At its inception, Medicare’s design mimicked the structure of existing private insurance, which commonly included different policies for different sets of services. It also was designed, like private insurance at the time, as a passive bill payer that did not try to influence how care was delivered. In fact, because of concerns about the potential influence of such a large government program, the original Medicare statute requires that Medicare not influence providers’ practice of medicine and gives beneficiaries access to all participating providers. Medicare is administered by the HCFA, and pays for some $200 billion in health care benefits each year for about 40 million elderly and disabled Americans. Individuals who are eligible for Medicare automatically receive Hospital Insurance (HI), known as part A, which covers inpatient hospital, skilled nursing facilities (SNF), certain home health, and hospice care. Beneficiaries generally pay no premium for this coverage, having previously contributed payroll taxes from covered employment, but they are liable for required deductibles, coinsurance, and copayment amounts. (See tables 1 and 2.) Medicare-eligible beneficiaries may elect to purchase Supplementary Medical Insurance (SMI), known as part B, which covers physician, outpatient hospital, laboratory, and other services. Beneficiaries must pay a premium for part B coverage, currently $50 per month, and are also responsible for part B deductibles, coinsurance, and copayments. Most of Medicare’s 40 million beneficiaries are enrolled in both parts A and B. However, approximately 2 million are enrolled only in part A. Another 400,000 are enrolled only in part B. Those enrolled in only one part of the program often have private insurance from an employer or other source to make up the difference. Approximately 14 percent of Medicare beneficiaries enroll in Medicare+Choice plans. These plans include health maintenance organizations and other private insurers who are paid a set amount each month to provide all Medicare-covered services. Beneficiaries must be enrolled in both parts A and B to join these plans, which typically offer lower cost-sharing requirements and additional benefits compared to Medicare’s traditional fee-for-service program, in exchange for a restricted choice of providers. Medicare pays for services out of two separate trust funds. Part A services are paid for out of the HI Trust Fund. It is primarily financed through the Medicare payroll tax that is exclusively dedicated to this trust fund. Part B services are paid for out of the SMI Trust Fund. This trust fund is financed in part through the part B premium, which is adjusted each year to equal 25 percent of expected part B spending. The remaining 75 percent is paid for out of general tax revenues. Medicare’s two parts have distinct financing and participation arrangements. Modifying these arrangements could promote the use of a more comprehensive measure of Medicare’s financial health and help policymakers anticipate future fiscal imbalances. In addition to selecting such a measure or measures, Congress could also decide to establish thresholds that would trigger corrective actions designed to rebalance Medicare revenues and spending. Unification of the now separate HI and SMI trust funds would require consideration of these issues, but even without such a merger, comprehensive financial measures and associated triggers would be useful. Unification would also require Congress to determine how the current mix of payroll taxes, beneficiary premiums, and general revenues might be modified to fund the program, as well as whether beneficiaries would be obligated to participate in the full program or could obtain coverage for subsets of services. In the past, Medicare’s financial status has been generally gauged by the projected solvency of the HI trust fund. Looked at this way—and based on the latest annual report from the Medicare Trustees—Medicare is viewed as solvent through 2029. Solvency is a popular measure, in part because the consequences of insolvency are clear. If there is no money in the HI trust fund, the government cannot pay hospitals or other providers of part A services. Thus, the threat of insolvency can be a powerful driver for action. In 1997, the Medicare Trustees estimated that the HI trust fund would become insolvent in 2001. The HI trust fund had not been so close to a crisis since 1972. Following the Trustees’ 1997 report, Congress enacted the Balanced Budget Act of 1997, which contained substantial payment and other reforms designed to slow Medicare’s cost growth. These reforms, coupled with a strong economy, helped to increase the life expectancy of the HI trust fund. However, HI trust fund solvency is an incomplete measure of Medicare’s fiscal health. It does not reflect the cost of the part B component of Medicare, which covers outpatient services and is financed through general revenues and beneficiary premiums. Part B accounts for more than 40 percent of current Medicare spending and is expected to account for a growing share of future total program dollars. The concept of solvency does not apply to the trust fund for part B, SMI, because increases in expenditures are automatically matched with increases in general revenues and beneficiary premiums. In addition, HI trust fund solvency does not mean that Medicare’s part A component is financially healthy. Although the trust fund is expected to remain solvent until 2029, HI outlays are projected to exceed HI revenues beginning in 2016. As the baby boom generation retires and the Medicare- eligible population swells, the imbalance between outlays and revenues will increase dramatically. Thus, in 15 years the HI trust fund will begin to experience a growing annual cash deficit. At that point, the HI program must redeem Treasury securities acquired during years of cash surplus. The government will then need to increase taxes, increase borrowing (or retire less debt), impose spending cuts, or implement some combination of these actions. When part A expenditures outstrip payroll tax revenues, it may be tempting to reallocate some expenditures from part A to part B. This would extend the solvency of the HI trust fund, but would do little to improve Medicare’s overall financial health. For example, BBA reallocated a portion of home health spending from part A to part B. Although that action—phased in over time—reduces HI expenditures and extends that trust fund’s solvency, it also increases SMI expenditures. Consequently, the home health reallocation increases the proportion of Medicare funded by general revenues and beneficiary premiums. Clearly, it is total program spending—both part A and part B—which determines whether Medicare is sustainable over the long haul. Whether the program remains in its current configuration, or the relationship between parts A and B are restructured, a more comprehensive measure of Medicare’s financial health could help Congress anticipate future fiscal imbalances. A variety of such measures exist now. For example, the Medicare Trustees report total Medicare spending as a share of gross domestic product (GDP). This measure clearly shows that total Medicare expenditures will likely consume an increasingly larger share of the national economy. Currently, combined HI and SMI expenditures account for 2.3 percent of GDP. This percentage is expected to rise to 4.5 percent in 2030 and 8.5 percent in 2075. Another comprehensive indicator measures Medicare spending relative to the entire federal budget. We estimate that Medicare’s share of the federal budget will increase from 10 percent in 2000 to over 23 percent in 2030 if the program’s spending growth continues unchecked. The adoption of new financial health indicators for Medicare would be one step; the next would be to decide what should trigger congressional action. Congress could agree that it would take action to rebalance Medicare spending and revenues whenever a comprehensive measure reached a predetermined level. Possible actions could include increasing general revenue contributions, payroll taxes, or beneficiary premiums; reducing benefits; cutting provider payments; or introducing efficiencies to moderate spending. The 1999 Breaux-Frist Medicare reform proposal provides one example of a potential trigger. Under that proposal, the two trust funds would be unified and congressional action would be required in any year when general revenue contributions exceeded 40 percent of total Medicare expenditures. The need for measures of program sustainability and thresholds that would trigger congressional action would be most acute if the trust funds are unified. Such a reconfiguration could remove the powerful signal of the HI trust fund insolvency and reduce the apparent urgency of corrective actions. If the trust funds remain separate, comprehensive measures of Medicare’s financial health and associated triggers could avoid the shortcomings that arise from a focus on the HI trust fund’s solvency. Improved measures of Medicare sustainability and agreed-upon thresholds will not, however, alter the difficult decisions facing this and future Congresses. A growing Medicare population and advances in expensive medical technology will increase future demands for health care spending. Policymakers will need to find ways either to control Medicare’s spending growth or obtain additional revenues to pay for it. Any solution to address the financial imbalance will affect beneficiaries, taxpayers, providers, or some combination of the three groups. Better measures of Medicare’s financial health may help identify the need for action, but will not lessen the difficulty of implementing a solution. Creating a unified trust fund for Medicare parts A and B would raise several new issues Congress would need to address. One is program financing—Congress would have to specify Medicare’s revenue sources and the share that each source would contribute. Under the current arrangement, revenues come from the Medicare payroll tax, general revenues, and beneficiary premiums. Broadly speaking, the amount financed from each revenue source depends upon the amount spent on Medicare services and the classification of services into parts A and B. The payroll tax supports part A services. The amount of general revenues devoted to Medicare is set equal to 75 percent of part B expenditures. Beneficiary premiums are collected to pay for the remaining 25 percent of part B spending. If the trust funds were unified, Congress would have to specify the funding mechanism. It could, for example, determine the share that general tax revenues, payroll tax revenues, and beneficiary premiums would each contribute to total Medicare spending.