Medicare Funding: The Long-Term Outlook and Your Long-Term Plan

On June 5, the trustees for Medicare’s hospital trust fund released a report containing some somber news: the fund is expected to run out of money in 2026, three years earlier than previously expected. The report cited lower-than-expected revenues from payroll and Social Security taxes, coupled with higher-than-expected payments to hospitals and private Medicare plans.

While President Trump has argued that a faster-growing economy would forestall the need for cuts to entitlement programs like Medicare and Social Security, last week’s report underscores the serious challenges facing these programs as more and more Baby Boomers reach eligibility age.

The trust fund only pays for Medicare Part A costs, which includes expenses related to hospitalization. Other aspects of the program, including physician visits, prescription drug costs, and outpatient services, are funded by general fund revenues. In 2017, Medicare provided coverage for 58.4 million people—85 percent of whom were seniors—for a total bill of just over $710 billion. It’s also important to note that depletion of the fund will not cause the benefits to suddenly stop. It will, however, trigger decreases in benefit payments to eligible persons.

Obviously, none of this is welcome news to those currently in retirement or those approaching retirement in the next decade or so. It does, however, strongly underline the critical need to take healthcare costs into careful consideration while forecasting income needs in retirement. No matter how Congress and the administration act, now or in the future, to shore up the finances of these programs so important to many Americans, it is clear that responsible retirement planning must include a significant component of self-funding for healthcare, either through increased budgeting for direct payment of costs or through purchase of cost-efficient insurance that can pick up part of the expense that Medicare and similar programs might have been expected to cover.

For most people, this means taking a careful look at Medicare Part C plans, which are offered through private insurers and must offer the same coverage as Medicare Parts A and B (sometimes called “Original Medicare”). There are many plans available, and for most people in or approaching retirement, it is very important to carefully evaluate these plans, their costs, and the coverages they offer. As the hospital trust fund continues to face funding challenges, your Part C plan will likely become more and more important to managing your healthcare costs.

For other individuals, some form of concierge healthcare or direct primary care (DPC) may offer a viable option. With these plans, patients pay the physician directly, bypassing insurance altogether. The patient pays a monthly or annual retainer, and in return the physician provides access to medical services. While these plans do not typically include hospitalization costs, they can be an important part of managing the overall cost of healthcare for certain individuals. Plans can be as inexpensive as $600 annually or as much as $15,000 a year or more, depending on the level of access and the type of services desired.

Whether you choose to allocate more of your savings to pay directly, to purchase a Medicare Part C plan with better options and coverage, or to utilize the services of a concierge or direct-pay provider, it’s important to weigh carefully the long-term implications of Medicare funding and its effects on your out-of-pocket healthcare costs. The warning signs are clear; the time to make an effective plan is now.

Stay Diversified, Stay Your Course!