News Release

Medicare Trustees Report Shows Serious Financial Status of Medicare Program

In their annual report, the Medicare Trustees today announced that both the Medicare Hospital Trust Fund and the Supplementary Medical Insurance Trust Fund expenditures are growing faster than the rest of the economy. The Trustees report expenditures were $432 billion in 2007, or 3.2 percent of gross domestic product (GDP), and are projected to increase to nearly 11 percent of GDP in 75 years.

The Trustees report that Medicare’s Hospital Insurance (HI) Trust Fund will become insolvent earlier in 2019 than reported last year. HI expenditure growth is estimated to average 7.4 percent each year over the next 10 years, a higher rate than either Gross Domestic Product (GDP) or Consumer Price Index (CPI) growth. This year the HI Trust Fund will spend more than its income, and from 2009 through 2017, about $342 billion will need to be transferred from the Federal treasury to cover beneficiaries’ hospital insurance costs.

“We need to act quickly and effectively to address Medicare’s fiscal health, including enacting the steps proposed in the President’s budget, which would postpone the insolvency date of the Part A trust fund for ten years,” said Health and Human Services Secretary Mike Leavitt. “Congress should also act immediately on the smart changes put forward by the Administration after last year’s funding warning, which would allow the program to be modernized and transformed.”

“Although Congress has never allowed a Medicare trust fund to become exhausted, under the current payment structure, a person who is 54 years old today can not be assured that Medicare hospital insurance benefits will be there when he or she turns 65 and first becomes eligible for Medicare,” said Centers for Medicare & Medicaid Services Acting Administrator Kerry Weems. “That’s why we are already beginning to implement steps to make health care services under Medicare as effective and efficient as possible for beneficiaries.”

The Supplementary Medical Insurance (SMI) Trust Fund is automatically in financial balance because beneficiary premiums and general revenue financing are reset each year to match the expected costs of the program for the following year. However, Part B benefit payments have increased by an average of 9.6 percent for each of the past five years and that continued growth remains a concern. The Trustees emphasize that actual Part B costs are very likely to exceed the current-law projections, primarily because the Trustees anticipate that Congress will continue to override an existing provision in the Medicare law that would require substantial reductions in Medicare payments to physicians over the next 10 years.

“We need to transform the program from being a passive bill-payer to an active purchaser of healthcare by giving quality and cost information to providers and beneficiaries to choose the most effective and efficient care,” said Weems. “We are also testing new forms of provider payments to reward providers who deliver the highest value to our beneficiaries. We can do this by enhancing competitive bidding strategies, paying more to higher quality providers than lower quality, and demonstrations that use care coordination, bundling and electronic health records.”

In comparison to the status of the Part A and Part B programs, expenditures for Part D have consistently been lower than projected. The 2007 report continues to project lower spending, primarily due to a significant reduction in bids. However, costs over time are still expected to increase at an average annual rate of about 11.1 percent through 2017, down from the 12.6 percent estimated last year. Part D benefit coverage is provided through private drug insurance plans that participate in Medicare and receive Federal subsidies that lower beneficiary premiums and reduce plan financial risks. Compared to last year’s Trustee report estimates, premiums for basic coverage in 2008 are lower than anticipated in last year’s report. Rebates from manufacturers in 2008 are expected to be higher than last year’s estimates.

As required by the Medicare Modernization Act (MMA), the Trustees compare overall projected Medicare expenditures with the program’s “dedicated revenues”—principally HI payroll taxes, certain income taxes on Social Security benefits, beneficiary premiums, and special state payments to Part D. The portion of program costs financed by general revenues (rather than by “dedicated revenues”) is projected to exceed 45 percent in 2014. Because this result falls within the first 7 years of the projection period (2008-2014), the Trustees have issued a determination of “excess general revenue Medicare funding” for the third consecutive year.

When this determination is made in two consecutive Trustees Reports, a “Medicare funding warning” is triggered. The funding warning indicates that the level of Federal general revenues required to finance Medicare is an important concern, but it does not signify that program benefits cannot be paid.

The Medicare funding warning was first triggered by the 2007 report and is triggered again with the 2008 report. The funding warning requires the President to propose legislation to respond to the issue within 15 days following the release of the next fiscal year’s budget and the Congress is required to expeditiously consider the President’s proposals. President Bush submitted legislation in February 2008 in response to the 2007 Medicare funding warning and Congress has taken no action. As a result of the new funding warning, the President must again submit to Congress proposed legislation to respond to the warning within 15 days of the release of the next fiscal year’s budget.

As the Trustees note, “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.”

One possible solution is the competitive approach used for Part D where beneficiaries and their caregivers, with support from Medicare and many local partners around the country, are using information on prices and coverage to choose prescription drug plans that best fit their individual needs in terms of formulary coverage, monthly premiums, and other benefit features. Competition, together with good information on quality and price, has the potential to lead to cost savings in many other areas of Medicare as well. CMS is beginning to implement competitive reforms in durable medical equipment, Part B drug pricing, and other areas.

Additional reforms and initiatives can help address Medicare's financial condition by shifting the program’s focus to preventing costly complications and getting the right care to each patient — rather than simply paying more for more medical services and for more complications. Such initiatives and proposals include:

• Basing payment levels on provider reports on quality and their ability to prevent costly and life-threatening hospital acquired infections;
• Providing transparent quality and cost information to beneficiaries and providers;
• Developing and testing strategies to pay more for better results rather than more services;
• Implementing competitive bidding approaches to the delivery of care;
• Promoting the adoption of interoperable health information technology;
• Implementing reductions in market basket rates of growth, as proposed in the President’s 2009 Budget, including a proposed 0.4 percent reduction in the growth rate of Medicare payments if Congress does not pass a specific alternative proposal to achieve needed improvements in sustainability; and
• Increasing the share of program costs paid by the highest-income beneficiaries, as proposed in the 2009 Budget.

The Medicare trustees are Treasury Secretary and Managing Trustee Henry M. Paulson, Jr., Secretary of Health and Human Services Michael O. Leavitt, Labor Secretary Elaine L. Chao, and Social Security Commissioner Michael J. Astrue. Two other members are appointed by the President and represent the public. These two positions are currently vacant. Kerry N. Weems, Acting Administrator of the Centers for Medicare & Medicaid Services, serves as Secretary to the Board of Trustees.

The report is available at: http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2008.pdf.

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Note: All HHS press releases, fact sheets and other press materials are available at http://www.hhs.gov/news.

Last revised: March 25, 2008