Association for Public Policy Analysis & Management

Medicare is financed through a payroll tax, premiums paid by beneficiaries, and through general revenues.  From the inception of the Trust Fund, the Medicare Trustees have made projections of future revenues and disbursements to ensure that Trust Fund balances are adequate to pay future costs; they also forecast total Medicare spending as a share of GDP.  As baby boomers retire and Medicare covers a larger share of the national population, Medicare’s share of the federal budget and the economy is expected to increase. Yet, since 2000, the overall financial outlook for the program – particularly the anticipated cost of the program in terms of general revenue – has substantially improved even as the level of benefits covered by the Medicare has been enhanced.  Changes in both policy and forecasts over the past fifteen years suggest that there is scope for considerable optimism about the ability of our nation to afford the Medicare program into the future. As the nation again considers options for Medicare going forward, it is useful to understand how the program has evolved over time.  The challenges of accurately projecting future Medicare disbursements have significant implications for the content, timing and scale of Medicare policy decisions. Current and future beneficiaries have very little control over the likely overall costs and benefits of medical care, which are primarily a function of unforeseeable technological innovation and responses to payment and other program policies.  This underscores the rationale for social insurance for retiree health care costs and strengthens the case for focusing policy decisions on the immediate policy window.  Current policymakers should take steps to reduce the current burden of Medicare costs by containing current spending.  Future policymakers are likely to have as much opportunity and much more information to make optimal Medicare decisions including ways to finance Medicare.