Analysis of the 2008 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, 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 due to moving the valuation period forward by one year (from 2007-2081 to 2008-2082) thereby adding a year (2082) with a high projected deficit. ²The HI trust fund now has a projected 75-year actuarial deficit equal to 3.54 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 3.54 percent 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 1.70 percent in 2008, down from 1.95 percent last year.

The Medicare (HI) trust fund will be solvent for another 11 years and the Social Security trust funds for another 33 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 2010 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 78 percent of HI costs.

By comparison, 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 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 78 percent of Social Security's costs.

Key Dates for the Medicare & Social Security Trust Funds

Source: The Annual 2008 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 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 $12.4 trillion and the Social Security trust fund has a shortfall of $4.3 trillion, $0.4 trillion less than last year. To provide some context to these estimates, the Trustees project that gross domestic product (GDP) over the next 75 years will total $797.1 trillion. Therefore, the shortfall in Medicare's HI trust fund represents only 1.6 percent of GDP and the shortfall in Social Security's trust funds represents only 0.60 percent of GDP.

Medicare spending will outpace Social Security spending as a share of the economy (GDP) due to rising health care costs. ⁴In 2008, 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 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 2082, Medicare's costs are projected to grow to 10.8 percent of GDP, compared to Social Security's projected costs of 5.8 percent of GDP.

The National Committee's Concerns

Medicare's arbitrary 45% general revenue financing cap has been triggered once again, bringing unsound harmful 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. The 45 percent cap was first triggered with the release of the 2007 Medicare Trustees report. Consequently, this has triggered both a budget proposal and a legislative proposal by President Bush to reduce general revenue financing. President Bush's trigger proposals have included dangerous provisions, such as the means-testing of Medicare premiums and across-the-board cuts to Medicare providers. Cuts to Medicare providers could harm the well-being of seniors as providers limit their willingness to serve Medicare beneficiaries. The trigger should be immediately repealed before more dangerous and unnecessary proposals to cut Medicare spending are introduced.

The 45 percent trigger on general revenue financing is an unsound and arbitrary measure of Medicare's financial status. The cap ignores Medicare's financing structure which was designed to rely on general revenues to finance about 75 percent of Parts B and D. Additionally, the cap prohibits the use of all solutions, such as increased revenues, to address problems facing both the Medicare program and the U.S. health care system. (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 $50 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 2008 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 31 percent from $96.40 a month in 2009 to $126.40 a month in 2017. 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 2009 and beyond. The trustees also project that the Part B annual deductible will increase about 32 percent from $135 in 2009 to $178 in 2017. Similarly, the trustees project that the average Part D premium will rise an astonishing 80 percent from $28.33 a month in 2009 to $51.08 a month in 2017. The Part D annual deductible is projected to increase 81 percent from $295 in 2009 to $535 in 2017.

In just 9 years, the Part D donut hole will grow to over $3,000. The donut hole is expected to rise 81 percent from $1,670 in 2009 to $3,020 in 2017. 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 2008 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 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 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, March 2008