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Analysis of the 2016 Medicare Trustees Report

The 2016 Medicare Trustees Report shows that Medicare solvency remains greatly improved since the enactment of the Affordable Care Act (ACA), with the Hospital Trust Fund paying full benefits until 2028 and the increase in per enrollee spending continuing to be lower than the growth in overall per capita national health expenditures. Implementation of payment and delivery system reforms that emphasize coordinated care especially for people with multiple chronic conditions, incentives that are reducing the rate of hospital readmissions, and a slowdown in payments to hospitals and private Medicare plans, are improving Medicare’s financing. At the same time, under the ACA, millions of Medicare beneficiaries are receiving preventive screenings and wellness visits without copayments as well as additional assistance with their prescription drug costs.

Background

Each year the Medicare Trustees release a report on the current status and projected condition of the funds over the next 75 years. The Trustees report on both of Medicare's Trust Funds - the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. The HI Trust Fund finances Part A which covers inpatient hospital and related care. The SMI Trust Fund finances Part B physician and outpatient care, as well as Part D which pays for prescription drugs.

Medicare Part A (HI Trust Fund) is primarily financed by payroll taxes on earnings that are paid by employees, employers and the self-employed. Employees and employers each pay 1.45 percent in taxes on all earnings. The self-employed contribute 2.9 percent, the equivalent of the combined employer and employee tax rates.

Medicare Parts B and D (SMI Trust Fund) are financed by payments from federal general fund revenues (about 75 percent) and by monthly premiums charged to beneficiaries (about 25 percent). Because Medicare Part B and Part D are automatically financed through general revenues and beneficiary premiums to meet estimated program costs each year, the SMI Trust Fund is adequately financed in both the short and long term.

Financial Outlook of the Medicare Program

The Medicare Part A (HI) Trust Fund will be solvent until 2028, which is two years earlier than was projected last year. In 2028, payroll taxes alone are estimated to be sufficient to cover 87 percent of HI costs.

Solvency has improved by 11 years from the date that was projected before enactment of the Affordable Care Act. This legislation improved Medicare's financing by reducing the rate of increase in provider payments, phasing out overpayments to Medicare Advantage plans and increasing Medicare payroll taxes for high-income individuals and couples.

Medicare's actuarial shortfall increased from last year. The HI Trust Fund now has a projected 75-year actuarial deficit equal to 0.73 percent of payroll compared with last year's estimate of 0.68 percent. This is still much less than the 3.88 percent of payroll that the Trustees estimated before the Affordable Care Act became law. In other words, the HI Trust Fund's fiscal imbalance could be solved by increasing payroll taxes by 0.73 percent, by reducing the program's spending by a corresponding amount, or by some combination of the two.

Medicare spending remained stable as a share of the economy. The Trustees project that Medicare's costs (for both the HI and SMI Trust Funds), will grow from 3.6 percent of gross domestic product (GDP) to 5.6 percent of GDP in 2040. This increase occurs because the number of people receiving benefits will grow as the baby boom generation retires. Thereafter, Medicare's costs are projected to grow more slowly, to 6.0 percent of GDP in 2090. Again, these increases are lower than what was projected before enactment of health care reform when Medicare's costs were projected to grow from 3.5 percent of GDP in 2009 to 11.3 percent of GDP in 2083.

Costs for Part B (SMI Trust Fund) are growing due to the aging population and rising health care costs. Part B spending, which was 2.1 percent of GDP in 2015 is projected to increase to 3.5 percent in 2037 and to 3.8 percent in 2090. These increases are lower than those projected before enactment of the Affordable Care Act – i.e. that costs would rise to 4.5 percent of GDP in 75 years.

Medicare Part B Premium and Deductible

The Part B monthly premium for 2017 is projected to increase slightly ($104.90 to $107.60 for someone receiving an average Social Security benefit) for about 70 percent of Medicare beneficiaries because of the projected 0.2 percent Social Security cost-of-living adjustment (COLA) for 2017. The hold harmless provision in the law protects Social Security benefits from being reduced if there is no COLA or the COLA is not large enough to cover the increase in the Part B premium. However, the standard monthly premium is projected to increase from $121.80 to $149.00 for about 30 percent of beneficiaries who are not protected by the hold harmless provision. These individuals include Medicare Part B beneficiaries new to Medicare in 2017 and current enrollees who do not have the Part B premium withheld from their Social Security benefit. State Medicaid programs – that pay the Part B premiums for low-income beneficiaries dually eligible for Medicare and Medicaid – will also pay the higher rate. Higher-income beneficiaries (incomes exceeding $85,000 for an individual and $170,000 for a couple) will pay even larger income-related monthly premiums, which are projected to range from $204.40 to 467.20 in 2017 compared with $166.30 to $380.20 in 2016. The annual deductible is projected to increase from $166.00 to $204.00 for all beneficiaries in 2017.

Medicare Part D

Part D expenditures as a percent of GDP are expected to increase from 0.5 percent in 2015 to 1.4 percent in 2090. The average annual increase in expenditures for Part D is projected to rise to 10.6 percent over the next 5 years — more than twice the estimated 5 percent growth for the overall U.S. economy.

The average Part D monthly premium is $34.13 in 2016, and is estimated to be $40.66 in 2017.

In 2016, Part D enrollees with incomes exceeding the threshold of $85,000 for an individual and $170,000 for a couple are paying an income-related monthly adjustment amount in addition to their normal plan premium, ranging from $12.70 to $72.90 per month in 2016. This is estimated to increase to $15.10 to $86.70 in 2017. The Part D annual deductible, which is $360 in 2016, will be $400 in 2017.

A recent spike in prescription drug prices driven by the use of expensive specialty drugs accounts for a per enrollee benefit payment increase. In 2015, per capita benefits for Part D increased 15 percent, faster than they had historically, because of price increases for brand name drugs and the high use of the new hepatitis C drugs. In 2016 per capita benefits are estimated to increase 14.6 percent.

In the future, the per capita drug cost growth rate is expected to exceed other categories because of expected slowing of the trend toward greater generic usage and a continuing increase in the use and price of specialty drugs.

Parts B and D Out-of-Pocket Costs

The Medicare Trustees project that by 2090, Parts B and D out-of-pocket costs - premiums and cost-sharing amounts - will consume 34 percent of the average Social Security check compared to 23 percent in 2016.

NATIONAL COMMITTEE POSITION

The long-term outlook for Medicare is improving and spending per beneficiary is projected to continue growing more slowly than general health spending. However, Medicare faces a long-term financial challenge due to the large increase in the number of beneficiaries as baby boomers reach age 65, skyrocketing prescription drug prices and overall health care inflation.

It is critical that we successfully implement reforms in the Affordable Care Act that are containing costs and promoting access to quality health care. This includes supporting coordinated care through Accountable Care Organizations, medical homes, bundled payments, and reducing hospital readmissions and hospital-acquired infections, as well as efforts to further reduce spending due to waste, fraud and abuse. These provisions, along with requirements in the law to slow the rate of increase in provider payments and reduce overpayments to Medicare Advantage plans, are necessary to prevent Medicare costs from becoming unsustainable for both beneficiaries and the federal government.

The National Committee supports strengthening Medicare’s financing without shifting costs to beneficiaries by requiring pharmaceutical manufacturers to pay Part D drug rebates to the federal government and allowing Medicare to negotiate prescription drug prices. The Congressional Budget Office (CBO) has estimated savings of $121 billion over 10 years if drug manufacturers were required to provide rebates for drugs prescribed for low-income Medicare beneficiaries, as they were required to do before passage of the Medicare Modernization Act. 

Government Relations and Policy, June 2016


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