Medicare Turns a Profit

What You Need to Know

Medicare hospitalization program revenue fell 1.3% in between 2020 and 2021.
Because enrollees minimized use of ordinary, non-COVID-19 care, hospitalization program expenditures fell 18%.
When Medicare is ailing, Congress writes big, unpredictable bills to cure it.

COVID-19 gave the U.S. Medicare Part A hospitalization program a big financial boost in 2021.

Because enrollees minimized use of ordinary hospitals, spending on benefits plunged.

Thanks to that drop in spending on hospital bills, the Medicare Part A program reported the equivalent of a $8.5 billion operating profit in 2021 on $337 billion in revenue, according to the new Medicare Trustees Report.

That compares with a loss of $60 billion on $342 billion in revenue in 2020.

A year ago, the Medicare trustees were predicting that the hospitalization trust fund would run dry in 2026, and that program operating revenue, from payroll taxes and other sources, would cover about 91% of the program costs that year.

Now, the trustees are predicting that the trust fund will last until 2028, but that operating revenue will cover just 90% of program costs in 2028.

What It Means

Until now, members of Congress have responded to Medicare trust fund depletion warnings by racing to write and pass big, “must pass,” hard-to-filibuster Medicare fix bills that include a wide range of provisions.

If past trends continue, the program solvency issues described in the current report may be more likely to lead to big changes in life insurance, annuity, retirement savings program, estate tax and general income tax rules, at some point between now and 2027, than to lead to dramatic changes in the Medicare program.

Medicare and Its Parts

The Medicare program was founded in 1965 and now provides coverage for about 65 million U.S. residents who are 65 or older, have severe kidney disease or qualify for Medicare health benefits because they are getting Social Security disability insurance program benefits.

Medicare Part A — the oldest part of the “original Medicare” program — covers inpatient hospitalization services.

Most Medicare Part A enrollees pay their full share of the cost of coverage by paying payroll taxes into what is officially known as the Federal Hospital Insurance Trust Fund. Ordinary Part A enrollees pay no premiums for their Part A coverage.

In theory, workers and their employers are supposed to be using that trust fund to build up a large pool of assets that can help pay hospitalization bills as the baby boomers age and the ratio of workers to Medicare enrollees falls.

Interest on the trust fund assets is supposed to help pay for the hospitalization program.

Medicare Part B covers outpatient hospital services, physician services and some other services. It has a small trust fund, but enrollees are supposed to pay about enough premiums every year to cover that year’s benefits expenses.

Medicare Part C includes the Medicare Advantage program and other programs that give private organizations a chance to offer alternatives to the original Medicare program. Medicare program managers provide contributions to Medicare Part C plans that are related to what the Medicare program would have spent on the enrollees if they were in the original Medicare program. The enrollees may also pay monthly premiums.

Medicare Part D is the Medicare prescription drug program. That program draws on funding from the federal government, state contributions and enrollee premium payments. Like the Medicare Part B program, the Part D program gets about enough cash in a given year to pay the bills for that year.

Medicare supplement insurance policies are private insurance arrangements that fill in the gaps in Medicare Part A, Medicare Part B and Medicare Part D coverage. The issuers of those policies do not get subsidies from the government.

Medicare Part A Hospitalization Performance Details

The Medicare Part A program’s main source of revenue, payroll taxes, fell 0.3% between 2020 and 2021, to $302 billion.

A Medicare Part B and Medicare Part D Performance Snapshot

The Medicare Part B outpatient and physician services program is reporting a $30 billion operating profit for 2021 on $436 billion in revenue, compared with a $34 billion operating profit on $452 billion in revenue for 2020.

The Medicare Part D drug program is reporting a $9.7 billion operating profit for the latest year on $115 billion in revenue, up from an $800 million operating profit on $106 billion in revenue for the previous year.

The federal Medicare Part A, Part B and Part D programs recorded a total operating profit of $48 billion in 2021 on $888 billion in revenue, compared with a total operating loss of $26 billion on $900 billion in revenue in 2020.

The U.S. Government

Medicare is an arm of the U.S. federal government.

The U.S. federal government reported a deficit, or loss, of $2.8 trillion for 2021 on $4 trillion in revenue and $22 trillion in national income, or gross domestic product.

That compares with a loss of $3.1 trillion for 2020 on $3.4 trillion in revenue.

In 2019, the last full year before the start of the COVID-19 pandemic, the federal government recorded a deficit of $984 billion on $3.5 trillion in revenue.

Medicare Part A revenue accounted for about 8.4% of 2021 federal revenue, and Medicare Part A, Part B and Part C generated about 22% of federal revenue.

The Looming Medicare Solvency Fights

The release of the new Medicare trustees’ report is one more skirmish in the battle over how the federal government should handle its finances.

The Committee for a Responsible Federal Budget responded by noting that the Medicare trust fund is continuing to approach insolvency rapidly.

The imbalance must “be addressed sooner rather than later to prevent across-the-board benefit cuts or abrupt changes to tax or benefit levels,” the committee said.

The administration of President Joe Biden says policymakers should think about the quality of Medicare benefits as well as Medicare program finances.

Chiquita Brooks-LaSure, the administrator of the Centers for Medicare and Medicaid Services, the agency that oversees Medicare, said in a written comment about the report that Medicare needs to continue to provide high-quality, person-centered coverage.

“Medicare trust fund solvency is an incredibly important, longstanding issue and we are committed to working with Congress to continue building a vibrant, equitable, and sustainable Medicare program,” Brooks-LaSure said.