What Is the Medicare Hospital Insurance Trust Fund?
The Medicare Hospital Insurance (HI) Trust Fund is the financial engine behind Medicare Part A. It covers inpatient hospital care, skilled nursing facility stays, home health services, and hospice care for more than 67 million Americans. The fund draws roughly 90% of its income from payroll taxes. Employers and employees each contribute 1.45% of wages, while self-employed individuals pay 2.9%. Higher earners — singles above $200,000 and couples above $250,000 — pay an additional 0.9% surcharge.
The HI Trust Fund is separate from the Supplementary Medical Insurance (SMI) Trust Fund, which finances Medicare Parts B and D. Unlike the HI fund, the SMI fund is automatically replenished each year through premiums and general federal revenues. Therefore, it does not face the same depletion risk.
When Could the HI Trust Fund Run Dry?
The Congressional Budget Office (CBO) now estimates that the HI Trust Fund balance will be exhausted by 2040. That projection is 12 years earlier than the CBO’s March 2025 estimate — a dramatic shift in a very short time. This rapid deterioration means future retirees could face significant cuts to vital health care services far sooner than previously anticipated.
Earlier, the Medicare Board of Trustees’ 2024 annual report had projected depletion in 2036. However, the June 2025 Trustees report moved that date forward to 2033 — three years earlier — due to higher projected expenditures for hospital services, hospice services, and physician-administered drugs.
A Fund That Has Been Extended Before
Historically, Congress has never allowed the HI Trust Fund to fully deplete. Over the past 40 years, the Trust Fund insolvency date was extended 20 times. Major reforms such as the 1984 Deficit Reduction Act, the 1997 Balanced Budget Act, and the 2010 Affordable Care Act all had large, sustained impacts. Still, projections today are moving in the wrong direction — and faster than expected.
What Happens When the Fund Is Depleted?
A depleted HI Trust Fund does not mean Medicare shuts down entirely. Instead, the program becomes legally restricted to paying out only what it collects in current revenue. This distinction is critical.
Automatic Benefit Cuts Kick In
If the HI Trust Fund balance is exhausted and spending continues to outstrip income, total payments to health plans and providers are limited by law to the amount of income credited to the fund. The CBO estimates benefit reductions would start at 8% in 2040 and rise steadily to a 10% cut by 2056.
Hospitals and Providers Take the Hit
Providers — not just patients — bear immediate consequences. Upon depletion of the HI Trust Fund, payments to medical providers would be reduced by 11 percent. Hospitals, nursing facilities, and hospice programs would face direct payment cuts, which could threaten access to care in high-cost or rural areas.
Medicare Is Not “Bankrupt”
Despite alarming headlines, Medicare does not go away. Even when the HI Trust Fund reserves are depleted, incoming payroll taxes and other revenue will still be sufficient to pay 89% of Medicare hospital insurance costs. The share covered by dedicated revenues will decline slowly to 87% in 2048 before gradually recovering. Consequently, the word “bankruptcy” overstates what actually happens — but the shortfall is still deeply serious.
Why Is the Fund Draining Faster Now?
Several interconnected forces are accelerating the HI Trust Fund’s decline.
Rising Healthcare Costs and an Aging Population
As the nation’s population ages, Medicare enrollment continues to climb. Older Americans spend more on healthcare on average and are not subject to payroll taxes once they retire. As a result, HI spending is projected to climb from 1.5% of GDP in 2024 to 1.9% in 2034, while payroll tax revenues hold steady at around 1.4% of GDP over the same period.
Recent Tax Legislation Cuts Fund Income
The primary culprit for accelerated depletion is a sharp reduction in the fund’s projected income, heavily driven by legislation passed over the last year. Tax cuts have reduced revenues from taxing Social Security benefits. Furthermore, because the trust fund will carry smaller balances going forward, it will generate less interest income — creating a compounding negative effect on its overall finances.
Higher-Than-Expected Spending
Per-enrollee spending in Medicare Part A’s fee-for-service program in 2025 and 2026 bids by Medicare Advantage plan providers both came in higher than expected. This has led to projections of greater per-enrollee spending across both programs.
What Can Policymakers Do?
Congress has several tools available to extend the HI Trust Fund’s solvency — though each carries political trade-offs.
Raise the Medicare Payroll Tax
Congress could close the projected funding gap by raising the Medicare payroll tax from its current 1.45% each for employers and employees to approximately 1.65%. Alternatively, lawmakers could enact an equivalent mix of spending reductions and tax increases to achieve the same effect.
Cut Provider Payments or Expand Revenue
Lawmakers could also reduce how much Medicare pays hospitals and other providers, or broaden the base of income subject to the Medicare payroll tax. Either approach would help balance the fund’s ledger.
Broader Program Reform
No automatic changes come into effect when a Medicare funding warning is issued. Instead, the President must submit legislation to Congress, and an expedited process exists for Congress to act on that proposal — though historically, Congress has rarely acted decisively in response.
What This Means for Patients and Providers
The HI Trust Fund’s projected depletion is not an abstract budget problem. It directly affects tens of millions of seniors and the hospitals and care facilities that serve them. Cuts of even 8–10% in Medicare reimbursements can force hospitals to reduce services or delay capital investment. Rural and safety-net hospitals — which depend heavily on Medicare revenue — are especially vulnerable.
It remains unclear exactly what changes the Centers for Medicare & Medicaid Services would make to operate the Part A program under such circumstances. Addressing this crisis will require significant — and timely — legislative action.
