll tax. This is also driving Social Security payments. Second, they expect advancing medical technology to expand both the scope and number of health care services provided, thereby adding new costs to the system.

The table below summarizes the findings of the Medicare Trustees with respect to their 10-year intermediate case forecast.

Remember that “Public Revenues” are the dedicated recurring revenues that support these programs, including payroll taxes, tax on Social Security benefits and insurance premiums. “Government Payments” are the funds provided annually by the general fund of the US government.

Medicare Costs: 10-Year Forecast ($ billions)

 

  Part A (Hospital) Part B (Outpatient) Part D (Drug) Total
2016
Total Expenditures 285.4 293.4 100.0 678.8
Public Revenues 281.9 72.1 13.8 367.8
Government Payments 8.9 241.1 82.4 332.4
         
2026        
Total Expenditures 529.9 638.1 194.1 1,362.1
Public Revenues 476.2 123.1 35.1 634.4
Government Payments 53.7 515.0 159.0 727.7

Source: Medicare Trustees 2017 Annual Report  Note: The portion of Government Payments supporting Medicare Parts B & C are assumed to be the same in 2026 as they were in 2016.

To summarize, Medicare expenses are forecast to increase to $1.36 trillion in 2026, largely as a result of the growing number of beneficiaries and secondarily as a result of rising health care costs. Dedicated Public Revenues grow, but at a slower rate than total expenses as the ratio of workers to beneficiaries decreases.

With respect to Medicare Part A hospital insurance, which like Social Security is funded by FICA payroll taxes, the HI Trust Fund is forecast to be fully depleted in 2029, at which point only 88% of benefits will be covered by dedicated tax revenues.

From a fiscal perspective, this forecast suggests that the US government will need to increase its annual budget for Medicare by $395.3 billion by 2026, to $727.7 billion.

The next article will discuss the very real fiscal challenges the country faces with respect to both Social Security and Medicare.

 

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