Medicare's Trust Funds: Background and the Need for Reform

James Capretta
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James Capretta: American Enterprise Institute

AEI Economic Perspectives, 2024

Abstract: Medicare’s two trust funds present a misleading picture of the program and its contribution to the federal government’s rising debt burden. Hospital Insurance (HI) is projected to be depleted of reserves by 2031, while Supplementary Medical Insurance (SMI) is perpetually solvent. In reality, the drawdown of HI’s balances and escalating SMI costs are both problems. SMI’s expenditures exceed HI’s but are obscured by unlimited receipts from the Treasury’s general fund, which translate directly into more borrowing. The 2003 Medicare Modernization Act exacerbated the problem by tapping the general fund further for prescription drug coverage. That law also created a new trigger to expedite legislation limiting the future burden on the general fund, but presidents have mostly ignored it, and Congress has been passive. Inevitably, Congress will be forced to step in to prevent HI insolvency. When it does, it also should change SMI to restrain unfinanced cost growth. Political leaders will be reluctant to cap the transfers, so other options should be considered to create pressure for change

Keywords: AEI Economic Perspectives; federal debt; Health care costs; Medicare (search for similar items in EconPapers)
JEL-codes: A (search for similar items in EconPapers)
Date: 2024
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