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News Release

MEDICARE TRUSTEES RELEASE ANNUAL REPORT

The Medicare trustees today delivered their annual reports on the fiscal health of Medicare, finding that the financial outlook has declined from last year's estimate, due to lower-than-expected revenues and higher-than-expected hospital spending in 2002.

In the estimate released today, Medicare's Hospital Insurance (HI) Trust Fund is projected to be exhausted in 2026, four years earlier than estimated in last year's report. HI taxable payroll in 2002 was about 4 percent lower than previously estimated. At the same time, hospital expenditures increased about 2 percent more than estimated, primarily as a result of higher inpatient hospital admissions and a faster increase in the average complexity of these admissions.

The report also projects rapidly increasing costs in the Supplementary Medical Insurance (SMI) Trust Fund, which covers physician visits and other outpatient services. These increases point to higher future federal funding, beneficiary premiums and beneficiary co-pays in Medicare's Part B program, the trustees said.

The trustees called for changes to address long-term fiscal problems facing Medicare. In addition, the trustees again issued a combined report covering both parts of the Medicare program, in order to present a more comprehensive picture of the financing challenges ahead.

"The time has come to modernize and improve the Medicare program," said HHS Secretary Tommy G. Thompson. "The President's recently-released Medicare framework provides the kinds of choices and benefits our beneficiaries need, including prescription drug coverage. At the same time, it makes the best use of today's modern health care delivery methods to encourage better quality and more affordable care while beginning to address Medicare's long-term financial challenges. This approach will help us protect Medicare for today's seniors and tomorrow's retirees."

Hospital Insurance Trust Fund (HI)

The trustees estimate that the Hospital Insurance Trust Fund will remain solvent until the year 2026, based on the most probable economic and demographic assumptions. This projected depletion date represents a four-year loss for estimated Part A solvency, from the forecast of 2030 made by the trustees last year. The change was due to a downward revision by the Bureau of Economic Analysis in wages resulting in lower taxable payroll, and to increased hospital admissions and an increase in the average complexity of admissions.

At the same time, the trustees reported that long-term projections of the fiscal health of the HI fund have worsened. The reasons for the decline are based largely on the steady increases in projected health care costs as well as the growing number of Medicare beneficiaries due to the retirement of the baby boom generation. Today, there are about four workers for every Medicare beneficiary. By 2077, there will be only about two workers for every beneficiary.

Supplementary Medical Insurance Trust Fund (SMI)

As in previous years, the trustees find that the Supplementary Medical Insurance Trust Fund (covering Part B of Medicare, which pays for physicians' services, outpatient care and other medical services) remains adequately financed into the future -- but only because of its financing structure. The financing mechanism requires general revenues and beneficiary premiums to be adjusted automatically providing guaranteed Part B funding. However, Part B spending is experiencing rapid growth -- over 11 percent last year alone -- with costs expected to nearly double over the next 10 years and to accelerate further as the first members of the baby boom generation enter the program in about 2010.

The SMI trust fund is expected to run a deficit of $7.4 billion in 2003, because the beneficiary premiums and general revenue financing were set prior to enactment of the Consolidated Appropriations Resolution, 2003. This legislation raised Medicare payments to physicians significantly, resulting in SMI costs that exceed the scheduled financing. Premiums and general revenues in 2004 and later will be adjusted upward to match higher levels of costs.

Over time, SMI would require a rapidly growing share of general revenues and substantial increases in beneficiary premiums. SMI general revenues accounted for about 7.8 percent of total federal income taxes in 2002. If such taxes remained at their current level relative to the national economy, then SMI general revenues would account for about 32 percent of total income taxes in 2077.

Rising Part B costs also have direct impact on Medicare beneficiaries. In the next 20 years, a person who is 65 years old today would see the portion of his/her Social Security check that is withheld to pay the monthly Part B premium almost double, from 6.8 percent to 12.4 percent. The total out-of-pocket expenses for Part B services (premiums plus copayments) would increase from 15.7 percent to 22.9 percent.

Medicare Overall

Taken together, Part A and Part B total costs are projected to more than triple over the next 75 years -- growing from 2.6 percent of gross domestic product (GDP) today, to 5.3 percent by 2035, and to 9.3 percent by 2077. At the same time, total trust fund revenues (excluding interest) will grow much more slowly -- from 2.6 percent of GDP today, to 4.1 percent in 2035, and to just 5.8 percent in 2077. In 2077, the gap between Medicare revenue and Medicare spending would be the equivalent of 3.5 percent of gross domestic product.

Without changes in the Medicare program, closing the projected HI gap between revenues and expenditures would require that benefits be reduced by 42 percent, or income from the payroll tax would need to be increased by 71 percent, the report said.

"The projections shown in this report continue to demonstrate the need for timely and effective action to address Medicare's financial challenges -- both the long?range financial imbalance facing the HI trust fund and the continuing problem of rapid growth in both HI and SMI expenditures," the report said.

The Medicare trustees are Treasury Secretary and Managing Trustee John W. Snow, Secretary of Health and Human Services Tommy G. Thompson, Labor Secretary Elaine 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. Tom Scully, administrator of the Centers for Medicare & Medicaid Services, serves as secretary to the Medicare Board of Trustees.

The Medicare reports are available on-line at: www.cms.hhs.gov/publications/trusteesreport/

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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 17, 2003