Medicare spending was 15 percent of total federal spending in 2017, and is projected to rise to 18 percent by 2028. Based on the latest projections, the Medicare Hospital Insurance (Part A) trust fund is projected to be depleted in 2026, three years earlier than the 2017 projection, the Kaiser Family Foundation (KFF) points out in its new report, "The Facts on Medicare Spending and Financing."

In 2017, Medicare benefit payments totaled $702 billion, up from $425 billion in 2007. But as a share of total Medicare benefit spending, payments to Medicare Advantage plans for Part A and Part B benefits nearly doubled between 2007 and 2017, from 18 percent ($78 billion) to 30 percent ($210 billion), as enrollment in Medicare Advantage plans increased over these years.

Medicare per capita spending is projected to grow at an average annual rate of 4.6 percent over the next 10 years because of growing Medicare enrollment, increased use of services and intensity of care, and rising healthcare prices.

Medicare as a Share of the Federal Budget, 2017 (Courtesy Kaiser Family Foundation)

This is of obvious importance because as the federal health insurance program for nearly 60 million people ages 65 and older and younger people with permanent disabilities, Medicare helps to pay for hospital and physician visits, prescription drugs and other acute and post-acute care services.

Medicare accounted for 20 percent of total national health spending in 2016, 29 percent of spending on retail sales of prescription drugs, 25 percent of spending on hospital care and 23 percent of spending on physician services.

Average annual growth in total Medicare spending was 4.5 percent between 2010 and 2017, down from 9 percent between 2000 and 2010, despite faster growth in enrollment since 2011 when the baby boom generation started becoming eligible for Medicare.

Medicare Benefit Payments for Part A, B, and D, 2007 and 2017 (Courtesy Kaiser Family Foundation)

Slower growth in Medicare spending in recent years can be attributed in part to policy changes adopted as part of the Affordable Care Act (ACA) and the Budget Control Act of 2011 (BCA). Although Medicare enrollment has been growing around 3 percent annually with the aging of the Baby Boomer generation, the influx of younger, healthier beneficiaries has contributed to lower per capita spending and a slower rate of growth in overall program spending, the KFF said.

Spending Trends for Medicare Compared to Private Health Insurance

In the 1990s and 2000s, Medicare spending per enrollee grew at an average annual rate of 5.8 percent and 7.3 percent, respectively, compared to 5.9 percent and 7.2 percent for private insurance spending per enrollee.

Between 2010 and 2017, Medicare per capita spending grew more slowly than private insurance spending, increasing at an average annual rate of just 1.5 percent over this time period, while average annual private health insurance spending per capita grew at 3.8 percent.

Medicare spending is expected to continue to grow more slowly in the future compared to long-term historical trends, the Congressional Budget Office (CBO) projects.

Medicare spending will double over the next 10 years. The CBO says Medicare spending will likely increase from $583 billion in 2018 to $1.3 trillion in 2028. Between 2018 and 2028, net Medicare spending also is projected to grow as a share of the federal budget — from 14.1 percent to 17.9 percent — and the nation’s economy — from 2.9 percent to 4.2 percent of gross domestic product.

Also, the average annual growth in total Medicare spending is projected to be higher between 2017 and 2027 than between 2010 and 2017 (7.3 percent versus 4.5 percent).

Long-Term Spending Projections

Beyond the next 10 years, the CBO said it expects Medicare spending to rise faster than GDP because of factors that include the aging of the population and faster growth in healthcare costs than growth in the economy on a per capita basis. According to the CBO’s most recent long-term projections, net Medicare spending will grow from 2.9 percent of GDP in 2018 to 6.1 percent in 2047.

"Over the next 30 years, the CBO projects that ‘excess’ healthcare cost growth defined as the extent to which the growth of healthcare costs per beneficiary, adjusted for demographic changes, exceeds the per person growth of potential GDP will account for 60 percent of the increase in spending on the nation’s major healthcare programs (Medicare, Medicaid, and subsidies for ACA Marketplace coverage), and the aging of the population will account for the remaining 40 percent," the KFF report said.

As mentioned at the beginning of this article, according to recent government projections, the Part A trust fund will be depleted in 2026, three years earlier than the 2017 projection. Actuaries estimate that Medicare will be able to cover 91 percent of Part A costs from payroll tax revenue in 2026.

Part B and Part D do not have financing challenges similar to Part A because both are funded by beneficiary premiums and general revenues that are set annually to match expected outlays.

Changes to Medicare to help address spending challenges include: restructuring Medicare benefits and cost sharing; increasing Medicare premiums for beneficiaries with relatively high incomes; raising the Medicare eligibility age; and shifting Medicare from a defined benefit structure to a "premium support" system.