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Trustees: Medicare's future funding may be in jeopardy

From the June ACP Observer, copyright 2007 by the American College of Physicians.

Many people enjoy reading horror novels for the anticipation of impending doom. For Washington policy wonks, the annual Medicare Trustees' report serves the same purpose. The report describes economic and demographic forces that inexorably are leading to disaster for the Medicare program. Policymakers are aware of these forces, but for the most part, are doing little to address them.

The Social Security Act established the Medicare Board of Trustees to oversee the financial operations of the Hospital Insurance (HI) and Supplemental Medical Insurance (SMI) trust funds. The Trustees issue an annual report to Congress on the fiscal and actuarial health of these funds.

The HI Trust fund, financed through payroll taxes, pays for hospital expenses and related costs of Medicare Part A. The SMI trust fund, financed by general revenue and beneficiary premiums, pays for physician services, durable medical equipment, laboratory testing, and prescription drugs (Medicare Part B and Part D). Both funds are entitlements, meaning that the federal government is legally required to pay out the total amount of dollars required to provide all covered services rendered to beneficiaries.

The Trustees' report tells Congress whether the payroll taxes collected to support the HI Trust Fund will be sufficient, how much premiums will have to be increased, and how much more out of general revenue will be needed to support the growing costs of Medicare Parts A, B and D.

Medicare's self destruction

Selected passages from the Trustees' 2007 findings (with emphasis added in italics) provide a sober accounting of the likely shortfall between revenue collected to support the program and anticipated Medicare spending:

  • Total Medicare expenditures were $408 billion in 2006 and are expected to increase in future years at a faster pace than either workers' earnings or the economy overall. As a percentage of GDP, expenditures are projected to increase from 3.1% in 2006 to 11.3% by 2081. Growth of this magnitude, if realized, would substantially increase the strain on the nation's workers, Medicare beneficiaries and the Federal Budget.

  • The HI trust fund does not meet our (the Trustees') short-range test of financial adequacy, and fund assets are projected to be exhausted in 2019. In the long range, projected expenditures and scheduled tax income are substantially out of balance, and the trust fund does not meet our test of long-range close actuarial balance. Closing deficits of this magnitude will require very substantial increases in tax revenues and/or reductions in expenditures.

  • Part B costs have been increasing rapidly, having averaged 11% annually over the last six years, and are likely to continue rising. Under current law, an average annual growth rate of 6.6% is projected for the next 10 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law. If Congress continues to override these reductions, as they have since 2003, the Part B growth rate would instead average roughly 8% to 9 %. For Part D, the average annual increase in expenditures is estimated to be 12.6% through 2016. The U.S. economy is projected to grow by 4.8% on average during this period, significantly slower than either Part B or Part D.

  • The Part B and Part D accounts in the SMI trust fund are adequately financed under current law, since premium and general revenue income are reset each year to match expected costs. Such financing, however, would have to increase rapidly to match expected expenditure growth under current law.

The Trustees do not go as far as to characterize these trends as leading to Medicare's destruction, but it is clear that they believe that the program cannot survive in its current form. Closing the gap between rising expenditures and that ability of taxpayers and beneficiaries to fund the program will likely require decisive action by Congress, the President and future presidents. Indeed, the Trustees conclude with a challenge:

"These projections demonstrate the need for timely and effective action to address Medicare's financial challenges. Consideration of such reforms should occur in the relatively near future. We believe that prompt, effective, and decisive action is necessary to address these challenges—both the exhaustion of the HI trust fund and the anticipated rapid growth in HI, SMI Part B, and SMI Part D expenditures."

No president or member of Congress wants the Medicare program to fail, but they also know that any solution will likely require some combination of unpopular proposals. To bring costs in line with revenue, Congress likely will need to reduce benefits, restrict eligibility, reduce or redistribute payments, increase taxes, raise premiums, introduce competition in pricing and services, and/or use the purchasing power of the federal government to cause providers to use more efficient ways of delivering services.

Or, Congress could choose to replace Medicare with an entirely new way of financing health care that brings all Americans into the same system, so that funding and benefits could be shared more widely throughout the population. Such a program of universal coverage might be more equitable, but it would still face the enormous challenge of limiting health care expenses to what the country is able to afford.

These are the kinds of challenges that should be discussed as the presidential campaign unfolds. Voters can and should demand a role in prodding candidates to write a story that ends with Medicare being preserved through more equitable sharing of costs and benefits, rather than allowing it to slide into self-destruction. So far, though, the candidates are promising more benefits and more coverage, without any realistic view of how to pay for them or control costs.

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