Medicare at 60: A Popular Program Facing Challenges Free

Abstract

As Medicare approaches its 60th anniversary, it almost goes without saying that the program is both popular and successful. Medicare provides health insurance coverage to 67 million older adults and people with disabilities. Medicare is viewed favorably by Democrats, Republicans, and independents. Medicare has also helped to extend life expectancy and, in conjunction with the Civil Rights Act of 1964, narrow disparities in care. It is a vital source of revenue for hospitals, physicians and other health care providers, and health insurers, and it is an essential component of health and retirement security in the United States. These are among the reasons why Medicare is often considered a third rail in politics. Medicare also faces challenges stemming from the growing role of private plans, demographic shifts, and rising health care costs. This article examines these challenges by focusing on three fundamental questions: What are the implications of the transformation taking place such that private insurers are playing a more dominant role in providing Medicare benefits? What changes may be important for addressing the gaps in covered benefits and related affordability challenges? And how can Medicare be sustained to finance care for current and future generations?

As Medicare approaches its 60th anniversary, it almost goes without saying that the program is both popular and successful. Medicare provides health insurance coverage to 67 million older adults and people with disabilities. Like Social Security, Medicare is viewed favorably by Democrats, Republicans, and independents (Kirzinger et al. 2023). It also gets high satisfaction ratings among the people it covers (Pollitz et al. 2023). Medicare has helped to extend life expectancy and, in conjunction with the Civil Rights Act of 1964, narrow disparities in care (Fried 2015; James 2015). The program is firmly embedded in the fabric of the US health care system and is a vital source of revenue for hospitals, physicians and other health care providers, and health insurers (Hacker 2015). Moreover, Medicare is an essential component of health and retirement security in the United States (Oberlander 2015). These are among the reasons why candidates often promise to protect Medicare, along with Social Security, during political campaigns.

Notwithstanding its positive attributes, Medicare faces challenges stemming from the growing role of private plans, demographic shifts, and rising health care costs. This article examines these challenges by focusing on three fundamental questions that could frame future policy decisions: What are the implications of the structural transformation taking place such that private insurers are playing a more dominant role in providing Medicare benefits? What changes may be important to address the major gaps in covered benefits and related affordability challenges facing an older and more diverse beneficiary population? And, considering the fiscal challenges posed by an aging population and rising health care costs, how can Medicare be sustained to finance care for current and future generations?

The Expanding Role of Private Plans in Medicare

Over the past 20 years, Medicare has gradually transformed into a program that delivers benefits through a marketplace of private plans, with a shrinking (but still significant) role for traditional Medicare. Since the Medicare Modernization Act of 2003, Medicare Advantage enrollment has increased steadily because of a variety of factors, including stronger financial incentives to encourage insurers to participate in this market, new “Medicare Advantage” branding to enhance the appeal of health maintenance organizations (HMOs) and preferred provider organizations (PPOs) as an alternative to traditional Medicare, and the establishment of the Medicare Part D prescription drug benefit that is administered exclusively by private plans (Jacobson and Blumenthal 2023). Over the past two decades, as the share of enrollment in Medicare Advantage has nearly quadrupled from 14% of the eligible population in 2005 to 54% in 2024, enrollment in traditional Medicare has steadily declined and now covers less than half of the total Medicare population (Freed, Fuglesten Biniek, et al. 2024) (fig. 1).

The increasingly prominent role of private insurers in Medicare has important implications for beneficiaries, health care providers, Medicare spending, and more broadly, the health care system.

Implications for Beneficiaries

For beneficiaries, the Medicare Advantage marketplace offers some benefits, some risks, and most certainly some additional complexity. Due in large part to payment policies adopted over the years to encourage private insurers to participate, they have flocked to this market. Consequently, beneficiaries across the country can choose from among dozens of Medicare Advantage plans. Medicare Advantage plans, unlike traditional Medicare, are required to provide a cap on out-of-pocket spending, which helps to limit beneficiaries’ exposure to high medical expenses. They almost always offer benefits that are not covered by traditional Medicare, such as dental, vision, and hearing coverage, and gym memberships. Some insurers offer meals after hospital stays and transportation to medical appointments that may be particularly helpful to patients who need additional support.

Most insurers offer these additional benefits without charging a premium beyond the standard Medicare Part B premium (for reasons related to the Medicare Advantage payment system described below). In contrast, people with traditional Medicare often pay a premium for a separate Medicare Part D plan and for supplemental coverage (Medigap or employer-sponsored retiree health benefits). For beneficiaries living on modest incomes, the combination of lower premiums and extra benefits often tips the scales in favor of Medicare Advantage over traditional Medicare.

Medicare Advantage plans are able to offer supplemental benefits in part because insurers use various strategies to manage their costs, which gives them more leeway to offer extra benefits in ways that may be less transparent to consumers. (As described later, supplemental benefits are also facilitated by the current payment system.) For example, one strategy for limiting costs is for plans to contract with limited networks of hospitals, physicians, and other health care providers, which essentially limits which health care providers enrollees can see unless they are able and willing to pay more to be treated outside their plan's network. This contrasts with traditional Medicare, which allows beneficiaries to have access to virtually all hospitals and doctors. In some areas, Medicare Advantage enrollees have also encountered problems maintaining ties with their existing health care providers because some hospitals, health systems, and medical groups have terminated contracts with Medicare Advantage insurers over delays in payments and more restrictive coverage determinations and payment rates (Clark 2023; Emerson 2023).

In addition, Medicare Advantage plans, unlike traditional Medicare, typically use tools to manage potentially unnecessary or inappropriate utilization and costs, such as prior authorization requirements. Insurers use these tools to help manage costs, but their use can result in delays in or denials of care or denials for payment of services ordered by health care providers. In 2022, more than 46 million prior authorization requests were submitted to Medicare Advantage insurers on behalf of Medicare Advantage enrollees, amounting to 1.7 prior authorization requests per enrollee (Fuglesten Biniek, Sroczynski, et al. 2024). Medicare Advantage insurers often require prior authorization for postacute skilled nursing facility stays and home health care, which may contribute to fewer days of care being provided in high-cost care settings, thus reducing costs incurred by the plan, which may help to cover the cost of extra benefits (Ochieng and Fuglesten Biniek 2022; US Senate Permanent Subcommittee on Investigations 2024).

The proliferation of private Medicare Advantage plans has introduced more choice for beneficiaries along with complexity when it comes to coverage decisions. Although beneficiaries in traditional Medicare have the broadest possible choice of doctors, hospitals, and other health care providers, the Medicare program has evolved to give greater emphasis to choice among insurers and plans. The average Medicare beneficiary has the option to choose between the traditional Medicare program and Medicare Advantage, and can choose among 42 Medicare Advantage plans (34 of which include prescription drug coverage) offered by eight insurers in 2025 (Fuglesten Biniek, Freed, et al. 2024).

Plans vary in many ways that are both important and sometimes difficult to decipher, including cost sharing for covered benefits, the generosity of extra benefits, provider networks, and formularies. Beneficiaries value having a choice, but they also say the process of comparing coverage options is daunting and that they often feel ill equipped to make these decisions without relying on insurance brokers (Freed, Cottrill, et al. 2023). In practice, only 3 in 10 beneficiaries say they review plan features from one year to the next (Ochieng et al. 2024).

Year-to-year changes in plan availability and design present another potential risk for beneficiaries. Insurers participate in the Medicare Advantage program voluntarily, in part because this market is relatively profitable, with higher gross margins than other health insurance markets (Ortaliza et al. 2024). However, profits are not guaranteed. While the availability of plans and generosity of coverage have generally increased over time, insurers regularly make changes to the markets in which they participate, the number of plans they offer, and the breadth and generosity of benefits (Freed, Damico, et al. 2023b). Assessing these changes can be a tall order for beneficiaries, particularly as they grow older and develop more medical conditions or cognitive impairments.

As a safeguard for beneficiaries who may not be satisfied with their Medicare coverage decision, federal law allows beneficiaries to switch Medicare Advantage plans each year or to switch between Medicare Advantage and traditional Medicare during the annual open enrollment period. Because traditional Medicare has relatively high deductibles and cost sharing, and it lacks a cap on out-of-pocket expenses, most people who choose traditional Medicare have some form of supplemental coverage (Ochieng, Cubanski, and Neuman 2024). Medicare supplemental insurance (Medigap) policies, which are offered by private insurance companies, help to cover deductibles, coinsurance, and copayments for beneficiaries in traditional Medicare. However, beneficiaries who switch from Medicare Advantage to traditional Medicare are at risk of being denied a Medicare supplemental insurance (Medigap) policy if they have a preexisting condition, such as asthma, cancer, or heart disease (Freed, Ochieng, et al. 2024). Under a 1990 federal law, Medigap insurers are required to issue policies to Medicare beneficiaries without regard to preexisting conditions but under very limited circumstances, and principally only after people turn 65 and enroll in Medicare Part B. The Affordable Care Act (ACA) of 2010 provides strong federal guaranteed-issue protections to private health insurance, but these protections do not apply to the Medigap market. Only four states have full guaranteed issue protections for the Medigap market beyond minimum federal requirements (Freed, Ochieng, et al. 2024).

Implications of Medicare Advantage for Medicare Spending

The current payment system for Medicare Advantage is designed to expand beneficiaries’ access to private plans by making it financially attractive for insurers to deliver Medicare benefits throughout the country. On this measure, it has been quite successful. Specifically, with few exceptions, Medicare beneficiaries have the option to choose from dozens of Medicare Advantage plans, most of which offer expanded benefits without charging an additional premium, which has contributed to the growth in Medicare Advantage enrollment (Neuman, Freed, and Fuglesten Biniek 2024).

Under the current payment system, Medicare payments to Medicare Advantage plans are estimated to be higher than Medicare spending for similar beneficiaries in traditional Medicare. Medicare has always spent more on beneficiaries in Medicare Advantage than on those in traditional Medicare, and although the disparity declined following changes made in the ACA, the gap has widened in recent years. In 2024, Medicare was estimated to pay private insurers 22% more than it would have paid for similar people in traditional Medicare, amounting to an additional $83 billion, according to the Medicare Payment Advisory Commission (MedPAC 2024). That compares to 9% more in 2016, which translated into $15 billion in additional spending (MedPAC 2024). Higher spending for Medicare Advantage than for traditional Medicare puts a strain on the Hospital Insurance Trust Fund. It also contributes to higher Part B premiums for beneficiaries, including beneficiaries in traditional Medicare (CRFB 2023).

Several factors cause payments to Medicare Advantage plans to be higher than spending in traditional Medicare. In more than half of all US counties, the Medicare Advantage benchmark (the maximum amount the federal government is willing to pay private insurers) is set above spending on traditional Medicare beneficiaries. The quality bonus program,¹ which is intended to help consumers compare plans based on quality, pushes benchmarks even higher, despite concerns about the star rating system on which it is based (MedPAC 2020). Additionally, favorable selection into Medicare Advantage, the incentive to code diagnoses more intensively (“upcoding”), and, in some cases, outright fraud all lead to higher Medicare spending (MedPAC 2024).

Policy makers are beginning to give more attention to the higher spending for Medicare Advantage enrollees than for similar beneficiaries in traditional Medicare. The Centers for Medicare and Medicaid Services has been phasing in modest changes to payments to address the effects of upcoding, and has been strengthening the audit process. However, lawmakers in Congress have yet to focus on broader proposals to address relatively high Medicare expenditures associated with the Medicare Advantage program. In recent years, there has been little interest in pursuing proposals to slow the overall growth in Medicare spending, including but not limited to Medicare Advantage, in the absence of a broader focus on the federal deficit or national debt. Lawmakers may be concerned that a change in payments will lead insurers to exit the market or offer fewer extra benefits for enrollees, a potential consequence that the health insurance industry and its allies have emphasized in the context of relatively modest changes made by the Biden administration. In fact, the Medicare Advantage market has remained fairly robust based on insurer participation, the number of plans offered, extra benefits, and enrollment.

Implications of a Diminishing Role for Traditional Medicare

The growing role of Medicare Advantage also raises important questions about the future of the traditional Medicare program, including what part it will play in shaping and supporting the health care system more broadly. Although the share of Medicare beneficiaries who receive their coverage from Medicare Advantage plans has increased steadily, traditional Medicare remains an important source of coverage, particularly in areas where Medicare Advantage has not gained a strong foothold, and for people who prefer broader access to providers than is available in most Medicare Advantage networks.

In addition to providing health care coverage for 30 million seniors and people with disabilities, traditional Medicare serves other important functions that may warrant closer attention if current trends continue. For example, traditional Medicare provides substantial financial support for graduate medical education (GME) and to health care providers in underserved areas. This support includes funding to hospitals to pay for the direct and indirect costs of training new doctors, which supports most residency positions across the country. In addition, support for critical access hospitals (CAHs) allows these facilities to improve their financial stability, preserving access to health care services in rural communities. Furthermore, payment adjustments for hospitals that have a disproportionate share of low-income patients offset the costs of serving these patients.

To maintain support for these priorities, lawmakers would likely need to establish alternative payment approaches, which could create some financial uncertainty for hospitals that receive these payments. For example, traditional Medicare pays CAHs 101% of reasonable costs (CMS 2023a). Medicare Advantage plans, however, are not required to follow this practice, and some reports suggest private plans pay substantially less to CAHs, exacerbating their financial challenges because a growing share of hospital patients are covered by these plans (Dreher 2023). Although less directly related to Medicare Advantage enrollment levels, the formulas for GME and disproportionate share hospital payments are built into the inpatient prospective payment system rule that governs how traditional Medicare payments to hospitals for inpatient services are determined. As the role of traditional Medicare declines, it is not clear to what extent or how the federal government will continue to support GME, funding for safety net and other rural hospitals, and other priorities.

Traditional Medicare also serves as the basis for calculating benchmarks used to set payments to Medicare Advantage plans. The current system sets benchmarks based on the cost of providing Medicare-covered benefits to beneficiaries in a given county. As the share of beneficiaries in traditional Medicare declines, and if the relatively small population remaining in traditional Medicare is dissimilar to the Medicare Advantage population in that county (e.g., different health conditions or utilization patterns), then the current payment system becomes less and less effective as the basis for setting payments. Already, more than one third (37%) of Medicare beneficiaries currently live in a county where fewer than 40% of beneficiaries are covered by traditional Medicare (Freed, Fuglesten Biniek, et al. 2024).

Importantly, traditional Medicare also provides a benchmark for health care prices paid by Medicare Advantage and commercial insurers, without which insurers’ leverage in price negotiations could be diminished, which could lead to increases in health care prices and overall costs, including increasing costs for employers and premiums for people with private insurance. Commercial prices are often expressed as a percentage of Medicare rates and depend on a robust and comprehensive payment system under traditional Medicare to help constrain prices. Alternative approaches could be established, but that would not be a small undertaking.

In addition, lawmakers might also have to find alternative strategies to encourage and maintain quality standards among hospitals and health care providers. For example, to encourage higher-quality care, traditional Medicare imposes penalties on hospitals for 30-day hospital readmissions and hospital-acquired infections. It's not clear to what extent Medicare Advantage plans do the same, or how the absence of these and other quality standards embedded in traditional Medicare would affect patient care. Furthermore, without traditional Medicare, the federal government would lose some of its ability to test new payment and delivery system reforms.

Finally a key consideration for Medicare beneficiaries is that traditional Medicare serves as an important backstop for Medicare Advantage enrollees if their plans pull out of the market or if they are no longer satisfied with their coverage. A strong traditional Medicare program holds private plans accountable by providing a feasible alternative for beneficiaries to obtain Medicare benefits.

Policy Options to Restore Balance between Traditional Medicare and Medicare Advantage

There are a number of policy options that could be considered to respond to the challenges posed by the growing dominance of Medicare Advantage. To improve beneficiaries’ ability to compare their options, policy makers could limit the number of plans that are offered, and benefits could be standardized, especially with respect to supplemental benefits. Filling gaps in traditional Medicare, such as providing dental coverage or instituting an out-of-pocket cap, which have contributed to the exodus of beneficiaries from traditional Medicare to Medicare Advantage, would strengthen traditional Medicare's ability to hold private plans accountable by providing a viable and attractive coverage option. Requiring guaranteed issue for Medigap plans beyond a person's initial Medicare enrollment period could also help to facilitate movement into traditional Medicare from Medicare Advantage for those who decide that traditional Medicare better meets their needs, although doing so might also increase Medigap premiums.

The increase in Medicare spending caused by policies to address these challenges could be offset by changes in Medicare payments to private plans (McWilliams 2024). Here, there are a menu of options that could be considered, including revising how benchmarks are set, reforming the quality bonus program, making additional changes to the risk adjustment methodology, and reforming the star rating program. Of course, any reduction in payments to insurers that sell Medicare Advantage plans would face strong political opposition from insurers as well as from some members of Congress, potentially from both sides of the aisle. Reductions in payments could lead to fewer extra benefits, higher cost sharing, and more barriers to care, including more restrictive provider networks, which could trigger a backlash among enrollees. Those implications would have to be balanced against the benefits of a stronger traditional Medicare program and potentially lower Part B premiums for all beneficiaries.

Benefit Gaps and Affordability

Although Medicare is an invaluable source of health insurance coverage, people with Medicare can face high health care spending because of gaps in benefits, deductibles and other cost-sharing requirements, and monthly premiums. Medicare households spend twice as much of their annual household expenditures on health care as do households where no members are covered by Medicare (13.6% vs. 6.5%) (Ochieng, Cubanski, and Damico 2024). The larger burden of health care spending among Medicare households is a function of both higher health care service use and spending and lower average total household spending on food, housing, transportation, and other items.

Gaps in the Medicare benefit package—for example, no coverage for dental, vision, or hearing services under traditional Medicare, limited coverage of postacute home health and skilled nursing facility care, and virtually no coverage of long-term services and supports in either traditional Medicare or Medicare Advantage—mean that many Medicare beneficiaries lack coverage for services they are likely to need as they age.² Medicare Advantage plans typically cover benefits not covered under traditional Medicare, such as some dental, vision, and hearing services, but the value of these benefits is often capped, and they vary across plans. In addition, data are lacking on the extent to which enrollees actually use these benefits and how much people pay for these services.

The lack of coverage for long-term services and supports under Medicare means that beneficiaries who require these services often rely on family members for caregiving or pay substantial amounts out of pocket for this care, if they can afford it. The cost of long-term care can be prohibitively expensive. The median annual cost of a private room in a nursing home was $116,800 in 2023 and $288,288 for round-the-clock home health aide services (Chidambaram and Burns 2024), and few beneficiaries have the financial resources to pay these costs for an extended period of time. Women in both traditional Medicare and Medicare Advantage are most likely to be affected by Medicare's lack of coverage for long-term services and supports because they live longer than men, and half of all women ages 85 and older live alone—meaning they are less likely to have a spouse to provide caregiving at home when they are no longer able to care for themselves (Freed, Cubanski, et al. 2024).

Premiums and cost-sharing requirements add to the health care cost pressures facing Medicare beneficiaries. Medicare Part B premiums, which are paid by beneficiaries in both traditional Medicare and Medicare Advantage, reached almost $2,100 for a year of coverage in 2024 (CMS 2023b). Beneficiaries in both traditional Medicare and Medicare Advantage may also be subject to cost sharing for hospital stays, physician services, and other services as well as deductibles and cost sharing for prescription drugs. Beneficiaries in Medicare Advantage plans have the financial protection of an out-of-pocket limit for services covered under Medicare Parts A and B, but beneficiaries in traditional Medicare do not, which is why many opt for Medigap supplemental coverage if they can afford the monthly premiums (Neuman, Freed, and Fuglesten Biniek 2024).

Some Medicare beneficiaries have the financial resources to cover these out-of-pocket costs with ease, but many may struggle with their health care expenses as a result of having relatively low incomes and limited savings. One in four people with Medicare lived on incomes below $21,000 per person in 2023, and half lived on incomes below $36,000 per person (Cottrill, Cubanski, et al. 2024) (fig. 2). Median income declines with age and is lower for women than men and among Black and Hispanic beneficiaries than among white beneficiaries. Moreover, many Medicare beneficiaries have limited savings to draw on if they need to pay for expensive medical or long-term care. One in four Medicare beneficiaries had less than $17,000 in savings per person in 2023. Among people on Medicare, median savings is considerably lower among women than among men and is substantially lower among Black and Hispanic beneficiaries than among white beneficiaries (Cottrill, Cubanski, et al. 2024).

Gaps in benefits, premiums, and cost-sharing requirements, coupled with modest incomes and savings, take a toll on many people with Medicare. About one in eight Medicare beneficiaries (12%) said they had had problems paying or had been unable to pay medical bills in the last year. About one in four rate Medicare negatively in terms of their monthly premiums (27%) and out-of-pocket costs for doctor visits (21%) and prescriptions (24%), and more than one third (36%) reported that they had delayed or gone without dental care, vision or hearing services, prescription drugs, or a visit to the doctor in the previous year because of the cost (Pollitz et al. 2023). For comparison, a slightly higher share (17%) of people with employer-sponsored insurance reported problems paying medical bills, and roughly the same share (38%) reported delaying or going without certain services in the previous year because of the cost. More than one in five US adults ages 65 and older reported carrying debt related to health or dental care in 2022, which is half the rate (44%) among insured adults ages 18 to 64 (Cottrill, Neuman, et al. 2024; Lopes et al. 2022).

Medicare beneficiaries with low incomes and limited assets can qualify for varying forms of financial assistance to pay their Medicare costs. The Medicare Savings Programs provide for payment of Medicare Part B premiums and, in most cases, cost sharing through state Medicaid programs. The Medicare Part D Low-Income Subsidy program covers Part D premiums and subsidizes cost sharing for prescription drugs. Under federal guidelines, income eligibility for the Medicare Savings Programs tops out at 135% of the federal poverty level and 150% for Part D extra subsidies. These programs provide meaningful assistance to those who qualify, but the income thresholds that determine eligibility are considerably lower than for subsidies offered under the ACA, and millions of beneficiaries are estimated to be eligible but not enrolled (Feyman et al. 2024).

The Inflation Reduction Act of 2022 included measures that will help to ease the burden of high out-of-pocket costs for prescription drugs for people with Medicare. The law provides a new $2,000 out-of-pocket cap on prescription drug costs under Medicare Part D, a $35 cap on monthly costs for insulin, and free vaccines under Part D. These new cost-saving measures apply to beneficiaries in both traditional Medicare and Medicare Advantage. Costs for these new benefits are offset by requirements for the federal government to negotiate drug prices for some high-cost drugs in Medicare and for manufacturers to pay rebates to the federal government if drug prices increase faster than inflation (Cubanski, Neuman, and Freed 2023).

Although these changes will help make prescription drugs more affordable, affordability challenges are likely to persist in the absence of policy action. Among actions that could be proposed are adding coverage of dental, vision, and hearing services to traditional Medicare, along with helping with the cost of long-term services and supports, such as by supporting tax credits to unpaid family caregivers (proposed by President Donald Trump during the 2024 presidential campaign) or broadening Medicare to cover a new home care benefit (proposed by Vice President Kamala Harris during the 2024 campaign); placing an annual cap on out-of-pocket spending under traditional Medicare; and strengthening financial protections for low-income beneficiaries, such as by lifting the income and assets eligibility thresholds for the Medicare Savings Programs (KFF 2024a).

Taking steps to improve Medicare affordability and address benefit gaps could help to mitigate the need for beneficiaries in traditional Medicare to purchase supplemental coverage or the incentive to enroll in Medicare Advantage for extra benefits and out-of-pocket cost protection. However, the price tag for making improvements in traditional Medicare and enhancing financial subsidies for beneficiaries with modest incomes would likely be steep, which could affect Medicare spending and premiums, without other measures to offset the costs. There are a number of options that could be considered to help cover these costs, such as accelerating and expanding the Medicare drug price negotiations program established by the Inflation Reduction Act, adjusting down payments to Medicare Advantage plans, implementing site-neutral payments (establishing the same Medicare payment per service without regard to site of care), or increasing revenues.

Sustainability and the Fiscal Challenges Facing Medicare

Medicare is facing daunting demographic trends in the form of population aging and enrollment growth, which are contributing to the financial pressures that Medicare faces. The US population is aging, with the share of people 65 and older projected to increase from 17% in 2020 to 23% in 2050; among those 65 and older, the share of people 80 and older is projected to increase from 23% in 2020 to 37% in 2050 (US Census Bureau 2023). As the population ages, the number of people covered by Medicare is projected to grow by nearly a third in the next quarter century, rising from about 67 million in 2023 to close to 88 million people in 2050 (Boards of Trustees 2024).

The growth and aging of the Medicare population has implications for program spending because older beneficiaries incur higher average costs than younger beneficiaries. In 2022, Medicare spending per person was twice as high for 90-year-old beneficiaries as for 66-year-olds who had recently aged into Medicare ($20,026 vs. $9,679) (KFF 2024b) (fig. 3). As the population covered by Medicare ages, average Medicare spending per person overall will grow.

Notably, up until very recently, Medicare spending overall and per person was growing at historically low rates relative to previous time periods. Between 2010 and 2020, average annual growth in total Medicare spending was 5.9%, down from 9.0% between 2000 and 2010 (Cubanski and Neuman 2023). (For per capita spending, these rates were 1.9% and 7.4%, respectively.) The influx of younger, healthier beneficiaries since 2011, when the baby boom generation started becoming eligible for Medicare, was a contributing factor in the slower rate of growth in overall Medicare spending in the 2010s. Slower growth in Medicare spending can also be attributed to policy changes made by the ACA, including reductions in Medicare payments to Medicare Advantage plans and health care providers and increased revenues, and the Budget Control Act of 2011, which lowered Medicare spending through sequestration that reduced payments to providers and plans by 2% beginning in 2013 (since extended through 2032) (Buntin et al. 2022; CRS 2023; White, Cubanski, and Neuman 2014).

Looking forward, Medicare spending is projected to grow at a faster rate overall and on a per capita basis. Total Medicare spending grew by 8.1% in 2023 after growing by 6.4% in 2022 (Martin et al. 2024). In explaining the increase for 2023, Medicare's actuaries cited faster spending growth for hospital services and retail prescription drugs. Medicare spending growth is projected to drop to 5.7% in 2025 and then rise to 8.6% in 2026, with average annual growth of 7.6% between 2027 and 2032, although the actuaries expect spending growth rates to moderate in 2030 as a result of slower enrollment growth and negotiated drug prices (Fiore, Madison, and Poisal 2024). Medicare spending per enrollee is also expected to grow, in part because of implementation of benefit improvements, principally the $2,000 cap on out-of-pocket Part D spending that will contribute to higher Medicare per capita spending beginning in 2025.

In and of themselves, trends in population aging and Medicare enrollment growth might be less worrisome if per capita spending growth was flat and if revenue growth kept pace with overall spending increases. But as noted above, Medicare per capita spending is not projected to be flat, and revenue growth is not keeping pace with spending (CBO 2024a; Martin et al. 2024). One sign of the growing gap between revenues and costs is that the number of workers contributing payroll taxes that support Part A hospital insurance benefits to each Medicare beneficiary has been steadily declining since the late 2000s, dropping from about 4.0 workers per beneficiary to 2.8 in 2023 (Boards of Trustees 2024). A further reduction is projected in the coming decades.

The growth in the number of beneficiaries, the aging of the Medicare population, and the rise in Medicare per capita costs will put increasing financial pressure on Medicare and the federal budget and will contribute to higher costs for beneficiaries. Looking over the next decade, net Medicare outlays are projected to increase from $839 billion in 2023 to more than $1.7 trillion in 2034, or from 14% of the federal budget to 17% (CBO 2024b). Over these years, Medicare spending is expected to claim an increasing share of the nation's economic output, growing from a projected 3.1% of gross domestic product to 4.2% (CBO 2024b). The Congressional Budget Office projects that both population aging and health care cost growth will contribute to an increase in federal health spending per person over the next 30 years, including Medicare spending; but growth in per person health care costs alone accounts for more than two thirds of that increase (CBO 2024a). Projecting health care spending is a highly uncertain exercise, but it is difficult to imagine a scenario where Medicare spending per person does not increase at a pace faster than the revenues required to pay for it.

One commonly cited measure of Medicare's fiscal outlook is the date of depletion of the reserves in the Part A Hospital Insurance Trust Fund, currently projected by Medicare's Office of the Actuary (OACT) to occur in 2036 (Boards of Trustees 2024). This represents a five-year improvement in the outlook for the Part A trust fund since OACT's previous year's projection, which generally indicates more robust economic conditions. Medicare's Board of Trustees has estimated that a payroll tax increase of 0.35% (from 2.9% to 3.25%) or a spending reduction of 8% would restore the long-term solvency of the Part A trust fund (Boards of Trustees 2024). Importantly, however, the Congressional Budget Office has recently updated its projection of the Part A trust fund, extending the year of trust fund depletion to 2052, based on changes in projections of Part A spending and revenues and a change in CBO's modeling related to graduate medical education payments (CBO 2025). To date, the gap between the OACT and CBO trust fund solvency projections has not been reconciled.

The Medicare Part A trust fund is not facing an imminent financial crisis, with at a minimum more than a decade to go before the trust fund reserves are projected to be depleted; but putting off discussions about viable solutions could make choices more painful when the time comes to take action. The longer the delay in acting, the steeper the revenue increase or spending cuts required. There are a number of policies that could be considered to shore up the Part A trust fund, but the trade-offs and the politics are not easy since Medicare is a large source of revenue for hospitals, other health care providers, and insurers as well as a financial lifeline for beneficiaries. However, Congress has stepped in repeatedly over the course of Medicare's history to adopt changes to keep Medicare on sound financial footing. As noted earlier, the ACA made a number of changes in Medicare payment policies that helped to slow down program spending growth, which underscores that it is possible for policy makers to take action to alter and strengthen Medicare's financial trajectory.

Consideration of the status of the Part A trust fund alone does not provide a complete picture of Medicare spending, however. Medicare spending on physician services, hospital outpatient services, and other services covered under Part B now accounts for a larger share of Medicare spending than hospital services and other Part A–covered services, and by 2033 will account for more than half (52%) of total Medicare spending (Boards of Trustees 2024). Because of the nature of Part B financing—where there is no earmarked payroll tax, and instead general revenues and beneficiary premiums are formulaically adjusted based on expected spending for the coming year—there is no trust fund depletion date prompting lawmakers to consider steps to address rising program costs. And as Part B spending increases, so do monthly Part B premiums. As of 2024, the Part B premium alone accounts for 9% of the average Social Security benefit, which is just one of several components of out-of-pocket costs (KFF 2024b).

There has been a clear partisan divide among lawmakers on how to address Medicare's fiscal issues. Democrats have been more inclined than Republicans to support proposals to raise revenues, such as a proposal by President Biden to increase the Medicare tax on higher-income individuals (White House 2024). Republicans have been more inclined than Democrats to favor structural changes that would dismantle the defined benefit nature of the Medicare program, such as a proposal endorsed by the Republican Study Committee to implement a premium support model for Medicare (RSC 2024). In the past few years, there has appeared to be some bipartisan interest in modest adjustments to Medicare Advantage payments and in promoting site-neutral payments, but neither of these changes alone would be enough to have a substantial impact on the current trajectory of Medicare spending. Lawmakers also continue to discuss proposals related to prescription drug spending, but retail prescription drugs account for only about 10% of Medicare spending, which suggests that additional efforts here would also not significantly bend Medicare's cost curve (KFF 2024b). In contrast to proposals that might lower Medicare spending, President Trump has proposed to eliminate income taxes on Social Security benefits, which would negatively impact the solvency of both the Medicare Part A trust fund and the Social Security trust fund.

In recent years, lawmakers have shown little appetite for addressing Medicare's longer-term financial challenges by either reining in spending or increasing revenues, but a renewed focus on spending constraints could emerge, despite President Trump's campaign promises to make no cuts to Medicare or Social Security. Medicare savings proposals could also be considered in the context of legislation that extends tax cuts expiring in 2025.

Conclusion

The 60th anniversary of Medicare offers an opportunity to reflect on the program's enormous achievements and future challenges. Medicare, like the health care system itself, will face pressure to evolve in ways to meet the needs of an expanding, aging, and more diverse population. Lawmakers are likely to face difficult choices as they work to ensure that health care remains affordable for people with Medicare while also ensuring that the program has adequate resources to fund needed benefits.

The emergence of private plans as the dominant source of coverage in Medicare raises new and somewhat pressing questions for lawmakers, including whether and how to sustain traditional Medicare as an option for beneficiaries. Traditional Medicare is unlikely to fade away in the foreseeable future, but if current trends continue, its future role as a source of coverage will be greatly diminished. This is the result of policies that have promoted Medicare Advantage at the expense of traditional Medicare. A central question for lawmakers is whether to stay on this path toward a privatized Medicare or adopt policies to sustain and strengthen traditional Medicare for the future.

In the absence of meaningful policy change, the Medicare of tomorrow will look very different from the Medicare of today, and certainly very different from Medicare at its inception 60 years ago. How lawmakers respond to the challenges laid out here will help to chart a course for how tens of millions of older adults and people with disabilities get health coverage and care in the years ahead.

Acknowledgments

The authors wish to thank Alex Cottrill for his help in the preparation of the manuscript.

Notes

References