October 2012 ~ Health Policy Brief No. 5
Medicare is the nation’s primary source of health care coverage for more than 48 million elderly and disabled Americans. In 2010, Medicare accounted for 15.1 percent of the federal budget and 3.6 percent of gross domestic product (GDP). Its viability is vital for both the financial security of the people who depend on it now and for taxpayers who pay into Medicare and will rely on it in the future.
Solvency and sustainability are two useful but very different concepts for assessing the financial health of the Medicare program. At a time when Medicare is at the forefront of national political debate, it is essential to think about both Medicare’s solvency and sustainability without muddling the two terms.
Solvency is a measure of whether Medicare’s two trust funds – the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund – are able to pay the full cost of benefits prescribed by law on a timely basis. Sustainability is a much more subjective concept, one that cannot easily be addressed by the annual calculations of the Medicare trustees. Instead, it is a concept that is intended to reflect societal values and the political viability of the program as currently structured. Sustainability asks whether future Medicare spending is at a level that Americans are likely to be willing and able to pay for, based on projections of economic growth and spending.