Medicare’s Financial Condition: Beyond Actuarial Balance

Medicare’s trust funds account for all income and expenditures. The HI and SMI programs operate separate trust funds with different financing mechanisms. General revenues, payroll taxes, premiums, and other income are credited to the trust funds, which are used to pay benefits and administrative costs. Any unused income is required by law to be invested in U.S. government securities for use in future years. In effect, the trust fund assets represent loans to the U.S. Treasury’s general fund.There are enough unique features of prescription drug pricing and delivery that warrant examining prescription drugs separately from non-drug medical services. Both categories of care—drug and non-drug medical—have challenges related to utilization of unnecessary services, unit costs for certain services, and determination of the most appropriate treatment within a list of services (or drugs), but the specific details can vary substantially between them.

• The projected HI deficit over the next 75 years is 0.82 percent of taxable payroll. Eliminating this deficit would require an immediate 28 percent increase in standard payroll taxes or an immediate 17 percent reduction in expenditures—or some combination of the two. Delaying action would require more severe changes in the future.

The trustees acknowledge that the estimates based on current law projections could understate the seriousness of Medicare’s financial condition, because actual Medicare expenses might exceed current law estimates. In particular, the trustees and the chief actuary point to scheduled reductions in provider payments that may not occur. Current law requires downward adjustments in payment updates for most non-physician providers to reflect productivity improvements; these adjustments might not be sustainable in the long term. Current law also requires updates for physician services that are not expected to keep up with physician costs. In the Statement of Actuarial Opinion that accompanies the report, the chief actuary of the Centers for Medicare & Medicaid Services (CMS) specifically states, “Should these price updates prove to be inadequate, beneficiaries’ access to and the quality of Medicare benefits would deteriorate over time, or future legislation would need to be enacted that would likely increase program costs beyond those projected under current law in this report.”
 
At the request of the trustees, the CMS Office of the Actuary developed an alternative analysis that provides an illustration of the potential understatement of current-law Medicare cost projections if the productivity adjustments were phased down gradually beginning in 2028 and physician updates were more consistent with cost growth. Although the illustrative alternative projections are not intended to be interpreted as the official best estimates of future Medicare costs, they do, as noted in the trustees’ report, “help illustrate and quantify the potential magnitude of the cost understatement.”
 
Under the alternative scenario, the HI trust fund still would be depleted in 2026. However, the projected deficit over the next 75 years would be 1.71 percent of taxable payroll—compared to 0.82 percent under current law. Eliminating this deficit would require an immediate 59 percent increase in standard payroll taxes or a 30 percent reduction in expenditures—or some combination of the two.
 

Increases in SMI Costs Increase Pressure on Beneficiary Household Budgets and the Federal Budget

The SMI trust fund includes accounts for the Medicare Part B program, which covers physician and outpatient hospital services, and the Medicare Part D program, which covers the prescription drug program. Approximately one-quarter of SMI spending is financed through beneficiary premiums, with federal general tax revenues covering the remaining three-quarters.²
 
The SMI trust fund is expected to remain solvent due to its financing being reset each year to meet projected future costs. As a result, increases in SMI costs will require increases in beneficiary premiums and general revenue contributions. Increases in general revenue contributions will put more pressure on the federal budget. SMI general revenue funding is scheduled to nearly double from 1.6 percent of gross domestic product (GDP) in 2018 to 2.8 percent in 2092.
 
Premium increases similarly will increase the burden on beneficiaries, especially when considered in conjunction with increasing beneficiary cost-sharing expenses. The average beneficiary expenses (premiums and cost-sharing) for parts B and D combined are currently 24 percent of the average Social Security benefit. These expenses are projected to increase to 34 percent of the average Social Security benefit by 2092. These expenses do not include cost sharing under Part A.
 
The 2018 Medicare Trustees Report projects that total SMI spending will continue to grow faster than GDP. The total spending will increase from 2.1 percent of GDP in 2017 to 3.2 percent of GDP in 2030 and to 3.9 percent of GDP in 2092.
 
Spending under the illustrative alternative analysis would be higher, especially in the long term, reflecting the phase-down of productivity adjustments for non-physician provider payments and higher physician updates in the long range. SMI spending projected in the alternative analysis would increase from 2.1 percent of GDP in 2017 to 3.2 percent of GDP in 2030 and to 5.4 percent of GDP in 2092.
 

Increases in Total Medicare Spending Threaten the Program’s Sustainability

A broader issue related to Medicare’s financial condition is whether the economy can sustain Medicare spending in the long run. To help gauge the future sustainability of the Medicare program, the trustees consider the share of GDP that will be consumed by Medicare. With Medicare spending expected to continue growing faster than GDP, greater shares of the economic growth will be devoted to Medicare over time, meaning smaller shares of the economy will be available for other priorities.
 
Under current law, Medicare expenditures as a percentage of GDP will grow from 3.7 percent of GDP in 2017 to 6.2 percent of GDP in 2092. However, under the CMS Office of the Actuary alternative scenario, total Medicare expenditures would increase to 8.9 percent of GDP in 2092.

Calendar Year	2018 Report	2018 Alternative Projection
2017	3.7	3.7
2020	3.9	3.9
2030	5.2	5.2
2040	5.9	6.1
2050	5.9	6.6
2060	6.0	7.1
2070	6.1	7.8
2080	6.2	8.4
2090	6.2	8.8
2092	6.2	8.9

Sources: 2018 Medicare Trustees Report, CMS Office of the Actuary


The trustees note the urgency of addressing Medicare’s financial challenges, stating:


Medicare’s challenges are not solely financial. Medicare beneficiaries are a diverse group with diverse health care needs and certain beneficiary populations, such as those with a disability or multiple chronic conditions, are particularly vulnerable to having high health care needs. Many beneficiaries have limited resources to rely upon should they be faced with high out-of-pocket health costs. Aside from the addition of the prescription drug program in 2006, Medicare’s fee-for-service benefit package has remained mostly unchanged; some services aren’t covered and beneficiary out-of-pocket costs are not capped. Therefore, any changes aiming to improve Medicare’s financial condition should be considered in light of how the changes would impact the program’s ability to meet the health care needs of beneficiaries and whether the changes would encourage beneficiaries to seek cost-effective care.