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The American Academy of Actuaries is the nonpartisan professional organization for actuaries in the United States. Actuaries are risk professionals who quantify and assist in managing risk, and apply their expertise and knowledge to a wide range of problems facing people in their everyday lives and businesses. In their work of estimating the costs of uncertain future events, actuaries utilize objective data in their modeling of risk.


Medicare has played a vital role in providing health care benefits to nearly all Americans age 65 and older. The program, however, faces long-term sustainability challenges. Medicare spending will increase dramatically over the next few decades as the Baby Boomer population ages into the program and health spending per beneficiary grows. At the same time, the number of workers per enrollee will shrink. As a result, benefit payments are expected to exceed payroll taxes, threatening solvency of one of its major trust funds. And Medicare will make up an increasing share of federal government and household spending, meaning less will be available for other needs.

Medicare’s challenges are not solely financial. Medicare beneficiaries are a diverse group with diverse health care needs. Certain beneficiary populations are particularly vulnerable to having high health care needs, such as those with a disability, multiple chronic conditions, or cognitive impairments. In addition, many beneficiaries have limited resources to rely upon if faced with high out-of-pocket health costs. Another issue is whether the Medicare benefit design, which has remained mostly unchanged since the program was enacted in 1965, is meeting the needs of beneficiaries.


Medicare’s Financial Challenges


Medicare provides a wide range of health care benefits that are financed through two trust funds. The Hospital Insurance (HI) trust fund supports Medicare Part A, which covers inpatient hospital care and post-acute care services such as skilled nursing facility care and home health care services. The Supplementary Medical Insurance (SMI) trust fund supports Medicare Part B—hospital outpatient care, doctor visits, lab tests, and medical supplies—and Part D prescription drug coverage.


HI trust fund income falls short of the amount needed to pay HI benefits. Medicare’s HI trust fund receives revenues from payroll taxes and pays for beneficiaries’ inpatient hospital and post-acute care services. It had built up a surplus of $202 billion at the end of 2017 but is projected to be depleted in 2026.[1] At that time, tax revenues are projected to cover only 91 percent of program costs, with the share declining to 79 percent in 2050.


No current provision exists for general fund transfers to cover HI expenditures in excess of dedicated revenues, so additional revenues would need to be raised, benefits cut, or some combination of the two. Eliminating the looming deficit over the next 75 years would require an immediate 28 percent increase in payroll taxes, an immediate 17 percent reduction in expenditures, or some combination of both.


Higher SMI costs increase pressure on beneficiary household budgets and the federal budget. Medicare’s SMI trust fund receives about three-quarters of its funding from federal general tax revenues and one-quarter from beneficiary premiums. The SMI trust fund is expected to remain solvent because its financing is reset each year to meet projected future costs. But increases in SMI costs will require increases in beneficiary premiums and federal tax dollars, which will add pressure to the federal budget. SMI general revenue funding is scheduled to increase from 2.1 percent of gross domestic product (GDP) in 2017 to 3.9 percent in 2092.


SMI premium increases similarly will place pressure on beneficiaries, especially when considered in conjunction with increasing beneficiary cost-sharing expenses. The average beneficiary expenses (premiums and cost-sharing) for Parts B and D combined currently equal 23 percent of the average Social Security benefit. These expenses will increase to 35 percent of the average Social Security benefit by 2092.


Increases in total Medicare spending threaten the program’s sustainability. Because Medicare spending is expected to continue growing faster than GDP, greater shares of the economy will be devoted to Medicare over time, meaning smaller shares of the economy will be available for other priorities. Medicare expenditures as a percentage of GDP are projected to grow from 3.6 percent of GDP in 2017 to 5.9 percent of GDP in 2092.


Meeting the Needs of the Beneficiary Population


Medicare is not a “one-size-fits all” program; it serves diverse populations with diverse needs. Several paths can lead to Medicare eligibility, including turning age 65, becoming permanently disabled, and being diagnosed with end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS). Each of these avenues can signal particular health care needs. And even within eligibility categories, beneficiary characteristics and needs can differ. As a result, any program changes should be considered in light of how they may impact the broad range of Medicare beneficiaries.


Certain Medicare beneficiary subgroups are particularly vulnerable. Many Medicare beneficiaries have characteristics associated with high health care needs, increasing the importance of access to affordable health care services. Thirty percent of Medicare beneficiaries have five or more chronic conditions, and 36 percent have a cognitive or mental impairment.[2] Twenty-seven percent report being in fair or poor health, and 36 percent have limitations with at least one activity of daily living, which include eating, bathing, toileting, dressing, and functional mobility.[3] The increased need for health care services often is coupled with a reduced ability to pay for those services. Median income for the Medicare population is $26,200 and median assets are $74,540,[4] indicating that many beneficiaries have limited resources to rely upon if faced with high out-of-pocket health costs. In addition, over 11 million Medicare beneficiaries are dually eligible for Medicaid.[5]


Medicare spending varies by subgroup. Medicare spending is on average higher for disabled beneficiaries than beneficiaries aged 65 and older and for dual eligibles than for non-dual eligibles. Spending per beneficiary differs even more dramatically by the number of chronic conditions, increasing from about $2,000 for those with zero or one chronic health condition to over $30,000 for those with six or more conditions.[6] The nature of the services received also differs by chronic condition, with a larger share of spending going toward inpatient hospital care and other Part A services for those with more chronic conditions.


A small share of Medicare beneficiaries accounts for a large share of Medicare spending. The most costly 5 percent of Medicare’s traditional fee-for-service (FFS) program beneficiaries account for over 40 percent of Medicare FFS spending.[7] The most costly 25 percent of beneficiaries account for over 80 percent of spending. The least costly 50 percent of beneficiaries account for less than 5 percent of spending.


Limitations of Medicare benefit coverage. Medicare provides health insurance coverage for a broad range of health care services. With the notable exception of adding the prescription drug program in 2006, however, Medicare’s traditional fee-for-service benefit package has remained mostly unchanged since the program was enacted in 1965. There are calls for a restructuring to provide greater financial protection and also to encourage beneficiaries to seek cost-effective care.


The traditional Medicare benefit package doesn’t coordinate cost-sharing between Medicare parts A and B, doesn’t cap out-of-pocket costs, and doesn’t cover vision, dental, and hearing services. As a result, most beneficiaries enrolled in traditional Medicare have supplemental coverage that provides more protection against catastrophic costs. Medicare Advantage plans offer catastrophic protection and more benefit design flexibility, and may also offer extra benefits not typically covered in traditional Medicare. Medicare provides only very limited coverage of long-term care services and supports, regardless of whether beneficiaries enroll in traditional Medicare or Medicare Advantage.


Revising the traditional Medicare benefit structure has been proposed to address the shortcomings of the current benefit structure as well as to help encourage Medicare beneficiaries to seek more cost-effective care. One such option is to include a new out-of-pocket cost-sharing limit along with unifying the Part A and Part B deductibles and restructuring the copayment and coinsurance requirements. In the longer term, moving to a value-based insurance design (VBID) and allowing supplemental benefits for beneficiaries with certain conditions could allow for better targeting of health care services.


Medicare Premium Support


Premium support is an option that has been proposed as a way to improve Medicare’s financial condition. Currently, Medicare beneficiaries can choose to enroll either in the traditional fee-for-service Medicare program or in a private Medicare Advantage plan. Under a premium support approach, Medicare beneficiaries would receive a government contribution to apply toward the premium of a health plan of their choice, usually either the traditional Medicare program or a Medicare Advantage plan. Beneficiaries who choose a plan with a premium greater than the government contribution would be responsible for paying the difference.


A premium support approach would limit the federal contribution toward Medicare, which could more directly foster competition between plans. This could encourage insurers to develop and beneficiaries to choose more cost-effective health plans. On the other hand, depending on how the government contribution is determined, premium support could simply shift costs to beneficiaries rather than reduce overall Medicare spending. Ensuring overall Medicare savings rather than just savings to the federal government may require that plans are structured to facilitate higher-quality care and more cost-effective health care payment and delivery systems.


Several details are important in determining how beneficiaries would fare and whether Medicare spending would be contained, including:


  • What is the government contribution? Options for setting the initial government contribution include setting it at the estimated average per-beneficiary cost under the current Medicare program or using competitive bidding to determine the amount (e.g., the lowest bid, a percentage of the average bid). Contributions could be set nationally or by region. Depending on the specific option chosen and premiums for plans offered, beneficiary premiums could be greater or less than what they would have paid under the current Medicare program. Also important is how the government contribution would increase over time. If the contribution doesn’t keep pace with health spending, growth could put pressure on insurance plans to contain costs. Yet, such a practice also could risk a greater share of Medicare costs being shifted to beneficiaries over time, either through higher premiums or higher cost-sharing.


  • How is the benefit package defined? Similar to the current requirement for Medicare Advantage plans, plans operating under a premium support structure could be required to provide at least the same benefits offered in traditional Medicare. An alternative would allow for more leeway in designing benefit packages so innovative benefits and designs could be more quickly adopted. If more flexibility were allowed, it would also be important to ensure that such flexibility does not lead to adverse risk selection issues. Plans should not be allowed to use benefit design flexibility to attract only lower-cost enrollees or avoid higher-cost enrollees.


  • Are low-income beneficiaries financially protected? Low-income individuals can be more at risk for avoiding or delaying health care due to costs. Currently, many low-income Medicare beneficiaries receive premium subsidies, cost-sharing subsidies, or expanded benefits, funded and administered in part by state Medicaid programs. A premium support program could be structured to include such protections; however, several complex issues would need to be resolved, including how such protections would be funded, whether state-by-state variations in Medicaid coverage would be retained, and how the plan bidding process would reflect these protections.


Improving Medicare’s Sustainability


Putting Medicare on a more sustainable path for current and future generations of beneficiaries will require policymakers to make some choices regarding benefit coverage, provider and plan payments, and taxpayer funding. Some fundamental questions to consider when assessing candidates’ Medicare reform proposals include:


  • How can we address Medicare’s long-term financing challenges?

  • How can we balance the goals of ensuring that Medicare beneficiaries have access to high-quality health care that is also affordable to them and to the nation as a whole?

  • How do proposals affect particularly vulnerable beneficiaries, including those with special health care needs or limited financial resources?

  • Should we change the benefit structure of the traditional Medicare program and/or allow coverage of additional services to meet the needs of an aging population?


Additional resources from the American Academy of Actuaries


Medicare’s Financial Condition: Beyond Actuarial Balance (June 2018)

Medicare at 50: Is It Sustainable for 50 More Years? (July 2015)

Medicare at 50: Who Are the Beneficiaries? (July 2015)

Medicare at 50: Does It Meet the Needs of the Beneficiaries? (July 2015)

Medicare at 50: Medicare Advantage Plans (October 2015)

Addressing Health Care Cost Growth in Medicare: A Framework (June 2015)

A Guide to Analyzing Medicare Premium Support (February 2013)

Revising Medicare’s Fee-For-Service Benefit Structure (March 2012)


[1] Medicare trust fund data throughout this section is from the 2018 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

[2] Kaiser Family Foundation; An Overview of Medicare; November 2017.

[3] Ibid.

[4] Ibid.

[5] CMS Medicare-Medicaid Coordination Office; Data Analysis Brief: Medicare-Medicaid Dual Enrollment from 2006 through 2016; November 2017.

[6] Centers for Medicare and Medicaid Services; Chronic Conditions Dashboard; available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Dashboard/chronic-conditions-county/cc_county_dashboard.html; accessed May 16, 2018. Figures reflect Medicare spending in 2015.

[7] Medicare Payment Advisory Commission (MedPAC); A Data Book: Health Care Spending and the Medicare Program; June 2017. Figures reflect spending distributions in 2013.