Medicare Part A Will Be Depleted by 2029, 2001 Trustees’ Report Says

The financial outlook of the Medicare Part A trust fund is a "mixed picture," according to a report released today by the Board of Trustees of the Federal Hospital Insurance Trust Fund. Part A pays for hospital, home health, skilled nursing facility and hospice care for Medicare beneficiaries and is financed primarily through payroll taxes. In their annual report, the trustees report that between 2001 and 2010, the financial outlook of the Part A trust fund is "favorable and continues to improve," but over the full long range projection period, the trust fund will experience a "greater actuarial deficit than previously projected." For 2000, Part A trust fund income exceeded Part A expenditures by $36.1 billion, giving the trust fund its third consecutive surplus. Furthermore, income is expected to continue to exceed expenditures for the next 20 years, according to the report. After that time, income is expected to fall short of expenditures, but the program would be able to use trust fund assets to pay benefits for the following eight years. Therefore, the report projects that the trust fund will be depleted by 2029, four years longer than last year's estimate of 2025. Under current law, Part A tax income "would meet only a declining share of expenditures," the report says, noting that tax income would equal 112% of expenditures in 2001 but would begin to fall short of expenditures "by a rapidly growing margin" after 2015. Tax revenues would account for 68% of costs by 2029. The trustees add that the Part A trust fund "fails by a wide margin" to meet their long-range test of "close actuarial balance." To achieve an actuarial balance over the next 75 years, the report says that Part A would have to either decrease outlays by 37% or increase income by 60%. The trustees also estimate that Part A expenditures will grow from 2.7% of workers' earnings in 2000 to 10.7% by 2075 ("2001 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund," 3/19).

Explanations
The trustees cite the "recent robust economy," lower utilization of skilled nursing services and "improved payment accuracy" for the four-year gain in Part A's expected solvency. However, they note that long term projections have worsened. In addition to an expected increase in the number of Medicare beneficiaries as baby boomers age -- a trend that has been previously reported -- the trustees said the poorer long-term prognosis comes because this year's report included "more realistic assumptions about health care cost growth in future years." While previous estimates assumed that per-beneficiary costs would increase at roughly the same rate as per capita gross domestic product, the trustees this year followed a recommendation of the 2000 Medicare Technical Review Panel and tied growth estimates to GDP increase plus one percentage point (HCFA release, 3/19). The new assessment reflects an "expected continuing impact of advances in medical technology on health care costs -- both in Medicare and the health sector as a whole," the trustees said (2001 Annual Report, 3/19).

Part B Outlook OK, But Costs Up
Unlike Part A, the trustees found that Medicare Part B (the Supplementary Medical Insurance Trust Fund), which covers physicians' services, outpatient care and other medical services, will remain "adequately financed into the future." The better outlook for that program reflects a difference in financing, they said: While Part A revenue comes from the finite Medicare payroll tax, Part B funding stems from general tax revenues and beneficiary premiums, and it is adjusted each year to reflect costs -- an "automatic financing mechanism [that] provides guaranteed" funding. But the trustees caution that this long-term solvency has "diverted attention" from a "rapid growth" in Part B's costs, which increased 10% last year alone due in part to new health screening benefits and an "above-average increase" in physicians' fees. They note that if federal income taxes remain at current levels "relative to the national economy," Part B will consume 22% of total general revenue in 70 years, compared to 5% of the total in 2000. Moreover, beneficiaries will see the amount withheld from their Social Security checks to pay Part B premiums rise from 6% to 11% over the next 20 years, with total out-of-pocket spending increasing from 14% of Social Security checks to 21% over the same period. Taken together, the trustees say, Part A and B costs will nearly quadruple over the next 75 years, rising from 2.2% of GDP today to 8.5% in 2075 (HCFA release, 3/19). In conclusion, the trustees surmise that federal officials "should determine effective solutions to the remaining long-range problems," preferably developing reforms in the "relatively near future." However, trustees caution that any solutions devised and implemented now "will likely need adjustment over time" (2001 Annual Report, 3/19).