Medicare financing and beneficiary income.

With Medicare outlays expected to continue their upward spiral and with the growing proportion of elderly among the population, Medicare financing is likely to be closely scrutinized in the coming years. In this paper I examine the economic, demographic, and health trends likely to affect Medicare solvency in the years ahead. I then review the current debate over adding catastrophic coverage to Medicare, with special attention to the proposed financing mechanisms. I conclude with an analysis of alternative revenue sources for Medicare in the future. I propose that a fundamental reform of Medicare financing be undertaken that would merge the health insurance (HI) and supplementary medical insurance (SMI) components of the program. Funding would come from currently scheduled HI payroll taxes, general revenues projected to meet SMI expenditures, alcohol and cigarette taxes, and a new Medicare premium related to beneficiary income.