Analysis of the 2009 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 (the 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 (the 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 Trust Fund is adequately financed in both the short and long term.

Financial Outlook of the Medicare Program

Medicare's actuarial balance increased from last year due to high unemployment and moving the valuation period forward by one year (from 2008-2082 to 2009-2083) thereby adding a year (2083) with a high projected deficit. ²The HI Trust Fund now has a projected 75-year actuarial deficit equal to 3.88 percent of payroll compared with last year's estimate of 3.55 percent. In other words, the HI Trust Fund's fiscal imbalance could be solved by increasing payroll taxes by 3.88 percent or by reducing the program's spending by a corresponding amount.

The Medicare (HI) Trust Fund will be solvent for another 10 years. Since 2004, the costs of the Medicare (HI) program have exceeded payroll tax revenue and the program has relied upon interest earnings to help pay benefits. Beginning in 2008 interest and other assets will have to be redeemed each year until the Trust Fund is exhausted during 2017, two years sooner than last year's estimate. At that time, payroll taxes alone are estimated to be sufficient to cover 81 percent of HI costs, 3 percent more than last year's estimate.

Key Dates for the Medicare Trust Funds

Source: The Annual 2008 and 2009 Reports of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

The long-term financial shortfall for the Medicare and Social Security programs represent a small percent of the total U.S. economy. ³The Trustees estimate that the HI Trust Fund has a shortfall over the next 75 years of $13.4 trillion. To provide some context to these estimates, the Trustees project that gross domestic product (GDP) over the next 75 years will total $788.2 trillion. Therefore, the shortfall in Medicare's HI Trust Fund represents only 1.7 percent of GDP.

Medicare spending will outpace Social Security spending as a share of the economy (GDP) due to rising health care costs. ⁴In 2009, the Trustees project that Medicare's costs (for both the HI and SMI Trust Funds) will represent 3.6 percent of GDP, compared to Social Security's costs which will represent 4.8 percent of GDP. The costs for both Medicare and Social Security will increase steeply between 2010 and 2030 because the number of people receiving benefits will grow as the large baby boom generation retires. During those years, Medicare's costs increase much faster than Social Security's due to expected increases in the use and cost of health care. Medicare's costs will begin to exceed Social Security's in just over two decades. In 2083, Medicare's costs are projected to grow to 11.3 percent of GDP, compared to Social Security's projected costs of 5.8 percent of GDP.

The 2009 Medicare Trustees' report shows that the costs of Parts B and D will continue to grow at an ever-increasing rate. According to the Trustees report, the standard Part B premium will increase more than 26 percent from $104.20 a month in 2010 to $131.40 a month in 2018. 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. If Congress intervenes to prevent these reductions - as they have in past years - then beneficiaries will pay even higher Part B monthly premiums in 2010 and beyond. The Trustees also project that the Part B annual deductible will increase about 26 percent from $146 in 2010 to $184 in 2018.

By statute, increases in the Part B Premium cannot be larger, in dollars, than the Cost-of-Living Adjustment (COLA) provided through Social Security. The Social Security Trustees currently predict there will be no COLA in 2010, or for the subsequent two years. If projections prove accurate, Part B premium increases will also be held to zero for about 75 percent of Medicare beneficiaries. New enrollees, seniors subject to the means-tested premiums, and some Medicaid beneficiaries are not subject to the limitation and they will bear the full burden of increases in Part B per beneficiary costs during those years. The prescription drug benefit, Part D, is not subject to the hold harmless provision, and the Trustees project that the average Part D premium will rise an astonishing 69 percent from $32.83 a month in 2010 to $55.60 a month in 2018. The Part D annual deductible is projected to increase 38 percent from $305 in 2010 to $490 in 2018.

Over the past several years health care costs have increased faster than 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 67 percent of the average Social Security check.

In just 8 years, the Part D donut hole will grow to over $5,700. The donut hole is expected to increase nearly 61 percent from $3,576.25 in 2010 to $5,755.00 in 2018. Once exposed to this massive gap in coverage, many seniors will be unable to reach Part D's catastrophic coverage because they cannot afford to pay 100 percent of the cost for their prescription drugs, in addition to paying monthly premiums for a benefit they are not receiving.

Beneficiary Cost-Sharing Amounts for Medicare Part B and Part D

Source: The Annual 2009 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The Part D donut hole is a NCPSSM calculation based on data contained in the Table V.C2 of the Trustees report.

The National Committee's Concerns

President Obama has continued the trend of proposing to means-test premiums in order to contain the costs of Medicare. The Administration's FY10 budget kept in place the Part B premium means-testing provisions as a form of cost containment. In addition, under the Health Reform Reserve Fund, President Obama has proposed implementing income adjusted premiums in Medicare Part D. The means-testing proposals would raise beneficiary premiums by $400 million in FY 2011 and over $8 billion between FY 2010 and 2019.

Medicare's arbitrary 45% general revenue financing cap has been triggered, raising the possibility of unsound cuts to the Medicare program. As part of the prescription drug law, the 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 year the 45 percent trigger is projected to be reached in 2014. 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 in 2009 the House of Representatives passed a rule to temporarily suspend the 45 percent trigger provision. 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 more dangerous and unnecessary proposals to cut Medicare spending are introduced. (For more information on Medicare's 45 percent trigger, read the National Committee's viewpoint "The Medicare Funding Cap, Bad Policy for the Future" at www.ncpssm.org .)

Excess overpayments to Medicare Advantage plans erode Medicare solvency and increase beneficiary premiums. According to the nonpartisan Medicare Payment Advisory Commission (MedPAC), Medicare is paying private plans an average of 13 percent more than it would cost to cover the same beneficiaries under traditional Medicare. Because these overpayments are financed by both Medicare Parts A and B, they worsen the solvency of the Medicare HI Trust Fund, increase Part B premiums for all beneficiaries, and accelerate the date in which Medicare will reach the 45 percent cap on general revenues. The Congressional Budget Office (CBO) projects that if these overpayments were eliminated and program payments were equalized, Medicare would save $55 billion over five years and $157 billion over ten years.

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. ⁵

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 increased cost over the next two decades, it represents only part of the equation. In the coming years, Medicare spending will grow faster than Social Security spending due to the rising cost of health services, increasing utilization rates, and anticipated increases in the complexity of services. Health care reform that creates meaningful mechanisms to contain cost and to promote access to quality health care is critical or Medicare costs will become unsustainable for both beneficiaries and for the federal government.

¹T he Part D account in the SMI Trust Fund also receives payments from states because the federal government assumed Medicaid responsibilities for premium and cost-sharing subsidies for individuals eligible for both Medicare and Medicaid.

² The actuarial balance is the difference between annual program revenue and costs, expressed as a percentage of taxable payroll, over the 75-year projection period.

³ The Trustees measure the future shortfall of the Medicare and Social Security programs in terms of 75-year open-group unfunded obligations. This measure calculates the shortfall based on present values of the programs' projected revenue and cost components for all current and future program participants.

⁴ 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.

⁵ 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, May 2009