In 2023, Medicare spent an average of $16,710 on health-care benefits for 67 million covered beneficiaries. America’s 161 million workers, who do not currently receive benefits, paid for the bulk of the program’s cost. While this arrangement has successfully financed health care for elderly and disabled Americans unable to work, it’s unlikely to be sustainable if Medicare’s cost doubles over the coming decade, as projected.
To see how we got here, consider the program’s history. The American health-insurance industry grew rapidly in the years following World War II, as many employers bought coverage for their employees. Those employer-sponsored plans, of course, didn’t cover people who were out of the labor force. As medical capabilities and longevity increased, hospitals struggled to finance treatment for the uninsured elderly, and business- and family-purchased plans were unable to fill the gap.
In 1965, Congress established Medicare to pay for the bulk of medical bills that the elderly incurred, and it expanded the program in 1972 to cover the disabled. Thanks to Medicare, Americans 65 and older in 2022 received medical services worth more than twice as much (an average of $14,310) as those received by Americans aged 25 to 64 ($7,096) but paid less in premiums and out-of-pocket costs ($2,216 vs. $2,586).
Medicare is a pay-as-you-go plan, financed largely by taxes on the workforce. In 2023, premiums paid by beneficiaries covered only 15 percent of its cost. A dedicated payroll tax on labor paid for about 36 percent, and the rest was financed by a combination of federal taxes, state taxes, and debt—borne primarily by today’s workers.
Most of today’s Medicare beneficiaries previously made net tax contributions to earlier generations’ benefits. But with growing medical capabilities and lengthening lifespans, today’s recipients now cost the program much more than they have previously contributed. In 2023, Medicare beneficiaries received $882 billion more in benefits than they paid in premiums. In 1990, when today’s recipients were still in the workforce, taxpayers’ net contribution was only $99 billion ($232 billion after adjusting for inflation).
Trouble lies ahead. Medicare’s trustees estimate that costs will more than double again over the next decade, while the number of workers per retiree will continue to shrink. The program needs a major funding boost to avoid reform. Who will provide it?
One answer, proposed in a recent study by Joe Albanese of the Paragon Health Institute, is to make wealthy Medicare beneficiaries pay for more of their benefits. Albanese notes that such a proposal was supported by both the liberal Obama administration and the conservative Heritage Foundation. Currently, only 8 percent of beneficiaries (those with annual incomes above $103,000) pay premiums that cover more than a sixth of their total Medicare expenses. And only 0.2 percent (those making more than $500,000) pay premiums covering as much as half of their program expenses.
Congress has gradually increased the premiums that the highest earners pay for Medicare’s Part B physician services—most recently in 2015. But fear of political blowback has kept lawmakers from going much further, and the premium hikes have done little to offset the program’s mounting costs.
This is unlikely to change much soon. The median personal income of those 65 and older was only $29,740 in 2022. Medicare already spent $16,710 per enrollee in 2023. If cost indeed doubles over the coming decade, seniors are unlikely to be able to bear much of the additional expense.
No one is eager to pay for the projected increase in Medicare costs, and lawmakers struggle to enact any policy change that leaves a large group of voters substantially worse off. A better approach, then, is to slow the rapid escalation of the program’s outlays. Most Medicare spending growth is caused by the automatic expansion of the program’s benefits to pay for any newly developed medical service, regardless of cost or effectiveness. Requiring beneficiaries to pick up the tab for some of these innovative offerings would reduce the burden on American workers.
For now, Americans can sustain their current level of support for Medicare recipients. But as costs continue surging, and major reform of the program seems distant, policymakers should at least make today’s beneficiaries pay for supplemental coverage of expensive new therapies. That would be a small step toward right-sizing a program growing ever costlier.
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