July 30, 2025, marks the 60th anniversary of the signing of the Medicare and Medicaid Act into law by President Lyndon B. Johnson. The landmark legislation established federal funding of healthcare benefits for individuals 65 and older (Medicare) and low-income families (Medicaid).
To understand how Medicare has grown in the past 60 years, let’s look at a few statistics. In 1965, seniors comprised 9% of the U.S. population, about 19 million individuals. Life expectancy for males was 66 years and 73 years for females. So, on average, Medicare provided for one to eight years of basic healthcare benefits. Medicare spending represented 7.2% of the GDP.
By 2030, 20% of the U.S. population will be enrolled in Medicare as the last of the Baby Boomers turns 65, about 73 million individuals. Average life expectancy today is a combined 79 years (male and female). Services covered by Medicare have broadened since 1965. Per the Center for Medicare &Medicaid Services (CMS), healthcare spending will approach 20% of GDP in 2030.
A corollary statistic is the U.S. birthrate, which is down from 19.4% in 1965 to 11.9% in 2025. The decline in birthrate raises two important questions that management and boards should be mindful of: 1) Where will the future healthcare workforce come from to take care of the Medicare population; and 2) how will the Medicare Trust Fund remain solvent if a smaller workforce will be contributing to Medicare?
With Medicare comprising nearly half of a typical hospital’s revenues, as Medicare goes, so goes hospital financial performance. Management and boards should reflect on three fundamental Medicare changes since 1965 and how they have affected financial performance.
1983: The shift to DRG reimbursement
In 1983, Medicare implemented the Prospective Payment System (PPS) based on diagnosis-related groups (DRGs), replacing cost-based reimbursement with fixed case rates. PPS was explicitly designed to encourage hospitals to restrain resource use. Subsequent studies found no overall decline in quality of care – mortality and readmission rates did not worsen under PPS, and in some cases, quality improved by reducing unnecessary procedures.
For some hospitals, the change proved difficult, with some hospitals defaulting on debt obligations, filing for bankruptcy or closing as they did not have the financial tools to navigate the reimbursement change. The disruption also gave rise to the prominence of hospital ratings, as investors and the industry turned to the rating agencies to understand what a strong hospital looked like (as indicated by a high rating) and what a weak hospital looked like (as indicated by a low or below investment grade rating).
1997: The Balanced Budget Act – cuts and consequences
Another major turning point came with the Balanced Budget Act (BBA) of 1997. Facing federal fiscal pressures, Congress enacted sweeping Medicare payment cuts aimed at reducing spending growth. The BBA was projected to save over $100 billion in Medicare spending within five years, largely by tightening provider payments.
The financial impact was quickly felt. Hospital margins dropped significantly in the late 1990s; for example, teaching hospitals saw total operating margins fall from 5.2% in 1996 to just 2.5% by 1999, and roughly one-third of those institutions slipped into negative margins during that period. Rural and safety-net hospitals, often more dependent on Medicare, likewise struggled to break even. This distress prompted Congress to intervene with the Balanced Budget Refinement Act of 1999 and other measures, which restored some funding and eased payment formulas in response to provider concerns.
Today: The rise of Medicare Advantage
Medicare Advantage (MA) enables private insurers to contract with CMS to cover beneficiaries, introducing competition and capitated payment as alternatives to traditional fee-for-service Medicare. After a slow start, the growth has been dramatic: as of 2024, just over half of Medicare beneficiaries were enrolled in an MA plan, up from only 19% in 2007 according to KFF. In raw numbers, 30 million seniors now get their Medicare coverage through private plans, attracted by extra benefits (e.g., gym memberships) and often lower out-of-pocket costs.
Medicare Advantage plans can bring value-based incentives and care coordination support, but they also may impose denials or contract adjustments that differ from fee-for-service Medicare. Many hospitals are terminating MA contracts given the escalation in denials and pre-authorizations and a slowdown in revenue growth.
Strategies for hospital leaders in a Medicare-reliant future
These three inflection points serve as a harbinger for future changes and their potential impact on financial sustainability, including the solvency of the Medicare Trust Fund (Hospital Insurance or Part A). Hospital and health system leaders must plan for modest Medicare annual increases, continued sequestration and an accelerated push to value-based care programs, all of which will tighten margins.
The following three suggestions offer a roadmap for hospital management:
- Evaluate long-term margin resiliency: In 2022, Medicare paid hospitals only about 82 cents for every dollar of cost, and roughly two-thirds of hospitals had negative Medicare margins that year. CFOs should stress-test their finances for a higher Medicare mix and the resulting impact on performance. Strengthening margin resiliency could include aggressive cost management (through care redesign, productivity gains and overhead reduction) and service-line optimization to ensure efficiency in high-Medicare areas like cardiology, orthopedics and oncology. It may also involve difficult decisions as commercial rates moderate and CMS pursues site-neutral reforms. Prior to the pandemic, the shared aspiration of many management teams was to break even with Medicare. A return to this financial aim to ensure financial stability should be on every board’s agenda.
- Use scenario planning and financial forecasting: A key tool in navigating uncertainty is rigorous scenario planning. Hospital finance leaders should model multiple “futures” for Medicare and their organization’s position. Developing playbooks for different scenarios can enable leadership teams to respond swiftly rather than reactively. While Medicaid represents a much smaller slice of revenues for the average community hospital, now is the time to develop a Medicaid playbook as reductions in state-directed payment programs will begin in 2028.
- Prepare for payment model shifts (fee-for-service to value-based care): CMS has stated one of its goals is to continue to move to value-based care; for example, it will be launching the Transforming Episode Accountability Model (TEAM)—a new mandatory, episode-based bunded payment model for five common procedures that will apply to acute-care hospitals in almost 200 core-based statistical areas—in January 2026. This means models like bundled payments, as well as accountable care organizations (ACOs) and other population-health frameworks, could increasingly replace straight fee-for-service for Medicare patients. Hospitals should evaluate their readiness for downside risk arrangements: Do they have data analytics, clinical protocols and cost management expertise to take on population-based budgets without incurring losses?
The 60th anniversary of Medicare is both a retrospective moment and a strategic call to action. It comes on the heels of the One Big Beautiful Bill (OBBB), which was signed into law on July 4 and is projected to decrease healthcare coverage and increase bad debt for hospitals and health systems. And with the OBBB’s impact on Medicaid comes a possible Medicare sequestration as well. This only adds to the urgency for hospitals to proactively adapt to Medicare’s evolving landscape so they remain positioned to continue their mission of care in the decades to come, ensuring that they remain vital community institutions. The message to leadership is clear: plan ahead, stay agile and remain informed on upcoming changes. Your organization’s future financial sustainability may depend on it.
A special thanks to John Fortunski for his contributions to this research.
