In its 2016 report to Congress, the Medicare Board of Trustees project that Medicare expenditures will increase in future years at a faster pace than either aggregate workers’ earnings or the economy overall and that, as a percentage of gross domestic product (GDP), they will increase from 3.6 percent in 2015 to 6.0 percent by 2090. The Trustees report stresses the need for substantial steps to address Medicare’s financial challenges. The Trustees believe that the sooner these solutions are enacted, the more flexible and gradual they can be, and the more time affected individuals and organizations (including health care providers, beneficiaries, and taxpayers) will have to adjust their expectations and behavior. The Trustees specifically recommend that Congress and the White House work with a sense of urgency to address the depletion of the Hospital Insurance (HI) trust fund and the projected growth in HI (which funds Part A) and the Supplemental Medical Insurance (SMI) trust fund (which funds Parts B and D) expenditures (Medicare Trustees Report, June 22, 2016).
Trustee assumptions. The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) contains approximately 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving benefits, combating fraud and abuse, and initiating a major program of research and development to identify alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and reduce costs. The Trustees report assumes that the various cost-reduction measures will occur as the ACA requires. However, the Trustees predict that if the health sector cannot transition to more efficient models of care delivery, and if the provider reimbursement rates paid by commercial insurers continue to follow the same negotiated process used to date, then the availability and quality of health care received by Medicare beneficiaries will fall over time compared to that received by those with private health insurance.
2015 report highlights. The Trustees report that, in 2015, Medicare covered 55.3 million people. Of this figure, 46.3 million were aged 65 and older, and 9.0 million were disabled. Almost 32 percent were enrolled in Medicare Advantage (Part C) private health plans that contract with Medicare to provide Part A and Part B health services. Part C plans receive prospective, capitated payments for their beneficiaries from the HI and SMI Part B trust fund accounts. Total 2015 Medicare expenditures were $647.6 billion, and total income was $644.4 billion, consisting of $633.9 billion in non-interest income and $10.5 billion in interest earnings.
Short-range projections. The Trustees estimate the depletion date for the HI trust fund is 2028. For 2015, HI expenditures were financed with $267.1 billion in non-interest income, $8.2 billion in interest paid to the HI trust fund by the Treasury, and a $3.5-billion net redemption of trust fund assets by the Treasury. The assets were $197.3 billion at the beginning of 2015, representing about 71 percent of expenditures during the year, which is below the Trustees’ minimum recommended level of 100 percent. Over the next 5 years, the Trustees projected annual growth rates for expenditures and non-interest income are 5.4 percent and 6.0 percent, respectively.
The Trustees report that the SMI trust fund is adequately financed over the next 10 years and beyond because premium income 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 addition, a hold-harmless provision restricts Part B premium increases for most beneficiaries in 2016; however, the Trustees indicate that there may be a substantial increase in the Part B premium rate for some beneficiaries in 2017.
Over the next five years, the Trustees project an average annual Part B growth rate of 6.9 percent for Part B and 10.6 percent for Part D. During this period, the projected average annual rate of growth for the U.S. economy is 5.0 percent, significantly slower than for Part B and Part D.
Long-range projections. For the 75-year projection period, the HI actuarial deficit increased from 0.68 percent of taxable payroll to 0.73 percent of taxable payroll. The Trustees primarily attribute the 0.05 percent of payroll increase in the actuarial deficit to lower taxable payroll and higher projected utilization of inpatient hospital services than previously estimated.
Part B outlays were 1.6 percent of GDP in 2015, and the Trustees project that they will grow to about 2.4 percent by 2090 under current law. The Trustees estimate that Part D outlays will increase from 0.5 percent of GDP in 2015 to about 1.4 percent by 2090.
Transfers from the general fund finance about three-quarters of SMI costs and are central to the automatic financial balance of the HI and SMI accounts, according to the Trustees. Such transfers represent a large and growing requirement for the federal budget. SMI general revenues currently equal 1.5 percent of GDP and would increase to an estimated 2.7 percent in 2090.
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