Today, the Medicare Trustees released their annual report on the solvency of the Medicare program, in which they reported the Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2024 the same year determined in last year’s Medicare Trustees’ Report.  What does this mean for the Medicare program and stakeholders?  Below are a few questions to help understand today’s announcement.

What does “HI Trust Fund” mean?

The Medicare program is financed through two trust funds – the HI Trust fund (funded primarily through payroll taxes) and the Supplementary Medical Insurance (SMI) Trust fund (funded through general revenues and beneficiary premiums).  The HI Trust fund pays for Medicare Part A, which pays for hospital, home health, and skilled nursing services.  The SMI Trust Fund pays for Medicare Part B (predominantly physician and outpatient services) and Part D (prescription drugs).

Does today’s announcement mean Medicare will be bankrupt in 2024?

No.  The Trustees report estimates the HI Trust Fund (Part A) will remain solvent until 2024.  The HI Trust Fund will continue to receive revenue (in the form of premiums) even after 2024, so the program will not be bankrupt (e.g., no longer be able to pay for any medical claims).  Rather, once the program becomes insolvent, there will not be enough funds to pay for all the Trust Fund’s obligations.  Because the SMI Trust Fund (Parts B and D) are financed through premiums and general revenues, technically they cannot become insolvent.

How many people have Medicare?

In 2011 Medicare covered approximately 48.7 million people – approximately 40.4 million people aged 65 and older, and 8.3 million disabled individuals.  In 2011 total expenditures (costs) for the Medicare program were $549.1 billion and total income was $530 billion.

How certain are the Trustees that the HI Trust Fund will become insolvent in 2024?

The Trustees are required to issue a report based on projections, but it’s important to keep in mind these are only estimates based on current law.  For example, the Trustees assume as part of their projections a nearly 30 percent reduction in reimbursement to physicians as called for under the sustainable growth rate(SGR) formula.  Every year since 2003 Congress acts to prevent these payment cuts from taking place.  In addition, the Affordable Care Act (ACA) called for a number of Medicare cuts to various providers.  If Congress acts to prevent these cuts from taking place, that could impact the solvency projections.

Now that the report has been released, do the Administration and/or Congress have to act?

As part of their report, the Trustees are required to estimate a ratio of the extent to which program outlays (expenditures) exceed dedicated revenue.  If in two consecutive years, this ratio is estimated to exceed 45 percent within seven years, then a “Medicare funding warning” is issued.  This year, the Trustees issued a “Medicare funding warning” for the seventh consecutive year.  Within 15 days after the date of the budget submission for the succeeding year (e.g., within 15 days after he submits his FY2014 Budget) the President is required to submit a proposed legislation to Congress to address the warning.  There is no requirement that Congress act on the President’s proposal.

Practically speaking the issuance of the Medicare Trustees’ report highlights the need for Congress and the Administration to begin developing proposals to extend the life of the HI Trust Fund though it is unlikely that major Medicare changes will be enacted in an election year.