Medicare is the second-largest program in the federal budget, behind only Social Security. In fiscal year 2025, it cost $997 billion—roughly 14% of all federal spending. Although both programs primarily serve older Americans, Medicare is growing faster than Social Security because healthcare costs are rising rapidly. Unlike Social Security, Medicare has an explicit claim on general tax revenues beyond its accumulated trust fund assets. That makes it a bigger strain on the federal budget. This post breaks down how Medicare is funded and why it’s playing an increasingly large role in the nation’s fiscal challenges.
How is Medicare Structured?
From a budget perspective, Medicare is not a single line item but a set of programs with distinct funding streams that flow into the federal budget in different ways:
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Part A (Hospital Insurance) is financed through the Hospital Insurance (HI) Trust Fund, which receives dedicated payroll tax contributions from workers and employers along with a portion of income tax receipts on Social Security benefits. Part A covers hospital stays, skilled nursing care, and hospice. The HI Trust Fund is projected to become insolvent in 2033 and, absent policy changes, will require an 11% across the board cut to remain solvent.
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Part B (Medical Insurance) and Part D (Prescription Drugs) are financed through the Supplementary Medical Insurance (SMI) Trust Fund. Part B covers doctors visits and out-patient care and Part D covers prescription drugs. Unlike Part A, this fund is never at risk of insolvency because it draws about three-quarters of its revenue from general federal revenues. The rest comes mostly from beneficiary premiums which are set each year based on projected spending. That means the federal budget must cover whatever costs arise, regardless of trust fund balances. Rising health care costs therefore translate directly into higher federal outlays.
How the Hospital Insurance Trust Fund Affects the Deficit
Medicare’s Hospital Insurance (HI) Trust Fund—used to pay for inpatient hospital care under Medicare Part A—has an effect on the federal budget. Like Social Security, it operates on a pay-as-you-go basis: payroll taxes from today’s workers are used to pay benefits for today’s retirees.
From its launch in 1966 through 2007, the HI Trust Fund ran surpluses, collecting more than it spent. That accumulated surplus totaled $326 billion by the end of FY 2007 and was invested in special Treasury bonds. The federal government used the proceeds from those bonds for other programs, but it’s legally required to repay the bonds with interest when Medicare needs the money.
Between 2008 and 2020, the HI Trust Fund ran deficits cumulatively totaling $192 billion over that period. To cover those shortfalls, the Treasury borrowed money to redeem the bonds. Starting in 2021 the HI Trust Fund ran surpluses which are projected to continue through 2027.
As of the end of 2025, the HI Trust Fund holds a balance of $245 billion. That balance gives the Treasury authority to borrow up to that amount to cover future deficits. But once the fund runs dry—projected to happen in 2033—the borrowing authority disappears. At that point, Medicare Part A would face an automatic 11% across-the-board cut unless Congress acts to shore up the trust fund.
In short, the HI Trust Fund adds to the deficit when the Treasury borrows to redeem its bonds. And unless reforms are made, that borrowing will continue until the trust fund is depleted.
How Does the Supplementary Medical Insurance Trust Fund Impact the Deficit?
Unlike Medicare’s Hospital Insurance (HI) Trust Fund, the Supplementary Medical Insurance (SMI) Trust Fund—used to pay for Medicare Parts B and D—can’t go “insolvent.” But that’s not because it’s sustainably funded. It’s because the SMI Trust Fund has unlimited access to general revenue from the Treasury. In other words, it can always draw on taxpayer dollars to cover its costs.
The SMI Trust Fund was never designed to be self-sustaining. It’s funded mainly through two sources: premiums paid by enrollees and contributions from the federal government. Each year, premiums are set to cover just 25% of expected costs. The remaining 75% comes from general revenue—making SMI a growing burden on the federal budget.
By 2033, when the HI Trust Fund is projected to run out of reserves, SMI spending will reach $1.3 trillion—compared to $785 billion for HI. But the real budget pressure comes from how much general revenue each program requires. After accounting for payroll taxes and premiums, SMI will need more than 10 times the general fund support of HI.
Between 2026 and 2035, the SMI Trust Fund is projected to require $7.6 trillion in general revenue transfers. That’s a huge share of the federal deficit. According to the Committee for a Responsible Federal Budget, total deficits over that period will reach $22.9 trillion—and about one-third of that will go toward keeping SMI fully funded under current law.
In short, SMI doesn’t face a trust fund cliff like HI—but its open-ended draw on taxpayer dollars makes it one of the largest and least visible drivers of long-term deficits.
Conclusion: Medicare’s Growing Role in the Nation’s Fiscal Challenges
Medicare is not just a major expense—it’s a structural driver of federal deficits. The Hospital Insurance Trust Fund adds to the debt when the Treasury borrows to cover shortfalls, and its projected insolvency in 2033 will force tough choices. Meanwhile, the Supplementary Medical Insurance Trust Fund exerts even greater pressure, drawing trillions from general revenues without any built-in limits. As healthcare costs continue to rise, Medicare’s open-ended obligations will consume a growing share of federal resources. Addressing the debt and deficit will require confronting these dynamics head-on—through reforms that improve sustainability, transparency, and long-term fiscal balance.
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