Many observers have noted that Medicare expenditures will significantly outstrip projected revenues over the course of the next 25 years. This paper examines the economic and demographic assumptions behind forecasts of Medicare hospital insurance and supplementary medical insurance expenditures and revenues and analyzes various strategies for closing the impending gap. It is argued that the present forecasts already assume considerable success in controlling hospital costs and physician payments, making substantial further savings unlikely. Shifting more of the burden onto the elderly through increased cost sharing or higher premiums also will not solve the program's fiscal problems over the long term. The remaining alternativeimposing higher income or payroll taxes on the under-65 population is also unlikely to be a welcome solution. The authors argue that, eventually, the nation must choose between some form of a two-tier system of benefits or a Canadian-style national health insurance system.

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