The 2006 Medicare Trustees Report issued on May 1, 2006 shows Medicare’s financial outlook declined slightly, compared to last year’s estimate. With continued growth in Medicare program expenditures and the retirement of the “baby boom” generation, Medicare faces growing strains on its financing sources.
Controlling health care costs while supporting high-quality care that prevents costly disease complications and unnecessary costs is critical to putting Medicare on a steady path to long-term fiscal sustainability. “We are implementing steps to strengthen Medicare and keep it up-to-date for future generations,” said Centers for Medicare & Medicaid Services Administrator Mark B. McClellan, M.D., Ph.D.
As required by MMA, the Trustees Report presents a unified summary of Medicare’s overall projected expenditures and dedicated revenue sources, and the general revenue that is required to fill the gap between spending and dedicated revenue. Based on this unified approach, the Trustees Report projects that the difference between outlays and dedicated revenues is expected to exceed 45 percent of total Medicare expenditures in 2012. This falls within the first 7 years of the projection (2006-2012) period, triggering a determination of “excess general revenue Medicare funding”—the first time that such a determination has been required under the MMA. If a second such determination is made in next year’s Trustees Report, then a “Medicare funding warning” would be made. Such a warning would require the President to propose legislation to address the issue in the next Budget, and Congress would be required to consider the proposal on an expedited basis.
In 2005, Medicare provided coverage to 42.5 million people, spending $330 billion on benefits. These benefit payments are funded from two trust funds—the Hospital Insurance (HI) trust fund and the Supplementary Medical Insurance (SMI) trust fund. Taken together, total expenditures from the HI and SMI trust funds are projected to increase at a significant pace in the absence of further reforms. Total Medicare expenditures are estimated to be 3.2 percent of gross domestic product (GDP) in 2006, reaching 11.0 percent in 2080. These increases reflect growth in medical prices and the volume and intensity of services. In addition, the retirement and aging of the “baby boom” generation will also increase expenditure growth rates for Medicare.
The HI trust fund is primarily financed through payroll taxes, plus a relatively small amount of interest, income taxes on Social Security benefits, and other revenues. In the report released today, the HI trust fund is projected to be exhausted in 2018, two years earlier than estimated in last year's report. The change in the solvency date results from somewhat higher actual spending due to greater growth in utilization than expected in 2005 for skilled nursing facility services, and also upward revisions in short-range assumptions about continuing growth in the volume and intensity of home health and skilled nursing facility services. Part A expenditures on Medicare Advantage were also higher than expected, because of the increasing severity of illness of patients enrolled in Medicare Advantage plans.
As a result of the MMA, the 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. Part B expenditures have grown significantly faster than GDP, leading to increasing general revenue requirements, and this trend is projected to continue. Also, because Part B program expenditures for 2005 were higher than had been projected last year, in part due to payment changes for physicians, trust fund assets at the end of the year will be well below the preferred range for the Part B account. As a result of the higher spending levels and reduced assets, it is expected that the Part B monthly premium rate will need to be increased by roughly 11 percent for 2007, to $98.20.
The Part D account of the SMI trust fund was established in 2004 for the Medicare prescription drug coverage, which began this year. The Part D cost projections in the 2006 Medicare Trustees Report are significantly lower than in the 2005 Report. These lower projected costs reflect slower-than-expected drug spending growth in 2004 and 2005, greater savings from manufacturer rebates and other discounts, utilization management projected to be achieved by Part D plans in the first few years, and preliminary data on actual Part D enrollment for 2006.
As the Trustees note in this report, “These projections demonstrate the need for timely and effective action to address Medicare’s financial challenges. Consideration of such reforms should occur in the relatively near future. The sooner the solutions are enacted, the more flexible and gradual they can be.” The Trustees Report, a press release and fact sheet are available through the links below.
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