The 2012 Medicare Trustees Report shows that passing health care reform legislation was important in extending the solvency of the Medicare Trust Fund. Medicare’s costs are projected to be substantially lower due to savings in the Affordable Care Act . However, the report also points out the need to further reform our health care system so that Medicare’s costs, which will grow due to the retirement of the baby boom generation and the increase in health spending per beneficiary, are affordable for both the federal government and individuals.

We must also keep in mind that Medicare’s costs probably will exceed current projections. This is because the projections do not take into account the likelihood that Congress will act, as it has many times in the past, to prevent an over 30 percent reduction in physician fees that is scheduled to go into effect in January 2013. Additionally, some question whether the reductions in reimbursements to providers that are included in the Affordable Care Act will be sustained if the control of their growth causes access problems for beneficiaries.



Each year the Medicare Trustees release a report on the current status and projected condition of the funds over the next 75 years. The Trustees report on both of Medicare’s Trust Funds – the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. The HI Trust Fund finances Part A which covers inpatient hospital and related care. The SMI Trust Fund finances Part B which covers physician and outpatient care, as well as Part D which covers prescription drugs.

Medicare Part A (HI Trust Fund) is primarily financed by payroll taxes on earnings that are paid by employees, employers, and the self-employed. Employees and employers each pay 1.45 percent in taxes on all earnings. The self-employed are charged 2.90 percent, the equivalent of the combined employer and employee tax rates.

Medicare Parts B and D (SMI Trust Fund) are financed by payments from federal general fund revenues (about 75 percent) and by monthly premiums charged to beneficiaries (about 25 percent) . Because Medicare Part B and Part D are automatically financed through general revenues and beneficiary premiums to meet estimated program costs each year, the SMI Trust Fund is adequately financed in both the short and long term.

Financial Outlook of the Medicare Program

The Medicare Part A (HI) Trust Fund will be solvent until 2024, which is the same as was projected last year . In 2024, payroll taxes alone are estimated to be sufficient to cover 87 percent of HI costs.

Solvency is greatly improved from the insolvency date that was projected before enactment of the Affordable Care Act . This legislation improved Medicare’s financing by reducing the rate of increase in provider payments, phasing out overpayments to Medicare Advantage plans, and increasing Medicare payroll taxes for high-income individuals and couples. Repealing the Affordable Care Act, would move up the insolvency date to 2016.

Medicare’s actuarial shortfall increases from last year, but part of the increase is due to the use of a new method for calculating Medicare’s long-run cost growth rate. The HI Trust Fund now has a projected 75-year actuarial deficit equal to 1.35 percent of payroll compared with last year’s estimate of 0.79 percent. In other words, the HI Trust Fund’s fiscal imbalance could be solved by increasing payroll taxes by 1.35 percent, by reducing the program’s spending by a corresponding amount or by some combination of the two.

Medicare spending will increase as a share of the economy. The Trustees project that Medicare’s costs (for both the HI and SMI Trust Funds), which were 3.7 percent of gross domestic product (GDP) in 2011, will grow substantially to 5.7 percent of GDP in 2035. This increase is because the number of people receiving benefits will grow as the large baby boom generation retires. Thereafter, Medicare’s costs are projected to grow more slowly to 6.7 percent of GDP in 2086. Again, these increases are lower than what was projected before enactment of health care reform when Medicare’s costs were projected to grow to from 3.5 percent of GDP in 2009 to 11.3 percent of GDP in 2083.

Costs for Part B (SMI Trust Fund) are growing due to the aging population and rising health care costs. Part B spending, which was 2.0 percent of GDP in 2011, is projected to increase to 3.4 percent in 2035 and to 4.0 percent in 2086. Although costs are projected to rise, the increases are lower than what was projected before enactment of the Affordable Care Act – that costs would rise to 4.5 percent of GDP in 75 years.


Medicare Part B Premium and Deductible

The standard Part B monthly premium for 2013 is projected to increase to $109.10 from the current $99.90. This amount is lower than was previously predicted before a slowdown in the growth of Medicare spending due to provisions in the Affordable Care Act . Part B enrollees with incomes exceeding $85,000 for an individual and $170,000 for a couple must pay a higher income-related monthly premium, which is estimated to range from $152.70 to $349.00 in 2013. The annual deductible is projected to increase from $140 to $153, which is also slightly lower than last year’s predictions.


Medicare Part D

Medicare Part D spending estimates are lower than projected last year.  The lower projections are a result of lower-than-anticipated drug spending in 2011 and a reduction in the projected rate of increase in prescription drug spending over the next 10 years due to greater use of lower-cost generic drugs.  

Part D expenditures as a percent of GDP are expected to increase from 0.44 percent in 2011 to 0.97 percent in 2035 and to 1.50 percent in 2085.  The average Part D monthly premium will be $31.08 in 2012.  In 2012, Part D enrollees with incomes exceeding the threshold of $85,000 for an individual and $170,000 for a couple must pay an income-related monthly adjustment amount in addition to their normal plan premium, ranging from $11.60 to $66.40 per month. The Part D annual deductible is projected to increase from $310 in 2011 to $320 in 2012.


Parts B and D Out-of-Pocket Costs

Over the past several years, health care costs have increased faster than average income or per capita gross domestic product. Additionally, annual percentage increases in the Medical Consumer Price Index have been greater than the Consumer Price Index. As a result, the Medicare Trustees project that by 2086, Parts B and D out-of-pocket costs – premiums and cost-sharing amounts – will consume 44 percent of the average Social Security check compared with 24 percent today.



The challenges facing Medicare are symptomatic of our larger health care financing problems. Total health care spending in the United States has been growing at a faster rate than the economy for many years, regardless of whether it is funded through government or private sources, and it is projected to continue doing so in the future. However, Medicare continues to control costs better than private insurance. While demographics play a role in Medicare’s cost increases over the next two decades, it represents only part of the equation. It is critical that we successfully implement reforms in the Affordable Health Care Act that contain costs and promote access to quality health care. These provisions, along with requirements in the law to slow the rate of increase in provider payments and reduce overpayments to Medicare Advantage plans, are necessary to prevent Medicare costs from becoming unsustainable for both beneficiaries and the federal government.

Government Relations and Policy, April 2012