2015 Medicare Fund Trustees Report

It’s an annual rite; the Medicare Trustees issue a report showing that the hospital fund is running out of money and will soon run huge deficits, jeopardizing beneficiary care and Congress does nothing to fundamentally transform the program and put it on long-term solid financial footing.  This years report is out, providing the opportunity for more of the same.   (Trustees Report)   The Trustees job is made a little easier this year because the long-running SGR issue in regard to physician reimbursement has been settled.  But they note the significant uncertainty that attends projection of medical costs even two or three years into the future, much less 20 years out.  Medicare Part A, which is primarily inpatient hospitalization and post-acute care, is largely paid from a trust fund into which employee and employer contributions go.  Medicare Part B, primarily outpatient services, is paid by general revenues and beneficiary premiums.  Part D is funded from premiums and general revenues.  The primary purpose of the Trustee report is to project the financial solidity of the Part A trust fund.  One inexorable demographic factor creating stress is that the ratio of workers putting money into the fund to beneficiaries has sharply declined and continues to decline.  And while medical costs seem relatively stable now, they have risen more sharply in the past and likely will again in the future, particularly if providers decide they will not accept low Medicare reimbursements.  The Trustees explicitly say that they expect access to physicians and other providers to become an issue in the future due to low payments.

Medicare spent about $613 billion in 2014 and had income of $599 billion.  The Health Insurance Trust Fund, for Part A, had assets of $205.4 billion at the start of 2014.  It went down by $8.1 billion in that year.  The ratio of the Trust Fund to annual expenses is 76%, the Trustees recommend that it be kept at 100%.  On an operating basis Part A expenses have exceeded income since 2008.  Due to economic improvements, the Trustees expect slight surpluses from 2015-2013 and then deficits that exhaust the Fund by 2030.  I wouldn’t count on the surpluses.  The SMI “Trust Fund” (it really isn’t one) which covers Part B and D is in slightly better shape for now, because its formula for premiums from beneficiaries and general revenue contributions is reset every year.  But in 2016 most beneficiaries will be protected from premium increases that otherwise would be likely to occur, which means that the remaining beneficiaries will likely see a huge premium rise.  They will be happy.  And the Trustees are expecting annual growth in Part B and D expenses  of 6.7% and 10.9% respectively over the next five years.  GDP growth is projected at 5.3%, which isn’t going to happen under the current set of federal policies.  So more and more general revenue is going to go to support Part B and D.  In dry language, the Trustees paint a grim picture further out, one in which the costs of the Medicare program are on unsustainable burden on the economy.

So what can be done.  It is pretty obvious for anyone with any political courage.  The age for Medicare eligibility needs to raised to be consistent with the age for social security eligibility and both need to be raised to be consistent with gains in life expectancy since their enactment.  Yes, people may need to expect to work longer, but the alternative is no one can depend on either of these programs.  We need to get to a state where the average amount that a cohort of people contribute to the programs, plus investment earnings, equal the expected average spending for that cohort.  It is fundamentally unfair to expect younger people to pay for the older generation and people need to understand that on average almost everyone gets way more out of the programs than they contributed.  That obviously can’t continue.  Both programs should be means tested; people who have adequate income or assets shouldn’t either pay much more of their total cost or at some level get no benefits.  We talk about eliminating economic inequality, but we won’t do these basic things to have the better-off segment bear its own costs.  Both programs should be largely changed to defined contribution or voucher models.  For Medicare, everyone picks a health plan and the health plans have to fully compete on price, with Medicare contributing only as much as the cost of the lowest price plan.  We can either take some rational steps now, when it is already too late to avoid some pain, or we can have a complete disaster, probably at the next economic downturn.