Could a Recession Affect Medicare?

Greater than 50%. Those are the odds DoubleLine Capital CEO Jeffrey Gundlach, who some call the "bond king," gives for a U.S. recession within the next few quarters. Gundlach acknowledged in an interview with CNBC that he thinks the probability of a recession is "higher than most people believe."

However, Gundlach isn't too much of an outlier. CNBC's recent survey of analysts, fund managers, and strategists revealed a 36% chance of a U.S. recession, up from only 23% in January.

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Many retirees may think they don't have to worry about a recession. They could believe that federal entitlement programs are protected from an economic downturn. But are they right? Could a recession have an impact on Medicare?

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Ripple effects

The short answer to the question is "yes." A recession could definitely affect Medicare, especially an economic downturn that's severe and long-lasting. To understand why, we must first look at the ripple effects typically experienced during a sharp recession.

Unemployment almost always increases when the economy is in a recession. That makes sense: Economic output declines during a recession, which usually means fewer people are working. The chart below shows how the U.S. unemployment rate jumped during recessions (the periods when the U.S. economy was in recession are highlighted in gray).

US Unemployment Rate data by YCharts

Medicare Part A (hospital insurance) is funded primarily by FICA payroll taxes. These taxes also fund Social Security. FICA taxes total 15.3% of an individual's wages, half of which is paid by the employee and the other half by the employer. Of this 15.3%, 2.9% goes to Medicare.

When unemployment rates are higher, FICA payroll taxes decline since there are fewer workers. Recessions, therefore, cause the revenue flowing into Medicare to fall. How would a recession potentially affect Medicare spending? This question is more difficult to answer.

Medicare enrollment could rise during a recession if seniors who were previously working lost their jobs and opted to file for Medicare benefits. However, a 2010 study conducted by Michael Levine with the Congressional Budget Office and Melinda Buntin with Vanderbilt University found that "the use of Medicare services by beneficiaries has not, on average over the past few decades, moved in concert with the business
cycle."

A recession's biggest potential impact on Medicare

Arguably the biggest potential impact on Medicare from a recession is that it could accelerate how quickly the Medicare Hospital Insurance Trust Fund will run out of money. The Medicare Board of Trustees (which includes the Administrator of the Centers for Medicare and Medicaid Services, the Treasury Secretary, Secretary of Health and Human Services, the Secretary of Labor, and the Commissioner of Social Security) determined last year that this trust fund will be depleted by 2036.

Importantly, though, the Medicare program itself won't be bankrupt when the Medicare Hospital Insurance Trust Fund runs out of money. Ongoing FICA payroll taxes and other sources of revenue will still fund roughly 89% of Medicare Part A benefits. Medicare Part B and Part D are funded by general federal revenue and premiums for beneficiaries.

The Medicare Board of Trustees' projection of when the trust fund will run out of money changes based on economic assumptions. A recession (especially a severe one) could dramatically change those assumptions.

Is a recession coming?

Admittedly, all of this could be much ado about nothing. There are no definitive indications that the U.S. economy is headed for a recession.

Some economists are more concerned about stagflation -- a combination of slow growth and higher inflation -- than they are about a recession. However, stagflation that causes higher unemployment could negatively affect Medicare, too.

The good news is that seniors receiving Medicare benefits probably don't need to worry. Medicare is so popular that few representatives and senators in Washington would be willing to risk their political future by allowing benefit cuts to be made as a result of a recession -- or anything else.

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