SOLVENCY OR AFFORDABILITY? WAYS TO MEASURE MEDICARE’S FINANCIAL HEALTHby Marilyn Moon and Matthew Storeygard
The Urban Institute
Prepared for The Kaiser Family Foundation
March 2002
How Medicare is FinancedBefore turning to these measures, it is useful to review how the Medicare program is funded. The two parts of the program have totally different revenue streams.
Part A, Hospital Insurance, is supported mainly by payroll taxes currently set at 1.45 percent each on employers and employees. Additional revenues come from taxation of Social Security benefits and some small general revenue transfers. Revenues are held in a trust fund that grows over time and pays out Part A expenditures on behalf of current beneficiaries. Surplus trust fund dollars are exchanged for Treasury securities and held as promises to pay benefits for future beneficiaries.
The build up in the Trust Fund is intended to assure individuals that the promises of future benefits will be kept. Moreover, it is effectively a way to ask current taxpayers (including the Baby Boom generation which will benefit in the future) to pay more in taxes now than is necessary to fund current Part A Medicare benefits.
Part B, Supplementary Medical Insurance, is supported by premiums from enrollees (equal to 25 percent of the costs for elderly beneficiaries) and from general revenues. The law, in place since Medicare began, requires that general revenues be devoted to Part B in whatever amounts are needed to pay benefits. Thus, although there is also a Part B trust fund, it is, by law, kept in balance and hence is usually ignored in solvency discussions.
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http://www.kff.org/medicare/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=14160(22 page PDF file)