Bracing for Medicare’s Financial Crossroads in 2025 and Beyond
July
2025
Changes in federal funding for Medicare are forecasted over the next decade, starting with FY 2026, due to mandates under the July 4 deficit legislation.
As Medicare nears its 60th anniversary, the program is contending with unprecedented demographic and economic pressures. With more than 66.7 million Americans enrolled and 11,000 Baby Boomers reaching age 65 each day, this surge — referred to by retirement economists as “Peak 65” — underscores its central role in retirement health care. Still, the strain on federal funding and private insurer participation is intensifying and is expected to reshape the program’s landscape and national retirement policy through 2034.
2025 Medicare Enrollment and Cost Trends
• Recipients: 66.7 million
• Annual Federal Medicare Spend: $987 billion
• Percentage of Federal Budget: 15%+
• Projected Medicare Enrollment by 2030: 76 million
• Risk Populations: Rural Enrollees, DualEligible Recipients, Low-Income/Near-Retirees
A System Under Change
Medicare remains divided into four parts, each with its own funding mechanisms and risk-bearing entities:
A
Part A (Hospital Insurance): Funded primarily by payroll taxes collected from employees and employers; Covers inpatient hospital care, skilled nursing facility care, home health care, and hospice care.
B Part B (Medical Insurance): Covers outpatient care, physician services, and some preventive care; Funded through a combination of general revenues, beneficiary premiums, and additional congressional funds.
C Part C (Medicare Advantage): Private alternative to Original Medicare that includes Parts A, B, and usually D, often with additional benefits; Premiums vary.
D Part D (Prescription Drug Plans): Standalone or bundled drug coverage through private insurers; Regulated and partially subsidized by Medicare.
Gap areas in optional coverage assist with paying for expenses not fully covered by Medicare Parts A-D. These include Medicare Supplement (Medigap) policies, as well as standalone plans for dental, vision, hearing aids, and long-term care — areas that represent common out-of-pocket costs for retirees.
Income Squeeze
Understanding the IRMAA Surcharge Effect
The Income-Related Monthly Adjustment Amount (IRMAA) continues to put financial pressure on higher-income retirees, many of whom fall into the “middle wealth” bracket. These surcharges, which are based on Modified Adjusted Gross Income (MAGI), often hit hardest those retirees who do not qualify for premium assistance or low-income subsidies but still depend on Social Security and modest investment income.
$500,001+
$628.90
Tiered Copay Restructuring
Most prescription plans follow a five-tier model:
• Tier 1: Generics, lowest cost.
• Tier 2: Preferred generics.
• Tier 3: Preferred brand-name drugs.
• Tier 4: Non-preferred brands.
• Tier 5: Specialty drugs with the highest copays.
Advisors must monitor these shifts, as brokers may see greater variance in formulary design and utilization management strategies.
Populations at Risk
• Nearly 4.5 million Medicare-eligible recipients paid IRMAA surcharges in 2024, up from 3.8 million in 2022.
• With inflation, wage growth, and federal saving mechanisms, the IRMAA bracket is more likely to tighten overtime, putting more pressure on retirees.
$85.80
According to the CMS Trustees Report, 2024, cuts to general revenue funding could follow pressure to reduce federal outlays, directly impacting Medicare for decades to come.
• Part A is projected to be insolvent by 2031.
• Parts B and D already rely on 75% federal subsidy, making them highly susceptible to cost-cutting reforms.
• More than 40% of Rural Enrollees rely exclusively on Medicare Advantage plans.
• Plan consolidation or carrier exits could eliminate local provider access, particularly for chronic care management.
• Medicare + Medicaid dual eligibility represents 19% of Medicare claimants but accounts for 35% of total Medicare spending.
• Federal cuts without coordinated state response may lead to fragmented care delivery.
• Near-Retirees earning just above Medicaid thresholds often bear the brunt of rising premiums and drug costs.
• A 10% increase in average Medigap premiums was observed from 2023 to 2024, with further hikes expected.
Critical Reforms Shaping 2025 Coverage and Cost
Star Rating System Overhaul
The Centers for Medicare & Medicaid Services (CMS) modified the Medicare Advantage (MA) Star Rating threshold in 2024. By weighting patient experience and access measures more heavily, it made it challenging for Medicare Advantage Organizations (MAOs) to attain a four-star or higher rating.
Star Ratings Matter
Higher-rated plans receive bigger payments and rebates, which they can reinvest in member benefits and use to stand out in the market.
• 72 plans lost at least one star.
• Seven plans earned a 5-Star Rating (down from 38 last year).
• Fewer MA prescription drug plans achieved top scores.
Drug and Vaccine Cost Controls
• Insulin copays are capped at $35/month for all Medicare plans.
Bottom Line
Under the July 4 budget law, CMS will face further pressure to reduce or cap bonus payments to comply with automatic Medicare spending cuts.
• Vaccines recommended by Advisory Committee on Immunization Practices are now free with no cost-sharing. These provisions improve retiree access but pressure insurers’ profit margins, potentially leading to tighter networks and increased premiums.
Part D Restructuring Under Inflation Reduction Act (IRA)
• In 2025, a $2,000 annual out-of-pocket cap on Part D prescriptions will go into effect.
• Plans must now cover 95% of drug costs after the cap is met, shifting risk to insurers and potentially limiting formularies.
Brokers must recalibrate plan comparisons, especially when advising dual-eligible or high-utilization retirees.
Additional Policy Forecasts
Legislative and administrative shifts underway:
• Expanding Medicare Savings Program eligibility and enforcing the staffing minimums in skilled nursing facilities are being delayed until October 1, 2034.
• Telehealth reimbursement policy extensions beyond the Public Health Emergency period remain under review but likely face a slower rollout.
• Potentially new limits to Medicare eligibility for lawfully present immigrants.
• Means-testing Medicare Advantage subsidies and Medigap benefit expansion (H.R. 1436) remain under consideration but are tentative with federal funding reductions.
Market Turbulence: Trends to Monitor
Possible Outcomes if Medicare Funding is Affected
Trend
Impact
MA Plan Consideration Fewer choices, especially in rural counties
Behavioral Health Expansion Delays
Coverage Carve-Outs
Employer-Driven Medicare Navigation
Broker Access Restrictions
IRMAA Bracket Expansion
Rise of Tech-Based Supplementals
Rollback of teletherapy and integrated care services
Insurers may begin excluding more highcost therapies or drugs
Employers increasingly sponsoring Medicare concierge services
Seniors may lose access to broker guidance with Medicare Advantage plans, as commissions are no longer paid for broker assistance
Brackets may be re-indexed more aggressively due to budget pressures
Surge in AI-driven plan comparison tools and virtual senior clinics
Navigating What Comes Next
While Medicare continues to be a foundational safety net in American retirement, its long-term sustainability is now in question. Regulatory reforms, rising costs, and shifting demographics are pressuring all stakeholders. Increased life expectancy, declining birth rates, and the “Peak 65” swell are accelerating cost burdens in ways never anticipated by the program’s original architects. This shift demands fresh thinking — not only from policymakers but also from brokers, employers, insurers, and retirees.
Proactive strategies such as the following will be increasingly essential to avoid disruption and maintain access:
• Coordinated plan design for Dual-Eligibles
• Data-driven utilization trend analysis
• Regional access forecasting
• Legislative watch and scenario planning
Conclusion
Medicare’s promise is one of longevity, access, and dignity but these stand on fragile fiscal ground. Navigating the crossroads that lie ahead requires more than reaction — it demands foresight, informed positioning, and early action.
For organizations and advisors with deep Medicare fluency, the path forward is one of stewardship: helping clients manage volatility while shaping sustainable outcomes. Those already embedded in the complexities of Medicare’s shifting landscape are best positioned to help others navigate into its next chapter.
Sources
America Counts Staff. 2020 Census Aging Boomers Report. December 2019.
Alliance for Lifetime Income/PR Newswire. Peak 65 Retirement Trends. January 2025.
Medicare Trustees Report. Boards of Trustees Annual Report. May 2024.
U.S. Government Accountability Office. America’s Fiscal Health at Risk. February 2025.
Kaiser Family Foundation. 2025 Budget Reconciliation – Medicare Provisions. July 2025.
Centers for Medicare & Medicaid Services. 2025 Medicare Premiums and Deductibles. November 2024.
Centers for Medicare & Medicaid Services. 2025 Medicare Advantage and Part D Star Ratings. October 2024.
Centers for Medicare & Medicaid Services. Medicare Telehealth Trends. Q4 2024.
Congressional Research Service. Pending Medicare Reform Legislation: Medigap Expansion Legislation (H.R. 1436/S.939), MA
Premium Means-Testing, Telehealth Reimbursement. May 2025.