Last week, the Medicare Board of Trustees (the Board) released its annual report on the fiscal condition of the Medicare trust funds:  the Hospital Insurance (“HI”) fund, which supports Medicare Part A, and the Supplementary Medical Insurance (“SMI”) fund, which supports Medicare Parts B and D.  The Board reports that although the federal health care reform legislation passed in 2010 has improved the short-term financial health of the funds, the funds still face substantial long-term deficits based on current law and population projections. 

According to the report, the financial status of the HI trust fund actually has improved in the short term as a result of lower expenditures and additional tax revenues caused by the health care reform legislation.  Nevertheless, the Board estimates that HI expenditures will continue to exceed income, as they have since 2008, until the fund is exhausted in 2024, five years earlier than predicted a year ago.

The Board states that if health care reform is to have a long-term effect on the sustainability of the Medicare Part A program, future downward adjustments to payment increases for all categories of Part A providers will be necessary.  According to the Board, however, “[w]ithout fundamental changes in today’s health care delivery and payment systems, these reductions would probably not be viable indefinitely into the future and would likely result in HI payment rates that would eventually become inadequate to compensate providers for their costs of treating beneficiaries, with adverse implications for beneficiary access to care.”

The Board found that the SMI trust fund appears adequately financed through the next ten years because premium and general revenue for the Part B and Part D programs are reset each year to match expected costs.  However, Part B and D expenditures have increased over the last five years by an annual average of 6.9 percent and 9.7 percent, respectively.  Part B expenditures were 1.5 percent of GDP in 2010 and are projected to grow to 2.4 percent by 2085.  The Board expects Part D expenditures to increase from 0.4 percent of GDP to 1.7 percent by 2085.  Even though the SMI trust fund maintains a balanced annual budget, the Board found that the fund’s financing would have to grow more quickly than the overall economy to match the expected growth of long-term expenditures under current law.

Medicare expenditures totaled $523 billion in 2010.  The Board report states that future expenditures projected under current law are likely to increase at a faster pace than either workers’ earnings or the overall economy.  By 2085, the Board predicts that Medicare expenditures will increase from 3.6 percent of GDP to 6.2 percent.  According to the Board, “We believe that prompt action is necessary to address both the exhaustion of the HI trust fund and the anticipated excess growth in HI, SMI Part B, and SMI Part D expenditures.”

The “2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds” can be found here.