Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
The looming insolvency date of Medicare Part A’s Hospital Insurance (HI) trust fund is often the focus of headlines and policymakers, but it represents only about a third of total Medicare spending. This fixation misses Medicare’s primary fiscal threat: the growth of Medicare Parts B and D, which are heavily subsidized by general revenues and growing rapidly.
On April 1, the Congressional Budget Office (CBO) released its annual Long-Term Budget Outlook: 2025 to 2055, which surprisingly projects that the HI trust fund will now remain solvent until 2052—17 years later than last year’s estimate. But don’t let this updated projection, driven by economic and technical adjustments, fool you: Medicare is the single largest driver of long-term federal deficits, and its finances are fiscally ruinous. Policymakers need to look beyond the trust fund insolvency to the bigger picture of rapidly growing Medicare expenditures in a country with projected federal deficits of $2 trillion annually, over $36 trillion in debt, and higher than desired interest rates and inflation.
Part A Trust Fund Insolvency Date Moved Back
Medicare Part A is funded through payroll taxes deposited into the HI trust fund. In practice, payroll taxes credited to the HI trust fund are immediately exchanged for special government bonds, and the cash goes into the general Treasury fund, where it can be used for any purpose. Part A payments are actually paid out of the general fund, and the government erases a reciprocal amount of the bonds. So there is no actual trust fund in the common understanding of the term, but there are still statutory implications for benefits when the trust fund is “emptied” and costs exceed revenues and assets.
CBO estimates that the HI trust fund balance will be exhausted by 2052, which will result in immediate Part A benefit cuts: 6.5 percent in 2053, 6.6 percent in 2054, and 6.9 percent in 2055. CBO expects the balance to increase through 2038, but expenditures will begin to outstrip new revenue in 2039.
CBO projects a later trust fund insolvency date for several reasons. Income projections are higher, in part because of expected faster growth in wages and CBO accounting for updated historical data from the Treasury Department. Revenues from the taxation of benefits are also expected to be higher because of changes in the distribution of income and a revised upward CBO projection of pension income and Social Security benefits. Additionally, interest income from the HI trust fund is expected to be greater than previously estimated thanks to the larger-than-expected balance in the trust fund.
Part A spending also slowed—it was lower in 2024 than anticipated—and CBO now expects payments to hospitals to grow more slowly than the agency did last year. CBO also updated its modeling of federal payments to insurers in Medicare Advantage (MA). MA payments are linked in part to traditional fee-for-service Part A payments, so slower growth in Part A payments means slower growth in MA payments. While final numbers will not be available for 2024 until the 2025 Medicare Trustee’s report is released, in 2023 Part A spent $403.1 billion.
Part A’s HI trust fund is not the best measure of Medicare’s fiscal health. Part B, which covers outpatient care like physician services, and Part D, which provides prescription drug coverage plans, account for around 62 percent of Medicare spending. Parts B and D are technically “funded” through the Supplemental Medical Insurance (SMI) trust fund, but the SMI trust fund gets money directly from general revenues.
Part B was supposed to be funded primarily by the premiums they charge beneficiaries, but that has not been true since 1971. Part D premiums are also heavily subsidized, with almost 80 percent being covered by the taxpayer. In total, taxpayers covered two-thirds ($435.8 billion) of the $633.9 billion in payments for Parts B and D in 2023. Figure 1 below shows the sources of Medicare revenue from 1975 through 2023 and projections for the following decade.
The 2024 Medicare Trustees’ report expects Medicare to have spent $1.1 trillion in 2024 (outpacing defense spending and interest payments on the national debt), and as Figure 2 demonstrates below, Part B is where most of the problem lies. According to the 2024 trustees’ report, between 2013 and 2023, Part A payments grew by 51.4 percent, while Part B payments grew by 103.5 percent. This cost growth doesn’t just affect the taxpayer, it also affects beneficiaries as cost increases mean premium increases for Parts B and D. Seniors spend roughly 26 percent of their Social Security income on Part B and D expenses.
The program needs reform to reduce cost pressures. As Paragon has previously highlighted, there are ways to reduce Medicare spending without reducing benefits, most of which have a history of bipartisan support.
Congress should implement site neutral policies in Medicare, where the program would pay the same or similar rates for the same procedures regardless of whether they were done in hospital or at a physician’s office, would reduce federal spending by $220 billion over 10 years. Site-specific payment policies mean Medicare pays hospitals significantly higher rates for the same procedure than they pay physicians or ambulatory surgical centers. These policies have been a primary catalyst for hospital acquisitions of physician offices, which hospitals then turn into outpatient departments to receive higher payments, increasing industry consolidation and raising prices for both public and private payers.
Congress should modify Medicare payments to hospitals for uncompensated care – which covers both charity care and uncollected payments—to base uncompensated care payments on a hospital’s share of charity care and non-Medicare bad debt, which would save $88 billion over 10 years. Eliminating Medicare’s reimbursement for bad debt (which occurs outside of the Medicare program) would save another $74 billion over 10 years.
Congress should also reduce payments for drugs that hospitals have acquired under the 340B Drug Pricing Program to more accurately reflect hospital acquisition costs—which the Trump administration attempted to do in 2018 but was blocked by courts on technical grounds. According to CBO, this policy would reduce spending by $73.5 billion over 10 years and would also reduce beneficiary cost sharing.
Finally, Congress should improve Medicare Advantage. Paragon’s unified package of reforms to Medicare Advantage would save upwards of $250 billion over 10 years. Paragon’s changes include capping MA base payments at 100 percent of local fee-for-service (FFS) costs and calculating them based on the FFS population with both Part A and B coverage; ending quality bonuses and focusing star ratings on health outcomes and patient experience; directing seniors to actively choose between FFS and MA; and improving risk adjustment to address plan coding intensity. Importantly, this package also restricts first-dollar coverage of cost-sharing in Medigap plans.
Part A’s looming insolvency is often the primary focus of the media. While it is good news that the HI insolvency date has been pushed back, policymakers must not lose sight of the broader issues—Medicare is on an unsustainable trajectory and is the primary driver of federal deficits and debt. Policymakers should shift their focus away from the specificities of the HI trust fund’s solvency and toward comprehensive reforms. Fortunately, there are a plethora of ways to improve the program and reduce its long-term costs.
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