Part A hospital spending is helping to accelerate Medicare insolvency, trustees say

The costs of hospital inpatient care are a key driver in forecasts that the Medicare Hospital Insurance (HI) Trust Fund will run out of money within eight years.

As described in the latest annual report of the Medicare trustees, the projection of a 2033 insolvency date represents a three-year acceleration from last year’s estimate. Changes spurring the constricted timeline include 2024 healthcare spending levels that exceeded prior projections, an increase in the estimate of future hospital utilization and a drop in taxable payroll.

Although annual surpluses to the fund are expected through 2027, the Part A program would need to dip into its reserves to cover costs thereafter. Six years later, the reserves would expire. While pushed up from last year, the 2033 estimate is farther out than projections from some recent years.

If the HI Trust Fund becomes insolvent, a payment reduction of 11% would begin immediately, with the program able to make payments only as payroll-tax proceeds come in. The fund covers Medicare payments for hospital inpatient settings, hospices and skilled nursing facilities, among other venues.

A separate fund, the Supplementary Medical Insurance Trust Fund, subsidizes Part B outpatient services and Part D coverage of prescription drugs. That fund is not vulnerable to insolvency because it is financed by beneficiary premiums and general federal revenues, but the trustees note that rising costs affect the affordability of healthcare and the nation’s capacity to address other key sectors. When looking at Parts A, B and D combined, costs as a share of GDP have risen from 2.2% in 2000 to 3.9% in 2025.

Federal spending on Medicare Advantage, which draws from both trust funds, is projected to rise from 1.8% to 2.9% as a share of GDP over the next decade.

Surging inpatient payments

The faster timeline for insolvency partially stems from an increase in projected spending on inpatient and hospice services, according to the CMS actuaries who compiled the report on behalf of the trustees.

Medicare inpatient hospital payments are projected to rise by 6.4% this year, which would mark the highest rate since 2002. The payments would rise by between 3.8% and 5.1% each year between 2026 and 2032, with even the low end of that range marking the biggest annual increase since the mid-2000s, except for 2016.

In 2033, the date of projected insolvency, payments would spike by 5.7%, according to the actuaries.

The projected data suggests the spending increase arguably would be outside the control of hospitals. Input prices, reflecting costs in areas such as labor and supplies, would increase by 3.4% to 3.6% per year through 2033, higher than in any year between 2010 and 2022 (the increase jumped to 3.9% in 2023).

There also would be growth in admissions of 1.5% this year, 1.8% in 2026 and between 0.4% and 1% during the remaining years through 2033. Prior to 2023, admissions had declined each year since 2007. Reasons for the shift include a backlog of demand coming out of the pandemic in 2023-24 and, in ensuing years, an aging population. The actuaries highlighted the potential for larger incidences of disability and end-stage renal disease.

Looking at societal trends, the Medicare Payment Advisory Commission (MedPAC) stated in its own 2025 report, “The declining ratio of workers to Medicare beneficiaries creates a financing challenge for the Medicare program.”

Upcoming growth in case mix is expected to be a moderate factor in inpatient spending after the metric decreased in 2022-2024, post-pandemic, and stayed flat in 2025.

No easy solutions

It remains to be seen whether the projections spur policymakers to look for additional ways to hold down reimbursement, such as by further restricting the annual payment update. Congress would need to enact any such changes, and Medicare traditionally has been an area that legislators prefer not to touch.

The trustees noted a steady decrease in the ratio of the Medicare payment rate to the commercial insurance payment rate, down from roughly 68% in 2011 to 55% in 2024. Nearly 80% of hospitals had negative Medicare margins on inpatient care, with an average margin of minus-13% as of 2023, when excluding COVID-19 relief funding. That share would be 90% in 2040 if the current Medicare payment formula remains in place.

Over time, the CMS actuaries wrote in a memo, “Providers could not sustain continuing negative margins and would have to withdraw from serving Medicare beneficiaries or (if total facility margins remained positive) shift substantial portions of Medicare costs to their non-Medicare, non-Medicaid payers.”

Alternatively, Congress could choose to boost rates, and two relatively straightforward approaches would be to:

• Eliminate the productivity adjustment that reduces the annual hospital inpatient and outpatient payment update (e.g., by 0.5% for FY25)
• Develop a new physician payment system that allows for inflation-based adjustments (the House version of the budget reconciliation bill includes such a provision)

But such steps would further deplete the trust funds.

MedPAC said extending the solvency of the HI Trust Fund for 25 years would require bumping the Medicare payroll tax from 2.9% to 3.35% or finding ways to decrease Part A spending by 10.6% — or a combination of a tax increase and a spending decrease. Sustained economic growth of the sort seen post-pandemic would allow for approaches that are more moderate.

A vast difference

One question about the report is the discrepancy relative to a report issued this year by the Congressional Budget Office (CBO). That report pushed back the estimated date of expiration from 2035 to 2052, essentially going in the opposite direction from the trustees in assessing trends related to inpatient hospital care and tax revenues.

Even in retrospective analyses of 2024, the CBO said Medicare Part A spending was less than anticipated, while the trustees said it was greater. In contrast to the trustees, the CBO said inpatient payments would grow more slowly than it previously anticipated.

Of the two reports, the one issued by the trustees is considered the official word on the Medicare trust funds, but there is no telling which report will prove more accurate.

“As Congress seeks to address these [projected] shortfalls, we must have the best information available, which is why I’m alarmed at the 19-year divergence between CBO’s and the Medicare Board of Trustees’ insolvency projections,” Rep. Jodey Arrington (R-Texas), chair of the House Budget Committee, said as part of a written statement.