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Analysis of Financial Statements & Stewardship Information

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Financial Condition – What is Our Financial Picture?

The following chart summarizes trend information concerning components of our financial condition -- assets, liabilities, net position, and net cost of operations.  The consolidated Balance Sheet presents a picture of our financial condition as of September 30, 2007, as compared to FY 2006, and displays assets, liabilities and net position. Another component of our financial picture is our consolidated Statement of Net Cost.  Each of these components is discussed below, and in Section II of this document.

 

FINANCIAL CONDITION (Dollars in Billions)

FY 2003 Restated

FY 2004

FY 2005

FY 2006

FY 2007

Increase (Decrease)

% Change

Total Assets

$389.3

$403.8

$428.5

$513.9

$503.8

$(10.1)

(2.0%)

Total Liabilities

$63.2

$66.8

$71.0

$78.4

$81.9

$  3.5

4.5%

Net Position

$326.1

$337.0

$357.5

$435.5

$421.9

$(13.6)

(3.1%)

Net Cost of Operations

$510.4

$547.2

$581.3

$623.9

$664.6

$  40.7

6.5%

Assets—What Do We Own and Manage?

Assets represent the amounts that we own or manage.Our assets were $503.8 billion at the end of FY 2007.  This represents a decrease of $10.1 billion (-2.0 %) below the prior year's assets.  This decrease is largely attributable to the net effect of a decrease of $45.1 billion in Fund Balance with Treasury and an increase of $23.9 billion in Net Investments.  The Fund Balance with Treasury decrease of $45.1 billion resulted primarily from decreases of $19.9 billion in Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) and $30.1 billion in HHS appropriations.  The Net Investments increase of $23.9 billion was largely related to growth in the Medicare trust funds for HI and SMI.  Funds not currently needed to pay Medicare benefits and related expenses are held in separate trust funds and invested in U.S. Treasury securities.

Fund Balance with Treasury and Net Investments together comprise 95.4 percent of total assets.  The remaining assets (4.6%) consist of Accounts Receivable, Cash and Other Monetary Assets, Inventory and Related Property, General Property, Plant, and Equipment, and Other Assets.  

 

ASSETS
(Dollars in Billions)

Restated
FY 2003

FY 2004

FY 2005`

FY 2006

FY 2007

Increase (Decrease)

%
Change

Fund Balance with Treasury

$  86.3

$ 97.7

$99.6

$159.9

$114.8

$(45.1)

(28.2%)

Investments, Net

$282.4

$287.9

$300.7

$342.0

$365.9

$ 23.9

7.0%

Other Assets

$ 20.6

$ 18.2

$ 28.2

$  12.0

$  23.1

$ 11.1

92.5%

Total Assets

$389.3

$403.8

$428.5

$513.9

$503.8

$(10.1)

(2.0%)

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Liabilities – What Do We Owe?

FY 2007 Liabilities by Type: accounts payable, other liabilities, accrued grant liability, federal employee and veteran benefits, and entitlement benefits due and payable.

Our liabilities at the end of FY 2007, or amounts that we owe as a results of past transactions or events, were $81.9 billion.  This represents an increase of $3.5 billion, or 4.5 percent above the prior year's liabilities.  Entitlement benefits due and payable to the public from the Medicare and Medicaid insurance programs represent more than 75 percent of the liabilities.  Of the $.3 billion  increase in FY 2007 entitlements, $.8 billion was attributed to the Medicare program, $.2 billion was attributed to the Medicaid program, and ($.7) billion was attributed to other entitlement programs.  Of the $.9 billion increase in Federal Employee and Veterans' Benefits, the majority relates to the Public Health Service Commissioned Corps Pension Liability, which is determined by an actuary under the Commissioned Corps' defined noncontributory benefit plan authorized under Public Law 78-410.  The increase in Other Liabilities is attributed primarily to an increase in CMS' contingent liabilities.  Contingent liabilities are accrued where a loss is determined to be probable and the amount can be estimated.  It is important to note that no liability has been recognized on HHS' balance sheet (nor were costs included in the Statement of Net Cost) for future payments to be made to current and future program participants beyond the existing Incurred but Not Reported Medicare claim amounts as of September 30, 2007.  This is because Medicare is accounted for as a social insurance program rather than a pension program, consistent with Federal accounting standards.


LIABILITIES
(Dollars in Billions)

FY 2003 Restated

FY 2004

FY 2005

FY 2006

FY 2007

Increase (Decrease)

% Change

Accounts Payable

$1.2

$1.4

$1.1

$1.2

$1.0

$(.2)

(16.7 %)

Entitlement Benefits Due and Payable

$48.1

$49.2

$53.8

$61.2

$61.5

$.3

.5%

Accrued Grant Liabilities

$3.8

$3.8

$3.8

$3.8

$3.9

$.1

2.6%

Federal Employee & Veterans Benefits

$6.9

$7.2

$7.2

$7.5

$8.4

$.9

12.0%

Other Liabilities

$3.2

$5.2

$5.1

$4.7

$7.1

$2.4

51.1%

Total Liabilities

$63.2

$66.8

$71.0

$78.4

$81.9

$3.5

4.5%

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Ending Net Position—What Have We Done over Time?

Our net position represents the difference between assets and liabilities. Changes to our net position are impacted by changes that occur within cumulative results of operations and unexpended appropriations.  At the end of FY 2007, HHS' Net Position shown on the Consolidated Balance Sheet and the Consolidated Statement of Changes in Net Position was $ 421.9 billion, a decrease of $ 13.6 billion (3.1 percent) from the previous year.  This was due to the net effect of an increase of $29.2 billion in cumulative results of operations and a decrease of $42.8 billion in unexpended appropriations.  Net Position is the sum of the cumulative results of operations since inception and unexpended appropriations, those appropriations provided to HHS that remain unused at the end of the fiscal year.

Net Cost of Operations—What Are Our Sources and Uses of Funds?

Our net cost of operations represents the difference between the costs incurred by our program less receipts.  We receive the majority of funding through Congressional appropriations and reimbursement for the provision of goods or services to other Federal agencies.  HHS net cost of operations during FY 2007 totalled $664.6 billion.  This represents an increase of $40.7 billion, or 6.5 percent more than FY 2006 costs of $ 623.9 billion.  The Medicare program accounted for the majority of the increase for FY 2007.  HHS component gross cost for FY 2007 increased $41.4 billion over FY 2006 and exchange revenues increased $.7 billion, largely due to an increase in Medicare premiums collected from beneficiaries.  The largest share of increase in gross costs is attributed to the Centers for Medicare & Medicaid Services, where costs increased $38.2 billion.

The following two charts depict HHS' net cost of operations by HHS component and by Major Budget Function.

 

FY 2007 Net Cost by HHS Agency (responsibility segment): NIH, all others, ACF, CMS, all others includes AoA, AHRQ, CDC, FDA, HRSA, IHS, OS, and SAHMSA. FY 2007 Combined Net Cost by Budget Functional Classification: income security, education, training, and social services, and medicare.

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Budget Resources – What Were Our Resources and the Status of Funds?

The Combined Statement of Budgetary Resources provides information on how budgetary resources were made available and their status at the end of the year.  Total resources of $981.3 billion for FY 2007 were an increase of $28.5 billion over FY 2006, a 3.0 percent increase.  FY 2007 obligations of $956.7 billion were $71.8 billion over FY 2006 obligations, a 8.1 percent increase.  Resources at year end were $24.7 billion of which $7.3 billion was not available for expenditure.  Total net outlays of $671.9 billion, cash disbursed for the Department's obligations, increased $57.2 billion (9.3 percent) over FY 2006 outlays.  Outlays for Medicare (excluding Part D) and Medicaid combined were $19.9 billion more than in FY 2006 and outlays for all other HHS programs in FY 2007 were $37.3 billion more than the previous year. The greater difference was in “otherâ€� HHS programs, which includes Part D. Budgetary resources provided were 3.0 percent greater, obligations incurred increased 8.1 percent and outlays increased 9.3 percent. 

Social Insurance

The Statement of Social Insurance is presented as a basic financial statement, in accordance with Statement of Federal Financial Accounting Standards No. 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessments.  This Statement presents the 75-year actuarial present value of the income and expenditures of the Hospital Insurance and Supplementary Medical Insurance trust funds.  Future expenditures are expected to arise from the formulas specified in current law for current and future program participations.  These projections are considered to be important information regarding the potential future cost of the Medicare program.

Medicare Trust Funds

The Medicare program is by far the largest of all HHS programs.  At the end of FY 2007, approximately $363.2 billion or 99.3 percent of HHS investments were in U.S. Treasury securities to support the Medicare trust funds.  Established in 1965 as Title XVIII of the Social Security Act, Medicare was legislated as a complement to Social Security retirement, survivors, and disability benefits, and originally covered people age 65 and over.  In 1972, the program was expanded to cover the disabled, people with end-stage renal disease requiring dialysis or kidney transplant, and people age 65 or older who elect Medicare coverage.  Medicare is a combination of four programs:  HI, SMI, Medicare Advantage, and Medicare Prescription Drug Benefit.  Since 1966 Medicare enrollment has increased from 19 million to approximately 44 million beneficiaries.

In December 2003, the President signed the Medicare Prescription Drug, Improvement & Modernization Act to improve and modernize the Medicare program, including the addition of a drug benefit (Part D).  The Medicare Prescription Drug program represents the largest change to the Medicare program since its enactment in 1965, and FY 2007 is the first year to reflect a full year of costs.

Hospital Insurance

HI Medicare Benefit Payments: home health agency, inpatient hosptial, skilled nursing facility, hospice, and managed care. Source: CMS/OACT.

Hospital Insurance or Medicare Part A usually is provided automatically to people age 65 and over who have worked long enough to qualify for Social Security benefits and to most disabled people entitled to Social Security or Railroad Retirement benefits.  The program pays for in-patient hospital, skilled nursing home, home health, hospice care, and managed care and is financed primarily by payroll taxes paid by workers and employers.  The taxes paid each year are used mainly to pay benefits for current beneficiaries.  Funds not currently needed to pay benefits and related expenses are held in the Hospital Insurance trust fund, and invested in U.S. Treasury securities. 

Based on estimates from the Mid-Session Review of the FY 2008 President's Budget, the majority of outlays relate to inpatient hospital spending (63%), managed care (19%), and skilled nursing facility (10%). During FY 2007, Hospital Insurance benefit outlays grew by 10.7 percent.  The outlays are projected to increase by 8.5 percent to $4,610 per enrollee.

Under the Trustees' intermediate set of assumptions, and as displayed in the Statement of Social Insurance, the Hospital Insurance trust fund will incur an actuarial deficit of nearly $12,292 billion ($12.3 trillion) over the 75-year projection period, as compared to $11,290 billion ($11.3 trillion) in the FY 2006 financial report.  In order to bring the HI trust fund into actuarial balance over the next 75 years, very substantial increases in revenues and/or reductions to benefits would be required.

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Supplementary Medical Insurance

Supplementary Medical Insurance, or Medicare Part B and Medicare Part D, is available to nearly all people age 65 and over, the disabled, and people with end-stage renal disease who are entitled to Part A benefits.  The program pays for physician, outpatient hospital, home health, laboratory tests, durable medical equipment, designated therapy, Medicare prescription drug discount care enrollment fees, managed care, prescription drug expenses for Transitional Assistance beneficiaries, and other services not covered by Hospital Insurance.  The coverage is optional and beneficiaries are subject to monthly premium payments.  Approximately 94 percent of Hospital Insurance enrollees elect to enroll in Supplementary Medical Insurance.

The program is financed primarily by transfers from the general fund of the U.S. Treasury and by the monthly premiums.  As with Part A, funds not needed to pay benefits and related expenses are held in the Supplementary Medical Insurance trust fund and invested in U.S. Treasury securities.

The chart below displays Supplementary Medical Insurance benefit outlays based upon the Mid-Session review of the FY 2008 President's Budget. Based on these estimates, the benefit outlays grew by 42.9 percent during FY 2007.  During FY 2007, the benefit outlays per enrollee were projected to increase 41.3 percent to $5,560 per enrollee. 

 

SMI Medicare Benefit Payments: DME, lab hospital, home health, managed care, other, and physician.

As reported in the Required Supplementary Information section of this report that income, including interest on U.S. securities, is very close to expenditures.  Expenditures include benefit payments as well as administrative expenses.  This is because Supplementary Medical Insurance funding differs fundamentally from Hospital Insurance. Parts B and D are not based on payroll taxes, but rather on a combination of monthly beneficiary premiums and income from the U.S. Treasury.  Both are established annually to cover the following year's expenditures, thus B and D accounts are automatically in financial balance every year, regardless of future economic and other conditions.

Under the Trustees' intermediate set of assumptions, and as displayed in the Statement of Social Insurance, the situation over the 75-year period is entirely different from Hospital Insurance projections due to the financing explained above.  The projected future expenditures for Part B will be $18,221 billion ($18.2 trillion), or $0.6 trillion more than the FY 2006 projection.  The projected future expenditures for
Part D will be $10,766 billion ($10.8 trillion), or $.5 billion more than the FY 2006 projection. A substantial level of uncertainty surrounds these projections pending the availability of sufficient data, especially on Part D expenditures, to help establish a trend baseline.  Also, the reader must take into consideration that estimates have been made on the assumption that the trust fund will continue to operate without change in current law.

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Limitations of the Principal Financial Statements

The principal financial statements in Section II of this report have been prepared to report the financial position and results of operations of HHS, pursuant to the requirements of 31 U.S.C. 3515 (b).  While the statements have been prepared from the books and records of HHS in accordance with generally accepted accounting principles for Federal entities and the formats prescribed by the Office of Management and Budget, the statements are in addition to the financial reports used to monitor and control budgetary resources, which are prepared from the same books and records.  The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity.

 

Date of Report: November 15, 2007


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