The Medicare Trustees Report

While we have already broken down the Social Security Trustees report, the Trustees have also produced a report for Medicare. Considering that health care spending is central to our fiscal challenges and Medicare is the largest program in that category, understanding the report's findings is critical.

The Hospital Insurance trust fund, which funds Part A of Medicare mostly through the 2.9 percent payroll tax, has been running cash-flow deficits for years and is projected to become insolvent in 2024, the same year projected in last year's report. At that point, benefits would be cut by 13 percent. The 75-year actuarial imbalance in HI is 1.35 percent of payroll, a significant jump over the 0.79 percent of payroll shortfall projected last year.

Sources of the increase come from higher utilization of services by providers other than hospitals, changes to the Trustees' methodology about health care cost growth, and higher than expected enrollment in private health plans (Part C) that reimburse at a higher rate than traditional Medicare. These changes are netted against lower expected utilization in hospitals, minor legislative changes, and lower than expected 2011 Medicare spending, all which improve the HI outlook.

Changes in HI Actuarial Imbalance (Percent of Payroll)
  75-Year Actuarial Shortfall
2011 Report Imbalance -0.79%
2011 Spending Levels +0.09%
Private Health Plans -0.12%
Hospital Utilization +0.26%
Other Provider Utilization -0.53%
Economic and Demographic Assumptions +0.01%
Long Range Cost Growth Assumptions -0.30%
Legislative Changes +0.03%
2012 Report Imbalance -1.35%

However, the financial status of the HI trust fund is not the most important measure for Medicare, since it only represents one portion of the program. A more useful metric is total Medicare spending, which also includes other spending on patient care and prescription drugs (mostly funded by beneficiary premiums and general revenue). Even under current law projections, which assume various cost control measures stay in effect longer than some other sets of projections, Medicare spending is on course to rise rapidly from about 3.5 percent of GDP today to about 6 percent by 2040. Thereafter, it would rise only gradually to 6.7 percent by 2086.

However, the Trustees note that current law includes some unrealistic assumptions. Notably, at the end of the year, physician payments would have to be cut by 31 percent to comply with the Sustainable Growth Rate formula. Congress has for the last ten years enacted "doc fixes" to avert that. In addition, the Affordable Care Act reduces provider payment updates by the increase in economy-wide productivity (projected at 1.1 percentage points annually over the long run) and mandates that the Independent Payment Advisory Board (IPAB) enact other Medicare savings if spending growth exceeds a certain target. 

The Trustees state that the productivity adjustments may prove to be unsustainable over the long run, although if and when that happens is less certain than with the doc fix. Also, the IPAB would not be much of a factor under current law, but it may have to come up with substantial reductions if the other two scheduled payment reductions do not happen.

Because of the likelihood that at least some of these reductions will be overridden, the Trustees have usually produced an alternative scenario. This year, they have very helpfully made two scenarios, showing what Medicare spending would be if just the doc fixes were passed and if the ACA reductions were overriden along with the doc fixes. For physician payments, the Trustees assume they are increased by one percent per year for the first ten years and then increase with per capita health care spending growth after that. For the ACA reductions, the Trustees assume they are phased out gradually from 2022 to 2036. 

As you can see, enacting doc fixes increases Medicare spending to about 8 percent of GDP 75 years from now, but its growth trajectory is somewhat parallel to current law; in other words, there still is a slow down in the growth rate, just from a higher level. On the other hand, overriding all three payment reduction mechanisms increases Medicare spending to 10.4 percent of GDP in 2086, and cost growth basically barrels through the 2040 yellow light. The report states that removing the productivity adjustments have by far the largest effect.

The Trustees report shows that Medicare spending will rise significantly over the next thirty years, but that it can be much more controlled if we stick to our "cost-control guns" and adhere to a PAYGO principle of paying for any savings measures that Congress unwinds.