Medicare trustees paint bleak financial picture

Physician spending will consume an increasing portion of GDP even if pay cuts take effect. Part A will be insolvent in 2024.

By Charles Fiegl — Posted May 23, 2011

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The trustees tasked with keeping an eye on Medicare's finances again warned that it is on an unsustainable fiscal path, with outpatient care eating up a increasingly larger portion of the nation's gross domestic product and the hospital trust fund being exhausted five years sooner than predicted last year.

Members of President Obama's Cabinet unveiled the dire forecasts during a briefing at the Treasury Dept. after the trustees released the report on May 13. Lawmakers, federal officials and health care industry groups responded to the trust fund report with calls for serious entitlement overhauls to save Medicare and Social Security for future generations.

"We should not wait for the trust funds to be exhausted to make the reforms necessary to protect our current and future retirees," Treasury Secretary Timothy F. Geithner said. "Larger, more difficult adjustments will be necessary if we delay reform."

The 2011 annual report states:

  • Total Medicare costs will grow to 5.2% of GDP by 2030, up from 3.6% in 2010.
  • Supplementary medical insurance costs, which include physician care and prescription drug costs, will rise to 3.1% of GDP by 2030 and 4.1% by 2085, up from about 2% in 2010.
  • The projected date of the hospital insurance trust fund exhaustion is 2024, compared with 2029 in last year's annual report.

The American Medical Association said the latest trustees report left no doubt that now is the time to repeal the sustainable growth rate formula that helps determine physician pay. Under current law, the SGR would lead to physician rates dropping considerably over the long term to about 40% of what private insurers are expected to pay in 2030. Medicare payments currently average 80% of private insurer rates.

"The longer it takes to reform this system, the greater the cost," said J. James Rohack, MD, AMA immediate past president. "Across-the-board cuts in Medicare do not get to the root of the cost challenge and can hamper patients' ability to receive care. Instead of focusing only on cuts, the ultimate goal should be to achieve better value for our health care spending."

The Association supports a three-step process to reforming the payment system that consists of repealing the SGR, instituting a five-year period of stable physician payments and testing payment models that would be the basis for a new system.

The Part B fund technically cannot become insolvent because it is supported by a combination of general revenues and patient premiums. Part B costs have been growing at about 7% annually, Centers for Medicare & Medicaid Services Actuary Richard Foster said during a May 16 forum at the American Enterprise Institute.

Medicare trustees must assume in their projections that the SGR will result in deep cuts to physician pay, starting with an estimated 29.5% reduction in January 2012. Because Congress almost always steps in to prevent the cuts from taking effect, the trustees warned that their Part B projections probably don't represent the true long-term costs of providing physician care to seniors and disabled people.

"These implications are very likely to be understated to a significant degree, because projected physician payment updates are unrealistically reduced under the current law sustainable growth rate system and because of the significant probability that the productivity adjustments to other Medicare price updates will not be feasible in the long term," the trustees report states.

Total Medicare spending as a percentage of GDP would increase more rapidly if the physician pay formula were repealed, averting the pay reductions. Medicare would consume about 6% of GDP in 2030 and approach 11% of GDP in 2085 if physicians receive annual pay raises based on an economic index that tracks the costs of providing medical care, according to projections from Foster's office.

Focus on the hospital side

The annual release of the Medicare trustees report typically prompts observers to focus on the hospital side of the program because of the prospect that the trust fund supporting Part A will become insolvent.

Exhaustion of the fund does not mean the program will be bankrupt, said Michael Astrue, commissioner of Social Security. Revenues, for instance, still would cover 90% of costs under Part A in 2024, meaning enrollees would continue to receive most of their benefits. But the adverse effect on beneficiaries would worsen over time.

"Under current law, these vitally important programs are on unsustainable paths," said trustee Robert Reischauer, president of the Urban Institute in Washington, D.C. "The sooner policymakers address this problem, the less disruptive the unavoidable adjustments will be and the greater the possibility for adjusting in a way that is balanced, equitable and measured."

Ensuring the future solvency of the Medicare Part A trust fund partially relies on hospitals and doctors becoming more efficient, Foster said. In the 2010 report, changes under the health system reform law led analysts to project trust fund surpluses from 2014 through 2021. The surpluses were replaced with deficits in the 2011 report because of revised assumptions that reflect a slower economic recovery. The Part A fund brought in $2.5 billion, or about 1.4%, less than expected in 2010.

Foster said physicians and hospitals will have a difficult time providing less costly, higher quality care at the levels required to turn the situation around. No health care facility or group of professionals has come close to achieving such efficiencies. That puts lawmakers in a tough spot, Foster said.

"If providers cannot match productivity adjustments and payments lag behind their costs, at some point they will become unable or unwilling to treat Medicare beneficiaries," he said. "And at that point, they would have to drop out of the market, or probably more likely Congress would have to step in and say, 'We can't have access problems for Medicare. We're going to have to override these payment adjustments.' "

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Medicare spending on Part B

Spending on Medicare Part B, which includes physician services, outpatient hospital care, home health services and medical equipment, has grown an average of 7.1% annually over the last five years, according to the 2011 Medicare trustees report. In 2012, spending is projected to drop because of a planned 30% cut to Medicare physician rates.

Year Aggregate benefits Average per
patient benefit
1970 $2.0 billion $101
1975 $4.3 billion $180
1980 $10.6 billion $390
1985 $22.9 billion $768
1990 $42.5 billion $1,304
1995 $65.0 billion $1,823
2000 $88.9 billion $2,381
2005 $149.2 billion $3,754
2010 $209.7 billion $4,786
2011 $224.8 billion $4,984
2012 $217.5 billion $4,668
2013 $230.3 billion $4,781
2014 $248.1 billion $5,000
2015 $263.5 billion $5,165

Source: 2011 Medicare trustees report. Figures for years 2011-15 are estimates. (link)

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Depleting hospital dollars

The insolvency date for the Medicare Part A trust fund has fluctuated from year to year. The date tends to move further away during good economic times because the fund relies on revenues from payroll taxes. Congress also has taken legislative actions to keep the program afloat longer.

Year of
trustees report
Projected year
of insolvency
1990 2003
1991 2005
1992 2002
1993 1999
1994 2001
1995 2002
1996 2001
1997 2001
1998 2008
1999 2015
2000 2025
2001 2029
2002 2030
2003 2026
2004 2019
2005 2020
2006 2018
2007 2019
2008 2019
2009 2017
2010 2029
2011 2024

Source: House Ways and Means Committee

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External links

"2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds," May 13 (link)

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