Medicare gains ground but still in peril

The Medicare Trustees have projected in their annual report that the program's hospital insurance trust fund will remain solvent until 2026, two years later than predicted last year, but with many uncertainties impacting the program, they urge reform.

The Trustees cited a number of contributing factors to the improved outlook, including lower-than-expected spending on hospital coverage in 2012 and lower projected costs for Medicare Advantage.

[See also: Medicare to remain solvent until 2024]

Per-beneficiary Medicare spending growth has also slowed, compared to previous decades, rising at 1.7 percent annually between 2010 and 2012, which is less than increases in the Consumer Price Index. Federal health officials are also projecting more easing of the growth rate as a result of Affordable Care Act programs like accountable care contracting, if they end up working as designed.

At the same time, millions of American baby boomers will be entering the program in the coming decades, some of them with more costly chronic conditions than their parents. In the long term, “the impact of demographic shifts causes the annual deficits to increase rapidly through about 2045,” the Medicare Trustees report projects.

And those projections are “highly uncertain,” considering “that scientific advances will make possible new interventions, procedures and therapies,” the Trustees note. “No one knows whether these future developments will, on balance, increase or decrease costs.”

Projecting Medicare spending and costs into the future is itself an exercise in uncertainty. In the Trustee's annual report for 2009, for example, solvency was predicted through 2029.

In 2012, Medicare covered 50.7 million people, 27 percent of whom are enrolled in Medicare Advantage, combining hospital and medical coverage. Total Medicare expenditures in 2012 were $574.2 billion — while income into the trust fund was $546.9 billion.

Spending has exceeded income every year since 2008, and the Trustee’s report warned, as it has in previous years, that “the fund is not adequately financed over the next 10 years.”

The Medicare hospital insurance trust fund has not met the Trustees’ formal test of “short-range adequacy” since 2003; growth in hospital insurance spending has averaged 5.6 percent annually over the last five years and is projected to grow at an average 3.7 percent rate over the next five.

Meanwhile, the supplemental medical insurance trust fund is “adequately financed” over the next 10 years and beyond, since Medicare Parts B and D are reset each year and cover expected costs. Medicare Part B and Part D costs have grown at a fairly high rate, though, averaging 6.1 percent annual growth over the last five years, the Trustees found, compared to 2.3 percent growth for the U.S. economy. The Trustees are projecting an average growth rate of 5.1 percent for the next five years.

The Trustee’s report assumes that various cost-reduction measures as required by ACA will occur. However, if the healthcare industry fails at payment reform and transitioning to more efficient models of care delivery, and if lawmakers continue to thwart current law assumptions, such as has traditionally happened with the physician payment schedule, there will be trouble.

The Trustees’ 280-page report goes on to detail projected expenditure and revenue scenarios in the long-term – towards the end of this century. Medicare spending currently accounts for about 3.6 percent of the nation’s GDP and, based on an “intermediate set of assumptions,” will grow to 6.5 percent of GDP by 2087, the Trustees project.

But if “lawmakers continue to override the statutory decreases in physician fees, and if the reduced price increases for other health services under Medicare are not sustained and do not take full effect in the long range, then Medicare spending would instead represent roughly 9.8 percent of GDP in 2087.”

While the two-year extension of projected insolvency may be greeted with some cheers, particularly among ACA advocates, the annual report said the trust fund “does not meet either the Trustees’ test of short-range financial adequacy or their test of long-range close actuarial balance” – with projected hospital insurance revenue expected to fall short of expenditures in most future years under current policy scenarios.

“The financial projections in this report indicate a need for additional steps to address Medicare’s remaining financial challenges,” the Trustees said. “Consideration of further reforms should occur in the near future. The sooner solutions are enacted, the more flexible and gradual they can be.”

While still looking to Congress for a long-term fix, the healthcare industry may be greeting the news with a modest amount of optimism, at least in seeing a slowing of spending growth and the insolvency date pushed back two years from 2012’s report, said Thomas Wildsmith, chair of the Medicare steering committee at the American Academy of Actuaries and a senior manager of public policy at Aetna.

Still, “It’s way too soon for us to be doing a victory dance,” he said. “I’m in a position where I will be becoming eligible for Medicare about the time the trust fund is predicted to run out of money. So there are baby boomers who should be reading the report with a certain degree of interest.”

Echoing the Trustees’ recommendations, Wildsmith said he thinks the most palatable fix for Medicare financing would be one sooner rather than later. “If we act now, we’ll have more modest changes. So if you’re 25, you’re 27, you’re 30 years old and you’re concerned about whether Medicare will be there for you, my advice would be to support corrective action now.”