The Other Trustees Report

Last Friday, CRFB highlighted the 2011 Social Security trustees report in a paper outlining the projections and important changes from last year. We found the program to be on an unsustainable path, even more so than last year's Trustees estimated. But there's another program growing unsustainably that the Trustees also oversee -- Medicare.

Friday's Trustees report found that Medicare Part A (Hospital Insurance, or HI) faces a 75-year actuarial imbalance of -0.79 percent of taxable payroll (compared to -0.66 percent last year), which makes it 40-50 percent as large as the Social Security shortfall (based on CRFB estimates of the two shortfalls as percents of GDP). Because the HI program has a much smaller trust fund balance, it is expected to become insolvent in 2024 -- which is five years earlier than last year's report and 12 years earlier than Social Security's insolvency date. However, just looking at HI does not tell the whole story of Medicare's financial outlook.

Medicare Part A makes up less than half of total Medicare spending; the rest comes from Part B (physician services) and Part D (prescription drugs). These programs have no dedicated revenue source and rely on general revenues from the Treasury and participant premiums.

Under current law assumptions, combined Medicare costs will rise from its current 3.7 percent of GDP to 4.0 percent by 2020, and 5.9 percent by 2050 before leveling off at around 6.2 percent at the end of the 75-year window. This path is quite similar to last year's projections.

However, these current law numbers are highly unrealistic. They assume that Medicare providers under Part B will face a 30 percent cut next year, per the sustainable growth rate formula (SGR), despite the fact that politicians have provided annual "doc fixes" for the past decade. They also assume all the savings from the Affordable Care Act -- particularly, continued reductions in provider payment growth rates -- will continue indefinitely. Past experience has shown that the former will certainly not happen, and most experts believe that the latter cannot continue forever (though there is disagreement on how long they can continue). As Richard Foster, the chief actuary of Medicare, explains:

Without major changes in health care delivery systems, the prices paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the prior law.

The report mentions an illustrative alternative scenario like they had last year, though it has not yet been published as a separate report yet. Under this illustrative scenario, which is described in the Trustees report, lawmakers would continue to pass doc fixes and the provider payment reductions from ACA would be fully implemented for the first ten years, then phased out over fifteen years. With these assumptions, spending would increase to 10.4 percent of GDP in 2080 (compared to 6.2 percent under current law) and the HI actuarial shortfall would be 2.15 percent of taxable payroll (compared to 0.79 percent under current law). This highlights the need for maintaining the savings already written into current law in addition to further cost controls on health care spending (read more about this).