CBO's July Monthly Budget Review brings us ten months into the fiscal year, and it's time to update our tracking of the slow growth of Medicare so far in 2014. Through June, Medicare growth totaled 1.2 percent over the first nine months of FY 2014, or 3.6 percent when removing the effect of a number of temporary* or phased-in policies, mostly from the Affordable Care Act (what we refer to as the "underlying" growth rate).
The recent CBO Long-Term Budget Outlook confirmed that our long-term debt problems remain far from solved, with debt projected to exceed the size of the economy within 25 years. Federal spending, especially the mandatory portion of the budget, will continue to outpace revenue collected, running up debt and interest payments on that debt. Spending on Social Security and health care programs will grow by almost half from 9.8 percent of GDP today to 14.3 percent of GDP by 2039. Two factors are reponsible for major portions of the increase in mandatory spending: an aging population and "excess cost growth," when health care costs are growing faster than the rest of the economy.
Note: CBO has issued a more detailed score of the bill. The table has been updated to reflect these numbers.
We have already released our analysis of the 2014 Social Security Trustees' report, which showed that the program's long-term finances are largely similar but slightly worse than projected last year. Now it's time to turn to the Medicare report, which showed some improvement in the finances of the Hospital Insurance (HI) trust fund for Part A (which covers inpatient hospital and post-acute care) and lower Medicare spending on an apples-to-apples basis. However, the improvement in the Medicare outlook does not mean that the program is out of the woods. Even with assumptions that the Trustees question as too optimistic, the report forecasts a significant rise in Medicare spending, and the HI trust fund is projected to be insolvent in 16 years.
Hospital Insurance Trust Fund Solvency
The Trustees now foresee the HI trust fund being exhausted in 2030, four years later than they predicted last year, at which point payments from the trust fund would be cut by about 15 percent. The 75-year actuarial shortfall narrowed by one-quarter of a percentage point, from 1.11 percent of taxable payroll to 0.87 percent. These revisions are similar to those of Congressional Budget Office (CBO) earlier this month.
As a percent of GDP, Part A spending will rise from 1.5 percent this year to 2.1 percent by 2035 and 2.4 percent by 2070. Meanwhile, revenue will rise more slowly from 1.45 percent this year to 1.7 percent by 2035 and 1.8 percent by 2070. The HI fund is projected to run surpluses from 2015-2020, which would be the first time since 2004. However, deficits will quickly return and rise to 0.5 percent of GDP by the late 2030s, stabilizing at that level after.
Although most of our analysis of CBO's Long-Term Budget Outlook has focused on debt projections, CBO also makes projections about the solvency of trust funds over the long term. And, unfortunately, it finds that most major trust funds will become insolvent in the not-too-distant future.
CBO has already projected the impending disruption of construction projects due to the Highway Trust Fund depletion later this year, the 20 percent across-the-board benefit cut facing Social Security Disability beneficiaries sometime in FY 2017, and the need to address the Pension Benefit Guaranty Corporation's Multiemployer Pension fund by 2021. In this report, it finds that the the combined Social Security trust funds (assuming the SSDI program borrows from the Old-Age trust fund) and the Medicare Hospital Insurance (HI) trust fund will both run out of money around 2030. In other words, CBO projects that all the major trust funds will be depleted just over fifteen years from now. And, at that point, significant automatic benefit/payment cuts would take place.
As we touched on before, Social Security's projected finances are worse than last year, a product of lower payroll tax revenue and lower interest rates. On the other hand, the HI insolvency date has been moved back about five years due to CBO's continued downward revisions to Medicare spending. Still, these changes give a 15-year clock for both the Social Security trust fund and the HI trust fund. These trust funds would experience a sizeable cut in spending (benefits) to bring outlays in line with revenue when the trust funds are exhausted.
|Exhaustion Dates for Major Trust Funds
||Percent Cut Required
|Highway Trust Fund||FY 2015||28%|
|Social Security Disability Insurance||FY 2017||20%|
|PBGC Multiemployer Fund||FY 2021||87%|
|Medicare Hospital Insurance||~2030||~15%|
|Social Security Old-Age and Survivors Insurance||2032||~30%|
|Social Security Combined||2030||~27%|
Source: CBO, CRFB calculations
The Congressional Budget Office’s (CBO) new Long-Term Budget Outlook presents plenty of good news on Medicare costs yet still highlights the role that increased federal health care spending plays in driving the medium- and long-run growth in our debt. While costs are lower than in last year's projection, health care spending is still expected to increase significantly as a percent of GDP over the long term.
Projected federal health care costs overall may be down only a small amount (0.1 percent of GDP annually) since last year's report, but they have now been lowered by an astounding $900 billion cumulatively from 2011-2021. Moreover, CBO also slightly lowered its estimate of underlying health care cost growth because it is based on the historical average of spending growth since 1985 (with recent years weighted more heavily), which now incorporates one more year (2012) of very slow growth. For Medicare, this works out to slower long-term spending per beneficiary growth of about 0.07 percentage points annually.
Despite the improvements, spending on these programs is still scheduled to grow from 4.8 percent of GDP this year all the way up to 8 percent of GDP by 2039.
CBO's release of the June Monthly Budget Review (MBR) gives us another data point in what has been an interesting story for Fiscal Year (FY) 2014: the slow growth of Medicare. Last month, the MBR showed Medicare spending growing by only 0.3 percent in FY 2014 compared to spending in the same time period (eight months) in FY 2013. We further noted that excluding the effects of temporary or phased-in policies (in order to illustrate Medicare's underlying growth rate) would bring the growth rate up to 2.5 percent, still well below anticipated economic growth and Medicare beneficiary growth. Incorporating the June data shows a mild acceleration in Medicare's growth rate, yet still remaining very low.
The Congressional Budget Office today released a preliminary analysis of several sections of the House VA reform bill. Like the Senate bill that we analyzed last week, the legislation would increase VA health spending by allowing the VA to contract with private health providers. In fact, if appropriators fully funded the House legislation, it could cost more than the Senate bill.
Now that both chambers of Congress have passed bills aimed at improving the Department of Veterans Affairs (VA) health system, they will need reconcile their differences, likely via conference committee.
The Senate voted 93-3 yesterday on new legislation to expand veterans' benefits by allowing beneficiaries to seek out private (non-VA) health care paid for by the Department of Veterans Affairs (VA).