Medicare Is on Track to Add $85 Trillion to the National Debt by 2056

Romina Boccia and Ritvik Thakur

Over the coming decade, financing Medicare’s doctors’ services and outpatient care (Part B) and prescription drug coverage (Part D) will put roughly $10.7 trillion straight onto the national credit card. That is worse than the Trustees projected a year ago, and prescription drug spending accounts for nearly all of the deterioration. Medicare’s financial deterioration is happening on autopilot, but Congress chose to put it on an unsustainable course.

Prescription Drug Spending Increased Sharply

From 2026 through 2035, the Trustees now project an additional $731 billion in Part D spending compared with last year’s estimate, a 34 percent increase. Figure 1 shows the revision year by year.

The Inflation Reduction Act’s (IRA) Part D redesign is the primary culprit. The IRA cut what beneficiaries pay out of pocket for prescription drugs and shifted those costs onto taxpayers. Part D’s costs are not fully covered by premiums. Because the program is financed through Supplementary Medical Insurance (SMI), the federal government automatically provides the additional general revenues needed to cover the gap. Scholars at Paragon Health Institute, CBO, James Capretta at AEI, and Cato’s Michael Cannon detail other IRA mechanics that caused this massive increase in spending.

The Debt Contribution: The Next 10 to 30 Years

The Trustees Report obscures the real danger. It reports a 75-year unfunded obligation of $4.2 trillion for Part A Hospital Insurance and $0 for SMI, on the theory that current law already obligates the general fund to cover whatever Parts B and D spend. That accounting treats an unlimited claim on the Treasury as though it costs nothing. Part D is ultimately financed by taxpayers. And because the federal government runs persistent deficits, those general-fund dollars are partly financed through borrowing—meaning higher Part D spending contributes to higher federal debt.

The Financial Report of the U.S. Government puts Medicare’s true 75-year unfunded obligation at $60.4 trillion: $3.3 trillion for Part A, $49.3 trillion for Part B, and $7.8 trillion for Part D. That is the amount by which Medicare spending exceeds the revenue dedicated to it over the next 75 years, in present value terms. Parts B and D account for 94 percent of it.

Figure 2 shows what that means over the next decade. Parts B and D add $9.0 trillion to the debt, or an estimated $10.7 trillion once interest costs are included. Medicare doctors’ visits, outpatient services, and prescription drugs account for 44 percent of the entire federal deficit over the next ten years.

The long-term picture is worse because Medicare spending outgrows the economy. Automatic debt financing for Parts B and D climbs from 2.1 percent of GDP in 2026 to 3.3 percent by 2055. Cumulatively, that is $52 trillion in borrowing over 30 years or $85 trillion including interest (Figure 3), none of it requiring a single vote.

Cut Medicare Spending Growth to Avoid a Debt Crisis

Congress must put Medicare on a budget. The best option converts Medicare’s subsidy into checks or vouchers, so seniors control their own dollars, and providers face competitive pressure on price. At a minimum, Medicare spending growth should be capped at the growth rate of the economy. More incremental reforms to strengthen Medicare’s finances include expanded means testing, site-neutral payments, and reducing overpayments to Medicare Advantage plans.

Every year Congress fails to impose a budget constraint, the long-term Medicare bill grows by trillions, and it arrives as higher interest costs, slower economic growth, crowded-out priorities, and greater risk of a fiscal crisis. Congress should act now to rein in Medicare’s unsustainable spending growth.

Source: https://www.cato.org/blog/medicares-debt-problem-got-worse-year