Medicare Hospital Trust Fund Will Be Insolvent by 2018

The Medicare hospital trust fund will become insolvent in 2018, two years earlier than was predicted last year, according to the 2006 annual report by Medicare trustees, the New York Times reports (Pear, New York Times, 5/2). Medicare's hospital expenses will exceed its income by 2010, the report says (Crowley et al., CQ Today, 5/1).

By 2018, the trust fund will be able to cover only 80% of estimated billings for inpatient care, according to the report. Beyond 2018, the condition of the trust fund will decline rapidly, it says (Alonso-Zaldivar/Havemann, Los Angeles Times, 5/2). The insolvency date is two years earlier than last year's projected date largely because of higher-than-expected hospital costs, the report says (Goldstein, Washington Post, 5/2).

"We do not believe the currently projected long-run growth rate of Social Security or Medicare are sustainable under current financing arrangements," the trustees write in the report, adding, "The sooner that solutions are adopted, the more varied and gradual they can be" (Fagan, Washington Times, 5/2).

Medicare's financial problems "come sooner -- and are much more severe" than Social Security's, the report says. According to the report, the Social Security trust fund by 2040 -- one year earlier than projected in 2005 -- will run out of reserves and will be able to cover only 74% of promised benefits.

The six trustees include two independent experts and four Bush administration officials, including HHS Secretary Mike Leavitt (Los Angeles Times, 5/2).

The 2006 report was delayed a month because of a dispute between administration officials and congressional leaders over the renomination of Thomas Saving and John Palmer, the two independent trustees who Bush recently gave recess appointments (CQ Today, 5/1).

Legislative Trigger

Under the 2003 Medicare law, the president is required to submit to Congress legislative proposals to reduce Medicare spending if trustees project that general revenue contributions will exceed 45% of total Medicare spending for two consecutive years within the first seven years of the program. The trustees 2006 report makes that projection for the first time, saying that the 45% threshold will be met in 2012.

That means President Bush would have to propose legislative changes to the program in 2007 if the trustees projections are similar next year (Lueck, Wall Street Journal, 5/2).

Drug Benefit

The report also contains enrollment and cost projections for the drug benefit, which is paid for from general revenue rather from than the hospital trust fund (Washington Post, 5/2). Not including premiums collected from beneficiaries and payments made by states, the drug benefit is projected to cost $872 billion from 2006 to 2014, down from $1.1 trillion estimated last year (New York Times, 5/2).

The trustees expect the cost of the drug benefit to equal 0.4% of the gross domestic product for 2006, down from an estimated cost of 0.6% of GDP for 2006 predicted in last year's report. The cost of the program is expected to reach 2.3% of GDP in 2080, compared with an estimate of 3.3% in last year's report.

Reasons for Estimates

According to CQ Today, the report attributes the reduced cost of the drug benefit to:

Lower-than-expected enrollment;
Lower-than-expected drug spending in 2004 and 2005; and
A change in the prediction that health care costs will increase more rapidly than per capita GDP(CQ Today, 5/1).

According to the report, the lowered cost estimate also is in part because an anticipated 4% increase in drug costs was offset when the private insurers sponsoring Medicare drug plans provided medication discounts sooner than expected (Wall Street Journal, 5/2). In addition, average monthly premiums for Medicare drug plans were lower than expected at $34.20 for 2006 and $35.86 for 2007. Estimates for average monthly premiums in last year's report were $37.37 and $41.22, respectively.

In a joint statement, Palmer and Saving said the projected costs of the drug benefit were "significantly lower than those in the 2005 report due to recent slower growth in overall prescription drug spending and lower enrollment in stand-alone prescription drug plans than was expected a year ago."

Part B Premiums

The report also projects that monthly premiums for Medicare Part B -- which covers outpatient care -- will increase to $98.20 for 2007. Basic Part B monthly premiums have increased more than 50% in the last three years, from $58.70 in 2003 to $88.50 this year (New York Times, 5/2).

Administration Comments

Leavitt said the report demonstrates that Congress should approve Bush's proposal to cut Medicare spending growth by $36 billion between 2007 and 2011. Leavitt said, "The message of this report is urgency," adding, "I do not want to stand here another year with just another bad report and another year of inaction. It's time to act" (Pugh, Philadelphia Inquirer, 5/2).

Treasury Secretary John Snow, a trustee, said the U.S. faces a "looming fiscal crisis as the baby boom generation moves into retirement" (Crutsinger, AP/Detroit Free Press, 5/2). Snow said, "With commendable foresight, Congress wisely included a new cost containment provision that can trigger congressional review of Medicare's finances. If this trend continues, and we expect that it will, the administration and the Congress will need to consider ways to address Medicare's finances in the near future" (CQ Today, 5/1).

Bush said, "The systems are going broke, and now is the time to do something about it" (Washington Post, 5/2).

Other Comments

Senate Finance Committee Chair Chuck Grassley (R-Iowa) said, "At some point, Congress is going to have to get down to the difficult business of restraining the cost growth of these programs." Grassley "stopped short of promising action soon," the Los Angeles Times reports (Los Angeles Times, 5/2).

Rep. John Dingell (D-Mich.), ranking member on the House Energy and Commerce Committee, said the "dire situation" predicted in the report is "an ill-disguised scare tactic to force cuts in a program that millions of Americans depend on," adding, "We need to protect, not pillage the Medicare program" (Carey, CQ HealthBeat, 5/1).

Rep. Pete Stark (D-Calif.), ranking member of the House Ways and Means Subcommittee on Health, said, "There is no crisis," adding, "Though the program's outlook has worsened on President Bush's watch, there remains plenty of time to mend rather than end Medicare" (Heil, CongressDaily, 5/2).

Marilyn Moon, a health care economist and former Medicare trustee, said that the legislative trigger "could give the president a good rationale for having a major Medicare reform proposal in next year's budget" but added that the 45% indicator is "a very phony crisis" (Los Angeles Times, 5/2).

Column

In his State of the Union address in January, President Bush called for a bipartisan commission to look at Medicare and Social Security, but to date, "there is no commission and no commissioners," and Bush "has mentioned the idea only twice since January," Washington Post reporter Dana Milbank writes in a column. "[N]ot to worry," Milbank concludes, "Even with yesterday's bad news, we still have a dozen years before Medicare collapses" (Milbank, Washington Post, 5/2).

The report is available online.

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