Medicare’s long-term financial outlook is in dire straits. While spending is already historically high, the Congressional Budget Office (CBO) projects that, without fundamental reform, things will only get worse.
According to the CBO, total government spending will grow from 23.3% of GDP in 2025 to 26.6% in 2055. Almost two-thirds of this growth is expected to come from out-of-control Medicare spending. In short, on its current trend, Medicare is simply unaffordable. It is also undermining the viability of the broader healthcare system.
Such a dire outlook seemingly contradicts patients’ view of the program. According to KFF, 91% of beneficiaries over 65 rated Medicare’s overall performance as excellent or good. Of course, why wouldn’t they?
Beneficiaries are satisfied with Medicare because the program notoriously underpays providers. Imagine how satisfied you would be with your car insurance provider if the company could pay the auto shop less than 40 cents on the dollar for the costs of repairs.
This is precisely what Medicare does. As a 2024 RAND research report documented, “across all hospital inpatient and outpatient services (including both facility and related professional claims), employers and private insurers paid, on average, 254% of what Medicare would have paid for the same services at the same facilities.”
The 254% premium that private insurers and employers pay is not representative of the actual cost of care. The costs that the private sector must pay doctors and hospitals are higher than they would otherwise be due to Medicare’s uneconomical compensation levels.
In other words, patients with private or employer-based insurance are subsidizing the costs for Medicare patients – not to mention the uninsured and Medicaid patients, who also have uneconomical reimbursement rates. This cost shift makes Medicare seem like it is better insurance than it is; but at the expense of worsening the healthcare affordability crisis for everyone else.
Medicare’s underpayments also undermine the financial viability of healthcare providers. According to the AAMC, hospitals lose money on nearly all services they provide to Medicare patients. Specifically, they found that “hospitals saw an aggregate loss of $4.9 billion, or an average loss of $2,244 per discharge” for each Medicare inpatient beneficiary served.
As documented by American Medical Association, low Medicare reimbursement rates are financially harming private practices and discouraging doctors from accepting new Medicare patients. When coupled with the other pressures on doctors, the inadequate Medicare compensation is contributing to the growing doctor shortage problem.
Nor is there a logical foundation to Medicare’s underpayments. Take Medicare’s home health care benefit as an example. The Centers for Medicare & Medicaid Services (CMS) is “poised to impose its fourth consecutive permanent home health rate cut in four years” totaling “nearly 13%”. Generating healthcare savings is a must, but the problem, in this case, is that these actions may be penny-wise, but they are also pound-foolish.
A study from the Penn Leonard Davis Institute of Health Economics demonstrated that “home health care was associated with an average savings of $4,514 in total Medicare payments in the 60 days after the first hospital admission.”
The underpayment of home healthcare risks these larger systemic savings. As the National Alliance for Care at Home notes, “half of all U.S. counties lost home healthcare agencies between 2020 and 2024, and “in over 70% of counties, agencies are treating fewer traditional Medicare patients.”
These realities demonstrate that fundamental reform is a must. Otherwise, Medicare will either bankrupt the country or provide seniors with extremely deficient healthcare.
As I argued in a June 2025 Forbes editorial, reforms should restructure Medicare as a cash-based benefit system similar to how the government pays Social Security benefits. At current spending levels, Medicare can annually pay each beneficiary $15,150 ($30,300 for a married couple) to cover the costs of their insurance and out-of-pocket healthcare spending. If deposited into a health savings account (HSA), then any funds unspent in a given year could be used in subsequent years.
When patients control their health care spending, they naturally seek out the most efficient and appropriate setting for their needs. Home healthcare is a perfect example. Given the choice and financial incentive, many patients recovering from a hospital stay would select care at home, where outcomes are comparable or better and costs are far lower, rather than being sent to a high-cost institutional facility simply because Medicare’s reimbursement formula favors it.
Giving patients control over their own healthcare spending also incentivizes providers and insurers to focus on patients’ needs not the edicts of government bureaucrats. So empowered, providers will be incentivized to find new innovative ways to deliver care and reduce costs. The benefits from this reform could be further enhanced by enacting reforms that similarly empower patients with private insurance – both the employer-sponsored plans and the healthcare exchanges.
A cash-based, patient-directed model aligns economic and clinical incentives: patients spend prudently, providers compete on value, and care migrates to lower-cost, higher-satisfaction settings like home health. In contrast, when payment decisions are dictated by government formulas and fee schedules, the system rewards inefficiency, distorts care choices, and drives costs ever higher.
Medicare is financially unsustainable and undermines the healthcare system’s viability. While it is easy to overlook these issues and focus on patient satisfaction surveys, that is akin to judging the success of the Titanic’s voyage based on the dinners that first class guests were served. Perhaps it generates rave reviews in the short run, but ultimately things are not going to end well.