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From Health Reform WK-EDGE, April 30, 2019

Annual report shows trust fund solvent to 2026

By Jeffrey H. Brochin, J.D.

The report notes that projections of Medicare costs are highly uncertain when projecting out more than several decades as scientific advances will make some conditions, which are untreatable today, routinely handled in the future.

The Trustees of Medicare’s two trust funds—the Hospital Insurance (HI) trust fund, which funds Medicare Part A, and the Supplementary Medical Insurance (SMI) trust fund, which funds Medicare Part B and D—have issued their 54th annual report to Congress, as required by the Social Security Act. The Trustees estimate that the HI trust fund will be solvent until 2026, when it will no longer be able to pay full benefits. The SMI trust fund, however, is expected to remain financed because income from premiums and general revenue are reset each year to cover expected costs (2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, April 22, 2019).

Projections. The projections assume that laws on the books will be implemented and adhered to with respect to scheduled taxes, premium revenues, and payments to providers and health plans, but the one exception is that the Part A projections disregard payment reductions that would result from the projected depletion of the Medicare Hospital Insurance trust fund.

The reason for two trust funds. The Medicare program helps pay for health care services for the aged, disabled, and individuals with end-stage renal disease (ESRD), and is funded by way of two separate trust funds: the HI fund, otherwise known as Medicare Part A, which helps pay for inpatient hospital services, hospice care, skilled nursing facility, and home health services following hospital stays, and the SMI fund, which consists of Medicare Part B and Part D. Part B helps pay for physician, outpatient hospital, home health, and other services for individuals who have voluntarily enrolled, and Part D provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries and premium and cost-sharing subsidies for low-income enrollees. The six-member Medicare Board of Trustees oversees the financial operations of the HI and SMI trust funds.

NHE outstripping growth rates. Since 1960, U.S. national health expenditure (NHE) growth rates typically outpaced economic growth rates, though the magnitude of the differences has been declining. The Trustees have long assumed that this differential would continue to narrow over the long-term projection period and that the cost-reduction provisions of the Patient Protection and Affordable Care Act (ACA), as amended by the Health Care and Education Reconciliation Act of 2010 and the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) would further decrease this gap.

Since 2008, average annual NHE growth has been below historical averages although it has generally continued to outpace average annual growth of the economy. There is some debate regarding whether this recent slower growth in NHE reflects the impact of economic factors that are mostly cyclical in nature, such as modest income growth over the last decade, or factors that would lead to a permanently slower growth environment, such as structural changes to the health sector that could result in lower health care cost growth.

Substantial shortfall projected. Notwithstanding recent favorable developments, current-law projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers. The report found that the HI Trust Fund will be able to pay full benefits until 2026—the same projection as in last year’s report. However, the Part B and Part D accounts in the SMI trust fund are expected to be adequately financed because income from premiums and general revenue are reset each year to cover expected costs. Such financing, however, would have to increase faster than the economy to cover expected expenditure growth.

Impact of Medicare population growth. The Trustees projected that total Medicare costs (including both HI and SMI expenditures) will grow from approximately 3.7 percent of GDP in 2018 to 5.9 percent of GDP by 2038, and then increase gradually thereafter to about 6.5 percent of GDP by 2093. The faster rate of growth in Medicare spending as compared to growth in GDP is attributable to faster Medicare population growth and increases in the volume and intensity of health care services. However, as the report also noted, the substantial differences between current-law and illustrative alternative projections demonstrate that Medicare’s actual future costs are highly uncertain for reasons apart from the inherent challenges in projecting health care cost growth over time. The Board recommended that readers interpret the current-law estimates in the report as the outcomes that would be experienced under the Trustees’ economic and demographic assumptions if the productivity adjustments in the ACA and the physician price updates in MACRA can be and are sustained in the long range.

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