Medicare Trustees Forecast Bleak Future for Program

April 24, 2012

April 24, 2012 — The trustees of the Medicare program yesterday released their annual report in which they gave readers the choice of 3 different sets of numbers — bleak, bleaker, and bleakest — about the financial future of the budget-breaking program.

And do not count on the bleak numbers materializing, the trustees say. The outlook could go from bad to worse, they explain, if the federal government backs off from its current game plan to squeeze reimbursement rates for physicians and hospitals. Once again, the notorious sustainable growth rate formula (SGR) insinuates itself in Medicare math.

The scariest part of the annual report is its prediction — repeated from last year — that the Medicare Part A trust fund covering hospital care will run out of money in 2024. The so-called Supplementary Medical Insurance (SMI) trust fund for Medicare Part B, which covers physician services, and Medicare Part D, for prescription drugs, does not face this cliff because of how it is structured. However, Part B and Part D costs will continue to grow faster than the economy, straining the government's ability to pay them. The future prospects of Medicare Part C, also known as Medicare Advantage, are somewhere in between, because it draws money from both the endangered hospital trust fund and the SMI trust fund.

The Medicare trustees, who include Health and Human Services Secretary Kathleen Sebelius, Center for Medicare and Medicaid Services (CMS) Acting Administrator Marilyn Tavenner, and Secretary of the Treasury Timothy Geithner, write that even the best-case scenario for the program dictates prompt action to curb runaway costs.

"The sooner solutions are enacted, the more flexible and gradual they can be," they write. "Congress and the executive branch must work closely together with a sense of urgency."

The Obama administration spotlighted good news in the numbers. In a statement released yesterday, CMS credited cost savings from the Affordable Care Act (ACA) with extending the solvency of the Medicare hospital fund from 2016 to 2024. Likewise, it says the ACA will ease pressure on the SMI trust fund. CMS issued a separate analysis based on the trustees' report showing that the ACA will save Medicare $200 billion through 2016.

"Medicare's Actual Future Costs Are Highly Uncertain"

Any positives in the trustees' report, such as savings enabled by the ACA, come with a caveat the size of an elephant on steroids. "Medicare's actual future costs are highly uncertain," the trustees write.

That is why the trustees' report contains 3 different financial projections. The most hopeful one is merely bleak. The trustees call it their current-law projection because it is based on laws now in place, such as the ACA.

In this best-case scenario, the hospital Part A trust fund — its savings account, so to speak — empties out in 2024.

Part A insolvency does not mean that Medicare would stop paying for inpatient care, because a constant stream of Medicare taxes and beneficiary premiums flows into the fund. In 2011, Part A revenue amounted to $229 billion. It was not enough to cover $257 billion in expenditures that year, so Medicare had to take roughly $28 billion out of the trust fund to make ends meet. That left the fund with $244 billion at the end of 2011.

In 2024, with the trust fund depleted by continual deficit dipping, there will only be the current revenue stream for Part A costs. The trustees estimate that it will cover 87% of them in 2024 and 67% in 2050, which will translate into lower hospital reimbursement.

Meanwhile in the current-law projection, the SMI trust fund for Medicare Part B and Part D rolls forward, financed through congressional appropriations and beneficiary premiums. Because this revenue stream is reset each year to keep up with rising costs, the fund does not face an insolvency crisis. However, the trustees write that this financing "would have to increase faster than the economy to match expected expenditures." Over the next 75 years, this fund's share of gross domestic product (GDP) would double from 2% to 4%.

Total Medicare spending continues to rise over the coming decades in the current-law projection, but not as steeply as it would have absent the ACA. By 2040, Medicare spending will account for 6% of the GDP compared with 3.7% in 2011. At that point, the cost curve flattens considerably, with Medicare outlays increasing to just 6.7% of GDP by 2085.

Overriding SGR Cuts Worsens Medicare Outlook

Of the 3 fiscal projections in the Medicare annual report, the current-law projection is the least likely to come true because it assumes 3 huge cost savings that appear iffy, the trustees write.

The first of these assumed cost savings is a Medicare pay cut for physicians scheduled for January 1, 2013, that will top 30%. It is mandated by Medicare's SGR formula, created by the Balanced Budget Act of 1997 to set physician reimbursement. Organized medicine warns that if the cut goes through, physicians will abandon the program en masse and leave seniors without medical care.

"It is a virtual certainty that lawmakers, cognizant of the disruptive consequences of such a sudden sharp reduction in payment, will override this reduction just as they have every year since 2003," the trustees write. The Congressional Budget Office has put the cost of repealing the SGR at more than $300 billion over 10 years, which essentially represents what the government expects to save in the current-law projection.

The other 2 cost-saving assumptions spring from the ACA, a law facing a possible repeal by the Supreme Court. The healthcare reform law lowers payments to a wide array of nonphysician providers such as hospitals, skilled nursing facilities, and ambulatory surgery centers to reflect anticipated gains in productivity, such as those achieved through computerization and smarter work processes, that lower provider costs. In other words, the government expects hospitals and the like to become as lean and mean as any other business out there and able to subsist on lower payment rates. The ACA will peg Medicare rates to the rate of productivity improvement in the economy at large. Expected savings: More than $233 billion through 2019, according to CMS Chief Actuary Richard Foster.

Like others, the trustees wonder whether nonphysician providers can wring several hundred billion dollars more in costs from their operations. "The trustees believe that this outcome, while plausible, will depend on the achievement of unprecedented improvements in healthcare provider efficiency," they write.

In addition, the ACA created the controversial Independent Payment Advisory Board (IPAB) to control Medicare costs. The IPAB will advise Congress on ways to curb the per capita growth of Medicare spending if it exceeds growth rate targets set by the law. The IPAB's proposals automatically take effect unless Congress enacts alternative measures that achieve the same level of savings.

Organized medicine has loudly denounced the IPAB as an unaccountable collection of bureaucrats that will do as much damage to physician reimbursement as the SGR formula. The Republican-controlled House has already voted to repeal the IPAB, but the Democrat-controlled Senate is not expected to follow suit, and President Barack Obama would like to see the cost-control mechanism strengthened. Of course, the November election could increase the political odds of the IPAB's demise.

The ACA — Part of the Solution or the Problem?

In light of these uncertain cost savings, the trustees set forth 2 alternatives to the current-law projection of Medicare finances.

The first alternative projection assumes that Congress will block any SGR-triggered cuts to physician reimbursement, putting the cost curve on a steeper path. Total Medicare spending would increase to 6.5% of GDP by 2040 and 7.8% in 2085, as opposed to 6% and 6.7%, respectively, under the current law-projection.

The cost curve becomes even steeper under the second alternative projection. It factors out not only the massive physician pay cut but also the IPAB and decreases in nonphysician provider rates based on anticipated but hardly guaranteed productivity gains. Here, Medicare spending reaches 7% of GDP in 2040 and 10.3% in 2085.

The response of the Obama administration to the trustees' various forecasts was somber but hopeful. "The trustees' report tells us that while Medicare is stable for now, we have a lot of work ahead of us to guarantee its future," said CMS Acting Administrator Marilyn Tavenner. "The Affordable Care Act is giving CMS the ability to do this work."

Obama's Republican opponents also agreed that the trustees' report is a call to action, but characterized the ACA as part of the Medicare problem, not part of its solution.

"The idea that Obamacare will save Medicare would be laughable if the healthcare of millions of seniors was not at stake," Rep. John Fleming, MD (R-LA), a member of the GOP Doctors Caucus, said yesterday. "The administration may spin today's report to justify its do-nothing approach to Medicare reform, but the fact is Medicare remains on an unsustainable path."

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