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CCH® BENEFITS — 05/01/12

Medicare Stable, But Requires Strengthening, Trustees Report

from Spencer’s Benefits Reports: The Medicare Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2024, the same as last year’s estimate, the Medicare Trustees Report released on April 23 indicated. However, action is needed to secure its long-term future, the Trustees emphasized. In 2011, the HI Trust Fund expenditures were lower than expected.

Without the Patient Protection and Affordable Care Act (ACA), the HI Trust Fund would expire eight years earlier, in 2016. The ACA provides tools to control costs over the long term such as changing the way Medicare pays providers to reward efficient, quality care. These efforts to reform the health care delivery system are not factored into the Trustees projections as many of the initiatives are just being implemented.

“The Trustees Report tells us that while Medicare is stable for now, we have a lot of work ahead of us to guarantee its future,” said Marilyn Tavenner, Acting Centers for Medicare and Medicaid Services (CMS) Administrator. “The ACA is giving CMS the ability to do this work, with tools to lower costs, fight fraud, and change incentives so that Medicare pays for coordinated, quality care and not the number of services.”

The report projects that the Supplementary Medical Insurance (SMI) Trust Fund for medical benefits other than hospital is financially balanced because beneficiary premiums and general revenue financing are set to cover expected program costs. Spending from the Part B account of the SMI trust fund grew at an average rate of 5.9 percent over the last five years. SMI Part D, the Medicare prescription drug program, had an average growth rate of 7.2 percent over the last five years. Cost projections for Part D are lower than in the 2011 Trustees report, due to lower spending in 2011 and greater expected use of generic drugs. The projected average annual rate of growth for the U.S. economy is 5 percent during this period, significantly slower than for Part D and the probable growth rate for Part B.

In 2011, premiums for employer-based health insurance climbed by 8 percent for single coverage and 9 percent for family coverage, according to the 2011 Annual Employer Health Benefits Survey, conducted jointly by the Kaiser Family Foundation and Health Research Educational Trust (HRET). PriceWaterhouseCoopers expects medical costs to increase 8.5 percent in 2012, while Aon Hewitt forecasts health care trends of 8 percent to 10 percent over the next three to five years.

Part B outlays were 1.5 percent of GDP in 2011, and the Board projects that they will grow to about 2.5 percent by 2086. (Under the illustrative alternative projections, Part B costs would be 4.5 percent of GDP in 2086.) The Board estimates that Part D outlays will increase from 0.4 percent of GDP in 2011 to about 1.5 percent by 2086. These outlay projections are slightly lower than those shown in last year’s report mostly due to a reduction in the projected growth in prescription drug spending in the U.S. for the next 10 years.

HI expenditures have exceeded income annually since 2008 and are projected to continue doing so under current law in all future years. Trust Fund interest earnings and asset redemptions are required to cover the difference. HI assets are projected to cover annual deficits through 2023, with asset depletion in 2024. After asset depletion, if Congress were to take no further action, projected HI Trust Fund revenue would be adequate to cover 87 percent of estimated expenditures in 2024 and 67 percent of projected costs in 2050. In practice, Congress has never allowed a Medicare trust fund to exhaust its assets.

The financial projections for Medicare reflect substantial cost savings resulting from the ACA, but also show that further action is needed to address the program’s continuing cost growth.

In 2011, Medicare covered 48.7 million people: 40.4 million aged 65 and older, and 8.3 million disabled. About 25 percent of these 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 expenditures in 2011 were $549.1 billion. Total income was $530.0 billion, which consisted of $514.8 billion in non-interest income and $15.2 billion in interest earnings. Assets held in special issue U.S. Treasury securities decreased to $324.9 billion.

“The Board projects that, under current law, expenditures will increase in future years at a somewhat faster pace than either aggregate workers’ earnings or the economy overall and that, as a percentage of GDP, they will increase from 3.7 percent in 2011 to 6.7 percent by 2086 (based on the Trustees’ intermediate set of assumptions),” the Trustees’ report concluded. “If lawmakers continue to override the statutory decreases in physician fees, and if the reduced price increases for other health services under Medicare are not sustained and do not take full effect in the long range, then Medicare spending would instead represent roughly 10.4 percent of GDP in 2086. Growth of this magnitude, if realized, would substantially increase the strain on the nation’s workers, the economy, Medicare beneficiaries, and the federal budget.

The Medicare Trustees are Treasury Secretary and Managing Trustee Timothy F. Geithner, Health and Human Services Secretary Kathleen Sebelius, Labor Secretary Hilda L. Solis, and Social Security Commissioner Michael J. Astrue. Two other members are public representatives who are appointed by the President, subject to confirmation by the Senate. Charles P. Blahous III (research fellow at Stanford University's Hoover Institution, specializing in domestic economic policy but with an educational background in chemistry) and Robert D. Reischauer (an economist and president of the Urban Institute and former director of the Congressional Budget Office) began serving on Sept. 17, 2010. Tavenner is designated as Secretary of the Board.

For more information, visit http://www.cms.gov/ReportsTrustFunds/downloads/tr2012.pdf.

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