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Tax Policy Center
Medicare (HI) Trust Fund Collapse Will Cripple U.S. Hospital Services
This hospital surgical care crisis could happen as soon as 2030
Abstract
The Medicare Hospital Insurance (HI) Trust Fund, which finances Medicare Part A hospital coverage for seniors, is projected to be depleted by 2030 under Medicare’s High-cost scenario. At that point, Medicare is mandated to shift to a pay-as-you-go system, relying mainly on payroll tax revenue. This would result in sharp reductions in hospital reimbursements — covering potentially only 66.7% of projected costs by 2036.
Unlike Medicare Parts B and D, which are funded through general federal revenues and adjusted annually to meet expenses, Part A depends heavily on the HI Trust Fund. Its insolvency would place immense strain on the U.S. hospital system, which derives over 50% of surgical revenue from Medicare. Most hospitals, especially those with thin or negative margins, could not absorb a 33% cut in Medicare reimbursements.
Major surgeries such as heart procedures can cost hundreds of thousands of dollars. With Medicare unable to cover full costs, and private insurers unlikely to fill the gap affordably, seniors may find themselves without viable care options in the U.S.
As a result, many may turn to international medical tourism — particularly in countries like India, where surgical care is both high quality and significantly less expensive. However, this shift would only worsen the financial outlook for U.S. hospitals by accelerating patient outflows.
The article highlights a critical and time-sensitive healthcare challenge: the potential breakdown of hospital services for seniors following the projected collapse of the Medicare Part A Trust Fund.
Medicare basics
Medicare is the Government funded healthcare insurance for Seniors (65 +). Medicare is subdivided into three separate insurance programs:
- Medicare Part A covers hospital insurance
- Medicare Part B covers doctors’ visits
- Medicare Part D covers prescription drugs
These three insurance programs are each supported by their own trust fund.
- The Hospital Insurance (HI) Trust Fund supports Medicare Part A hospital insurance
- The Supplementary Medical Insurance (SMI) Trust Fund has actually two separate trust funds. One supports Medicare Part B (covering doctors’ visits), and another one supports Medicare Part D (drug coverage)
The above information is summarized in the table below.
Understanding Medicare finances
Each Medicare part (A, B, D) has its own separate income statement. You can see the most recent available one below.
The above financials indicate that HI-Part A is primarily funded by payroll taxes. Meanwhile SMI-Part B & D are primarily funded by Government contributions. The latter consists in Federal tax receipts (income tax, corporate tax, etc.).
Medicare funding and its implications
How a Medicare Part is funded has huge implications.
HI Trust Fund funding
If the HI Trust Fund is fully depleted, Medicare Part A can only pay hospital covered costs on a “pay-as-you-go” basis, limited to incoming revenues — mainly payroll taxes. Upon depletion, payments to hospitals and providers would be reduced to the level that can be covered by current payroll taxes and other smaller sources. This would mean that, absent legislative action, Medicare could not pay full benefits, and reimbursements would be delayed or reduced to match available income.
SMI Trust Fund funding
The SMI Trust Fund supporting Medicare Part B & D is far more resilient as it is mainly funded by the Federal Government tax receipts and to a lesser degree by premiums. The SMI Trust Fund is designed to be automatically balanced each year. Premiums and government contributions are adjusted annually to cover projected costs, making insolvency highly unlikely under current law. The risk of depletion is essentially nonexistent as long as Congress continues to appropriate the necessary general revenues and set premiums accordingly.
Funding and its implications summary
Medicare SMI Part B and D financial outlook is pretty good
Below see the Medicare 2024 annual report main scenario financial projection for the SMI trust funds Part B and Part D. The year 2023 consists of actual results. The projection covers the 2024–2033 period.
The above projections confirm that the SMI trust fund is on a sustainable footing. We notice that both Trust ratios (Begin balance/Expense) are projected to slightly decline over time. This is not much of a concern since both SMI trust fund for Part B and Part D are managed yearly near break even. In a sense, the SMI trust funds are not critically necessary to maintain the sustainability of Medicare Part B & D.
Medicare also issues another set of projections called the High-cost Scenario. The latter is associated with more adverse underlying demographic and economic assumptions relative to the main set of projections called Intermediate Scenario. For the SMI Medicare Part B & D, the High-cost Scenario makes very little difference. It also readily confirms that Medicare Part B & D are on solid financial footing as long as the US Government can roll over its Treasuries. Well, over the long term, that may be a bit of a question mark that is beyond the scope of this article. However, I covered this issue in an earlier article.
The US Fiscal Crisis
Absent the US defaulting on its Debt, the SMI Medicare Part B & D is on solid footing for the foreseeable future.
As we will soon see, the situation for the HI Part A is radically worse.
Medicare HI Part A financial outlook is terrible
Here I extended Medicare’s projections beyond 2033 until 2036. I did that by using the 5-year average growth rate in Income and Expense over the 2029–2033 period and calculating the resulting Income and Expense figures over the 2034 to 2036 period. Even if my method is simplistic, it is probably directionally relevant.
The Intermediate Scenario shows that the HI-Part A Trust fund would be fully depleted by the end of 2036. The gray zone indicates the years when this fund is depleted and would go negative. By Law, it would not be allowed to go negative. Here, I am simply letting the calculations run their course.
The High-cost Scenario shows that the HI-Part A Trust fund would be fully depleted by the end of 2030.
Remember when the HI Trust Fund is fully depleted, Medicare Part A can only cover hospital services on a pay-as-you-go basis. Given that, let’s look at the ratio of HI Income/Expense to see what % of expense it could cover over time.
The table and graph below show that:
- Under the Intermediate Scenario, HI Part A could only cover 87.4% of projected hospital cost in 2036.
- Under the High-cost scenario, HI Part A could only cover 82.4% of projected hospital cost in 2030. And, this coverage % would progressively drop to only 66.7% by 2036.
How would hospital services for Seniors survive after the collapse of the HI Trust Fund?
I don’t know that anyone knows.
What the general public does not realize is that major surgery can be extraordinarily expensive. Below see a sample of costs of various surgeries.
According to the sources, the cost of heart related surgeries can easily double when associated with any complications.
Even relatively mundane and common surgeries such as heart ablation to treat heart atrial fibrillation (a-fib) can be very expensive. Patients typically need two ablation surgeries to fully resolve their a-fib condition. And, the full treatment, including hospital stay can run a bill of $250,000 (according to a friend of mine who went through that a couple of years ago. Current costs are most probably higher).
Let’s explore the High-cost scenario associated with Medicare being able to reimburse only 2/3d of its full costs by 2036. How is that going to work?
On a pay-as-you-go basis, Medicare would be underfunded throughout the year. And, it would be unable to cover 100% of the cost it used to cover when the HI Trust Fund was supplementing its funding shortfall.
Who is going to cover the 1/3 of surgery costs that Medicare can’t cover anymore?
The private insurance sector can’t. It would have to charge exorbitant premiums just to breakeven on such a costly healthcare coverage. And, Seniors would not be able to afford such premiums.
The Government won’t readily come to the rescue as currently structured. As mentioned, Medicare Part A benefit costs are mandated to be restricted to the HI Medicare Part A receipts (mainly payroll taxes) once the HI Trust Fund is depleted.
Could hospitals take the hit of a — 33% discount on all Medicare covered surgeries? They most probably could not because of several considerations:
- Medicare covered surgeries account for over 50% of hospitals’ surgical care revenues. Thus a 33% reduction in Medicare reimbursement would result in an overall reduction in surgical revenues of more than — 16.5%.
- The high performing for profit hospital chains have pre tax profit margins of close to 12% (HCA Healthcare). But, several private hospital chains are currently struggling and operating at a loss (Community Health Systems).
- Non for profit hospital chains margins are low ranging from 1% to 4%.
- Neither the for profit or non for profit hospital sectors could remain in business when subject to — 33% discount on Medicare reimbursement.
If you are a Senior needing surgery in the near future, schedule it before 2030 (when the HI Trust Fund is expected to be depleted according to the High-cost scenario). Beyond that date you may have to go to India where surgical care is excellent and costs a small fraction vs the US.
US patients going to India would give them access to affordable surgical care. But, this flow of patients to India would only accelerate the demise of US hospital services.
THE END
Gaetan Lion is an independent researcher with expertise in economics, econometrics, investments, risk management, statistics, and quantitative analysis. His areas of interest include demographics, economics, investments, Climate Change, health care, sports, and politics.