Analysis of the 2010 Medicare Trustees' Report

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 the equivalent of the combined employer and employee tax rates, which is 2.90 percent.

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). ¹Because Medicare Part B and Part D are automatically financed through general revenues and beneficiary premiums to meet estimated program costs each year, the SMI T rust 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 2029. This is twelve years longer than the 2017 date projected in the 2009 Trustees' Report. In 2029, payroll taxes alone are estimated to be sufficient to cover 85 percent of HI costs. Improvements in Medicare's financing are due to enactment of the Affordable Care Act, which reduces the rate of increase in provider payments, phases out overpayments to Medicare Advantage plans, and increases Medicare payroll taxes for high-income individuals and couples.

In the short term, the Medicare (HI) program faces deficits due mainly to the recession's negative effect on payroll tax revenues. Fund surpluses are anticipated during 2014-2022. Afterward, the program will rely upon interest earnings and other assets to help pay benefits each year.

Medicare's actuarial balance improved greatly from last year. The HI Trust Fund now has a projected 75-year actuarial deficit equal to 0.66 percent of payroll compared with last year's estimate of 3.88 percent. In other words, the HI Trust Fund's fiscal imbalance could be solved by increasing payroll taxes by 0.66 percent, by reducing the program's spending by a corresponding amount or by some combination of the two.

Medicare spending will decrease as a share of the economy (GDP). ²In 2010, the Trustees project that Medicare's costs (for both the HI and SMI Trust Funds) will represent 3.6 percent of GDP. These costs will increase steeply between 2015 and 2030 because the number of people receiving benefits will grow as the large baby boom generation retires. However, the projected increase in Medicare spending as a share of GDP is greatly reduced from last year. Medicare's costs are projected to grow to 6.4 percent of GDP in 2084; last year the Trustees projected that Medicare's costs would grow from 3.5 percent of GDP in 2009 to 11.3 percent of GDP in 2083.

The 2010 Medicare Trustees' report shows slower cost growth for Medicare Part B as a result of the Affordable Care Act's provisions which reduce payment rates to most providers and to Medicare Advantage plans. Part B spending, currently 1.5 percent of GDP, is projected to increase to 2.5 percent in 75 years. The 2009 projection was that it would increase to 4.5 percent. Beneficiary premiums will continue to rise but at a slower rate. According to the Trustees' Report, the standard Part B premium will increase from $110.50 a month in 2010 to $160.10 a month in 2019. The Part B annual deductible will increase from $155 in 2010 to $223 in 2019. The Trustees have said that their cost estimates for Medicare Part B are likely too low because they assume substantial reductions in physician payments based on current law.

By statute, increases in the Part B premium generally cannot be larger, in dollars, than the Social Security cost-of-living adjustment (COLA). There was no COLA in 2010, and the Social Security Trustees predict there will be no COLA in 2011. This means that once again Part B premium increases will be held to zero for about 75 percent of Medicare beneficiaries. The other twenty-five percent - new enrollees, seniors subject to means-tested premiums, enrollees whose premiums are not deducted from their Social Security checks, and some Medicaid beneficiaries - are not subject to the limitation; they bear the full burden of premium increases that are necessary to fund twenty-five percent of Part B spending.

Medicare Part D spending estimates are lower than previously projected. The lower projections are due to lower-than-anticipated drug spending in 2008 and 2009 and a reduction in the projected rate of increase in prescription drug spending over the next 10 years. 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. Therefore, Part D costs are projected to grow at an average rate of 9.4 percent annually over the next decade and enrollees will likely see large increases in their premiums. The Trustees project that the average Part D premium will rise from $31.94 a month in 2010 to $54.47 a month in 2019. The Part D annual deductible is projected to increase from $310 in 2010 to $490 in 2019. Part D expenditures as a percent of GDP are expected to increase from 0.41 percent in 2009 to 1.75 percent in 2080.

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 2080, Parts B and D out-of-pocket costs will consume 50 percent of the average Social Security check compared with 27 percent today.

 The National Committee's Concerns

Some Medicare beneficiaries need protection from unusually high increases in their Part B premiums. Social Security's Trustees are currently projecting that, for the second year in a row, seniors will not see a cost-of-living adjustment (COLA) in 2011, despite experiencing increases in their out-of-pocket health care costs. In this circumstance, current law contains a "hold harmless" provision that prevents reductions in Social Security checks for about three-quarters of beneficiaries by prohibiting an increase in their Part B premiums. However, this "hold harmless" provision does not protect new enrollees, higher-income enrollees, enrollees whose premiums are not deducted from their Social Security checks, and low-income dual-eligible beneficiaries whose premiums are paid for through state Medicaid programs. We support legislation that would extend the current "hold harmless" policy to these remaining categories of Medicare enrollees so that their 2010 and 2011 Part B monthly premiums would remain at the current 2009 level of $96.40.

Medicare's arbitrary 45 percent general revenue financing cap has been triggered, raising the possibility of unsound cuts to the Medicare program. As part of the Medicare Modernization Act of 2003, the so-called prescription drug law, the Medicare Trustees are required to project the point at which general revenues will finance at least 45 percent of Medicare's outlays. If the Trustees project in two consecutive reports that the 45 percent cap will be reached in the next seven years, it triggers Presidential action and Congressional review. Since 2006, the Trustees have projected that general revenues will finance more than 45 percent of Medicare outlays. This threshold will be reached in fiscal year 2010 due to lower Medicare HI payroll tax receipts. According to the statute, the President is required to submit proposals to bring costs below the 45 percent threshold and Congress is required to consider the President's proposals on an expedited basis. However the House of Representatives passed a rule to temporarily suspend the 45 percent trigger provision in 2009. While application of the cap has been suspended in the House for the remainder of the 111th Congress, this ill-considered limit should be fully repealed before dangerous and unnecessary proposals to cut Medicare spending are introduced.

The privatization of Medicare Part D has lead to increased costs for seniors compared with what they would pay under a Medicare-operated drug plan. Instead of allowing seniors to participate in a government-administered Part D plan, the prescription drug law expressly prohibits Medicare from directly insuring seniors and providing a government-administered prescription drug plan. Furthermore, a "noninterference" provision in the law prohibits the Secretary of Health and Human Services from directly negotiating drug prices with pharmaceutical manufacturers. The National Committee believes Medicare beneficiaries deserve the same low drug prices that Veterans receive through negotiations between the federal government and drug companies. Studies have shown that seniors pay more for p rescription drugs under Medicare Part D than Veterans pay for prescription drugs under their federally-negotiated plan. According to a recent report by economist Dean Baker, a Medicare-operated Part D benefit with negotiated drug prices could save more than $30 billion a year. ³

The challenges facing Medicare are symptomatic of our larger health care 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.

¹The Part D account in the SMI Trust Fund also receives relatively small payments from states because the federal government assumed Medicaid responsibilities for premium and cost-sharing subsidies for individuals eligible for both Medicare and Medicaid, and from fees on manufacturers and importers of brand-name prescription drugs.

² Gross domestic product (GDP) is the principal measure of the economy and represents the value of all final goods and services produced in a country during a given period.

³ Baker, Dean. Center for Economic and Policy Research, Celebrating Pork: The Dubious Success of the Medicare Drug Benefit (Washington , D.C. : March 2007).

Government Relations and Policy, August 2010