Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 4 of 12)

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, editor@targetednews.com, Springfield, Virginia; 703/304-1897; https://targetednews.com

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 3 of 12)

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D. PART D FINANCIAL STATUS

This section presents actual operations of the Part D account in the SMI trust fund in 2021 and Part D projections for the next 75 years. Section III.D1 discusses Part D financial results for 2021, and sections III.D2 and III.D3 discuss the short-range Part D projections and the long-range projections, respectively. The projections shown in sections III.D2 and III.D3 assume no changes will occur in the statutory provisions and regulations under which Part D currently operates.

1. Financial Operations in Calendar Year 2021

The total assets of the account amounted to approximately $10.0 billion on December 31, 2020. During calendar year 2021, total Part D expenditures were approximately $104.9 billion. General revenue was provided on an as-needed basis to cover the portion of expenditures that Medicare subsidies support. Total Part D receipts were $114.6 billion. As a result, total assets in the Part D account increased to $19.7 billion as of December 31, 2021.

Table III.D1 presents a statement of the revenue and expenditures of the Part D account of the SMI trust fund in calendar year 2021, and of its assets at the beginning and end of the calendar year.

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Table III.D1--Statement of Operations of the Part D Account in the SMI Trust Fund during Calendar Year 2021

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

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a. Revenues

The major sources of revenue for the Part D account are (i) contributions of the Federal Government authorized to be apportioned and transferred from the general fund of the Treasury; (ii) premiums paid by eligible persons who voluntarily enroll; and (iii) contributions from the States.

Of the total Part D revenue in 2021, $5.2 billion represented premium amounts withheld from Social Security benefits or other Federal benefit payments. Total premium payments, including those paid directly to Part D plans, amounted to an estimated $17.0 billion or 14.8 percent of total revenue.

In calendar year 2021, contributions received from the general fund of the Treasury amounted to $85.3 billion, which accounted for 74.4 percent of total revenue. The payments from the States were $12.1 billion.

Another source of Part D revenue is interest received on investments held by the Part D account. Since this account holds a very low amount of assets, and only for brief periods of time, the interest on the investments of the account in calendar year 2021 was negligible. Finally, law enforcement and other settlements amounting to $251 million were attributable to the program and deposited into the Part D account.

b. Expenditures

Part D expenditures include both the costs of prescription drug benefits provided by Part D plans to enrollees and Medicare payments to retiree drug subsidy (RDS) plans on behalf of beneficiaries who obtain their primary drug coverage through such plans. Unlike Parts A and B of Medicare, the Part D account in the SMI trust fund does not directly support all Part D expenditures. In particular, enrollee premiums that are paid directly to Part D plans, and thus do not flow through the Part D account, finance a portion of these expenditures. However, these premium amounts are included in the Part D account operations (both income and expenditures) presented in this report. Total expenditures are characterized as either benefits (representing the gross cost of enrollees' prescription drug coverage plus RDS amounts) or Federal administrative expenses.

All expenses incurred by the Department of Health and Human Services, the Social Security Administration, and the Department of the Treasury in administering Part D are charged to the account. These administrative duties include making payments to Part D plans, fraud and abuse control activities, and experiments and demonstration projects designed to improve the quality, efficiency, and economy of health care services.

In addition, Congress has authorized expenditures from the trust funds for construction, rental and lease, or purchase contracts of office buildings and related facilities for use in connection with the administration of Part D. The account expenditures include such costs. However, the statement of Part D assets presented in this report does not carry the net worth of facilities and other fixed capital assets, because the value of fixed capital assets does not represent funds available for benefit or administrative expenditures and is not, therefore, pertinent in assessing the actuarial status of the funds.

Of the $104.9 billion in total Part D expenditures in 2021, $104.4 billion represented benefits, as defined above, and the remaining $0.5 billion reflected Federal administrative expenses. The Medicare direct premium subsidy payments and enrollee premiums implicitly cover administrative expenses incurred by Part D plans. The 2020 reconciliation payments, which typically would have been made by Medicare in November 2021, were postponed until January 2022 due to a deadline extension for plans to submit risk adjustment data. The postponed payments, which amounted to $8.4 billion and which were transferred from general revenue to the Part D account in December, resulted in total assets that were higher than usual as of December 31, 2021.

c. Actual experience versus prior estimates

Table III.D2 compares the actual experience in calendar year 2021 with the estimates presented in the 2020 and 2021 annual reports. A number of factors can contribute to differences between estimates and subsequent actual experience. In particular, actual values for key economic variables can differ from assumed levels, lawmakers may adopt legislative and regulatory changes after a report's preparation, and new, high-impact drugs can enter the market.

As shown in table III.D2, actual government contributions were higher than the estimates in the 2021 report for two main reasons: (i) the Trustees' projections did not reflect a policy change whereby the Part D trust fund would be expected to maintain a balance for reserving retrospective administrative expenses incurred by the Social Security Administration for its services on behalf of the Medicare program;/51 and (ii) the 2020 reconciliation amounts were higher than previously projected. Although actual government contributions were higher compared to the 2021 report, the benefit payments for calendar year 2021 were lower than projected mainly because, as mentioned previously, the reconciliation payments for calendar year 2020 were paid in January 2022 rather than in November 2021. Actual State transfers were higher than projected last year because the number of fully dual-eligible beneficiaries was higher than previously projected.

Compared to the estimates in the 2020 report, actual benefit payments for 2020 were significantly lower primarily because the reconciliation payments for calendar year 2020 were paid in January 2022. State transfers were lower than the 2020 report estimates largely because the legislation that temporarily increased the Federal medical assistance percentage (FMAP) was enacted after the 2020 report.

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Table III.D2.--Comparison of Actual and Estimated Operations of the Part D Account in the SMI Trust Fund, Calendar Year 2021

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d. Assets

The Department of the Treasury invests the portion of the Part D account not needed to meet current expenditures for benefits and administration in interest-bearing obligations of the U.S. Government.

The Social Security Act authorizes the issuance of special public-debt obligations for purchase exclusively by the account. The law requires that these special public-debt obligations shall bear interest at a rate based on the average market yield (computed on the basis of market quotations as of the end of the calendar month immediately preceding the date of such issue) for all marketable interest-bearing obligations of the United States forming a part of the public debt that are not due or callable until after 4 years from the end of that month. Since the inception of the SMI trust fund, the Department of the Treasury has always invested the assets in special public-debt obligations./52

Table V.H10, presented in section V.H, shows the assets of the SMI trust fund (Parts B and D) at the end of fiscal years 2020 and 2021. As explained in section III.D2, the flexible apportionment of general revenues for Part D eliminates the need to maintain a contingency reserve. As a result, Part D assets are very low and are held only briefly in anticipation of immediate expenditures.

2. 10-Year Actuarial Estimates (2022-2031)

This section provides detailed information concerning the short-range financial status of the Part D account, including projected annual income, outgo, differences between income and outgo, and trust fund balances. The projected future operations of the Part D account are based on the Trustees' economic and demographic assumptions, as detailed in the OASDI Trustees Report, as well as other assumptions unique to Part D. Section IV.B2 presents an explanation of the effects of the Trustees' intermediate assumptions and other assumptions unique to Part D on the estimates in this report.

Generally, the income to the Part D account includes the beneficiary premiums described previously and transfers from the general fund of the Treasury to cover each year's incurred benefit costs and other expenditures. The language that has been included in the Part D appropriation provides, without further Congressional action, resources for benefit payments under the Part D drug benefit program on an as-needed basis. The transfers from the Treasury reflect the direct premium subsidy payments, amounts of reinsurance payments, RDS amounts, low-income subsidies, net risk-sharing payments, administrative expenses, and advanced discount payments. This income requirement is reduced by the State transfers for the full-benefit dually eligible beneficiaries who were covered under Medicaid prior to the implementation of Part D.

Until 2015, actual cash transfers from the Treasury were made on the day the benefit payments to plans were due, typically the first business day of a month, causing the Part D account balance at the end of a month to include only a modest amount from the State transfers to the account after the benefit payments were made. Then in 2015 a policy was implemented to transfer amounts from the Treasury into the account 5 business days before the benefit payments to the plans, and therefore the Part D account now includes a more substantial balance at the end of most months.

The beneficiary premiums and direct subsidy rate are calculated based on the national average bid amounts and defined prior to each year's operations. The base beneficiary premium constitutes 25.5 percent of the expected total plan costs for basic Part D coverage. The actual premium a beneficiary pays is calculated as the difference between the plan bid and the national average bid, which is then applied to the base beneficiary premium. Beginning in 2011, beneficiaries with modified adjusted gross incomes exceeding a specified threshold pay income-related premiums in addition to the premiums charged by the plans in which the individuals have enrolled. The extra premiums are credited to the Part D trust fund account and reduce the financing amounts from the general fund.

The financing of the general fund is also affected by the brand-name manufacturer drug discounts. Starting in 2011, the drug manufacturers provide a 50-percent ingredient cost discount for brand-name drugs in the coverage gap that reduces beneficiary out-of-pocket expenses. Starting in 2019, the Bipartisan Budget Act of 2018 increases the brand-name drug discount in the coverage gap to 70 percent, with a corresponding decrease in plan benefits. Medicare Part D pays advanced discount payments prospectively to the non-employer Part D plans and will be reimbursed for these amounts once the plans receive the discounts from the drug manufacturers. Although the net cashflow for this arrangement is zero, the timing of the cashflow has an impact on the yearly financing amounts.

Expenditures from the account include the premiums withheld from beneficiaries' Social Security benefits and transferred to the private drug plans, the direct premium subsidy payments, reinsurance payments, RDS amounts, low-income subsidy payments, net risk-sharing payments, administrative expenses, and advanced discount payments. As noted previously, the Trustees supplement these expenditures to include the amount of enrollee premiums paid directly to Part D plans, thereby providing an estimate of total Part D benefit payments and other expenditures.

Part D expenditures on direct premium subsidy payments, RDS amounts, advanced discount payments, and administrative expenses are affected by the sequestration required by current law, which reduces benefit payments by the percentages listed below:

* 2 percent from April 1, 2013 through April 30, 2020;

* 1 percent from April 1, 2022 through June 30, 2022;

* 2 percent from July 1, 2022 through March 31, 2030;

* 2.25 percent from April 1, 2030 through September 30, 2030;

* 3 percent from October 1, 2030 through March 31, 2031; and

* 4 percent from April 1, 2031 through September 30, 2031.

Reinsurance, the low-income cost-sharing subsidy, and net risk-sharing payments are not affected by sequestration. (See section V.A for recent legislative changes affecting the sequestration of Medicare expenditures.)

Table III.D3 shows the estimated operations of the Part D account under the intermediate assumptions on a calendar-year basis through 2031.

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Table III.D3.--Operations of the Part D Account in the SMI Trust Fund (Cash Basis) during Calendar Years 2004-2031

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

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Table III.D4 shows prescription drug payment amounts in the aggregate, on a per capita basis, and relative to the Gross Domestic Product (GDP). The benefit amounts are shown on a cash basis and reflect net reconciliation payments that are made to adjust for prior-year differences between prospective payments made to plans and actual prescription drug expenditures. The magnitude and timing of the reconciliation payments can cause a volatile pattern of annual growth rates. For example, the 2020 plan bid amounts were less than the actual costs experienced by the plans in 2021, resulting in year-end reconciliation payments of $8.4 billion from the Medicare program to plans. However, due to a deadline extension for plans to submit risk adjustment data, the risk score adjustments were paid in January 2022 rather than in November 2021, as normally would have been expected, and accordingly both the total and per capita benefits for 2021 decreased from 2020. This change in the timing of reconciliation payments, which is not expected to occur in future years, will, in turn, lead to substantial increases in both the total and per capita benefits for 2022.

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Table III.D4.--Growth in Part D Benefits (Cash Basis) through December 31, 2031

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Part D benefit payments have experienced an erratic growth pattern throughout the history of the program. Expenditures have been increasing substantially, reflecting not only rapid growth in enrollment but also multiple prescription drug cost and utilization trends that have varying effects on underlying costs. For example, while drug costs have been increasing more rapidly than other categories of medical spending, there has been a substantial increase in the proportion of prescriptions filled with low-cost generic drugs that has helped constrain cost growth and, at the same time, a significant increase in the cost of specialty drugs that has increased cost growth. Additionally, direct and indirect remuneration (DIR) has dramatically increased as a percentage of gross drug spending, a factor that has significantly slowed Part D spending growth. In the future, the average per capita drug benefit growth rate is expected to exceed the rate of increase in other categories of medical spending. The faster projected aggregate benefit growth rate reflects three assumptions: that increases in the generic dispensing rate will likely slow, that increases in specialty drug cost growth will likely continue, and that the substantial DIR growth in recent years is expected to moderate. Over the next 10 years, aggregate benefits are projected to increase at 6.7 percent annually, on average, while the average per capita rate of growth is projected to be 4.1 percent.

Legislation and policy changes also contribute to the volatility of the annual growth rates. For example, the coverage gap gradually closed from 2012 through 2020, a factor that increased plan benefits and resulted in higher Part D expenditures and premiums. In addition, the policy to pay advanced reinsurance amounts to the employer/union only group waiver plans, beginning in 2017, affects the timing of the reinsurance payments, which were previously provided exclusively through the reconciliation process.

The Trustees have also prepared estimates using two alternative sets of assumptions. Table III.D5 summarizes the estimated operations of the Part D account under the intermediate assumptions and under the two alternative sets of assumptions. Section IV.B2 presents the assumptions underlying the intermediate estimates in substantial detail, and it outlines the assumptions used in preparing estimates under the low-cost and high-cost alternatives.

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Table III.D5.--Estimated Operations of the Part D Account in the SMI Trust Fund during Calendar Years 2021-2031, under Alternative Sets of Assumptions

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Because of the price assumptions for these alternative scenarios, the expenditures presented in these scenarios represent a narrow range of outcomes, and actual experience could easily fall outside of this range. For the low-cost scenario, the Trustees assume higher price inflation, which leads to higher spending. Similarly, under the high-cost scenario, the Trustees assume lower price inflation, which leads to lower spending. These price inflation assumptions partially offset the effects of the other assumptions in the high-cost and low-cost scenarios, resulting in a narrow range of expenditures. Given the considerable variation in the factors affecting health care spending, actual Part D experience could easily fall outside of this range. Because the GDP assumptions in these scenarios are similarly affected by the price inflation assumptions, Part D expenditures as a percent of GDP provide better insight into the variability of spending than the nominal dollar amounts, as shown in table III.D5.

The alternative projections shown in table III.D5 illustrate two important aspects of the financial operations of the Part D account:

* Despite the differing assumptions underlying the three alternatives, the balance between Part D income and expenditures remains relatively stable. This result occurs because the premiums and general revenue contributions underlying the Part D financing are reestablished annually. Thus, Part D income automatically tracks Part D expenditures fairly closely, regardless of the specific economic and other conditions.

* As a result of the close matching of income and expenditures described above, together with anticipated continuing flexibility in the apportionment of general revenues, the need for a contingency reserve to handle unanticipated fluctuations is minimal.

Adequacy of Part D Financing Established for Calendar Year 2022

As noted previously, the Part D account in the SMI trust fund will be in financial balance indefinitely because the premiums paid by enrollees and the amounts apportioned from the general fund of the Treasury are determined each year so as to adequately finance Part D expenditures. Moreover, the appropriation for Part D general revenues has included an indefinite authority provision allowing for amounts to be transferred to the Part D account on an as-needed basis. This provision allows previously apportioned amounts to change without additional Congressional action if those amounts are later determined to be insufficient. Consequently, once an appropriation with this provision has been made, no deficit will occur in the Part D account, and no contingency fund will be necessary to cover deficits./53

As described in section III.C on the financial status of the Part B account, it is important to maintain an appropriate level of assets to cover the liability for claims that have been incurred but not yet reported or paid. In the case of Part D, however, most such claims are the responsibility of the prescription drug plans rather than the Part D program. Accordingly, the Part D account is generally not at risk for incurred-but-unreported claim amounts, and no asset reserve is necessary for this purpose

Another potential Part D liability exists to the extent that Part D reinsurance payments and low-income cost-sharing subsidy payments are based on plan estimates./54

Since actual Part D costs, as subsequently determined, will generally differ from plan bids, payment adjustments are made after the close of the year as needed to reconcile the accounts. When plan bids have been below actual costs, Medicare has made reconciliation payments to the plans from the following year's appropriated general revenues; thus, creation of a reserve for payment of such settlement amounts is not required. For these reasons, the Trustees have concluded that maintenance of Part D account assets for contingency or liability purposes is unnecessary at this time. Accordingly, evaluation of the adequacy of Part D assets is also unnecessary, and the Part D account is considered to be in satisfactory financial condition for 2022 and all future years as a consequence of its basis for financing. 3. Long-Range Estimates

Section III.D2 presented the expected operations of the Part D account over the next 10 years. This section describes the long-range expenditures of the account under the intermediate assumptions. Due to its automatic financing provisions, the Trustees expect adequate financing of the Part D account into the indefinite future and so have not conducted a long-range analysis using high-cost and low-cost assumptions.

Table III.D6 shows the estimated Part D incurred expenditures under the intermediate assumptions expressed as a percentage of GDP, for selected years over the calendar-year period 2021-2096./55

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Table III.D6.--Part D Expenditures (Incurred Basis) as a Percentage of the Gross Domestic Product/1

Note: Percentages are affected by economic cycles

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The Trustees assume that, during the initial 25-year period, increases in Part D costs per enrollee will vary while gradually converging to the growth rates described in sections II.C and IV.D. Based on these assumptions and projected demographic changes, incurred Part D expenditures as a percentage of GDP would increase from 0.48 percent in 2021 to 0.84 percent in 2096.

Figure III.D1 compares the year-by-year Part D expenditures as a percentage of GDP for the current annual report with the corresponding projections from 2021. The expenditures as a percentage of GDP are slightly lower than last year's estimates due to (i) higher GDP assumptions and (ii) lower spending attributable to slower price growth and higher direct and indirect remuneration (DIR), which are partially offset by higher enrollment.

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Figure III.D1.--Comparison of Part D Projections as a Percentage of the Gross Domestic Product: Current versus Prior Year's Reports

Note: Percentages are affected by economic cycles.

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

(Continues with Part 5 of 12)

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, editor@targetednews.com, Springfield, Virginia; 703/304-1897; https://targetednews.com