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Everybody Just Relax! Medicare Isn’t In Any Financial Trouble

When a report comes out this spring about the solvency of the Medicare trust fund, everyone’s hoping for some more good news.

That was the case in 2013 when the Centers for Medicare & Medicaid Services (CMS) projected that the trust fund that finances Medicare’s hospital insurance coverage will remain solvent until 2026. That’s two years longer than what was projected in 2012. The solvency date changes from year-to-year depending on economic forecasts, health care costs, demographic data and revenues coming into the program. “I don’t know what will happen in this year’s report, but that typically has been the pattern over the past couple of years,” says Brian Kessler, an economist with Moody’s Analytics. “Every year, it gets extended out a little more.

The reason for the improvement is lower health care costs since the US economy slowed. The slowdown in spending on Medicare Part A, which pays for hospital, home health following hospital stays and skilled nursing facilities, has some suggesting providers are being more judicious in providing services. Not only was Part A spending down but also Medicare Advantage costs have been down as well because of the implementation of the Affordable Care Act.

Costs are expected to continue to grow slowly in the future because of those controls in the Affordable Care Act. Between 2010 and 2012, the amount spent on Medicare beneficiaries grew at 1.7 percent—lower than the growth in the Consumer Price Index. That may be offset in the future by 10,000 baby boomers turning 65 every day and becoming eligible for Medicare.
This question of a solvency date is an accounting question, and it’s not an insignificant issue, but I don’t think anybody thinks the Medicare program will go away if we reach this date in 2026,” says Juliette Cubanski, the associate director of Program on Medicare Policy at the Kaiser Family Foundation. “It doesn’t mean Medicare will stop paying benefits. What it does mean is that according to those projections there won’t be enough money coming into the program to fully pay for hospital benefits that are expected to be delivered that year.
For the Medicare hospital trust fund in 2026 that would mean a cut in benefits to about 87 percent of the full level if Congress didn’t act.

In 2012, Medicare covered 50.7 million people: 42.1 million people aged 65 and older, and 8.5 million people with disabilities, according to CMS. About 27 percent of these beneficiaries have chosen to enroll in Medicare Part C private health plans that contract with Medicare to deliver Part A and Part B health services. Medicare Part B pays for physician, outpatient hospital and home health services. Medicare Part D covers prescription drugs. “This question of solvency relates to only the part of the program that pays for hospital benefits,” Cubanski says. “The other parts of the program are financed on an ongoing basis, and therefore there’s no concern financing the care for physician services or prescription drugs.” The one downside in the calculations is how revenues have come in lower than expected. Total expenditures in 2012 were $574.2 billion. Total income was $536.9 billion. Payroll taxes cover less than 40 percent of the program costs, with the highest at 68 percent in 1980. The Medicare tax rate is 1.45 percent on all wages, paid by both employees and workers. In addition to payroll taxes, the rest of the Medicare contributions come from the general federal revenues and premium payments. “One of the things that’s misleading is there’s a strong focus on the trust fund, and that’s an important issue, but the trust fund is less than half of all Medicare funding,” Kessler says. “The majority comes from the general fund or from premiums of individuals for their coverage. When we get to 2026 or 2040 or whatever date, the surpluses will be replaced from the general fund.

Kessler said the further out the Medicare trust fund is extended the easier it is for policy makers to delay making changes, but it’s the proximity to insolvency date that has led to its extension.

Besides the Affordable Care Act reducing Medicare spending, a new .9 percent surcharge on higher-income wages is fed into the trust fund. Pilot programs encourage cost savings and the Budget Control Act of 2011 cut Medicare reimbursement rates by 2 percent. That will continue until 2023, Kessler says.

If the economy improves and there’s an infusion of payroll taxes into the trust fund, that will push back the insolvency date, Cubanski says. That will contrast with the more people that will continue to enter Medicare every year and increase health care spending.

This has been a concern for a long time that Medicare over the long run is covering more and more people but at the same time fewer people are actively working and paying payroll taxes into the system,” Cubanski says. “That’s something many policy makers are paying attention to and are concerned about. There’s a lot of moving parts and hard to predict with confidence where Medicare spending will be in the future.

The Obama Administration’s approach to Medicare savings would trim payments to drug companies, hospitals and other service providers. It has proposed having Medicare recipients pay higher premiums over time, based on their incomes. In addition, Obama wealthy taxpayers pay a higher Medicare payroll tax. There’s no support for raising the Medicare tax rate. There have been proposals to charge beneficiaries more for services and others have some Republicans have touted changing Medicare into a voucher system in which healthcare is delivered through private plans, but that proposal hasn’t gotten anywhere. Kessler says more steps will be taken to help reduce the cost of care and make healthcare delivery more efficient and suggests policymakers will act to make it work.

The bottom line is whatever is going to happen with Medicare, the funding will be there,” Kessler says. “That has been the case since the program was established.

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