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Medicare Trustees Say Financial Condition Better But
Broke by 2020
New drug plan costs lowered, physician costs
increased for 2006
March 23, 2005 – The Medicare Trustees Report was
issued today and shows that the financial condition of Medicare's
hospital fund has improved slightly and the report also highlights the
importance of using the new Medicare law to help reduce the spending
growth in other parts of Medicare. The Medicare program is the
second-largest social insurance program in the United States, with 42
million beneficiaries, primarily senior citizens 65 and older, and total
expenditures of $309 billion in 2004 but the report says it will be
insolvent by 2020.
HHS Secretary Mike Leavitt said the report shows
the importance of new tools added to Medicare that strengthen and
improve Medicare, and their key role in addressing Medicare's fiscal
health. The improvements include the addition of prescription drug
coverage, preventive benefits and new "pay for performance" initiatives.
"Getting Medicare's benefits in line with modern
medical care was the first step in dealing with Medicare's long-term
financial viability," Secretary Leavitt said. "The law that created
those new benefits also gives us new tools to provide better care more
efficiently, and we are using those tools."
In the annual report delivered today, the Medicare
trustees found that overall the program's financial outlook has improved
slightly compared to last year's estimate. The trustees estimate that
Medicare's Hospital Insurance (HI) Trust Fund is projected to be
exhausted in 2020, one year later than estimated in last year's report.
This change results from slightly higher income and slightly lower costs
in 2004 than previously estimated. Expenditure growth is estimated to be
6.6 percent per year over the next 10 years.
As a result of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA), the Supplementary
Medical Insurance (SMI) component of Medicare is now composed of two
parts, Part B and Part D, each with its own separate account within the
SMI trust fund. Projected costs for Medicare Part D, which funds
Medicare's new drug benefit, are also lower than forecast in last year's
Trustees Report, contributing to the improvement in Medicare's overall
spending outlook. At the same time, based on recent experience, the
report projects increasing costs in the Part B account, which includes
coverage for physician visits and outpatient services. Payments for Part
B services are expected to grow at an average annual rate of about 6.9
percent over the next 10 years. These increases point to higher future
federal funding, beneficiary premiums, and beneficiary co-pays in
Medicare's Part B program, the trustees said.
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The Centers for Medicare & Medicaid Services (CMS)
has a number of initiatives to address the rising costs of Part B, said
CMS Administrator Mark B. McClellan, M.D., Ph.D.
"With benefits that for the first time emphasize
preventing diseases and their complications, Medicare is implementing
the strongest foundation possible for a sustainable program that
provides up-to-date treatments to our beneficiaries," Dr. McClellan
said. "It made no sense to treat costly complications of diseases but
not help seniors with the cost of prescription drugs that could prevent
these conditions -- and now we're using these new benefits to make the
health care system more efficient. The Medicare law allows us to
implement new steps to get the most value from Medicare spending, by
keeping patients healthier and avoiding costly complications."
Reforms and initiatives designed to address
Medicare's financial condition include:
Preventive benefits, including the new "Welcome to
Medicare" physical, which will help those beneficiaries who are new to
Medicare address health problems before they become costly.
A Medical Health Support initiative, designed to
help chronically ill Medicare beneficiaries reduce their health risks.
Chronic illnesses such as diabetes and congestive heart failure account
for a large percentage of Medicare's costs.
A stronger Medicare Advantage program, where
beneficiaries get even more options to better manage chronic conditions
and where health plans have stronger financial incentives to help
improve coordination and reduce costs for chronically ill beneficiaries.
New steps that will use Medicare's new drug
coverage as effectively as possible in order to reduce health
complications and costs, including electronic prescribing incentives,
medication therapy management and a focus on obtaining more evidence
about the effectiveness of drug therapies.
Broad information on generic drug availability
under the new prescription drug benefit, which brings down costs for
both Medicare and beneficiaries.
Other changes underway to address costs include
reforms to Medicare's contracting process and requiring wealthier
Medicare beneficiaries to pay a greater percentage of their Part B
coverage.
The accelerated growth in Part B costs -- which
results not from new legislation but mainly from more utilization of
services like office visits and lab and diagnostic tests -- needs
further detailed examination, Dr. McClellan said. "We expect that
Medicare's new steps to improve care coordination, prevent disease
complications, and reward better performance will help avoid unnecessary
Medicare costs," he said. "We are looking closely at the reasons for the
Part B cost increases, and we will work with physicians and other health
professionals to make sure we are getting the most for rising Medicare
spending."
The Medicare trustees are Treasury Secretary and
Managing Trustee John W. Snow, Secretary of Health and Human Services
Mike Leavitt, Labor Secretary Elaine L. Chao and Social Security
Commissioner Jo Anne B. Barnhart. Two other members, the public
trustees, are appointed by the President with Senate confirmation. The
public trustees are John Palmer and Thomas Saving. They serve four-year
terms and represent the general public. Mark B. McClellan, M.D, Ph.D.,
CMS Administrator, serves as Secretary to the Board of Trustees.
The Boards of Trustees for Medicare report annually
to the Congress on the financial operations and actuarial status of the
program. Beginning in 2002, there is one combined report discussing both
the Hospital Insurance program ("Part A" of Medicare) and the
Supplementary Medical Insurance program ("Part B" & "Part D"). The
Office of the Actuary in CMS prepares the report under the direction of
the Boards.
FACT SHEET: Medicare Trustees Report
Hospital Insurance (HI) Fund
The trustees estimate that the Hospital Insurance
(HI) Trust Fund will remain solvent until the year 2020, a one-year gain
for estimated Part A solvency from the forecast of 2019 made by the
trustees last year. Over the next 10 years, HI expenditures are expected
to grow somewhat faster than income. Comparison with last year’s
estimates shows that actual payroll tax and other income in 2004 and
projected future amounts are slightly higher than previously projected.
In addition, projected HI expenditures are slightly lower than before,
due to slower growth in inpatient hospital benefits.
For these same reasons, the trustees reported that
long-term projections of the fiscal health of the HI fund have slightly
improved. Long-term, the outlook remains very problematic because of
steady increases in projected health care costs as well as the growing
number of Medicare beneficiaries following the retirement of the baby
boom generation. Today, there are about four workers for every Medicare
beneficiary. By 2079, there will be only about two workers for every
beneficiary.
Supplementary Medical Insurance Trust Fund
(SMI)
As in previous years, the trustees find that the
Supplementary Medical Insurance Trust Fund (covering Part B and the new
Part D of Medicare) remains adequately financed into the future—but only
because its financing from general revenues and beneficiary premiums
rises with spending.
Part B spending is experiencing growth—averaging
almost 11 percent per year over the last five years—with costs expected
to nearly double over the next 10 years as the first members of the baby
boom generation enter the program
The Part B account assets declined by $4.5 billion
in 2004. Beneficiary premiums and general revenue financing rates for
2004 were set with the intention of increasing the assets in the Part B
account of the trust fund to a more adequate level. The subsequent
increased payments to physicians and other Part B providers in the
Medicare Modernization Act (MMA), combined with expected expenditure
growth, increased Part B expenditures above the level anticipated when
the financing was set.
The financing rates for 2005 were set with the
intention of taking a step toward restoring the assets to a more
adequate level. However, because of higher-than-anticipated 2004
costs, the Part B account assets are now expected to increase just
slightly in 2005, remaining well below the desired level.
The Part D account within the SMI trust fund was
established by the MMA. For 2004 and 2005, the Transitional Assistance
Account covers transitional assistance to low-income beneficiaries under
the prescription drug card program. Beginning in 2006, beneficiaries can
obtain the new prescription drug benefit through private prescription
drug plans or Medicare Advantage health plans. Medicare will provide a
substantial subsidy for the prescription drug premiums. Medicare will
also pay some or all of the remaining beneficiary drug premiums and
cost‑sharing liabilities for low‑income beneficiaries. Medicare will
also pay special subsidies on behalf of beneficiaries retaining primary
drug coverage through qualifying employer‑sponsored retiree health
plans. These benefits are expected to grow more than Part A or Part B
costs, consistent with historical growth patterns. The projected
spending in Part D is slightly lower than projected in 2004.
Medicare Overall
Taken together, total costs for HI Part A and SMI
Parts B and D are projected to increase substantially over the next 75
years—growing from 2.6 percent of gross domestic product (GDP) today to
13.6 percent by 2079. The level of Medicare expenditures is expected to
exceed that for Social Security in 2024 and, by 2079, to represent
almost twice the cost of Social Security. At the same time, total trust
fund revenues (excluding interest) will grow more slowly—from 2.6
percent of GDP today to just 9.7 percent in 2079. In 2079, the gap
between Medicare revenue and Medicare spending would equal almost 4
percent of gross domestic product. All of this difference is
attributable to the projected imbalance in the HI trust fund.
The Medicare Modernization Act contains some
important steps toward addressing rising health care costs for seniors.
In addition to the prescription drug coverage, it also brings up-to-date
preventive benefits and programs to prevent complications for
beneficiaries with chronic illnesses. These benefits will help Medicare
and its beneficiaries avoid costs associated with preventable disease
complications. In addition, the law requires that the Trustees
determine whether the difference between Medicare spending and dedicated
financing sources exceeds 45 percent of Medicare outlays within the
following seven years, triggering the development and consideration of
fast-track legislation to address Medicare costs. The current report
finds that this “trigger” has not yet been reached but is approaching,
highlighting the importance of modernizing Medicare now and taking the
cost-saving steps included in the MMA to provide a strong foundation for
any further efforts to address Medicare costs..
“These projections demonstrate the need for timely
and effective action to address Medicare’s financial challenges.
Consideration of such reforms should occur in the relatively near
future. The sooner the solutions are enacted, the more flexible and
gradual they can be,” the report said.
NOTE: For additional details go to
http://www.cms.hhs.gov/publications/trusteesreport.
The Trustees Report is a detailed, lengthy
document, containing a substantial amount of information on the past and
estimated future financial operations of the Hospital Insurance and
Supplementary Medical Insurance Trust Funds. We recommend that readers
begin with the "Overview" section of the report. This section is fairly
short, is written in "plain English," and summarizes all the key
information concerning the expected financial outlook for Medicare.
Substantial additional material is available in the later sections for
those wishing to delve more deeply into the actuarial projections.
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