The most accurate figures on Medicare spending come from the annual Medicare Trustees Report, which relies on information compiled by the actuaries of the Centers for Medicare & Medicaid Services (CMS), which runs the program.
In 2011, Medicare spent a total of $549.1 billion on health care coverage for 48.7 million beneficiaries. This accounted for roughly 15 percent of the national budget and 21 percent of overall U.S. health care spending, according to the Congressional Budget Office.
Medicare costs fall into two main categories. The Hospital Insurance (HI) Trust Fund, which finances Medicare Hospital Insurance (Part A), pays for hospital expenses. The HI trust fund gets income from the Medicare payroll tax, levied on all salary incomes. Workers and employers both pay 1.45 percent of income; self-employed workers pay 2.9 percent of their net income. In 2011, these revenue streams totaled $195.6 billion. Medicare also collects revenue from interest paid on the bonds in the trust fund and from income taxes paid on some Social Security benefits.
In years when there is a surplus — taxes collected exceed money paid out for hospital bills — the surplus is invested in a special issue of U.S. Treasury bonds, paying a competitive rate of interest.
The HI Trust Fund started the 2011 fiscal year with a balance of $271.9 billion. During the fiscal year, Medicare spent $256.7 billion on Part A benefits and had an income of $228.9 billion, resulting in a $27.7 billion shortfall borrowed from the balance.
"Each year, the Trustees Report projects the year that the HI Trust Fund will become insolvent," according to an issue brief by the nonpartisan National Academy of Social Insurance (NASI). "The HI Trust Fund began running deficits in 2008 and according to the 2011 report, reserves are projected to be depleted by 2024. At that point, if no changes are made, scheduled HI income will cover 90 percent of estimated expenditures," the NASI brief said. "Put another way, when HI Trust Fund reserves are depleted in 2024, payments to doctors and hospitals can still be made, but only from current payroll tax contributions; these tax contributions will only be sufficient to cover 90 cents on the dollar."
The date of projected insolvency has varied widely throughout the years because of changing health care costs and economic and demographic projections. NASI noted that the dates of potential insolvency "have ranged from as few as four years to as much as 28 years, with the length of continued solvency averaging 13.7 years. Projections of HI solvency in 2011 fall just below the average over the last 21 years. HI insolvency has been avoided in part because Congress has made frequent adjustments to the program to ensure future spending and resources are in balance."
Medicare Medical Insurance (Part B) and Medicare Prescription Drug Plans (Part D) are funded in a different way from the Part A fund. Money for Part B and Part D comes from general tax revenue via direct appropriations by Congress and from monthly premiums paid by Medicare beneficiaries.
The Supplementary Medical Insurance (SMI) Trust Fund consists of two separate accounts — one for Part B (which pays for physician and other outpatient health services) — and one for Part D (which pays for outpatient prescription drugs). Beneficiaries who choose to participate in Part B or Part D must enroll and pay monthly premiums. Premiums paid by Medicare beneficiaries cover 25 percent of the cost of the SMI. The other 75 percent comes from general revenues.
The SMI fund started with a balance of $71.4 billion in 2011 and spent $225.3 billion on Part B services and $67.1 billion on Part D benefits during the fiscal year.
Medicare also spent $64.6 billion from the HI Trust Fund and $59.1 billion in SMI funds to provide Medicare Part C (or Medicare Advantage) benefits.
The fast "rate of growth in program costs will place increasing financial demands on both beneficiaries (to pay the premiums) and taxpayers (to provide the general revenues)," according to an issue brief by NASI.
The trustees in the most current report emphasize the need to control the growth of health care spending. They also recognize that, although they have the greatest degree of expertise, any of their predictions are fraught with uncertainty. "The projections in this year’s annual report provide an unequivocal incentive to vigorously pursue the development of effective and sustainable new approaches, with the potential to make quality health care much more affordable. Finally, the economic outlook remains more uncertain than usual. Due to the sensitivity of HI trust fund operations to wage increases and unemployment, the current slow recovery from the recent recession adds a significant further element of uncertainty to the trust fund projections."
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