The 2011 Medicare Trustees Report shows that passing health care reform legislation was important in extending the solvency of the Medicare Trust Fund. Medicare's costs are projected to be 25 percent lower over the next 75 years due to savings in the Affordable Care Act . The report also points out the importance of continued economic recovery to bolster the payroll tax money coming into the Hospital Insurance (HI) trust fund; and the need to further reform our health care system so that Medicare's costs, which will grow due to the retirement of the baby boom generation and the increase in health spending per beneficiary, are affordable for both the federal government and individuals.
We must also keep in mind that Medicare's costs probably will exceed current projections. This is because they do not take into account the likelihood that Congress will act, as it has many times in the past, to prevent a nearly 30 percent reduction in physician fees that is scheduled to go into effect in January 2012. Additionally, some question whether the reductions in reimbursements to providers, other than physicians, that are included in the Affordable Care Act will be phased out because they are too low and therefore causing access problems for beneficiaries.
Each year the Trustees of the Medicare Trust Funds 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 which covers physician and outpatient care, as well as Part D which covers 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 are charged 2.90 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 2024, which is five years shorter than was projected last year . Medicare solvency is shortened in the 2011 Medicare Trustees Report due in large part to our slow economic recovery which means less money is going into the Medicare HI Trust. In 2024, payroll taxes alone are estimated to be sufficient to cover 90 percent of HI costs.
Solvency is still greatly improved from the 2017 insolvency 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 and phasing out overpayments to Medicare Advantage plans.
Medicare's actuarial shortfall increases slightly from last year but is much less than the 3.88 percent of payroll that was projected before the enactment of health care reform. The HI Trust Fund now has a projected 75-year actuarial deficit equal to 0.79 percent of payroll compared with last year's estimate of 0.66 percent. In other words, the HI Trust Fund's fiscal imbalance could be solved by increasing payroll taxes by 0.79 percent, by reducing the program's spending by a corresponding amount or by some combination of the two.
Medicare spending will increase as a share of the economy (GDP). The Trustees project that Medicare's costs (for both the HI and SMI Trust Funds) which were 3.6 percent of GDP in 2010 will grow substantially to 5.5 percent of GDP in 2035. This increase is because the number of people receiving benefits will grow as the large baby boom generation retires. Thereafter, Medicare's costs are projected to grow more slowly to 6.2 percent of GDP in 2085. Again these increases are lower than what was projected before enactment of health care reform when Medicare's costs were projected to grow to 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, currently 1.46 percent of GDP, is projected to increase to 2.29 percent in 2035 and to 2.42 percent in 75 years. Although costs are projected to rise, the increases are lower than what was projected before enactment of the Affordable Care Act - that costs would rise to 4.5 percent of GDP in 75 years - which reduces payment rates to most providers and to Medicare Advantage plans.
Medicare Part B Premium and Social Security Cost-of-Living Increase
The standard Part B premium will decline in 2012, but premiums will increase for many beneficiaries . The standard Part B premium for 2012 is projected to be $106.60, a decrease from the 2011 standard premium of $115.40. However, because there was no Social Security cost-of-living adjustment (COLA) in 2010 or 2011, under a "hold harmless" provision in law the Part B premium increases were held to zero for about 75 percent of Medicare beneficiaries who continue to pay the 2009 premium of $96.40.
It is projected that there will be a 0.7 percent Social Security COLA in January 2012, although it may be larger, which means that premiums paid by most Part B enrollees will increase in 2012.
Medicare Part D
Medicare Part D costs continue growing faster than general inflation. Although projections are lower than last year's, this is primarily due to lower-than-anticipated drug spending in 2010 and a reduction in the projected rate of increase in prescription drug spending over the next 10 years due to increased use of lower-cost generic drugs. However, these lower costs are offset by the added costs of closing the coverage gap (the "donut hole") during 2011-2020 as provided for by the Affordable Care Act , increased enrollment, and continued increases in brand name drug costs. Therefore, Part D costs are projected to grow at an average rate of 9.7 percent annually over the next decade. Part D expenditures as a percent of GDP are expected to increase from 0.43 percent in 2010 to 1.08 percent in 2035 and to 1.70 percent in 2085. The Trustees project that the average Part D monthly premium will rise from $32.34 in 2011 to $33.49 in 2012 and to $54.84 in 2020. The Part D annual deductible is projected to increase from $310 in 2011 to $320 in 2012 and to $485 in 2020.
Parts B and D Out-of-Pocket Costs
Over the past several years health care costs have increased faster than average income or per capita gross domestic product. Additionally, annual percentage increases in the Medical Consumer Price Index have been greater than the Consumer Price Index. As a result, the Medicare Trustees project that by 2085, Parts B and D out-of-pocket costs � premiums and cost-sharing amounts - will consume 46 percent of the average Social Security check compared with 27 percent today.
NATIONAL COMMITTEE POSITION
The challenges facing Medicare are symptomatic of our larger health care financing problems. Total health care spending in the United States has been growing faster than the economy for many years, regardless of whether it is funded through government or private sources, and it is projected to continue doing so in the future. While demographics play a role in Medicare's cost increases over the next two decades, it represents only part of the equation. It is critical that we successfully implement reforms in the Affordable Health Care Act that contain costs and promote access to quality health care. These provisions, along with the law's provisions 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.
Government Relations and Policy, June 2011
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