Last week, the Social Security and Medicare Trustees released their annual reports on the long-term finances of each program, showing that those programs remain financially unsound and on the road toward insolvency. As part of the reports the public trustees, who are appointed members of the public rather than agency heads, release a statement highlighting their thinking around key issues surrounding the trust funds. Three issues stand out in this year’s statement: the need for prompt action to solve the impending exhaustion of the Social Security Disability Insurance (SSDI) Trust Fund; the need for near-term action to solve the imbalance in the Old-Age and Survivors Insurance (OASI) Trust Fund; and the importance of maintaining and building on measures to control Medicare cost growth.
The Impending SSDI Crisis
"It is impracticable to reduce DI costs sufficiently to prevent imminent Trust Fund depletion (and thus, sudden benefit reductions for highly vulnerable individuals) without at least a temporary increase in DI Trust Fund resources, irrespective of its source or combination with other measures."
Before Congress leaves for August, they must pass a transportation bill extending highway programs and transferring additional money into the Highway Trust Fund. The House posted a revised version of their transportation bill yesterday, which continues to responsibly offset the transfer to the Highway Trust Fund but adds in two deficit-financed tax cuts for veterans. The bill is expected to be voted on today, and Senate Majority Leader Mitch McConnell (R-KY) says the Senate will consider the bill after it is passed by the House.
The previous House bill used a variety of programs to pay for transferring $8.1 billion into the Highway Trust Fund, projected to be enough to continue current highway spending for five months, and presumably, allow Congress to continue negotiations over highway spending when they return in September. The revised bill keeps the same transportation section, although it only extends programs for three months, rather than five. Highway programs would need to be reauthorized by October 29, but Congress would likely be able to pass another extension through December without transferring additional money into the Highway Trust Fund.
However, the revised transportation bill also includes a new section on veterans, which refines and expands some veterans health programs, limits others, allows $3.3 billion of the Veterans Choice program to cover shortfalls within the VA health system, and enacts two small tax cuts. One of these cuts would exempt employers from counting veterans against the employer mandate, so veterans that already have access to health care will not count against the 50 employees that normally would require an employer to offer health insurance to their employees. The other tax cut allows veterans with service-connected disabilities to obtain health savings accounts, despite having medical coverage that would normally disqualify them.
|Provisions in July 28 House Transportation & Veterans Bill
|Transportation Section||$0 billion
|Transfer $8.1 billion into the Highway Trust Fund||-$8.1 billion|
|Extend current budget treatment of TSA fees from 2023 to 2025||$3.2 billion|
|Require lenders to report more information on outstanding mortgages||$1.8 billion|
|Close an estate tax loophole about the reporting of property||$1.5 billion|
|Clarify the statute of limitations on reassessing certain tax returns||$1.2 billion|
|Adjust tax-filing deadlines for businesses||$0.3 billion|
|Allow employers to transfer excess defined-benefit plan assets to retiree medical accounts and group-term life insurance||$0.2 billion|
|Equalize taxes on natural gas fuels||-$0.1 billion|
|Veterans Section||-$1.2 billion|
|Transfer funds from Veterans Choice program to cover VA shortfall||$0 billion|
|Exempt from the employer mandate servicemembers and veterans who already have health insurance||-$0.8 billion|
|Allow veterans to qualify for health savings accounts, even if they receive VA care||-$0.4 billion|
There was plenty of focus on the Social Security Trustees' report yesterday, but the Medicare report, released at the same time, contains very important information and projections as well. The report shows some improvement from last year, despite the incorporation of this year’s “doc fix” legislation for the first time. The Hospital Insurance (HI) Trust Fund for Medicare Part A remains scheduled to become exhausted in 2030, although the shortfall within HI is smaller. Over the longer term, Medicare spending is down due to lower cost growth assumptions.
Hospital Insurance Trust Fund
The HI Trust Fund was projected to become exhausted by 2024 as recently as 2012 and by 2017 in the 2009 report before enactment of the Affordable Care Act (ACA). The improvement in the Trust Fund’s finances since 2009 stems from the combination of the ACA’s Medicare cuts and HI payroll tax increases, the impressive recent slowdown in Medicare spending growth, and a general shift in the health care system from inpatient (covered by the HI Trust Fund) to outpatient care.
While the Trust Fund’s exhaustion date is unchanged, the 75-year actuarial shortfall shrank again this year to 0.68 percent of taxable payroll, down from the 0.87 percent projected in last year’s report, and from 1.11 percent the year before that. This year’s decline stems almost entirely from lower predicted long-range Medicare cost growth, somewhat offset by higher projected enrollment in Medicare Advantage (MA) plans.
CBO's Long-Term Budget Outlook, released last month, included updated projections for Social Security and Medicare, including individuals' expected benefits and taxes paid. The Social Security trust fund projections are very similar to last year's: the Social Security Disability Insurance Trust Fund is scheduled to be insolvent sometime in Fiscal Year 2017 (which starts in October 2016) and the larger Old Age and Survivor's Insurance Trust Fund is expected to run out of money in 2031. If the two programs are considered as one (if Congress reallocates funds from one to another as necessary), the combined fund will be exhausted in 2029, one year sooner than projected in last year's report.
Some information that wasn't in last year's report (but was in a separate publication on Social Security) explains that each succeeding generation will get more out of Social Security than they paid in. Individuals born in the 1940s are expected to, on average, receive $1.03 for every dollar paid in Social Security taxes. This amount increases over time, with those born in the 1980s scheduled to receive $1.40 in benefits for every $1 paid in taxes, up from $1.03 for those born in the 1940s. These amounts assume that Social Security will continue to pay full benefits even after the trust fund runs out.
The Chief Actuary for the Center for Medicare and Medicaid Services (CMS) recently released the 2014 Medicaid Actuarial Report forecasting Medicaid enrollment and spending for the next ten years. The report contains some good news, showing lower spending projections than last year's, but also some signs that the program may increasingly strain federal and state budgets in the coming years.
Medicaid spending is projected to grow on average by 6.2 percent per year over the next ten years, increasing total spending from $499 billion in 2014 to $835 billion by 2023. This growth rate is somewhat faster than GDP growth, thereby increasing spending as a share of GDP from 2.9 percent in 2014 to 3.1 percent in 2023. Enrollment is projected to grow by about 2 percent per year, meaning that per-person costs will rise by about 4 percent per year, roughly in line with the actuaries' projections of GDP per capita growth. Enrollment growth is concentrated more in the early years of the projection window as the Medicaid expansion covers more and more people.
The federal government will account for 60 percent of this spending each year, up from the historical share of about 57 percent that prevailed prior to the Affordable Care Act (ACA). Federal Medicaid spending is projected to grow from $300 billion in 2014 to $497 billion by 2023. The $3.9 trillion of total spending projected over the 2014-2023 period is $237 billion less than the Congressional Budget Office (CBO) expects for the same time period.
The Center for Medicare and Medicaid Innovation (CMMI) continues to push forward important delivery system reforms, last week announcing a new initiative -- the Comprehensive Care for Joint Replacement (CCJR) Model -- to bundle payments for hip and knee replacements. The proposed rule will be published in the Federal Register today.
Hospitals in 75 geographic areas would receive a single payment for the joint replacement surgery and 90 days of care thereafter (rather than individual payments for each service involved, hence the term "bundled") and would be eligible for financial bonuses if they are able to reduce costs while meeting quality metrics. Some of the specifications are similar to CMMI's previous iteration -- the Bundled Payments for Care Improvement (BPCI) initiative -- but the key difference is that CCJR is mandatory in those 75 geographic areas.
CCJR would be tested over a five-year period starting in 2016 and would charge hospitals with trying to limit the spending associated with the joint replacement surgery and follow-up. The hospital is being asked to bear the financial risk because they are best suited to coordinate a patient's care and because most of the variation in costs today occurs during post-acute care (after the initial surgery). Presumably, financial and quality incentives will place a much higher onus than exists today on hospitals to tailor the most appropriate recovery plan for their patients and better manage their care.
Given the difficulties voluntary CMMI initiatives can have in producing significant savings and fostering innovation over time, the mandatory nature here is vital. By making the CCJR mandatory, CMMI will also gain valuable knowledge about the effectiveness of bundled payments in Medicare.
Knee and hip replacements make a good first target because, as the Centers for Medicare and Medicaid Services (CMS) notes, hospitalizations for joint replacement surgeries are expensive -- costing Medicare $7 billion in 2013 -- and the cost per episode differed vastly from $16,500 to $33,000.
Over the past few weeks, we have been posting in-depth analysis of the Congressional Budget Office’s (CBO) Long-Term Outlook. In its supplemental data, CBO shows that health care spending is a major driver of our projected spending over the long term. By 2060, federal health care spending as a share of the economy will double from its current level to 10 percent of GDP. The major health care spending programs include Medicare, Medicaid, health exchange subsidies, and the Children's Health Insurance Program. Other sources of growth in spending include Social Security and interest costs. The following graph shows the drivers of our spending growth (excluding interest). Note that interest spending is actually the fastest growing part of the budget.
To ameliorate some concerns with the original bill, a revised version of H.R. 6, or the 21st Century Cures Act, was recently released, aiming to accelerate the development of medical cures by, among other things, increasing funding to the National Institutes of Health and creating a Cures Innovation Fund. The House of Represenatatives is likely to take up the revised version of the legislation later this week.
Last month, we discussed the prior iteration of the bill, detailing how the anticipated $12 billion gross cost was offset by several changes, including some real health savings, the selling of 64 million barrels of oil from the Strategic Petroleum Reserve (SPR), and a timing shift involving Medicare's prescription drug benefit -- Part D. However, there were a few concerns with the bill that have caused it be revised.
The first concern was technical: the Congressional Budget Office's (CBO) score of the bill scored the $10.55 billion designated for the NIH and Cures Innovation Funds as appropriations subject to the discretionary spending limits, contrary to lawmakers' intent. This meant that the additional money would simply crowd out other spending under the cap and that many of the offsets designated for the bill were unnecessary (it already reduced deficits by $12 billion), since they are only needed to offset mandatory spending.
The new bill lessens this new funding by $1.25 billion and clarifies that it should be classified as mandatory appropriations, thus adding $9.2 billion of costs to the bill on paper (although this is really a $1.25 billion reduction in costs from their original intent).
In a move that could stall promising health care delivery system reforms and drive up entitlement spending, the House Appropriations Committee last week voted to defund the Center for Medicare and Medicaid Innovation (CMMI) and the Agency for Healthcare Research & Quality (AHRQ) in their 2016 Labor, Health and Human Services, and Education bill.
Abandoning CMMI in particular would increase deficits this decade by $45 billion (or by $37 billion before incorporating the additional interest payments needed to service the higher debt), according to the Congressional Budget Office (CBO), and potentially by much more over the long run. The Innovation Center, created by the Affordable Care Act (ACA), is in charge of testing new approaches to improve quality and reduce cost within Medicare and Medicaid, including promising programs such as Accountable Care Organizations (ACOs), bundled payments, and initiatives to increase care coordination among low-income seniors and people with disabilities who are dually-eligible for Medicare and Medicaid.
Rescinding CMMI’s remaining $6.8 billion ($6.5 billion of outlays) in funding through 2020 (funding beyond 2020 is not eliminated) would put these initiatives and many more in jeopardy or delay them significantly, and severely curtail CMMI’s ability to fine-tune them as time progresses. Moreover, they would no longer be able to undertake new delivery system reform efforts with the potential to improve quality and lower costs, which is part of the reason CBO finds that defunding would increase mandatory federal health care spending by about $37 billion over the next ten years.
The rescission also represents an egregious budget gimmick, and is perhaps the worst CHIMP (change in mandatory program) we have seen so far. As we’ve explained before, CHIMPs allow policymakers to cut mandatory spending in order to pay for discretionary spending increases. More often than not, the discretionary spending increases are real, but the mandatory cuts are fake – and for one reason or another do not generate actual savings. In this case, the situation is far worse – rather than failing to generate savings, this CHIMP creates significant future costs.
Health care spending is arguably the most important part of CBO's long-term outlook, being a key driver of our nation's growing debt over the long term. Little has changed, though, since CBO's outlook last year, with similar assumptions for excess health care cost growth but a small improvement towards the end of the 75-year period due to a change in an assumption about Medicaid.
As a result of the fiscally-irresponsible physician payment law passed this year and slightly higher assumed long-term cost growth, Medicare spending is projected to be higher than last year's outlook by about 0.1 percent of GDP per year for the next ten years and by increasing amounts in later years. CBO expects Medicare spending to grow from 3 percent of GDP this year to 5.1 percent by 2040 (about as much as all federal health care spending this year), 7.2 percent by 2065, and 9.6 percent by 2090.
Other major health care spending – including Medicaid, the Children's Health Insurance Program, and the Affordable Care Act's (ACA) health insurance subsidies – has improved both as a result of short-term revisions to spending in CBO's ten-year projections and a change in CBO's assumption about Medicaid eligibility over the long term. CBO now assumes that, since Medicaid eligibility is largely determined by the poverty line, which grows with inflation, as real wages increase, more and more of the currently eligible would eventually lose eligibility. In the past, CBO assumed that states would either expand eligibility, increase outreach to the currently eligible, or expand benefits in order to offset this effect, but now it assumes they will only offset one-half of the effect. This assumption reduces their Medicaid eligibility projections by 4 percent over the next 25 years.