Medicare Is in Better Health Than You Might Think

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Millions of retirees rely on benefits from Social Security and Medicare for their financial survival after they quit working, but many policymakers have concerns about their long-term financial sustainability. Earlier this week, the trustees in charge of these critical programs issued their annual reports on their financial condition.

In the gloomy Social Security Trustees' report, little has changed since last year: The trust is expected to empty in 2033, after which the program will be able to pay just around 77 percent of its scheduled benefits.

However, the Medicare Trustees Report had some surprisingly positive news. The Medicare Trustees now expect that the program will be able to keep operating as is until 2030. That's four years longer than they expected in last year's report. Medicare trustees cite several factors to explain the good news.

1. People Spent Less on Health Care

The financial stability of any insurance program covering medical costs depends generally on two things: how much revenue it brings in and how much it has to pay for covered services. For a long time, the analysts at the Centers for Medicare and Medicaid Services have predicted that the demographic shift created by the imminent retirement of baby boomers would lead to much greater enrollment in Medicare, further stressing a system already dealing with rising health costs.

Yet the Medicare trustees reported that spending on the hospital services provided by Medicare was lower than expected. That was the primary factor that caused Medicare's long-term deficit to fall by more than 20 percent. Moreover, Medicare now expects that future growth in covered costs will be slower than initially predicted, at least over the next several years.

In the long run, Medicare trustees still believe that the program's expenditures will outpace the rate of economic growth as well as average workers' earnings. That's a major part of the reason why Medicare still faces a long-term threat.

2. Affordable Care Act Kept Some Costs in Check

When the Affordable Care Act became law, its proponents largely focused on how it provided insurance coverage to millions of previously uninsured Americans. Yet also included in the act were provisions that saved costs for Medicare recipients, and that has contributed to Medicare's health.

Medicare trustees highlighted ACA provisions that slowed the rate of increase in Medicare payments to health-care providers. By essentially making hospitals, doctors and other professionals accept smaller payments for Medicare-covered patients, Medicare reaped savings from its bargaining power.

Still, the Medicare trustees aren't certain that those trends can continue. Lower compensation rates could have an impact on the willingness of health-care professionals to serve Medicare patients, and any disruption could force lawmakers to consider boosting reimbursement rates back to higher levels in the future. The trustees argued that it's therefore likely that Medicare's future costs could easily be higher than its current projections, especially if policymakers can't come to consensus on how to resolve issues.

3. Medicare Won't Simply Disappear in 2030, or Even 2050

Many people mistakenly believe that Medicare will cease to exist when it runs out of money. But what "insolvency" means to the Medicare trustees is that the program won't have enough tax revenue to pay 100 percent of the benefits that its recipients are entitled to under the law.

The report says that in 2030, when Medicare is scheduled to run out of money, tax revenue will still be sufficient to pay 85 percent of expected benefits. By 2050, that figure could fall as low as 75 percent.

Yet even at that reduced level, Medicare would still be able to go a long way toward covering medical costs. Even now under current law, Medicare only covers a portion of most expenses, leaving recipients to cover the balance out of their own pockets or through supplemental insurance. A future failure of Medicare to pay all of its obligations would cost Americans more, but even in a worst-case scenario in which lawmakers couldn't agree to a solution, Medicare wouldn't simply disappear.

Cautious Optimism Rules

Even though Medicare's Trustees Report was largely positive, you still need to make contingency plans in considering what you'll do after you retire. With medical costs being one of the most challenging expenses retirees face, the future health of Medicare will be essential to the well-being of older Americans for decades to come.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. For more on boosting your retirement income see The Motley Fool's free report outlining a simple strategy to help ensure a more comfortable retirement for you and your family.
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