News Release

Medicare Trustees Release Annual Report

The Medicare Trustees Report issued today shows that the financial condition of Medicare's hospital fund has improved slightly and the report also highlights the importance of using the new Medicare law to help reduce the spending growth in other parts of Medicare.

HHS Secretary Mike Leavitt said the report shows the importance of new tools added to Medicare that strengthen and improve Medicare, and their key role in addressing Medicare's fiscal health. The improvements include the addition of prescription drug coverage, preventive benefits and new "pay for performance" initiatives.

"Getting Medicare's benefits in line with modern medical care was the first step in dealing with Medicare's long-term financial viability," Secretary Leavitt said. "The law that created those new benefits also gives us new tools to provide better care more efficiently, and we are using those tools."

In the annual report delivered today, the Medicare trustees found that overall the program's financial outlook has improved slightly compared to last year's estimate. The trustees estimate that Medicare's Hospital Insurance (HI) Trust Fund is projected to be exhausted in 2020, one year later than estimated in last year's report. This change results from slightly higher income and slightly lower costs in 2004 than previously estimated. Expenditure growth is estimated to be 6.6 percent per year over the next 10 years.

As a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), the Supplementary Medical Insurance (SMI) component of Medicare is now composed of two parts, Part B and Part D, each with its own separate account within the SMI trust fund. Projected costs for Medicare Part D, which funds Medicare's new drug benefit, are also lower than forecast in last year's Trustees Report, contributing to the improvement in Medicare's overall spending outlook. At the same time, based on recent experience, the report projects increasing costs in the Part B account, which includes coverage for physician visits and outpatient services. Payments for Part B services are expected to grow at an average annual rate of about 6.9 percent over the next 10 years. These increases point to higher future federal funding, beneficiary premiums, and beneficiary co-pays in Medicare's Part B program, the trustees said.

The Centers for Medicare & Medicaid Services (CMS) has a number of initiatives to address the rising costs of Part B, said CMS Administrator Mark B. McClellan, M.D., Ph.D.

"With benefits that for the first time emphasize preventing diseases and their complications, Medicare is implementing the strongest foundation possible for a sustainable program that provides up-to-date treatments to our beneficiaries," Dr. McClellan said. "It made no sense to treat costly complications of diseases but not help seniors with the cost of prescription drugs that could prevent these conditions -- and now we're using these new benefits to make the health care system more efficient. The Medicare law allows us to implement new steps to get the most value from Medicare spending, by keeping patients healthier and avoiding costly complications."

Reforms and initiatives designed to address Medicare's financial condition include:

• Preventive benefits, including the new "Welcome to Medicare" physical, which will help those beneficiaries who are new to Medicare address health problems before they become costly.
• A Medical Health Support initiative, designed to help chronically ill Medicare beneficiaries reduce their health risks. Chronic illnesses such as diabetes and congestive heart failure account for a large percentage of Medicare's costs.
• A stronger Medicare Advantage program, where beneficiaries get even more options to better manage chronic conditions and where health plans have stronger financial incentives to help improve coordination and reduce costs for chronically ill beneficiaries.
• New steps that will use Medicare's new drug coverage as effectively as possible in order to reduce health complications and costs, including electronic prescribing incentives, medication therapy management and a focus on obtaining more evidence about the effectiveness of drug therapies.
• Broad information on generic drug availability under the new prescription drug benefit, which brings down costs for both Medicare and beneficiaries.

Other changes underway to address costs include reforms to Medicare's contracting process and requiring wealthier Medicare beneficiaries to pay a greater percentage of their Part B coverage.

The accelerated growth in Part B costs -- which results not from new legislation but mainly from more utilization of services like office visits and lab and diagnostic tests -- needs further detailed examination, Dr. McClellan said. "We expect that Medicare's new steps to improve care coordination, prevent disease complications, and reward better performance will help avoid unnecessary Medicare costs," he said. "We are looking closely at the reasons for the Part B cost increases, and we will work with physicians and other health professionals to make sure we are getting the most for rising Medicare spending."

The Medicare trustees are Treasury Secretary and Managing Trustee John W. Snow, Secretary of Health and Human Services Mike Leavitt, Labor Secretary Elaine L. Chao and Social Security Commissioner Jo Anne B. Barnhart. Two other members, the public trustees, are appointed by the President with Senate confirmation. The public trustees are John Palmer and Thomas Saving. They serve four-year terms and represent the general public. Mark B. McClellan, M.D, Ph.D., CMS Administrator, serves as Secretary to the Board of Trustees.

A CMS fact sheet is available at http://www.cms.hhs.gov/media/press/release.asp?Counter=1397.