Analysis of the 2005 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 Part B and Part 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). ¹ Because 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

In 2005, the actuarial balance of Medicare's HI trust fund slightly improved. ² The HI trust fund now has a projected 75-year actuarial deficit equal to 3.09 percent of payroll compared with last year's estimate of 3.12 percent. In other words, the HI trust fund's fiscal imbalance could be solved by increasing payroll taxes by 3 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 1.92 percent in 2005.

The Medicare HI trust fund is solvent for another 15 years and the Social Security trust funds are solvent for another 36 years. ³ 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 2012 assets will have to be redeemed each year until the trust fund is exhausted in 2020. At that time, payroll taxes are estimated to be sufficient to cover 79 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 74 percent of Social Security's costs.

Key Dates for the Medicare & Social Security Trust Funds

Source: The Annual 2005 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds & The Annual 2005 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. ⁴ The trustees estimate that the HI trust fund has a shortfall over the next 75 years of $8.6 trillion and the Social Security trust fund has a shortfall of $4.0 trillion. To provide some context to these estimates, the trustees project that gross domestic product (GDP) over the next 75 years will total $628.9 trillion. Therefore, Medicare's shortfall represents only 1.4 percent of GDP and Social Security's shortfall represents only .64 percent of GDP.

Medicare's cost as a share of the economy is smaller than Social Security's, but this trend will reverse in the future. ⁵ In 2004, Medicare's costs (for both the HI and SMI trust funds) represented 2.6 percent of GDP, compared to Social Security's costs which represented 4.3 percent of GDP. Medicare's costs will increase steeply between 2010 and 2030 because the number of people receiving benefits will grow rapidly as the large baby boom generation retires. Medicare costs will continue to grow rapidly due to expected increases in the use and cost of health care. Medicare's costs will first exceed Social Security's in 2024. In 2079, Medicare's costs are projected to grow to 13.6 percent of GDP, compared to Social Security's projected costs of 6.4 percent of GDP.

The National Committee's Concerns

The 2005 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 Part B premiums will rise over 30 percent from $87.70 a month in 2006 to $114.70 a month in 2014. They also project that the Part B annual deductible will increase over 30 percent from $123 in 2006 to $161 in 2014. Similarly, the trustees project that the Part D premium will rise an astonishing 72 percent from $37.37 a month in 2006 to $64.26 a month in 2014. The Part D annual deductible is projected to increase nearly 75 percent from $250 in 2006 to $437 in 2014.

Estimated Part B & Part D Premiums and Deductibles

Source: The Annual 2005 Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

Medicare's Part B premium for 2006 is on track to become one of the largest premium increases in the Medicare program's history. Just over a week after the release of the trustees report, the Centers for Medicare and Medicaid Services (CMS) submitted new estimates indicating the Part B premium would increase by an additional $1.50. According to this new estimate, the Part B premium would rise by 14% or $11.00 from $78.20 a month in 2005 to $89.20 a month in 2006. Many experts believe the Part B premium for 2006 could rise even higher if planned cuts in physician reimbursement rates do not occur.

Seniors will continue to face ever-increasing premiums because the prescription drug law fails to provide meaningful mechanisms to contain health care costs. The prescription drug law does not effectively permit the importation of low-cost prescription drugs from other industrialized countries. Drugs that are manufactured in the United States or in FDA-approved plants are often sold for much less in other industrialized nations. In addition, the prescription drug law prohibits the Department of Health and Human Services from using the federal government's bulk purchasing power to negotiate lower prices on prescription drugs. Price negotiation is a tool that has been used effectively by the Department of Veterans' Affairs and many state governments to deliver lower drug prices and could deliver similar positive results to Medicare beneficiaries.

The use of “infinite horizon” projections for the shortfall in the Medicare HI trust fund is inappropriate, speculative, and misleading. Infinite horizon projections extend the forecast period beyond the traditional 75 years to infinity. The Medicare program already poses a number of uncertainties which make formulating 75-year projections difficult, such as: the rate of scientific breakthroughs; the frequency of release of “blockbuster” drugs; new diseases or recurrence of older ones; and new medical treatment techniques that improve the quality of or prolong life. Accurately forecasting such uncertainties indefinitely into the future is an impossible task. Even the non-partisan American Academy of Actuaries has criticized infinite horizon projection because it provides little if any useful information about the program's long-range finances and misleads individuals into believing that the program is in far worse financial condition than is actually indicated. ⁶

Medicare's current cap on general revenue financing represents an arbitrary measure of the program's health and prohibits the consideration of all solutions to the program's long-term shortfall. 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 six years, it triggers Presidential action and Congressional review. The President is required to submit a proposal that would likely require severe Medicare cuts to reduce general revenue financing. The Medicare program was designed to rely on general revenues to finance about 75 percent of Part B and Part D. This cap ignores Medicare's financing structure and prohibits the use of increased revenues to address problems facing both the Medicare program and the U.S. health care system. Given the trustees' projections, the 45 percent cap will be reached in 2012 and Presidential action will be triggered with the release of their 2007 report.

1. The Part D benefit will begin January 1, 2006. At that time, the Part D account in the SMI trust fund will also receive payments from states because the federal government will assume 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. The American Academy of Actuaries expressed these concerns in a letter dated December 19, 2003 to the Trustees of the Social Security System ( http://www.actuary.org/pdf/socialsecurity/tech_dec03.pdf ).

Government Relations and Policy/Policy Research, April, 2005