Medicare’s Financial Condition: Beyond Actuarial Balance

• The HI trust fund is projected to be depleted in 2029. At that time, tax revenues are projected to cover only 88 percent of program costs, with the share declining to 81 percent in 2041 and then increasing to 88 percent in 2091. There is no current provision for general fund transfers to cover HI expenditures in excess of dedicated revenues.
• The projected HI deficit over the next 75 years is 0.64 percent of taxable payroll. Eliminating this deficit would require an immediate 22 percent increase in standard payroll taxes or an immediate 14 percent reduction in expenditures—or some combination of the two. Delaying action would require more severe changes in the future.

In this year’s report, the trustees’ projections of Medicare’s financial outlook are based on benefits and revenues scheduled under current law. The trustees acknowledge that these estimates 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, Paul Spitalnic, the chief actuary of the Centers for Medicare & Medicaid Services (CMS), specifically states, “Overriding the price updates specified in current law … would lead to substantially higher costs for Medicare in the long range than those projected 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 are phased down gradually beginning in 2020, physician updates are more consistent with cost growth, and there are no savings from the Independent Payment Advisory Board (IPAB).² 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 alternative analysis, “help illustrate and quantify the potential magnitude of the cost understatement.”

Under the alternative scenario, the HI trust fund would be depleted in 2029, and the projected deficit over the next 75 years would be 1.76 percent of taxable payroll—compared to 0.64 percent under current law. Eliminating this deficit would require an immediate 61 percent increase in standard payroll taxes or a 31 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.³

The SMI trust fund is expected to remain solvent because its financing is 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 1.5 percent of GDP in 2017 to 2.7 percent in 2091.

Premium increases similarly will place pressure 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 will increase to 33 percent of the average Social Security benefit by 2091. These expenses do not include cost-sharing under Part A.

The 2017 Medicare Trustees Report projects that total SMI spending will continue to grow faster than GDP, increasing from 2.1 percent of GDP in 2016 to 3.1 percent of GDP in 2030, and to 3.7 percent of GDP in 2091.

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, higher physician updates in the long range, and assuming no savings from IPAB. SMI spending would increase from 2.1 percent of GDP in 2016 to 3.2 percent of GDP in 2030, and to 5.4 percent of GDP in 2091.

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. Because Medicare spending is 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.

Table 1: Total Medicare Expenditures as a Percent of GDP

Calendar Year	2017 Report	2017 Alternative Projection
2016	3.6	3.6
2020	3.9	3.9
2030	5.0	5.2
2040	5.6	6.2
2050	5.6	6.6
2060	5.7	7.1
2070	5.8	7.8
2080	5.8	8.4
2090	5.9	8.9
2091	5.9	9.0

Under current law, Medicare expenditures as a percentage of GDP will grow from 3.6 percent of GDP in 2016 to 5.9 percent of GDP in 2091. Under the CMS Office of the Actuary alternative scenario, however, total Medicare expenditures would increase to 9.0 percent of GDP in 2091.

Conclusion

The Affordable Care Act (ACA), enacted in 2010, includes provisions designed to reduce Medicare costs, increase Medicare revenues, and develop new health care delivery systems and payment models that improve health care quality and cost efficiency.⁴ Additional steps need to be taken, however, to address the long-term financial challenges to Medicare.
 
The HI trust fund is projected to be depleted in 2029, and Medicare spending will continue to grow faster than the economy—increasing the pressure on beneficiary household budgets and the federal budget and threatening the program’s sustainability.
 
In addition, Medicare’s financial challenges could be more severe than projected in the report. The report’s Medicare spending projections are considered understated to the extent that the ACA’s provisions for downward adjustments in non-physician provider payment updates to reflect productivity improvements and long-range physician payment updates being held below physician costs are unsustainable in the long term. If Medicare projections are calculated using assumptions that the productivity adjustments are phased down and physician updates are more in line with their costs, Medicare’s financial condition is shown to be even worse than under the projected baseline.

The American Academy of Actuaries’ Medicare Subcommittee has significant concerns about Medicare’s financing problems, and strongly recommends that policymakers implement changes to improve Medicare’s financial outlook.

We concur with the 2017 conclusions of the trustees when they say:


And we wish to underscore the need for this call for action.

1.

Compared to the 2016 report, the report for 2017 estimates slightly higher future cost increases for Part B benefits and slightly lower cost increases for Part D benefits. In addition, the Part B projection reflects the impact of a “hold harmless” provision that limited 2017 premium increases for many beneficiaries.