Medicare $ Is Not Running Out

O n May 2 headlines proclaimed that Medicare would run out of money by 2018. “US Medicare fund 12 years from running out,” was CNN’s headline. “Finances of Social Security and Medicare deteriorate” announced the New York Times . “Medicare’s fiscal health is declining” said the frontpage headline in the Minneapolis Star Tribune . According to the media, Medicare is going bankrupt. 

The source for these stories was the annual report of Medicare’s trustees. But the trustees did not say Medicare would run out of funds, they said Part A of Medi care, which finances hospital services, would run out of funds. Part A accounts for only 47 percent of total Medicare revenues. Parts B and D, which absorb the other 53 percent of Medicare revenues, are doing just fine. Part B finances physician services and tests. Part D finances drug coverage. 

Why is Part A “running out of money” while Parts B and D are not? Because Part A is financed with payroll taxes that all workers pay, while Parts B and D are financed primarily by “general funds,” i.e., by federal taxes like the income tax. Part B is financed about 75 percent by general funds and 25 percent by Part B premiums that are deducted from the Social Security checks of the seniors who sign up for Part B. Part D is financed about 80 percent by general revenues and the remainder by Part D premiums and a tax on Social Security benefits. 

Parts B and D, in other words, are financed similarly to the way the Pentagon is—with general revenues. Does anyone predict two decades in advance that the Pentagon will be broke in year x? Of course not. No one ever predicts the bankruptcy of Parts B or D in year x. “Crisis” and “bankruptcy” are predicted only for Part A because the payroll taxes that flow into the Part A trust fund finance only a particular program, in this case, Part A.