A Closer Look at the Medicare Actuary's Alternative Medicare Projections

Earlier this week, we discussed the new Medicare Trustees projections which project that the Hospital Insurance (HI, or Part A) trust fund will be exhausted by 2026. In our analysis, we highlighted the alternative projections that incorporate several policy changes that lawmakers may make to current law in light have the impact they have on providers and beneficiaries. While it’s too early to know to what degree these alternative projections are more realistic, they demonstrate that any changes lawmakers make will need to be offset to prevent even greater increases in spending that would worsen long-term sustainability.

The Medicare Actuary’s complete analysis of these alternative projections, released separate from the Trustees' report, further explains the alternative assumptions made and the impact they would have:

• SGR Fixes: The scheduled 25 percent cut to physician payments in 2014 under the Sustainable Growth Rate (SGR) formula would be adjusted to reflect historical precedent. Instead of a 25 percent cut, these projections assume a 0.7 percent annual update over the next decade, reflecting the average update that has occurred over the past 10 years when Congress consistently overrode these reductions. Over the long term, the illustration assumes that the Medicare physician spending growth would gradually transition to the per capita increase in national health spending and then equal that rate for the last 50 years of the projection, roughly GDP plus 1 percent.
• ACA Productivity Adjustments: The Affordable Care Act (ACA) calls for a reduction in payment rate updates equal to the increase in economy-wide multifactor productivity. The Actuary’s report argues there is a strong possibility these adjustments will not be sustainable in the long run and will result in Congressional action to limit these reductions. Instead, they assume a gradual phase-down of productivity adjustments. Productivity adjustments of 1.1 percent would be applied through 2019, but then phased down to 0.4 percent after 2020. After 2034, it assumes the same long-term growth rates in payments as their SGR adjustment, roughly GDP plus 1 percent.
• IPAB: If Congress overrides or modifies these adjustments in the future, that may exceed thresholds that would require IPAB to develop proposals to reduce the growth rate. The Actuary assumes lawmakers would act to eliminate the IPAB requirements.

So, what impact does this have on the overall outlook for Medicare? Under both current law and the alternative projections, the trust fund exhaustion date is 2026 (though slightly earlier in the year under the alternative projection), because most of the impact of the alternative adjustments is modest in the short term. However, the actuarial imbalance for Part A is much higher in the long-term at 2.17 percent of taxable payroll instead of 1.11 percent by the 75th year. Overall Medicare spending would rise to 4 percent of GDP in 2020 and 9.3 percent by 2080 (compared to 3.9 percent in 2020 and 6.5 percent in 2080 under current law). As a result, Medicare expenditures could be 45 percent greater than under current law by 2080.

It is possible, especially given Congress’s track record with the SGR, that these adjustments would be made. However, the tremendous increase in spending and in the long-term actuarial imbalance these changes would cause should serve as a warning to lawmakers that they need to find other ways to offset savings currently in law that they seem unlikely to be able to sustain over the long term. Importantly, there are numerous options for lawmakers to consider as they look for ways to replace these spending cuts and also address long-term health care cost growth and demographic pressures of an aging population that push up spending in Medicare.