July 5, 2016 | Issue Brief on Health Care
The Medicare Trustees have released their long-awaited 2016 annual report. It once again calls for expeditious action by Congress and the executive branch to address Medicare’s growing fiscal problems. The Medicare Trustees project major increases in Medicare spending, fueled by progressively higher taxes, and an even larger long-term Medicare debt than they projected last year.
These are the stark challenges facing taxpayers, who must fund the program over the next 10 years and beyond. Meanwhile, the Trustees warn, Medicare patients could face significant problems accessing quality care from doctors and hospitals, primarily as a result of the relentless set of Medicare payment cuts authorized under current law. This is especially true of payment reductions already authorized under the Affordable Care Act (ACA) of 2010.
Hospital Insurance Trust Fund Dwindling Faster than Anticipated. In the 2015 Medicare Trustees’ Report, government actuaries projected that the Hospital Insurance (HI) trust fund would be insolvent in 2030. This year, the Trustees set the date of insolvency at 2028, and if Medicare faces higher-than-anticipated costs, it could become insolvent as early as 2022. The Trustees again note that the HI trust fund does not meet either short-term or long-term standards for “financial adequacy.” This is not a surprise. In January 2016, the Congressional Budget Office (CBO) had already projected a faster pace of HI deterioration and set the date of HI insolvency in 2026: The “CBO estimates that if current laws governing the program remained in place, expenditures would outstrip non-interest income in all years through 2026 except for 2018, producing annual deficits that were relatively small in the first half of the period but would rise to $54 billion in 2025, the final year before the fund was exhausted.”
Although an important indicator of the fiscal inadequacy of the program, the HI program has never gone insolvent. Based on similar warnings over the years, Congress has always responded when faced with looming insolvency. Historically, Congress has raised HI tax rates on working families; in fact, HI payroll tax rates have been increased 10 times since 1966. Congress could also authorize the transfer of additional general revenues to close the gap (more spending) or enact additional provider cuts, or a combination of all these options.
Medicare Spending Once Again Accelerating. While in recent years, there was a notable slowing in the growth of Medicare spending, the Trustees project that total Medicare spending will jump from $648 billion to over $1.2 trillion over the next 10 years. In the near term, starting in 2017, Medicare spending will grow faster than workers’ wages and the general economy, and will outpace all other health spending; it will consume greater shares of the federal budget, and consume larger and larger shares of gross domestic product (GDP). For example, the Trustees project that in 2017 Medicare outlays will grow by 6 percent. By 2020, they project that growth to be 8.2 percent.
The Obama Administration anticipates that the various “delivery reforms” mandated by the ACA will slow cost growth and simultaneously improve the quality of patient care. Yet, the Trustees are not prepared to affirm their general effectiveness: “The ability of new delivery and payment methods to lower cost growth rates is uncertain at this time.” Moreover, as John O’Shea, MD, of The Heritage Foundation, has documented, the performance of these “delivery reforms,” including accountable care organizations (ACOs), has fallen far short of expectations.
Another failure of the most fashionable administrative payment initiatives will, of course, aggravate the projected Medicare spending increases. As noted, a key measure of the growth of Medicare spending is the program’s share of the nation’s GDP. Under current law (meaning that the ACA payment cuts and other changes are implemented as enacted), the Trustees estimate that Medicare will increase from 3.6 percent of GDP to 5.6 percent of GDP in 2040. Under the more realistic alternative scenario (meaning that ACA and other cuts will not be retained), Medicare will jump from 3.6 percent to 6.2 percent of GDP in 2040 and accelerate to 9.1 percent of GDP in 2090.
Heavier Taxpayers Burden. While the HI trust fund is financed by the 2.9 percent payroll tax on most working families, general revenues (mostly from income taxes from working families) largely fund the rest of Medicare. As a share of total Medicare financing, the share of general revenue needed to sustain Medicare is expected to grow. In 2015, general revenues to support Medicare Part B alone amounted to 13.5 percent of all personal and business income taxes. By 2020, the Trustees project, that amount will grow to 16 percent; and by 2040, it will reach 23.5 percent. By 2030, general revenues will account for 48 percent of total Medicare financing. As the report states, “Growth in general revenue financing as a share of GDP adds significantly to federal budget pressures.”
In terms of Medicare’s long-term financial condition, perhaps the most significant finding in the 2016 report is that the program’s unfunded obligations have worsened. In plain English, the Medicare unfunded obligation represents the dollar amount necessary either to pay for the program’s promised benefits through taxes, or the amount of reductions in benefit spending that would be necessary to bring the program into financial balance. The accumulation of Medicare’s unfunded obligations will impose enormous costs on current and future taxpayers. As the Trustees observe, these financial obligations are “useful indicators of the sizeable financial burden facing the American public.” Under “current law” assumptions, Medicare’s total unfunded obligations (over a 75-year actuarial window) amount to $32.4 trillion. Under the more realistic “alternative scenario,” the Center for Medicare and Medicaid Services’ Office of the Actuary estimates that the total amount would be $43.5 trillion.
Medicare Patients Facing Long-Term Access Issues. The Trustees report that, with the passage of time, physicians will be under increasing financial pressure as a new Medicare payment system for physicians takes effect. The Trustees project that the new payment reforms will reduce physician reimbursement, and by 2048, physician reimbursement will be lower than it would have under the previous payment system—the sustainable growth rate (SGR) formula—that was repealed and replaced in 2015. Say the Trustees: “Absent a change in the delivery system or level of update by subsequent legislations, the Trustees expect access to Medicare participating physicians to become a significant issue in the long term under current law.”
Likewise, Medicare patients will experience problems accessing hospital care as well. The Trustees say that “[b]y 2040, simulations suggest that approximately half of hospitals, 70 percent of skilled nursing facilities, and 90 percent of home health agencies would have negative total facility margins, raising the possibility of access and quality of care issues for Medicare beneficiaries.”
Today, Medicare payment for inpatient hospital services is 61 percent of private insurance rates. If there is no change in hospital productivity, as envisioned by the sponsors of the ACA, the Medicare payment rates would continue to decline, and would eventually fall to 40 percent of private rates. Faced with these financial pressures, the Trustees say that “[p]roviders could not sustain continuing negative margins and would have to withdraw from serving Medicare beneficiaries or (if total facility margins remained positive) shift substantial portions of Medicare costs to their non-Medicare, non-Medicaid payers.”
Another Call for Urgent Reform. The Medicare Trustees, as they have for years, have warned Congress and the President of the need to take remedial steps to address the financial problems of the Medicare program: “The Trustees recommend that Congress and the Executive branch work closely together with a sense of urgency to address the depletion of the HI Trust Fund and the projected growth in HI (Part A) and SMI (Parts B and D) expenditures.”
Immediate policy options are available. Congress could reform traditional Medicare by gradually raising the age of eligibility to 68, expanding means testing for Parts B and D premiums, and unifying Parts A and B with a more rational cost-sharing structure. For longer term fiscal stability, Congress should expand the defined-contribution financing (“premium support”) that today funds the Medicare drug program and thus introduce intense market competition among plans and providers to control costs. Such changes would result in large and permanent program savings.
Once again, the Trustees have done their duty. It is long past time that Members of Congress—with the President’s support and leadership—do theirs.—Robert E. Moffit, PhD, is a Senior Fellow in the Center for Health Policy Studies, of the Institute for Family, Community, and Opportunity, at The Heritage Foundation.
 2016 Annual Report of The Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, June 22, 2016, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html?redirect=/reportstrustfunds/ (accessed June 29, 2016). Hereafter cited as 2016 Medicare Trustees Report. The report was statutorily due on April 1, 2016, but annual official tardiness has become habitual.
 2016 Medicare Trustees Report, pp. 7 and 9. The Trustees note that the HI trust fund has not met the formal test of “short-range financial adequacy” since 2003.
 Congressional Budget Office, The Budget and Economic Outlook: 2016 to 2026, January 2016, p. 136, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51129-2016Outlook.pdf (accessed June 29, 2016).
 2016 Medicare Trustees Report, p. 190.
 Ibid., p. 196.
 John O’Shea, MD, “Overcoming Challenges to Physician Payment Reform in a Post-SGR World,” Heritage Foundation Backgrounder No. 3101, March 16, 2016, http://thf-reports.s3.amazonaws.com/2016/BG3101.pdf.
 2016 Medicare Trustees Report, p. 5.
 Roughly three-fourths of spending for Medicare Part B (physician payment) and Medicare Part D (prescription drugs) is funded from general revenues (business and income taxes) drawn from the Treasury.
 2016 Medicare Trustees Report, p. 41.
 Ibid., p. 22.
 In 2015, the Office of the Actuary projected long-term (75-year) Medicare debt at a range between roughly $28 trillion (“current law”) and $37 trillion (“alternative scenario”). Under either scenario, the growing Medicare obligation dwarfs the official national debt, now in excess of $19 trillion.
 Ibid., p. 72.
 Ibid., p. 214.
 Suzanne Codespote, “Medicare Unfunded Obligation for 2016 Trustees Report,” memo to Senate Budget Committee Staff, June 22, 2016.
 2016 Medicare Trustees Report, p. 2.
 Ibid., p. 194. The Trustees made the same estimates in their 2015 report.
 Ibid., p. 193.
 Ibid., p. 194.
 Ibid., p. 9.
 Robert E. Moffit, “The First Stage of Medicare Reform: Fixing the Current Program,” Heritage Foundation Backgrounder No. 2611, October 17, 2011, http://www.heritage.org/research/reports/2011/10/the-first-stage-of-medicare-reform-fixing-the-current-program.
 Robert E. Moffit, “The Second Stage of Medicare Reform: Moving to a Premium Support Program,” Heritage Foundation Backgrounder No. 2626, November 28, 2011, http://www.heritage.org/research/reports/2011/11/the-second-stage-of-medicare-reform-moving-to-a-premium-support-program.