Analysis of 2007 Medicare Trustees Report

The Social Security Act calls for a Board of Trustees for the Medicare trust funds and requires the Board to report each year on the current status and projected condition of the trust funds over the next 75 years. This report covers 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, in addition to Part D, which covers prescription drugs.

Medicare Part A (the HI trust fund) is funded primarily by payroll taxes on wages and self-employment income. Employees and employers each pay 1.45 percent of all wages in taxes. The self-employed are charged the equivalent of the combined employer and employee tax rates, which is 2.90 percent. Unlike the case in Social Security where payroll taxes are not imposed over a certain earnings level, all of a worker's wages are subject to Medicare taxes.

Medicare Parts B and D (the SMI trust fund) are financed by a combination of payments from federal general fund revenues (about 75 percent) and monthly premiums charged to beneficiaries (about 25 percent). ¹Because general revenues and beneficiary premiums are automatically adjusted annually to meet estimated program costs for Medicare Part B and Part D, the SMI t rust fund is adequately financed in both the short and long term.

Financial Outlook of the Medicare Program

Medicare's actuarial balance remained about the same as last year, changing only slightly because the valuation period moved forward by one year (from 2006-2080 to 2007-2081) thereby adding a year (2081) with a high projected deficit. ²The HI trust fund now has a projected 75-year actuarial deficit equal to 3.55 percent of payroll compared with last year's estimate of 3.51 percent. In other words, the HI trust fund's fiscal imbalance could be solved by increasing payroll taxes by 3.55 percent immediately, or by reducing the program's spending by a corresponding amount. Medicare's actuarial deficit is greater than Social Security's, which is estimated to be 1.95 percent in 2007.

 The Medicare (HI) trust fund and the Social Security (OASDI trust funds) each gained a year of solvency. ³The Medicare (HI) trust fund will be solvent for another 12 years and the Social Security trust funds for another 34 years. The trustees estimate that the costs of the Medicare (HI) program will exceed payroll tax revenue this year and that the program will rely on interest earnings to help pay benefits. However, the Trustees have made similar projections since 2004, which have not always been accurate due to higher than expected payroll tax receipts. Beginning in 2011, the trustees estimate that the interest will be depleted and assets will have to be redeemed each year until the trust fund is exhausted in 2019. At that time, payroll taxes are estimated to be sufficient to cover 79 percent of HI costs.

By comparison, the trustees estimate that the costs of the Social Security (OASDI) program will exceed payroll tax revenue in 2017, at which time the program will rely upon interest earnings to help pay benefits. Beginning in 2027, the interest will be exhausted and assets will have to be redeemed each year until the trust fund is exhausted in 2041. At that time, payroll taxes are estimated to be sufficient to cover 75 percent of Social Security's costs.

Key Dates for the Medicare & Social Security Trust Funds

Source: The Annual 2007 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds & The Annual 2007 Report of the Boards of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

The long-term financial shortfall for the Medicare and Social Security programs represents a small percent of the total U.S. economy. ⁴Over the next 75 years, the trustees estimate that the HI trust fund will have a shortfall of $11.6 trillion and the Social Security trust fund will have a shortfall of $4.7 trillion. To provide some context to these estimates, the trustees project that gross domestic product (GDP) over the next 75 years will total $730 trillion. Therefore, the shortfall in Medicare's HI trust fund represents only 1.6 percent of cumulative GDP over the valuation period, and the shortfall in Social Security's trust funds represents only 0.64 percent of GDP.

Medicare spending will outpace Social Security spending as a share of the economy (GDP) due to rising health care costs. ⁵In 2007, the trustees project that Medicare's costs (for both the HI and SMI trust funds) will represent 3.2 percent of GDP, compared to Social Security's costs which will represent 4.3 percent of GDP. The costs of both Medicare and Social Security will increase steeply between 2010 and 2030. This increase is only partly the result of an increase in the number of people receiving benefits as the large baby boom generation retires. In the case of Medicare, expected increases in the use and cost of health care generally are much greater factors in the program's rising costs. Medicare's costs will begin to exceed Social Security's in just over two decades. In 2081, Medicare's costs are projected to grow to 11.3 percent of GDP, compared to Social Security's projected costs of 6.3 percent of GDP.

The National Committee's Concerns

 Medicare's current cap on general revenue financing is set to trigger harmful changes to the Medicare program beginning in fiscal year 2009. 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, this triggers Presidential action and Congressional review. The 2006 and 2007 trustees' reports have both projected that general revenues will finance more than 45 percent of Medicare outlays beginning in 2012 and 2013, respectively. As a result, President Bush is required to propose legislation to reduce the federal revenue commitment to Medicare below the 45 percent cap within 15 days of submitting his f iscal year 2009 budget to Congress, expected in early February 2008. Congress is then required to consider the President's proposal on an expedited basis.

The President's fiscal year 2008 budget provides us with a number of examples of the type of Medicare change that could form the basis of this legislation. For example, the budget document proposes an across-the-board cut to Medicare providers to reduce the use of general revenues in Medicare financing. The cuts would begin as a four-tenths of a percent reduction to all payments to providers in the year the 45 percent limit is exceeded, and would grow by four-tenths of a percent every year the shortfall continues. These cuts are in addition to a host of other provider cuts proposed in the President's budget. When taken together, the cuts to Medicare providers could harm the well-being of seniors as providers limit their willingness to serve Medicare beneficiaries. The 2008 budget proposed by the President also includes expansion of the means-testing changes that were implemented in the Medicare Modernization Act of 2003. This expansion will shift more of the costs of Medicare onto the shoulders of beneficiaries.

The 45 percent trigger on general revenue financing is an unsound and arbitrary measure of Medicare's financial status. The cap is an arbitrary limit which merely shifts the burden of Medicare's costs without addressing the broader health care cost issues. It was enacted with no hearings, no discussion, and no separate votes. In fact, the cap was not in the Medicare legislation originally passed by either the House or the Senate. It suddenly appeared in the dead of the night in the Conference Report, buried in thousands of pages of legislative language, and was never considered on its own merits. It ignores Medicare's financing structure which was designed to rely on general revenues (which are relatively progressive) to finance about 75 percent of Parts B and D. Finally, the cap hinders Congressional efforts to consider all potential solutions to Medicare's financing problems. (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 12 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 $65 billion over five years and $160 billion over ten years. The trustees project eliminating the overpayments would add two full years to the solvency of the Medicare HI trust fund, and reduce beneficiary premiums by about two dollars each month.

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 low drug prices that can be achieved if the federal government uses the purchasing power of millions of beneficiaries to negotiate with 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. ⁶

The 2007 Medicare trustees' report shows that seniors will have to pay ever-increasing premiums and deductibles for Part B and Part D. The trustees project that the standard Part B premium will increase about 34 percent from $96.40 a month in 2008 to $129.40 a month in 2016. 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 2008 and beyond. The trustees also project that the Part B annual deductible will increase about 34 percent from $135 in 2008 to $181 in 2016. Similarly, the trustees project that the average Part D premium will rise an astonishing 94 percent from $30.56 a month in 2008 to $59.29 a month in 2016. The Part D annual deductible is projected to increase 86 percent from $285 in 2008 to $530 in 2016.

In just 9 years, the Part D donut hole will grow to over $6,000. The donut hole is expected to rise 89 percent from $3,201.25 in 2008 to $6,057.50 in 2016. 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 2007 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The Part D catastrophic threshold and size of the donut hole are NCPSSM calculations based on data contained in the Table V.C2 of the Trustees report.

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 even faster than Social Security spending due to the rising cost of health services, increasing utilization rates, and anticipated increases in the complexity of services. Until policymakers institute meaningful mechanisms to contain cost and to promote access to quality health care, Medicare will continue to suffer from the same challenges plaguing our nation's health care system.

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 term solvency refers to the ability of the trust funds to meet their financial obligations.

⁴ 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.

⁵ 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.

⁶ 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, April 2007