The Finance Of Longevity

Medicare's Financial Condition: Beyond Actuarial Balance

With income diminished and expenses on the rise, sustainability now a central focus

Excerpts from a new Issue Brief from the American Academy of Actuaries. Read the entire report here.

Each year, the Boards of Trustees of the Federal Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds submit a report to Congress on the Medicare program’s financial condition. The program is  operated through two trust funds. The HI trust fund (Medicare Part A) pays primarily for inpatient hospital services. The SMI trust fund includes accounts for the Medicare Part B program, which covers physician and outpatient hospital services, and the Medicare Part D program, which covers the prescription drug program.

The Medicare Trustees Report is the primary source of information on the financial status of the Medicare program, and the American Academy of Actuaries proudly recognizes the important contribution that members of the actuarial profession have made in preparing the report. The Academy members play a vital role in providing information to the public about the important issues surrounding the program’s solvency and sustainability.

 

Issue Brief Key Points

The Medicare program faces serious financing challenges:

  • Income to the HI trust fund is not adequate to fund HI benefits
  • Increases in SMI costs increase pressure on beneficiary household budgets and the federal budget; and
  • Increases in total Medicare spending threaten the program’s sustainability

Changes are needed to improve Medicare’s long-term solvency and sustainability. Delaying corrective measures would increase the burden that might be imposed on beneficiaries and taxpayers. Any changes aiming to improve Medicare’s financial condition should be considered in light of how they would impact the program’s ability to meet the health care needs of beneficiaries.

The 2018 Medicare Trustees Report finds that compared with the projections from the 2017 report, the projected financial condition of Medicare has deteriorated in the short term for parts A and B and improved for part D.1 The
HI trust fund is now projected to be depleted in 2026, three years earlier than in last year’s report. That leaves less than 10 years to find a solution. The program faces three fundamental long-range financing challenges:

  • Income to the HI trust fund is not adequate to fund the HI portion of Medicare benefits;
  • Increases in SMI costs increase pressure on beneficiary household budgets and the federal budget; and
  • Increases in total Medicare spending threaten the program’s sustainability

The trustees conclude: “The projections in this year’s report continue to demonstrate the need for timely and effective action to address Medicare’s remaining financial challenges—including the projected depletion of the HI trust fund, this fund’s long-range financial imbalance, and the rapid growth in Medicare expenditures.”

In this issue brief, the American Academy of Actuaries’ Medicare Subcommittee examines the findings of the Medicare Trustees Report with respect to program solvency and sustainability. The Medicare program continues to face serious financing problems. Due to Medicare’s critically important role in ensuring that Americans age 65 and older and certain younger adults with permanent disabilities have access to health care, it is important for policymakers to address the challenges that threaten the program’s long-term solvency and financial sustainability. The longer corrective measures are delayed, the worse the financial challenges will become and in turn, the greater the burden that is likely imposed on beneficiaries and taxpayers.

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 re present loans to the U.S. Treasury’s general fund.{pullquote]

The HI trust fund, which pays for hospital services, is funded primarily through earmarked payroll taxes. The projections of Medicare’s financial outlook in the report are based on current law. Under these projections, the financial condition of the HI trust fund has deteriorated since the 2017 Medicare Trustees Report. This deterioration primarily reflects lower projected payroll tax income, higher-than-expected benefit expenditures in 2017, higher payments to Medicare Advantage plans, and the impact of legislation that both lowered income and increased expenditures. The projected trust fund exhaustion date is 2026 (three years earlier than estimated in last year’s report), and the 75-year HI deficit increased from 0.64 percent of taxable payroll to 0.82 percent.

  • HI expenditures are projected to exceed HI revenues. After experiencing small surpluses in 2016 and 2017, 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 91 percent of program costs, with the share declining to 78 percent in 2039 and then increasing to 85 percent in 2092. 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 0.82 percent of taxable payroll. Eliminating this deficit would require an immediate 28 percent increase in standard payroll taxes or an immediate 17 percent reduction in expenditures—or some combination of the two. Delaying action would require more severe changes in the future.

 

Read the entire report, Medicare’s Financial Condition: Beyond Actuarial Balance, here.