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Robert Farley
By Robert Farley June 14, 2011

Tim Pawlenty said Medicare is only half paid for by premiums and taxes

The issue of funding Medicare -- and specifically the viability of a voucher-like plan proposed by Rep. Paul Ryan, R-Wis. -- was front and center at the Republican debate in New Hampshire on June 14, 2011.

Former Minnesota Gov. Tim Pawlenty said he will offer a plan that differs from Ryan's.

"It will feature performance pay rather than just volume pay to hospitals and clinics and providers," Pawlenty said. "It will allow Medicare to continue as an option, but it'll be priced against various other options that we're going to offer people, as well, and some other things."

Although he has not released the particulars of his plan, Pawlenty said doing nothing was not an option.

"There was a recent report out that the premiums for Medicare and the payroll withholdings are only paying about half the program," Pawlenty said during the debate. "So it is not financially solvent."

Last month, we checked a similar statement from Pawlenty, who said on ABC's This Week that Medicare "only has about 50 percent of it paid for by either premiums or payroll taxes, and the rest is deficit spending ... or debt spending."

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Medicare, which provides health care to about 50 million elderly or disabled Americans, is financed through a combination of funding streams: a Medicare payroll tax; general revenue (mostly from federal income taxes); premiums paid by Medicare users; and a tax on Social Security benefits and state payments toward the prescription drug benefit.

We'll go a little deeper in the weeds. The program is financed through two separate trust fund accounts: the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. Medicare payroll taxes go to the HI trust fund, which is primarily used to pay for inpatient hospital stays (otherwise known as Medicare Part A). The SMI trust fund is used to pay for physicians visits, outpatient care and prescription drug benefits (Medicare Part B and Part D). The SMI trust fund is funded primarily (about 75 percent) through general revenue, with most of the rest coming from patient premiums.

Let's start with the first half of Pawlenty's statement, that premiums and payroll withholding taxes only pay for about half the Medicare program.

According to the 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary Medical Insurance Trust Funds, Medicare expenditures came to $523 billion in 2010. Here's a breakdown of the revenue side of the equation:

• Payroll taxes, $182 billion
• Premiums, $61 billion
• Taxation of benefits, $13.8 billion
• General revenue, $205 billion
• Transfers from states for prescription drug benefits, $4 billion

If you break out premiums and payroll taxes, Pawlenty is correct that they covered about half the cost of Medicare in 2010.

It's the second half of the statement -- "So it is not financially solvent" -- that makes some Medicare experts uneasy.

Lisa Potetz of the Washington consulting group Health Policy Alternatives Inc. and co-author of a 22-page "Primer on Medicare Financing" in July 2009, noted that from its start in 1965, the Medicare program was set up to be partially funded by general revenue.
"His comment suggests that these things (payroll taxes and premiums) are supposed to pay for the program and aren’t doing their job," Potetz said when we spoke to her last month. "It was never the case that it was going to be entirely funded through payroll taxes and premiums. It's a little misleading to suggest something went awry."

In fact, for years, the HI trust fund ran a surplus and was used to fund other parts of the federal budget. To the extent you consider that "banked" money, there was a balance of about $344 billion as of last year. In recent years, however, hospitalization and nursing home costs have outpaced the amount coming in from payroll taxes (a problem that is expected to get much worse in coming years as more baby boomers reach retirement age). As a result, the HI fund has been "drawing down" its surplus, and is expected to deplete it within several years. At that point, the gap between what's taken in from payroll taxes and the actual cost of hospitalization would have to be picked up by taxpayers.

The SMI trust fund -- again, the fund used to pay for physicians visits and prescription drugs -- was set up so that a portion is paid through patient premiums, but the majority is paid from general revenue. Last year, the government paid $205 billion from general revenue into the fund.

Cost projections for that program are cause for alarm, but the financing of the program was always intended to come primarily from general revenue, Potetz said.

Medicare expert Marilyn Moon of the American Institutes for Research, an independent policy group, said a shift from hospital care to more outpatient care and physicians services has put a strain on the SMI fund, as has the prescription drug benefit added in 2006.

In its 2011 annual report, the Medicare Board of Trustees warned: "The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the federal budget. In fact, pressure is already evident. For the sixth consecutive year, a 'Medicare funding warning' is being triggered, signaling that projected non-dedicated sources of revenues -- primarily general revenues -- will soon account for more than 45 percent of Medicare’s outlays. That threshold was in fact breached for the first time in fiscal 2010."

It's certainly true that the cost of Medicare is growing and that general revenue -- primarily from income taxes -- is shouldering a growing share of the load. In 2008, the Government Accountability Office concluded the exploding cost of Medicare and other entitlement programs such as Medicaid and Social Security had put the federal budget on an "unsustainable fiscal path." But inasmuch as Medicare has always been supplemented by general revenues, we think it's a little misleading to suggest the program is now insolvent. National defense and highway construction are paid by taxpayer dollars, too. Are they "insolvent"? We think that's too loaded a term. And so we rate Pawlenty's statement Mostly True.

Our Sources

ABC News, Video: Tim Pawlenty interviewed on This Week, May 29, 2011

Centers for Medicare and Medicaid Services, 2011 Annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

Kaiser Family Foundation, "A Primer on Medicare Financing," by Lisa Potetz of Health  Policy Alternatives Inc. and Juliette Cubanski of the Henry J. Kaiser Family Foundation, July 2009

NPR, "Medicare Key To Conquering Deficit Dilemma," by Julie Rovner, Dec. 1, 2010

Social Security Online, Status of the Social Security and Medicare Programs

Government Accountability Office, A Citizens Guide to the 2008 Financial Report of the United States Government

Interview with Lisa Potetz of the Health Policy Alternatives Inc., May 31, 2011

Interview with Marilyn Moon of the American Institutes for Research, May 31, 2011

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Tim Pawlenty said Medicare is only half paid for by premiums and taxes

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