Time Running Out for Medicare Fix

Annual trustee’s report shows serious decay in finances, warns the problem likely is worse than stated.

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The annual trustee reports for Social Security and Medicare were released late last week. It was hard to find any good news for retirees in the continued financial erosion of both programs. Perhaps the best that can be said is that the problems with Medicare have become so acute that Social Security reforms are off the Congressional agenda for the time being.

[See 10 Essential Sources of Retirement Income.]

The headlines say Medicare's hospital insurance (HI) trust fund will run out of money in 2024. That's five years sooner than last year's projections. How could things have slipped so much in only a year? According to the report, payroll taxes into the HI fund were 1.3 percent lower than last year's projections. Healthcare expenditures, meanwhile, were 3.6 percent higher than projected. Voila—five years of reserves down the drain. And it could happen again.

Scary as that prospect might be, however, focusing on the HI trust fund distracts attention from the much larger drain on the budget from other Medicare spending.

Medicare actually has two trust funds. The HI fund—the one that's going to run out of money in 2024—helps pay for hospital, home health, skilled nursing, and hospice care for seniors and disabled beneficiaries.

The other fund is the supplementary medical insurance (SMI) fund. It's used to pay for the other parts of Medicare—Part B expenses for physicians and outpatient care and Part D prescription drug expenses. Part C of Medicare provides Medicare Advantage insurance and other insurance plans that are an alternative to coverage under basic Medicare Parts A and B. Part C expenses are paid out of both the HI and SMI funds.

[See How the GOP Budget Plan Would Transform Medicare.]

Unlike Social Security and the HI fund, the SMI is not really a self-contained trust fund. It is replenished as needed with general government revenues. It can't run out of money as long as the government continues paying all its bills. Those bills, of course, have been exploding. The trustees project Part B costs to grow by an average of 7.5 percent a year for the next five years. Part D expenditures are projected to rise by an average of 9.7 percent a year through 2020. Good luck trying to afford those cost increases, especially as surging numbers of retired baby boomers ratchet up demand for Medicare services.

In 2010, for example, the report says all the insurance premium income paid for Medicare policies will total $58.4 billion. To help pay program expenses, however, another $204.6 billion in general revenues was required.

Meanwhile, over in the HI fund, its deteriorating financial condition meant that the gap between its income (Medicare payroll taxes) and program expenses was covered by spending down its trust fund by $32.3 billion—only about 15 percent of the SMI shortfall.

And that $204.6 billion general fund transfusion is forecast to more than double to $450 billion in 2020. Even the trustees say this figure is probably too low. They say actual funding support is likely to be much higher.

That's because the trustees' projections must be based on current laws. That seems reasonable. However, the current Medicare rules have called for cuts to physician Medicare fees for years, and every year Congress overrides the cuts. Each year, the law increases the cumulative size of the required reduction, and it's now reached nearly 30 percent. No one expects this to occur. If anything, physician fees might need to be increased or more doctors will refuse to treat Medicare patients.

[See Public in Denial About Cost of Fiscal Fix.]

Likewise, the report must assume that cost-saving health reforms in the Affordable Care Act are realized. If projected cuts in payment rates were to occur, however, the report says, it's likely that many healthcare providers would lose money and stop treating Medicare beneficiaries. This is unlikely to be allowed by lawmakers. As a result, the report notes, "the actual future costs for Medicare are likely to exceed those shown by current-law projections in this report."

Right now, the report said, SMI general revenues equal 1.5 percent of the entire economy and total Medicare expenses are 3.6 percent of the economy—$523 billion in 2010. Until Congress and the White House get serious about this unsustainable problem, these percentages are going to grow—perhaps by a lot—and so will Medicare's drain on the budget.

Twitter: @PhilMoeller