Medicare’s Report Predicts Rising Costs and Partial Fund Depletion

August 12, 2025 / 6 min read

In a recent article, the author summarized the 2025 Social Security Administration Annual Report. As a follow up, this article will discuss Medicare’s recently released “2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund” (hereinafter “Medicare’s Report” or “report”).

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Overall, Medicare’s Report concludes that one of the two Medicare trust funds is expected to be depleted in 2033, three years earlier than previously projected,^[1] and that Medicare costs are projected to continue to rapidly grow, placing increased demands on both Medicare beneficiaries and taxpayers.^[2]

To help place this new report in context, below the author provides a brief overview of the Medicare program and summarizes the key points of Medicare’s report as follows:

Medicare program basics

Medicare is a federal health insurance program that provides health care coverage for qualified enrollees who are aged 65 and older, individuals with a disability, end-stage renal disease (ERSD), or Amyotrophic Lateral Sclerosis (also called ALS or Lou Gehrig’s disease).^[3] As of 2024, Medicare covered 67.6 million people, 60.3 million over age 65 and 7.3 million disabled.^[4]

The Medicare program consists of several parts, which are separated into two different trust funds: the Hospital Insurance trust fund (HI) and the Supplementary Medical Insurance trust fund (SMI).^[5] HI, commonly referred to as Medicare Part A, pays for inpatient hospital services, hospice care, skilled nursing facility care, and some home health services.^[6] SMI consists of Medicare Part B, which pays for physician, outpatient hospital, some home health, and other services for enrollees, and Part D, which provides subsidized drug insurance coverage for enrollees.^[7]

Medicare beneficiaries can also choose to receive coverage through Medicare Part C, also known as Medicare Advantage Plans, where Medicare beneficiaries can choose to enroll in Medicare plans offered by private health insurance plans.^[8] Part C plans receive payments from the Medicare HI and SMI trust funds on a capitated^[9] basis.^[10] The share of Medicare beneficiaries enrolled in Part C plans has rapidly increased, reaching 50 percent of Medicare beneficiaries in 2024 and the report projects it will continue to increase in the coming years.^[11]

In terms of expense, total Medicare expenditures in 2024 were $1.122 trillion against a total income of $1.133 trillion, leading to an increase in the Medicare trust funds of $11.2 billion.^[12]

Financing and future outlook

As noted above, the Medicare program has two separate trust funds: HI, for Medicare Part A, and SMI, for Medicare Parts B and D. Each of these funds are financed in different ways, which present unique challenges.

The HI trust fund is primarily financed through payroll taxes on covered earnings, with employers and most employees each paying a 1.45% tax on worker’s wages, and self-employed workers paying a 2.9% tax on their net earnings.^[13] While HI income exceeded expenditures in 2024, and the report anticipates this surplus to continue through 2027, the report projects a deficit beginning after that, with the deficit continuing until the HI trust fund is depleted in 2033.^[14] The report projects that, upon exhaustion of the HI trust fund, HI revenues project to cover only 89% of HI program costs.^[15] At that time, the HI trust fund revenues would be unable to fully cover costs, which could greatly reduce Medicare beneficiaries’ access to health care services.^[16]

In contrast to the HI trust fund, the SMI trust fund is financed primarily by contributions directly from the Federal Government and monthly premiums paid by SMI enrollees.^[17] Because of this, the SMI trust fund is expected to be adequately financed into the future because income from beneficiaries’ monthly premiums and government contributions are set each year to cover expected costs.^[18]

While there are not current concerns about the solvency of the SMI trust fund, the report notes that SMI costs have averaged an annual growth rate of 8.4% over the past five years, outpacing the Gross Domestic Product (GDP) growth rate of 6.1% in the same timeframe, with SMI costs projected to continue to grow faster than GDP growth over the next five years.^[19] The report notes the rapid growth in SMI costs will place increasing demands on Medicare beneficiaries and taxpayers.^[20]

The report indicates that, while there are differences in benefits and financing between HI and SMI, they share a close and interdependent relationship, and most Medicare beneficiaries are enrolled in both HI and SMI programs.^[21]

Report considerations

While Medicare’s Report provides detailed actuarial projections of Medicare’s financial outlook, the report concedes that projections of Medicare’s future costs contain a high degree of uncertainty, especially the further into the future projections are made.^[22] The report cites a number of factors that could influence Medicare’s future costs, including: scientific advances, new treatments, and potential gains in health care efficiencies, all of which could increase or decrease costs.^[23]

The report notes that future Medicare costs depend on many factors, including the size and composition of the Medicare population, as well as the frequency and price of medical services.^[24] Trust fund income will depend on the size of the workforce, worker earnings, and program costs, which will all depend on larger economic trends such as birth and death rates, labor participation rates, and economic growth.^[25]In the near term, the report highlights the continuing retirement of the baby boom generation as one driver of increasing Medicare costs.^[26]

One factor the report concludes is no longer projected to have a significant impact on the Medicare program is the COVID-19 pandemic.^[27]With regards to Part D Prescription Drug costs and the SMI trust fund, the report notes that Part D expenditures have increased substantially due to rapid growth in Part D enrollment.^[28] The report does note that, while Part D costs have increased substantially, in part due to an increase in the cost of specialty drugs, the large increase in the use of low-cost generic drugs has helped to constrain Part D cost growth.^[29]

Report recommendations

While noting the uncertainty of projections regarding Medicare costs,^[30] the report recommends changes to address impending challenges to the Medicare program.^[31] As an example, Medicare’s report finds that an immediate increase in the standard Medicare payroll tax to 3.32% or a reduction in Medicare expenditures by 9% would be needed to eliminate the deficit.^[32] Alternately, if more gradual changes were implemented, higher adjustments would be needed.^[33] Given this, the report recommends, in general, immediate action to allow for more flexible and gradual changes, and to give Medicare beneficiaries, health care providers, and taxpayers time to adjust.^[34]

Verisk will continue to monitor any relevant updates regarding this matter and provide updates as warranted.

[1] 2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, page 6.

[2] Id. at 36.

[3] Id. at 1

[4] Id. at 6

[5] Id. at 1

[6] Id.

[7] Id.

[8] Id.

[9] The report defines a capitated payment as: “A predetermined amount paid to a health care provider or organization to provide specified services to enrollees over a period of time.” 2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund at 237.

[10] 2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund at 1.

[11] Id. at 21

[12] Id. at 6

[13] In addition, the HI trust fund receives revenues from an additional 0.9% tax on the earnings above certain thresholds for high-income workers (earnings over $200,000 for single taxpayers and $250,000 for married couples), income taxes on Social Security recipients with incomes above certain thresholds, and interest earned on securities held in the HI trust fund. Id. at 10.

[14] 2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, at 6.

[15] Id. at 5

[16] Id. at 26

[17] Id. at 81

[18] Id. at 19

[19] Id. at 7

[20] Id. at 36

[21] Id. at 19

[22] Id. at 2

[23] Id. at 2-3

[24] Id. at 12

[25] Id. at 12

[26] Id. at 37

[27] Id. at 2

[28] Id. at 111

[29] Id. at 111

[30] Id. at 2

[31] Id. at 9

[32] Id. at 31

[33] Id.

[34] Id. at 9

Medicare’s Annual Report Predicts Rising Costs and Partial Trust Fund Depletion by 2033

Medicare program basics

Financing and future outlook

Report considerations

Report recommendations