T he annual Medicare trustees’ report, released on Monday, is bringing Medicare back into focus in Washington. The media’s focus is on the fact that Medicare’s Part A trust fund is projected to become insolvent in 2036, compared to 2031 from last year’s estimates. While this change is welcome news, the main takeaway from the report should be that Medicare represents the most significant fiscal challenge for the federal government. In fact, the trustees issued their seventh consecutive “funding warning,” an indication that the program is overly reliant on general-revenue transfers. Over the next decade, Medicare’s real cost is projected to expand by over a third — from 3.8 percent of the economy in 2024 to 5.1 percent in 2033.

Insolvency Date Is Important, but Not the Best Measure of Medicare’s Financial Challenges

The Part A insolvency date is the year when the trustees expect Medicare’s hospital-insurance trust fund to be depleted. This account pays for Medicare’s inpatient hospital and post-acute care benefits. It is almost entirely financed by payroll-tax revenue from current workers. When its excess balances run out, Medicare will by law only be able to pay out as much as it takes in. This will mean an estimated 11 percent cut in payments — a significant reduction that could reduce Medicare participation by health-care providers, and therefore seniors’ access to care.

Medicare’s Part A solvency has been a concern for years, although the expected depletion date fluctuates based on changes in policy, the economy, and public health. Last year’s report added three years to the insolvency date due to the repayment of advance payments made during the Covid-19 pandemic, innovations in joint-replacement procedures, and, grimly, a projected decrease in health-care spending over the next several years resulting from the significant number of Covid-19 deaths among the elderly.

This year’s report highlights strong payroll-tax collections as a result of higher employment and wage growth, lower-than-expected utilization of inpatient hospital and home-health services, and technical changes to Medicare Advantage payment calculations.

Medicare’s Overall Costs Matter Much More

Roughly 61 percent of Medicare spending now comes from Part B, which covers outpatient and physician services, and Part D, which covers prescription-drug benefits. About three-quarters of funding for these programs comes from tax revenue or deficit spending. As a result, Medicare’s continued growth will directly crowd out other government priorities and contribute to the nation’s debt burden. This is why the trustees issue a “funding warning” when Medicare is overly reliant on revenue coming from outside of its dedicated funding sources.

Medicare expenditures now exceed national-defense expenditures. The only budget item growing faster than health care is interest payments on existing debt, with Medicare being the driver of projected future health-care spending.

Rising costs for these benefits will also increase the financial burden on Medicare enrollees, because they typically pay about 20 percent of the cost for Part B services. On average, retirees spend about 26 percent of their Social Security checks on Part B and D expenses alone.

Reforms Are Needed

Policy-makers must consider ways to reduce Medicare’s costs so that the program can continue to be available and affordable for future generations.

There is no shortage of bipartisan ideas to lower costs without cutting benefits — including letting the trust funds off the hook for hospitals’ bad debt and uncompensated care costs. As the trustees show, subsidies that are unrelated to providing health-care coverage to seniors, like those for medical education, are a major component of Medicare spending.

Another simple idea that is growing in popularity is to pay the same rate for routine services regardless of whether patients receive them in a hospital or a physician’s office. This is particularly important given that rapidly growing outpatient hospital payments are driving Part B spending. These payments are expected to surpass spending on physician services by next year.

Policy-makers can also improve efficiencies in Medicare Advantage, the program through which seniors receive health coverage from private plans, by reducing bonuses to insurance companies and adjusting the way Medicare calculates payments, among other changes. Reducing government subsidies for wealthier Medicare beneficiaries is another approach worth considering.

Collectively, these policies could save Medicare hundreds of billions of dollars over the next decade.

The Part A insolvency date is not the primary measure of Medicare’s financial health — Part A represents a declining share of the program, and this new report should not make policy-makers complacent. Medicare’s problems are clear: A rising number of retirees, a shrinking number of current workers to fund their health benefits, and increasing per capita health-care costs are a recipe for fiscal disaster. There is also no telling when a future economic or public-health crisis will make the situation worse. No matter who is in the White House or Congress next year, preserving Medicare for current and future generations should be a top priority.