Congress Must Tackle Medicare’s Growing Financial Issues
The financial state of Medicare is deteriorating, and it’s probably time for Congress to get serious about making necessary adjustments to the program.
The Medicare Board of Trustees has made it clear in its 2025 report: taking action sooner rather than later will allow for more manageable and gradual changes. Early reforms would give everyone involved—health providers, beneficiaries, and taxpayers—more time to adapt their expectations and behaviors.
According to the trustees, Medicare spending is set to skyrocket from $1.2 trillion this year to over $2.3 trillion by 2034.
At the same time, the hospital insurance trust fund, which covers hospital services, is projected to go bankrupt by 2033. If that happens, there will be an automatic 11 percent reduction in hospital benefit payments, leading to annual cuts and ongoing deficits, ultimately limiting seniors’ access to essential hospital care.
This dire situation leaves Congress with little choice but to act. Historically, lawmakers have never let the program reach insolvency. So the real issue isn’t whether action will be taken, but what form it will take.
Lawmakers could opt for the usual route: increasing payroll taxes on working families or cutting Medicare benefits for seniors, or perhaps a mixture of both methods. Alternatively, they could consider a different strategy—one focused on enhancing the program while preserving what already functions well.
Change is unavoidable, though, as the trustees suggest, it can be managed more easily if it’s phased in gradually.
However, the escalating costs related to the supplemental medical insurance trust fund—which pays for Part B physician services and Part D prescription drugs—presents additional challenges.
This fund is primarily financed by taxpayer dollars, making it the biggest contributor to Medicare spending. Over the next five years, costs for Part B will rise by an average of 8.8 percent, with Part D not far behind at 7.1 percent—both outpacing the anticipated 4.2 percent growth in the overall economy.
It’s unsustainable for government spending to exceed the economic growth that supports it. As economist Herb Stein once pointed out, what isn’t sustainable will eventually stop.
Unlike Part A, which is funded through payroll taxes, around 75 percent of the costs for the supplemental medical insurance fund come from yearly allocations drawn from the Treasury, essentially direct taxpayer subsidies.
In 2024, 16.1 percent of all federal income taxes—both personal and corporate—will be directed toward this program. By 2030, that percentage will rise to 22 percent, and by 2040, it could reach 28 percent. This growth in funding will likely squeeze funding for other important areas like defense and energy programs.
Over the next 75 years, Medicare’s unfunded obligations—money required beyond the program’s dedicated revenues—are estimated to surpass $60 trillion. That’s a staggering amount needed to fulfill Medicare’s commitments to beneficiaries, reflecting a significant financial burden.
Often, discussions surrounding the budget or national debt fail to address these unfunded obligations linked to Medicare and similar expanding entitlement programs.
The rising costs are only partly covered by beneficiaries’ premiums, which represent about 25 percent of the increase. Seniors are likely facing steep premium hikes, with the standard monthly Part B premium projected to jump from $185 today to $347 by 2034.
The usual response in Washington to these rising costs is to tighten price controls or make changes to payment rules for providers. Though the aim is to keep costs in check, these changes can feel convoluted and sometimes don’t work as intended.
This strategy often results in the same outcome as simply increasing costs: making it harder for seniors to obtain necessary care.
When it comes to Medicare Part A, realistic projections indicate that by 2040, more than 40 percent of hospitals and over 50 percent of skilled nursing facilities may face negative margins. This raises serious concerns about both access to and the quality of care for Medicare beneficiaries. It’s a troubling outlook.
For Part B and specifically physician services, the payment system has been declining under Medicare’s complicated physician fee schedule.
Back in 2011, Medicare compensated doctors at 82 percent of private sector rates. By 2023, that number dropped to 71 percent, and it’s expected to reach just 64 percent this year.
The Trustees caution that without a fundamental change in the delivery system or adjustments from lawmakers, access to Medicare-participating physicians is likely to become a significant concern in the future. Addressing these issues now could help prevent further challenges.
Lawmakers and the White House could start by reforming manageable flaws within the increasingly popular Medicare Advantage program, which now serves more than half of all Medicare beneficiaries.
One immediate step could involve reforming how health plans are compensated. This might entail separating private plan payment from the outdated administrative payment system of traditional Medicare, instead utilizing market-based bidding to set prices for Medicare benefits. This approach would more accurately reflect competitive market dynamics and could generate real savings for both beneficiaries and taxpayers.
Additionally, Congress could tackle fraud incentives while simplifying how to assess costs for plans that enroll many older and sicker individuals, potentially improving savings further.
Moreover, Congress should remove unnecessary restrictions on benefits to allow for tax-free health savings accounts, direct primary care, and expanded drug coverage under Medicare Advantage, among other options.
The choice for Congress in light of the latest warnings from Medicare trustees is clear: kick the can down the road yet again, or begin addressing these pressing issues head-on. They’ve been postponing action for far too long as annual deficits, debt, and Medicare’s systemic troubles keep piling up. The time to act is running out.
