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Text: 2010 Medicare Trustees Report

Aug 05, 2010

The government released today the annual trustees report on the financial wellbeing of Medicare and Social Security. The report concluded that both programs are being strained by the current economy and the aging population.

For Medicare, it projects that changes put in place by the new health reform law will help extend the life of the program's trust fund by 12 years  –  from 2017 to 2029. But this projection comes with cautions that such gains will be dependent on the federal government achieving significant health care savings in the years to come. Meanwhile, the recession has worsened Social Security’s financial health – at least in the near term. Below are highlights of the report.

Read the full report (.pdf).

Read news summaries from today’s Daily Report.


HIGHLIGHTS

The major findings of this report under the intermediate set of assumptions are summarized below. Each of these findings is described in more detail in the "Overview" and "Actuarial Analysis" sections.

In 2009

In 2009, 46.3 million people were covered by Medicare: 38.7 million aged 65 and older, and 7.6 million disabled. About 24 percent of beneficiaries have chosen to enroll in Part C private health plans that contract with Medicare to provide Part A and Part B health services. Total benefits paid in 2009 were $502 billion. Income was $508 billion, expenditures were $509 billion, and assets held in special issue U.S. Treasury securities were $381 billion.

Short-Range Results

The financial status of the HI trust fund is substantially improved by the lower expenditures and additional tax revenues instituted by the Affordable Care Act. These changes are estimated to postpone the exhaustion of HI trust fund assets from 2017 under the prior law to 2029 under current law and to 2028 under the alternative scenario. Despite this significant improvement, however, the fund is still not adequately financed over the next 10 years. HI expenditures have exceeded income annually since 2008 and are projected to continue doing so under current law through 2013. Beginning in 2014, trust fund surpluses are estimated to occur throughout the short-range projection period and for several years thereafter. The shortfalls projected for the next 4 years can be met by redeeming trust fund assets, which at the beginning of 2010 were $304 billion, but the asset balance would fall below the Trustees’ recommended minimum level starting in 2012 under the intermediate assumptions. The HI trust fund has not met the Trustees’ formal test of short-range financial adequacy since 2003.

The SMI trust fund is adequately financed over the next 10 years and beyond because premium and general revenue income for Parts B and D are reset each year to match expected costs. However, further Congressional overrides of scheduled physician fee reductions, together with an existing "hold-harmless" provision restricting premium increases for most beneficiaries, could jeopardize Part B solvency and require unusual measures to avoid asset depletion. In particular, without legislation, Part B premiums payable in 2011 and 2012 by new enrollees, high-income enrollees, and State Medicaid programs (on behalf of low-income enrollees) will probably have to be raised significantly above normal requirements to offset the loss of revenues caused by the hold-harmless provision, raising serious equity issues.

Part B costs have been increasing rapidly, having averaged 8.3 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 4.8 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 23 percent for December of 2010. If Congress continues to override these reductions, as they have for 2003 through November of 2010, the Part B growth rate would instead average roughly 8 percent. For Part D, the average annual increase in expenditures is estimated to be 9.4 percent through 2019. The U.S. economy is projected to grow at an average annual rate of 5.1 percent during this period, significantly more slowly than Part D and the probable growth rate for Part B.

The difference between Medicare’s total outlays and its "dedicated financing sources" is estimated to reach 45 percent of outlays in fiscal year 2010, the first year of the projection. This threshold is reached much earlier than projected in previous reports primarily due to lower HI payroll taxes in 2010. Based on this result, the Board of Trustees is required to issue a determination of projected "excess general revenue Medicare funding" in this report. This is the fifth consecutive such finding, and it again triggers a statutory "Medicare funding warning," indicating that Federal general revenues are becoming a substantial share of total financing for Medicare. The law directs the President to submit to Congress proposed legislation to respond to the warning within 15 days after the date of the Budget submission for the succeeding year.

Long-Range Results

For the 75-year projection period, the HI actuarial deficit has decreased from 3.88 percent of taxable payroll, as shown in last year’s report, to 0.66 percent of taxable payroll, principally because the far-reaching effects of the Affordable Care Act reduce the actuarial deficit by 3.16 percent. However, this substantial improvement depends partly on the long-range feasibility of downward adjustments to increases in payment rates for all categories of HI providers in all future years. In the context of today’s health care system, these reductions would probably not be viable indefinitely into the future and would likely result in HI payment rates that would eventually become inadequate to compensate providers for their costs of treating beneficiaries, with adverse implications for beneficiary access to care. Under the illustrative alternative scenario, which assumes that the lower price updates are gradually phased out over 15 years starting in 2020, then about 60 percent of the full ACA savings would still be realized, and the HI actuarial deficit would be 1.91 percent of taxable payroll. The difference between the current-law and illustrative alternative HI projections underscores the importance of finding innovative new methods of delivering and paying for health care that improve quality of outcomes and achieve better cost efficiency. The Affordable Care Act institutes a major new program of research and development, which could lead to such results. Until specific methods have been designed, tested, and implemented, however, it is likely that the current-law projections for the HI trust fund (and SMI Part B as well) substantially understate the future cost of the program.

Part B outlays were 1.5 percent of GDP in 2009 and are projected to grow to about 2.5 percent by 2084. These cost projections are understated as a result of the substantial reductions in physician payments that would be required under current law and are further understated if the reductions in future price updates for most other Part B providers are not feasible. Actual future Part B costs will depend on the steps Congress might take to address these situations but under the illustrative alternative projections, Part B costs would be 5.2 percent of GDP in 2084, and would exceed the current-law projections by 22 percent in 2019, by 40 percent for 2030, and by 112 percent in 2084.

Part D outlays are estimated to increase from 0.4 percent of GDP in 2009 to about 1.8 percent by 2084. These outlay projections are slightly lower than those shown in last year’s report principally because of lower-than-expected spending in 2008 and 2009 as well as a reduction in the projected growth in prescription drug spending in the U.S. for the next 10 years. The lower Part D expenditures due to these factors are mostly offset by the cost of filling in the coverage gap (or "donut hole"), as provided for by the Affordable Care Act.

Conclusion

The financial outlook for the Medicare program is substantially improved as a result of the far-reaching changes in the Patient Protection and Affordable Care Act. In the long range, however, much of this improvement depends on the feasibility of the ACA’s downward adjustments to future increases in Medicare prices for most categories of health care providers. The development and implementation of new models for delivering and paying for health care have the potential to reduce cost growth rates to the level established by the statutory price updates, but specific outcomes cannot be assessed at this time.

The financial outlook for the Medicare program is substantially improved as a result of the far-reaching changes in the Patient Protection and Affordable Care Act. In the long range, however, much of this improvement depends on the feasibility of the ACA’s downward adjustments to future increases in Medicare prices for most categories of health care providers. The development and implementation of new models for delivering and paying for health care have the potential to reduce cost growth rates to the level established by the statutory price updates, but specific outcomes cannot be assessed at this time.

Total Medicare expenditures were $509 billion in 2009 and are projected under current law to increase in future years at a somewhat faster pace than either workers’ earnings or the economy overall. As a percentage of GDP, expenditures are estimated to increase from 3.5 percent in 2009 to 6.4 percent by 2084 (based on our intermediate set of assumptions). If Congress continues to override the statutory decreases in physician fees, and if the reduced price increases for other health services under Medicare become unworkable and do not take effect in the long range, then Medicare spending would instead represent roughly 11.0 percent of GDP in 2084. (This compares to 11.4 percent as shown in last year’s report under the prior law.) Growth of this magnitude, if realized, would substantially increase the strain on the nation’s workers, the economy, Medicare beneficiaries, and the Federal Budget.

HI tax income and other dedicated revenues are expected to fall short of HI expenditures in most future years. The magnitude of the shortfalls is reduced substantially by various Affordable Care Act provisions, with the result that trust fund assets can be redeemed at a slower rate, postponing the depletion of the fund by about 12 years compared to prior law. Although much improved, the HI trust fund still does not meet the short-range test of financial adequacy. In the long range, projected HI expenditures and scheduled tax income are much closer to balancing because of the new legislation, if the slower price updates can be continued indefinitely. If not, and prices are increased, then HI income and expenditures will remain substantially out of balance. Under either scenario, the trust fund does not meet the test of long-range close actuarial balance.

The Part B and Part D accounts in the SMI trust fund are adequately financed under current law, since premium and general revenue income are reset each year to match expected costs. Such financing, however, would have to increase faster than the economy to match expected expenditure growth under current law. Absent legislation, it will probably be necessary to significantly raise Part B premiums for a subset of beneficiaries in 2011 and 2012 to ensure adequate program financing.

The Affordable Care Act has introduced important changes to the Medicare program that are designed to reduce costs, increase revenues, expand the scope of benefits, and encourage the development of new systems of health care delivery that will improve health outcomes and cost efficiency. The financial projections in this report indicate a need for additional steps to address Medicare’s remaining financial challenges. Consideration of further reforms should occur in the near future. The sooner solutions are enacted, the more flexible and gradual they can be. Moreover, the early introduction of reforms increases the time available for affected individuals and organizations—including health care providers, beneficiaries, and taxpayers—to adjust their expectations. We believe that prompt action is necessary to address both the exhaustion of the HI trust fund and the anticipated excess growth in HI, SMI Part B, and SMI Part D expenditures.

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