Medicare Loses Another $15 Billion in 2014; Trustees Again Predict Hospital Insurance Trust Depletion by 2030

chart1Introduction

The Social Security Act established the Medicare Board of Trustees to oversee the financial operations of the Hospital Insurance (Part A) and Supplementary Medical Insurance (Part B and D) trust funds. The Social Security Act requires that the Board, “among other duties, report annually to the Congress on the financial and actuarial status of the trust funds.” On July 22, 2015, the Boards of Trustees of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund, delivered its annual report to Speaker of the House of Representatives John A. Boehner and President of the Senate Joseph R. Biden, Jr. The 2015 report is the 50th that the Board has published. What follows is a verbatim rendition of information, statistics, analysis, and predictions as published in the 2015 Medicare Trustees Report, which can be found here (PDF file).

The Medicare Trust Funds

The Medicare program has two parts. “Hospital Insurance (HI), otherwise known as Medicare Part A, helps pay for hospital, home health following hospital stays, skilled nursing facility, and hospice care for the aged and disabled. Supplementary Medical Insurance (SMI), consists of Medicare Part B and Part D. Part B helps pay for physician, outpatient hospital, home health, and other services for the aged and disabled who have voluntarily enrolled. Part D provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries and premium and cost-sharing subsidies for low-income enrollees.”

Medicare also has a Part C, which serves as an alternative to traditional Part A and Part B coverage. “Under this option, beneficiaries can choose to enroll in and receive care from private Medicare Advantage and certain other health insurance plans. Medicare Advantage Organization (MAO) and Program of All-Inclusive Care for the Elderly (PACE) plans receive prospective, capitated payments for such beneficiaries from the HI and SMI Part B trust fund accounts; the other plans are paid from the accounts on the basis of their costs.”

2014 Overview

The report indicates that “in 2014, Medicare covered 53.8 million people: 44.9 million aged 65 and older, and 8.9 million disabled. About 30 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 2014 were $613.3 billion, and total income was $599.3 billion, which consisted of $588.1 billion in non-interest income and $11.2 billion in interest earnings. Therefore, assets held in special issue U.S. Treasury securities decreased by $14.1 billion to $266.4 billion from 2013 to 2014.”

Trustees Short Term Predictions

The report estimates “the depletion date for the HI trust fund to be 2030, the same as in last year’s report. As in past years, the Trustees have determined that the fund is not adequately financed over the next 10 years. HI tax income in 2014 was somewhat higher than last year’s estimate, mostly due to adjustments for prior years, but is projected to be slightly lower through 2019; after 2019, however, projections of earnings throughout the period are higher mostly due to assumptions of slower projected growth in employer-sponsored health insurance—a factor that increases wages. Although HI expenditures in 2014 were nearly equal to the previous estimate, projected expenditures are higher at the end of the 10-year period than shown in last year’s report, largely due to increases in provider payment update assumptions that reflect recent trends.”

Hospital Insurance (Part A) Predictions

The report shows that “HI expenditures have exceeded income annually since 2008. However, the Trustees project slight surpluses in 2015 through 2023, with a return to deficits thereafter until the trust fund becomes depleted in 2030. In 2014, $8.1 billion in trust fund assets were redeemed to cover the shortfall of income relative to expenditures. The Treasury also paid from the general fund $8.8 billion in interest to the HI trust fund in 2014. The assets were $205.4 billion at the beginning of 2014, representing about 76 percent of expenditures during the year, which is below the Trustees’ minimum recommended level of 100 percent. The HI trust fund has not met the Trustees’ formal test of short-range financial adequacy since 2003. Growth in HI expenditures has averaged 2.1 percent annually over the last 5 years and is projected to average 4.8 percent over the next 5 years.”

Supplemental Medical Insurance (Part B) Predictions

The report concludes that 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 cover expected costs and ensure a reserve for Part B contingencies. In 2016, however, a hold-harmless provision that restricts Part B premium increases for most beneficiaries is expected to cause a substantial increase in the Part B premium rate for other beneficiaries.”

Trustees Long Range Predictions

For the 75-year projection period, the report details that “HI actuarial deficit has decreased from 0.87 percent of taxable payroll, as shown in last year’s report, to 0.68 percent of taxable payroll. The 0.19 percent of payroll reduction in the actuarial deficit was primarily due to (i) lower long-range Medicare cost growth resulting from changed assumptions about the effect of increases in income, technology, and health care prices on health care costs (about 0.23 percent of payroll) and (ii) provider payment reductions due to legislation (about 0.03 percent of payroll). Partially offsetting these favorable changes is the assumption that a higher proportion of Medicare beneficiaries will enroll in MA plans (about 0.07 percent of payroll).”

The report also suggests “Part B outlays were 1.5 percent of GDP in 2014, and the Board projects that they will grow to just over 2.4 percent by 2089 under current law. These long-range projections are lower than those in last year’s report under current law and much lower than under last year’s projected baseline mostly due to (i) recent legislation that changed physician payments and (ii) lower assumptions for long-range health care cost growth for other Part B services. The Board estimates that Part D outlays will increase from 0.5 percent of GDP in 2014 to about 1.4 percent by 2089. These long-range outlay projections are slightly lower than those shown in last year’s report primarily due to the assumptions about long-range health care cost growth as mentioned above.”

Conclusion

The report concludes that “total Medicare expenditures were $613 billion in 2014. The Board projects that 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 3.5 percent in 2014 to 6.0 percent by 2089 (based on the Trustees’ intermediate set of assumptions). If the reduced price increases for physicians and other health services under Medicare are not sustained and do not take full effect in the long range as in the illustrative alternative projection, then Medicare spending would instead represent roughly 9.1 percent of GDP in 2089. Growth under any of these scenarios, if realized, would substantially increase the strain on the nation’s workers, the economy, Medicare beneficiaries, and the Federal budget.”

The Trustees project that “HI tax income and other dedicated revenues will fall short of HI expenditures in most future years. The HI trust fund does not meet either the Trustees’ test of short-range financial adequacy or their test of long-range close actuarial balance. The Part B and Part D accounts in the SMI trust fund are adequately financed because premium and general revenue income are reset each year to cover expected costs. Such financing, however, would have to increase faster than the economy to cover expected expenditure growth.”

As the Trustees have indicated annually for several years now, “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 and behavior. The Trustees recommend that Congress and the executive branch work closely together with a sense of urgency to address the depletion of the HI trust fund and the projected growth in HI (Part A) and SMI (Parts B and D) expenditures.”

2015 Medicare Trustees Report Data for Calendar Year 2014

Part A

Part B

Part D

Total

Assets at end of 2013 (billions)

$205.4

$74.1

$1.0

$280.5

Total income

$261.2

$259.8

$78.2

$599.3

Payroll taxes

227.4

227.4

Interest

8.8

2.4

0.0

11.2

Taxation of benefits

18.1

18.1

Premiums

3.3

65.6

11.4

80.3

General revenue

2.0

188.5

58.1

248.6

Transfers from States

8.7

8.7

Other

1.6

3.3

5.0

Total expenditures

$269.3

$265.9

$78.1

$613.3

Benefits

264.9

261.9

77.7

604.5

Hospital

139.2

44.1

183.3

Skilled nursing facility

28.8

28.8

Home health care

6.6

11.2

17.8

Physician fee schedule services

69.2

69.2

Private health plans (Part C)

74.0

85.7

159.7

Prescription drugs

77.7

77.7

Other

16.3

51.7

68.0

Administrative expenses

$4.5

$4.0

$0.4

$8.8

Net change in assets

−$8.1

−$6.1

$0.1

−$14.1

Assets at end of 2014

$197.3

$68.1

$1.1

$266.4

Enrollment (millions)
Aged

44.6

41.3

n/a

44.9

Disabled

8.9

8.1

n/a

8.9

Total

53.5

49.3

40.5

53.8

Average benefit per enrollee

$4,951

$5,308

$1,920

$12,179

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