This Insight is part of our Medicare Payment Primers series.
The Medicare Trust Fund is composed of two separate funds: the Hospital Insurance Trust Fund and the Supplemental Medical Insurance Trust Fund.
Hospital Insurance (HI) Trust Fund: Purpose and Financing
The HI Trust Fund is the source of payment for services covered under Medicare Part A, including inpatient hospital care, skilled nursing facility care, hospice care, and home health services following an inpatient stay. The fund covers both traditional Medicare (with payments to providers and, in some limited cases, to beneficiaries) and Medicare Advantage (with payments to Medicare Advantage plans).
The HI Trust Fund is financed primarily through payroll taxes. Employers and employees each pay a 1.45% tax on all earnings, while self-employed individuals pay the full 2.9%. An additional 0.9% tax is levied on earnings over a certain threshold for high-income earners (currently $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all other taxpayers). The HI Trust Fund received approximately $396.4 billion from Medicare payroll taxes in 2024.
An additional $41.1 billion was credited to the fund from taxation of Social Security benefits in 2024, with another $7.2 billion received from the HI Trust Fund’s investments in special U.S. government securities. Finally, the fund received about $1.8 billion in 2024 from premiums paid by voluntary enrollees who are not otherwise eligible for premium-free Medicare Part A.
HI Trust Fund: Solvency
The HI Trust Fund faces long-term funding challenges as the population ages and healthcare costs rise. Annually, the Medicare Trustees (a board comprised of government officials and public representatives) report on a projected depletion date and the impact of depletion on expenditures, taxes, and provider payments. According to Dr. Marilyn Moon, a former trustee, “the Part A Trust Fund and its projections were essentially put into place to offer an early warning sign for the need for funds to assure that Medicare would continue to function without interruption. It is not a signal of the need for cutting back on services.”
The 2025 Trustees Report sounds such a warning: “…current-law projections indicate that Medicare still faces a substantial shortfall that needs to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.” At present, the HI Trust Fund is projected to remain solvent until 2033, which is three years fewer than in 2024 but longer than was projected before the COVID-19 pandemic. The change in the estimated depletion date is “mainly a result of higher-than-anticipated 2024 expenditures and higher projected spending for inpatient hospital and hospice services.”
Following a slowdown during the pandemic, Medicare spending has returned to normal levels and is expected to grow by 4% per year through the early 2030s. This growth is attributable to increases in Medicare enrollment and in the volume and intensity of services provided.
Revenue is not keeping pace with growing Medicare Part A expenditures. The ratio of workers to Medicare beneficiaries has been declining since the program began and is expected to continue to decline. At its inception, the program had 4.5 workers for each Medicare beneficiary, but by 2024 it had only 2.5 workers per beneficiary, down from 2.8 workers per beneficiary in 2023.
There are two options to extend the solvency of the Trust Fund: increase taxes or reduce expenditures. According to the Trustees Report, increasing the payroll tax from 2.9% to 3.32% would cover the actuarial deficit. The same could be accomplished by reducing expenditures by 9% by cutting provider payments and/or shrinking coverage. The Trustees noted the payroll tax hike or the expenditure reduction could occur gradually but would require adjustments that would be higher than if these actions were taken immediately. For example, in their 2024 report, the Trustees advised that a payroll tax increase from 2.9% to 3.25% or an expenditure reduction of 8% would be needed, demonstrating how it becomes more costly over time to keep the HI Trust Fund afloat.
Despite the headlines, Medicare cannot “go bankrupt.” Even with the depletion of the Trust Fund reserves, revenue will continue to flow into the fund through payroll taxes and other sources. That revenue, however, will not be enough to pay for the projected level of covered services at then-current rates. Absent any attempt to avoid insolvency, the hard choices policymakers would prefer to avoid would then be made for them.
Supplementary Medical Insurance (SMI) Trust Fund: Purpose and Financing
The SMI Trust Fund finances Medicare Part B (physician services, outpatient care, and medical supplies) and Medicare Part D (prescription drug benefits). Like the HI Trust Fund, the SMI Trust Fund covers both traditional Medicare and Medicare Advantage.
In 2024, approximately $498 billion from the U.S. Treasury’s general fund was transferred to the SMI Trust Fund, accounting for 73% of the fund’s revenue for the year. The remaining 27%–about $170 billion–came from enrollees’ premium payments.
SMI Trust Fund: Solvency
The SMI Trust Fund does not face insolvency because, by law, general revenue contributions and beneficiary premiums are adjusted annually to cover projected costs for Parts B and D. Over time, a growing share of federal revenues, mainly consisting of personal and corporate income taxes, will be needed to finance the SMI Trust Fund. In 2023, 17% of all personal and corporate income taxes were transferred to this fund. That percentage is expected to grow to 22% by 2030, forcing Congress to make hard decisions on what to cut to pay for Medicare Parts B and D. In addition, the monthly premiums paid by Medicare enrollees are expected to increase. According to the 2025 Trustees Report, “…the average Part B plus Part D premium would equal about 11 percent of the average Social Security benefit in 2025 but would increase to 20 percent in 2099,” forcing retirees to make hard decisions on what to do without to pay for Medicare. Similar increases are also expected in beneficiary cost-sharing amounts.
Now What?
Like the federal government, employers are facing a projected 8.5% increase in health insurance costs in 2026. In 2025, healthcare spending accounts for about 17.6% of U.S. GDP, and spending is projected to rise to 20.3% by 2033. Isolated efforts to control healthcare costs have met with limited success; the COVID-19 pandemic has been the only thing to significantly slow spending. Bold, systemic change–either purposeful or due to system failure–will be necessary. While disruptive, purposeful change is manageable and survivable for most. Change necessitated by system failure comes with a much higher price tag.
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