The Finance Of Longevity

American Academy of Actuaries: Medicare’s Financial Challenges Persist

Serious issues with Medicare’s financial condition persist

WASHINGTON—An analysis of the recently released 2020 Medicare Trustees Report by the American Academy of Actuaries notes that the serious issues with Medicare’s financial condition persist, a situation that if left unaddressed could shift growing financial burdens to future taxpayers and beneficiaries.

“The exhaustion date for the Hospital Insurance (HI) trust fund remains unchanged over last year’s projection, drawing ever closer, while funding demands from premiums and general revenue for other parts of the program are also tracking upward,” said Academy Senior Health Fellow Cori Uccello. “A big question in many peoples’ minds—which the report acknowledges but does not address—is what effects the COVID-19 pandemic will have on Medicare’s financial condition.”

Key facts about the program’s financial condition brought to light by the trustees’ report include:

The projected HI trust fund exhaustion date is 2026, unchanged from last year’s Medicare Trustees Report.
Supplementary Medical Insurance general revenue funding is scheduled to nearly double from 1.7 percent of gross domestic product (GDP) in 2020 to 3.1 percent in 2094.

Under current law, Medicare expenditures as a percentage of GDP will grow from 3.7 percent of GDP in 2019 to 6.5 percent of GDP in 2094. However, under the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary’s alternative scenario, total Medicare expenditures would increase to 8.6 percent of GDP in 2094.

Excerpts From ‘Medicare’s Financial Condition’

The COVID-19 pandemic will affect Medicare program expenditures and revenues. Due to the uncertainty of these  effects, however, the 2020 Medicare Trustees report does not reflect the potential impacts. The chief actuary notes that actual program experience could be worse than projected in the report, particularly in the near term.

The 2020 Medicare Trustees Report finds that compared with the projections from the 2019 report, the projected financial condition of Medicare has improved in the short term for parts A and D and deteriorated for part B.1 The HI trust fund is projected to be depleted in 2026, the same as in last year’s report. This leaves policymakers only six years to find a solution before funds will be insufficient to fully pay HI expenditures.

Medicare HI Trust Fund Income Falls Short of the Amount Needed To Fund HI Benefits
Medicare’s trust funds account for all income and expenditures. The HI and SMI programs operate separate trust funds with different financing mechanisms. General revenues, payroll taxes, premiums, and other income are credited to the trust funds, which are used to pay benefits and administrative costs. Any unused income is required by law to be invested in
U.S. government securities for use in future years. In effect, the trust fund assets represent loans to the U.S. Treasury’s general fund. The HI trust fund, which pays for hospital services, is funded primarily through earmarked payroll taxes.

The COVID-19 pandemic will affect Medicare program expenditures and revenues. Due to the uncertainty of these  effects, however, the 2020 Medicare Trustees report does not reflect the potential impacts...

The projections of Medicare’s financial outlook in the report are based on current law. The projected HI trust fund exhaustion date is 2026, unchanged from last year’s Medicare Trustees Report. However, the 75-year HI deficit decreased from 0.91 percent of taxable payroll in the 2019 report to 0.76 percent in this year’s report. The decrease primarily reflects lower payroll taxes revenues, and lower expenditures because of lower than-projected 2019 spending, lower updates to provider payment rates updates, and the incorporation of time-to-death into the demographic factors used in the projection
model. Partially offsetting this decrease in expenditures is higher spending growth for Medicare Advantage beneficiaries.

  •  HI expenditures are projected to exceed HI revenues. After experiencing small surpluses in 2016 and 2017, a deficit returned in 2018 and 2019. HI expenditures are expected to exceed revenues, including interest income, in every year during the 75-year projection period. As a result, the HI trust fund assets will need to be redeemed. When the federal government is experiencing unified budget deficits, funding the redemptions requires that additional money be borrowed from the public, thereby increasing the federal deficit and debt.

 

  • The HI trust fund is projected to be depleted in 2026. At that time, tax revenues are projected to cover only 90 percent of program costs, with the share declining to 78 percent in 2044 and then increasing to 90 percent in 2094. There is no current provision allowing for general fund transfers to cover HI expenditures in excess of dedicated revenues.
  • The projected HI deficit over the next 75 years is 0.76 percent of taxable payroll. Eliminating this deficit would require an immediate 26 percent increase in standard payroll taxes or an immediate 16 percent reduction in expenditures—or some combination of the two. Delaying action would require more severe changes in the future.

Read the Academy’s issue brief, Medicare’s Financial Condition: Beyond Actuarial Balance, and learn more about the Academy’s health policy work online under the public policy tab at actuary.org.

 

About the American Academy of Actuaries
The American Academy of Actuaries is a 19,500-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.