Medicare Income, Expenditures, and Trust Fund Assets, Fiscal Year, 1970-2011
Medicare is the second largest social insurance program. In 1999, 14.1% of the population was enrolled in Medicare. The chart above shows the income, expenditures, and trust fund assets of the Medicare system. Data for 2002 to 2011 are estimates. 1995 and 1997 were the only two years when expenditures exceeded income. But, during these two years, there were more than enough assets in the trust fund to cover the extra expenses.
Medicare benefits consist of two parts: hospital insurance (HI) and medical insurance (SMI).24 Each of these is funded differently and each fund is kept separate. SMI is funded by premiums paid by beneficiaries (in 2002, $54 a month) and by general revenues. Under current law, SMI premiums and general revenue rates are set yearly to match the projected SMI expenditures for the following year. HI income is linked to payroll tax revenues. Unfortunately, "per capita health care expenditures have increased significantly more rapidly than either wages or the economy overall."25 As a result, when people debate the solvency of Medicare, they are essentially debating the solvency of the HI portion.
The graph on the previous page may lead us to believe that income will continue to exceed expenditures, and in the event this doesn't happen (as in 1995 and 1997) there will be enough assets to draw from. But, if we look at costs and income as a percentage of taxable income (next chart) this may not be always the case. In fact, if the Centers for Medicare and Medicaid Services (CMS) projections are accurate (i.e. legislatures do nothing to offset rising costs), trust fund assets will have to be tapped as early as 2016. (The eldest Baby- Boomers will be turning 65 around 2011.) And, unlike previous years, CMS estimates that this withdrawal of assets will be ongoing. No longer will monies be added, and the amount gained through interest payments (assets are invested in U.S. Treasury securities) will be significantly less than what will be paid out. Some estimate that the Medicare trust fund will be insolvent by 2030.
Cost and Income Rates for Medicare Hospital Insurance (HI), 1967-2075
What can be done? In anticipation of rising costs, Congress enacted the Balanced Budget Act of 1997. It created the Medicare+Choice program (M+C). Under the plan, Health Maintenance Organizations (HMOs) provide Medicare beneficiaries a more comprehensive health care coverage than Medicare at an affordable price (albeit only by doctors of and at hospitals in their network).26 Medicare reimburses HMOs at a given rate for the service provided. This, along with new anti-fraud initiatives (discussed somewhat in the previous panel), preventative-care benefits, a simpler payment system, and establishment of medical savings accounts was expected to save Medicare $115 billion a year.
In reality, expenditures for Medicare decreased $617 million from 1997 to 1999. In 2002, 13% of Medicare beneficiaries were enrolled in M+C or other HMOs (down from 15% in 2001).
From 1999 to 2002, M+C HMOs began pulling out of the program due to inadequate reimbursements and federal regulations. According to Aetna U.S. Healthcare (Aetna), one of the HMOs that pulled out of the M+C program in certain areas, CMS "needs to provide adequate payment rates. While medical inflation increases at a double-digit rate (pharmacy costs alone are expected to rise almost 20 percent this year), the government is expected to increase payments to Medicare HMOs by about 5% in 2000." And, speaking about federal regulation, Aetna states: "…the Medicare+Choice interim final regulation is more than 90 pages and there have been more than 100 new mandates since the program's inception." HMOs also spent $95 million a year on a user fee to pay for the Medicare beneficiary information campaign.27
From 1999 to 2002, 2.2 million Medicare beneficiaries were affected by HMOs withdrawing from the M+C program or reducing their service areas. 327,000 no longer had access to a M+C plan. From 1999 to 2001, Medicare expenditures increased $29 billion.
In 2000, the Balanced Budget Refinement Act of 1999 (BBRA) was enacted to address the "flawed policy and excessive payment reductions resulting from the Balanced Budget Act (BBA) of 1997. It reflects the commitment of the President, Vice President, Secretary Shalala and Congress to act immediately to ensure that Medicare beneficiaries can continue to receive high-quality, accessible health care."28 What was its effect on HMOs?
"Although the General Accounting Office and other independent experts believe that managed care plans continue to be overpaid-even after the BBA," reimbursement rates increased. BBRA also provided entry bonuses for HMOs that set up service in counties previously not serviced by HMOs and for HMOs who previously withdrew from an area but decided to provide service again. The BBRA reduced user fees, provided HMOs with greater flexibility in benefits, and reduced quality standards for HMOs. But, despite the $4 billion the BBRA allocated for HMOs, from 2000 to 2002, HMOs continued to withdraw from the M+C program or reduced benefits, affecting 1.8 million people. Will Congress do anything in the future to head off the rising costs of Medicare? Not likely any time soon. The current debate in Congress entails adding prescription drug coverage to the original Medicare plan.
Sources: Centers for Medicare and Medicaid Services. 2002 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Trust and Federal Supplementary Medical Insurance Trust Funds. Retrieved September 12, 2002 from http://cms.hhs.gov/publications/trusteesreport/default.asp. Centers for Medicare and Medicaid Services. "Protecting Medicare Beneficiaries When Their Medicare+Choice Organization Withdraws," September 1, 2001. Retrieved September 12, 2002 from http://cms.hhs.gov/media/press/release.asp. David M. Walker. Comptroller General of the United States. United States Government Accounting Office. "Medi- care: Financial Outlook Poses Challenges for Sustaining Program and Adding Drug Coverage," April 17, 2002. Retrieved September 12, 2002 from http://www.gao.gov/new.items/d02643t.pdf. Aetna U.S. Healthcare. "Current Medicare Issues," August 2001. Retrieved September 13, 2002 from http://www.aetna.com/public_policy_issues/medicare.htm. The Majority Staffs. House and Senate Committees on the Budget. "The Balanced Budget Act of 1997: Summary of Provisions," July 30, 1997. Retrieved September 13, 2002 from http://www.house.gov/budget/papers/mainsumm.htm. Office of Research, Development, and Information. Centers for Medicare and Medicaid Services. "Program Information on Medicare, Medicaid, SCHIP, and other programs of the Centers for Medicare & Medicaid Services," June 2002. Retrieved September 12, 2002 from http://cms.hhs.gov/charts/default.asp. Centers for Medicare and Medicaid Services. "The 2001 Medicare and Medicaid Statistical Supplement to the Health Care Financing Review." Retrieved September 12, 2002 from http://cms.hhs.gov/review/supp/table10a.pdf. The Office of Congressman Neil Abercrombie. "Balanced Budget Refinement Act of 1999: Highlights." Retrieved September 13, 2002 from http://datahub-3.datahub.com/.
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