Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 10 of 12)

WASHINGTON, June 8 (TNSrep) -- The Boards of Trustees for the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds issued a 263-page annual report to Congress on June 2, 2022.

(Continued from Part 9 of 12)

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B. TOTAL MEDICARE FINANCIAL PROJECTIONS

Medicare is the nation's second largest social insurance program, exceeded only by Social Security (OASDI). Although Medicare's two components--Hospital Insurance (HI) and Supplementary Medical Insurance (SMI)--are very different from each other in many key respects, it is important to consider the overall cost of Medicare and its financing. By reviewing Medicare's total expenditures, readers can assess the financial obligation created by the program. Similarly, the sources and relative magnitudes of HI and SMI revenues are an important policy matter.

The issues of Medicare's total cost to society and the means of financing that cost are different from the question of the financial status of the Medicare trust funds. The latter focuses on whether a specific trust fund's income and expenditures are in balance. The separate HI and SMI financial projections prepared for this purpose, however, can be usefully combined for the broader purposes outlined above. To that end, this section presents information on combined HI and SMI costs and revenues. Sections III.B, III.C, and III.D of this report present detailed assessments of the financial status of the HI trust fund and the Part B and Part D accounts of the SMI trust fund, respectively.

1. 10-Year Actuarial Estimates (2022-2031)

Table V.B1 shows past and projected Medicare income, expenditures, and trust fund assets in dollar amounts for calendar years, 82 with projections shown under the intermediate set of assumptions for the short-range projection period 2022 through 2031.

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Table V.B1.--Total Medicare Income, Expenditures, and Trust Fund Assets during Calendar Years 1970-2031

Note: Totals do not necessarily equal the sums of rounded components

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As indicated in table V.B1, Medicare expenditures have increased rapidly during most of the program's history. From 1985 through 2021, expenditures grew at an average annual rate of 7.0 percent, and they are projected to increase at an average annual rate of 8.2 percent from 2022 through 2031.

Appendices

Through most of Medicare's history, trust fund income has kept pace with increases in expenditures./83

For this year's report, the Trustees estimate that, from 2022 through 2031, total Medicare income will increase at an average annual rate of 7.2 percent, which is slightly lower than the growth in expenditures.

The Department of the Treasury has invested past excesses of income over expenditures in U.S. Treasury securities, with total trust fund assets accumulating to $325.7 billion at the end of calendar year 2021. Combined assets fluctuated over the recent historical period for various reasons, including transfers from the general fund of the Treasury required by enacted legislation. The change in assets continues to fluctuate slightly over the remainder of the short-range projection period due to the timing of premium collections, as described in footnote 1 of table V.B1, and the return of HI deficits./84

2. 75-Year Actuarial Estimates (2022-2096)

Table V.B2 shows past and projected Medicare expenditures expressed as a percentage of GDP./85

This percentage provides a relative measure of the size of the Medicare program compared to the general economy and represents the portion of the nation's total resources dedicated each year to providing health care services to beneficiaries through Medicare. Expenditures represented 0.7 percent of GDP in 1970 and had grown to 2.6 percent of GDP by 2005, reflecting rapid increases in the factors affecting health care cost growth. Starting in 2006, Medicare provided subsidized access to prescription drug coverage through Part D, which caused most of the increase in Medicare expenditures to 3.0 percent of GDP in the first year. The Trustees project much more moderate continuing growth in the long range, partially as a result of the lower price updates under current law, with total Medicare expenditures projected to reach about 6.5 percent of GDP by 2096.

Part of the projected increase is attributable to the prescription drug benefit in Medicare. When it was fully implemented in 2006, Part D represented 11 percent of incurred Medicare expenditures; this share increased to 12 percent in 2021 and will account for 13 percent of Medicare expenditures by the end of the projection period.

The projections shown in table V.B2 for total Medicare as a share of GDP are similar to those in the 2021 report primarily because lower projections for Part D are mostly offset by slightly higher projections for Part B. The details of these changes are described in sections III.B, III.C, and III.D.

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Table V.B2.--HI and SMI Incurred Expenditures as a Percentage of the Gross Domestic Product

Note: Percentages are affected by economic cycles.

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Appendices

The 75-year projection period fully allows for the presentation of anticipated future developments, such as the impact of a large increase in enrollees from 2010 through 2031. This increase in the number of beneficiaries will occur because the relatively large number of persons born during the period between the end of World War II and the mid-1960s (known as the baby boom generation) will reach eligibility age and begin to receive benefits. Moreover, as this generation ages, these individuals will experience greater health care utilization and costs, thereby adding further to growth in program expenditures. Table V.B3 shows past and projected enrollment in the Medicare program.

As indicated in table V.B3, over the last 35 years the total number of Medicare beneficiaries approximately doubled, and the Trustees expect the total to increase by 42 percent over approximately the next 35 years. During this same historical period, the number of covered workers also increased rapidly (by about 46.5 percent), but the Trustees project this number to increase much more slowly (about 12 percent) over the next 35 years. This demographic shift and its implications for Medicare costs, relative to workers' earnings or to the GDP, are fairly well known.

The enrollment data also show that the number of Medicare beneficiaries enrolled in private health plans under Part C has increased substantially in recent years. (Section IV.C of this report describes the changes in enrollment growth since 2005.) By 2021, about 43 percent of eligible Medicare beneficiaries were enrolled in private Part C health plans. The Trustees expect modest increases in private plan penetration rates between 2022 and 2031, with the estimated proportion of beneficiaries in such plans ultimately stabilizing at about 53 percent.

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Table V.B3.--Medicare Enrollment

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Table V.B4 shows the past and projected amounts of Medicare revenues as a percentage of total non-interest Medicare income, under the intermediate assumptions. The table excludes interest income, which would not be a significant part of program financing in the long range.

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Table V.B4.--Medicare Sources of Income as a Percentage of Total Non-Interest Income

Note: Row sums may not exactly equal 100 percent due to rounding.

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General revenues (primarily those for SMI) represented 46 percent of total non-interest income to the Medicare program in 2021 and have constituted the largest share of Medicare financing since 2009. HI payroll taxes were the next largest source of overall financing at 34 percent. Beneficiary premiums (again, primarily for SMI) were third, at 15 percent. Projected HI tax revenues fall short of projected HI expenditures in all future years. In contrast, SMI premium and general revenues will keep pace with SMI expenditure growth, and State payments/86 (on behalf of Medicare beneficiaries who also qualify for full Medicaid benefits) will grow with Part D expenditures. General revenue transfers to the Part B account increased significantly in 2016, as required by the Bipartisan Budget Act of 2015 to compensate for premium revenue that was not received in 2016 due to the hold harmless provision. They increased again in 2020 and 2021, as required by the Continuing Appropriations Act, 2021 and Other Extensions Act to account for the outstanding balance of the Accelerated and Advance Payments (AAP) Program in 2020 and to compensate for premium revenue that was not received in 2021 due to the legislated specification of the aged actuarial rate calculation. Another source of Part B financing, from fees on manufacturers and importers of brand-name prescription drugs, increased from $2.5 billion in 2011 to $4.1 billion in 2018 but then decreased to $2.8 billion for 2019 and later. In the absence of legislation, HI tax income would represent a declining portion of total Medicare revenues. In 2028, for example, the projected year of depletion of the HI trust fund, currently scheduled HI payroll taxes would represent about 31 percent of total non-interest Medicare income. General revenues and beneficiary premiums would equal about 46 and 18 percent, respectively.

The law requires an expanded analysis of the combined expenditures and dedicated revenues of the HI and SMI trust funds. In particular, the law requires a determination as to whether the difference between total Medicare outlays and its dedicated financing sources is projected to exceed 45 percent of total outlays within the next 7 fiscal years (2022-2028). Dedicated Medicare financing sources include HI payroll taxes; income from taxation of Social Security benefits; State transfers for the prescription drug benefit; premiums paid under Parts A, B, and D; fees on brand-name prescription drugs paid to Part B; and any gifts received by the Medicare trust funds. The test uses expenditures adjusted to avoid temporary distortions arising from the payment of Medicare Advantage and Part D capitation amounts in September when the normal October payment date is a Saturday or Sunday.

The Trustees made determinations of excess general revenue Medicare funding in each of the reports for 2006 through 2013 and in the 2017 through 2021 reports. Two consecutive such determinations trigger a Medicare funding warning. The 2007 through 2013 reports, and the 2018 through 2021 reports, thus prompted Medicare funding warnings. The law specifies that in response to such findings the President must submit to Congress, within 15 days after the date of the Budget submission for the succeeding year, proposed legislation to respond to the warning. The law also requires Congress to consider the legislation proposed in response to Medicare funding warnings on an expedited basis. To date, elected officials have not enacted legislation responding to these funding warnings.

Figure V.B1 displays, on a calendar-year basis, the historical and projected ratio of the difference between total Medicare outlays and dedicated financing sources to total Medicare outlays. As indicated, this ratio exceeded 45 percent at the end of calendar years 2009 through 2012 and in calendar year 2020, and it is expected to again exceed that level at the end of calendar year 2024, the third year of the projection. Therefore, the Board of Trustees is issuing a determination of excess general revenue Medicare funding in this report. Since this is the sixth consecutive such finding, a Medicare funding warning is again triggered.

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Figure V.B1.--Projected Difference between Total Medicare Outlays and Dedicated Financing Sources, as a Percentage of Total Outlays

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As figure V.B1 also indicates, the Board projects that the difference between outlays and dedicated funding sources will reach almost 52 percent of outlays by 2046 and will decline to 50 percent by the end of the 75-year period. This difference between outlays and dedicated funding sources, which the law refers to as general revenue Medicare funding, includes the following:

* Financing specified portions of SMI Part B and SMI Part D expenditures;

* Reimbursing the HI trust fund for the costs of certain uninsured beneficiaries;

* Paying interest on invested assets of the trust funds;

* Redeeming the special Treasury securities held as assets by the trust funds; and

* Financing the imbalance between HI expenditures and dedicated revenues after HI asset depletion.

Current law provides for the first four of these items. However, for the fifth--coverage of the HI shortfall--there is no provision under current law.

The law also requires a comparison of projected growth in the difference between outlays and dedicated revenues with other health spending growth rates. Table V.B5 contains this comparison.

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Table V.B5.--Comparative Growth Rates of Medicare, Private Health Insurance, National Health Expenditures, and GDP

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The gap between outlays and dedicated revenues slowed after 2010 as Medicare spending decelerated and as cost-reducing provisions began taking effect. The COVID-19 pandemic had a significant effect on expenditures in 2020, but the impact on dedicated funding sources is delayed because program financing, which includes Part A payroll tax income and the Part B and Part D premiums, is set prospectively and is not able to be changed. This phenomenon, along with the assumed path of the pandemic through 2028, results in the growth patterns shown in table V.B5. Beginning in 2023, the gap between outlays and dedicated revenues will increase faster than outlays in many years through 2046 since the dedicated sources of income to the HI trust fund will generally cover a decreasing percentage of HI outlays.

In addition to projected Medicare outlay growth, table V.B5 shows projected growth in GDP, total national health expenditures in the U.S., and private health insurance expenditures. The Trustees expect each of the health expenditure categories to continue the longstanding trend of increasing more rapidly than GDP in most years. Private health insurance expenditures equal the total premiums earned by private health insurers, including benefits incurred and the net cost of insurance. The net cost of insurance includes administrative costs, additions to reserves, rate credits and dividends, premium taxes, and profits or losses.

Several factors affect comparisons between aggregate Medicare and private health insurance cost growth:

* The number of Medicare beneficiaries is currently increasing by about 3 percent per year, and this growth rate will continue as more of the post-World War II baby boom generation reaches eligibility age. The number of individuals with private health insurance is estimated to increase at slower rates than the growth in the number of Medicare beneficiaries.

* Certain current-law provisions, such as the limitation on maximum out-of-pocket costs in 2014 and later, will also affect the average actuarial value of private health insurance benefits.

* The use of health care services differs significantly between Medicare beneficiaries (who are generally over 65) and individuals with private health insurance (who are predominantly below age 65). The former group, for example, has a higher incidence of hospitalization, skilled nursing care, and home health care. For the latter group, physician services represent a greater proportion of their total health care needs. Different cost growth trends by type of service will affect overall growth rates and reflect the distribution of services for each category of people.

* There is some overlap between people with Medicare and those with private health insurance. For example, many Medicare beneficiaries have supplemental health insurance coverage through private Medigap insurance policies or employer-sponsored retiree health benefits, and private health insurance includes both of these categories. About 10 million Medicare beneficiaries receive supplemental coverage through the Medicaid program; neither the growth rates for Medicare nor those for private health insurance reflect the Medicaid costs for these dual beneficiaries.

A number of research studies have attempted to control for some or all of these differences in comparing growth trends. Over long historical periods, average, demographically adjusted, per capita growth rates for common benefits have been somewhat lower for Medicare than for private health insurance. For shorter periods, however, the rates of growth have often diverged substantially, and the differential has been negative in some years and positive in others. More information on past and projected national and private health expenditures, and on comparisons to Medicare growth rates, is available in the sources cited in table V.B5.

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The report is posted at: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

(Continues with Part 11 of 12)

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