In June 2025, the Medicare Trustees released their annual report, revealing that the Hospital Insurance trust fund is now projected to be insolvent by 2033 – three years sooner than previously estimated. Once the fund depletes, Medicare would only be able to pay 89% of scheduled Part A benefits, putting older adults, hospitals, and the health system under stress.
Many Americans have come to rely on Medicare. The vast majority (~88%) of the funding for inpatient hospitalizations originates from a 2.9% payroll tax split evenly between US employers and employees. These funds go into an account known as the Medicare Part A Hospital Insurance trust fund.
If Medicare’s hospital insurance fund runs out of money, Medicare won’t go bankrupt. However, the US’ single largest insurer will likely be forced to slash reimbursement for inpatient hospitalization – meaning that if hospitals charge Medicare $100 for care they provide, Medicare would only be able to pay around $89 back.
To account for this projected deficit, absent Congressional intervention Medicare could be forced to decrease services (potentially limiting services such as skilled nursing) and pass on a higher percentage of costs to beneficiaries. For older Medicare beneficiaries – many of whom live on limited or fixed incomes – such an outcome may be untenable.
Decreasing either inpatient reimbursement or utilization would also place financial strain on hospitals. Many hospitals that rely on inpatient Medicare payments, such as safety-net institutions (that provide high amounts of uncompensated care) and rural hospitals, operate under low margins and may be especially susceptible to limiting services and closure.
In the Medicare trustees’ report, worsening financial projections are attributed to several key factors: rising healthcare costs, an aging population, and a payroll tax system that’s not keeping pace with demand.
As the population continues to age at the highest rate in US history, beneficiaries are living longer with more comorbidities, increasing inpatient hospitalization and hospice costs. Combined with unexpectedly low growth in the economy and payroll taxes, Medicare financial projections project depletion of the primary fund by 2033.
Similar solvency concerns have cropped up before. But what could Congress do this time?
With no other changes, Medicare’s looming insolvency leaves policymakers with difficult choices. Under its current structure, benefits will either be cut, or revenues will have to increase. Unless Congress changes the laws governing Medicare – and either shifts expenses or allows Part A to be funded by general revenues – then existing options will remain unattractive. And the longer Congress delays, the more abrupt and painful those changes will be.
One option is to increase tax revenues. The Medicare payroll tax has remained largely unchanged for decades. When facing a similar scenario in 2010, the Affordable Care Act addressed solvency concerns by increasing taxes for a limited pool of high-earning taxpayers.
In the 2025 report, the trustees projected that an increase in the Medicare payroll tax rate from 2.90% to 3.25% would maintain sustainability for at least 75 years. While politically difficult, such an adjustment could be enacted gradually and may serve to preserve inpatient benefits.
Raising taxes is politically challenging, so reform efforts could also include attempts to limit spending growth. Policymakers could consider more aggressively implementing value-based payment models that bundle inpatient and post-acute care together (such as bundled payments for certain operations, which have shown promise).
Another option, which Congress chose in 1997, moved payment responsibilities for home health services from the trust fund to general revenues, an accounting slight-of-hand that decreased Part A expenditures. In the Trustees’ report, the authors project that an immediate decrease in expenditures by 8% would be enough to ensure long-term solvency – so even small decreases or shifts in spending could be impactful. While such a solution be unlikely to fix long-term issues, it could buy several years of time.
Aside from short-term fixes, Congress could use this opportunity to identify a strategy to replenish the Medicare hospital fund over the long-term. Strategies could include establishing new sources of tax revenue for Part A, or ceding Congressional authority to the Medicare Trustees to independently allow certain tax increases or restructuring to promote financial solvency. Congress could also permanently avoid issues by dissolving the trust fund and financing Part A out of Medicare’s general revenues.
Regardless of what Congress decides, no solution will be easy. No one likes paying more taxes, and Medicare reforms are politically charged. However, Medicare itself remains popular and ensuring its sustainability is likely to resonate with voters. Many may decide that the short-term pain of a tax increase outweighs the long-term pain of a non-functional Medicare. Regardless, policymakers should consider steps to ensure the long-term viability of Medicare Part A – and act before it’s too late.
Research for this piece was supported by Arnold Ventures.
