The Sound Bite:

Politicians continue to claim that Medicare will go “broke” or “bankrupt” in the coming years without Medicare reform.

Fact or Fiction?

Fiction. Conversations on Medicare going broke or bankrupt center around the funding and expenditures under Medicare Part A (Hospital Insurance), and not around Medicare Part B (Medical Insurance) or Medicare Part D (Prescription Drugs).

According to the Medicare Trustees’ 2013 report, the Hospital Insurance (HI) Trust Fund, which funds Part A, is expected to be insolvent by 2026. Insolvency is defined as not being able to pay 100 percent of costs. According to the trustees’ report, when the funds are exhausted in 2026, payroll taxes will still cover “87 percent of estimated expenditures in 2026 and 71 percent in 2050.”

Part A is funded by payroll taxes, which is paid by most employees, employers and people who are self-employed. Other funding sources included income taxes paid on Social Security benefits, interest earned on the HI trust fund investments, and Part A premiums paid by people who aren’t eligible for premium-free Part A.

However, there is a difference between going “broke” or “bankrupt” and insolvency. Medicare will always have funds. Neither the Social Security Trust Fund nor the HI Trust Fund has ever run out of money. A 2009 Congressional Research Service report said the HI trust fund has faced a projected shortfall almost from its inception in 1966. In 1970, the projected insolvency of the HI Trust Fund was 1972.

Through the years, Medicare has regularly taken steps to curtail program spending in order to balance revenues and outlays. Whether it's 2016 or 2026, Medicare will remain available for seniors, though likely with fewer benefits, many elected officials and experts say.

Before Medicare ever becomes insolvent, there are two warnings to prompt Congress to act.

First, Medicare Trustees are required under the Medicare Modernization Act of 2003 (MMA) to estimate when program expenditures will exceed dedicated revenue. If the actuaries estimate the ratio will exceed 45 percent within seven years, an "excess general revenue funding" alarm is issued. This is known as the “Medicare Solvency Trigger.”

Second, if that determination is made for two consecutive years, it sets off what is known as a "Medicare Funding Warning." The aim of this warning is to prompt the president and Congress to take action, whether to revise benefits, adjust controls on costs, or some of both. It is an effort to limit the amount of money coming from general revenues that finance Medicare and is thought to be a cost-control measure.

Should Congress and the president fail to act, there are currently no federal statutory provisions to govern what would happen if Medicare were unable to pay all of its bills.

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