Kusserow’s Corner: Medicare Trust Fund Estimated to Survive through 2030

It is widely known that the aging of the population is creating a “time bomb” for Medicare Part A. The question for decades has been when will the bomb explode, that is, when will the Fund bankrupt and not have enough money to pay for Medicare Beneficiary services. The Trust Fund is supported by the Federal Insurance Contribution (FICA) tax of 7.65 percent that is automatically withheld from every employee’s check with another 7.65 percent being paid by the employer on behalf of the employee. This is to pay into both the Social Security and Health Insurance (HI) Trust Funds. Of the 7.65 percent FICA, exactly 1.45 percent of the salary goes into the HI trust.

The reason for the time bomb concern is that, demographically, we have long known that the ratio of working employees that contribute to the trust funds is declining against the growing number of elderly individuals who are drawing against the funds as Social Security recipients and Medicare beneficiaries. The simple reality is that Americans are living longer. There are only a few options open for staving off the explosion for the Medicare Trust Fund: raise FICA taxes, reduce the rates of escalation of health care costs, and/or cut benefits.

During my tenure as HHS Inspector General, we worked diligently to reduce the rate of health care costs due to waste, abuse, and fraud. The Office of Inspector General (OIG) continues in this effort. No matter the amount of effort, this cannot but slightly slow down the rate of the explosion. Other measures to reduce the rate of increase in health care costs relate to cutting back expenditures for health services, not an attractive alternative. The daily press speaks about changes in reimbursement initiatives by Medicare and how that invokes a great deal of outcry from the provider community. The most controversial method to staving off bankruptcy of the HI is to cut on the benefit side of the equation. So far, the only step in that direction is moving towards means-tested programs whereby those with larger incomes may receive fewer benefits.

So, the question comes down to the estimated date of the explosion or bankruptcy of HI. This year, the Office of the Actuary in CMS issued its most recent report on the state of the Medicare Trust Fund to the Trustees who are mandated to report annually to Congress on the financial operations and actuarial status of the program. There is one combined report, discussing both the HI program (Medicare Part A) and the Supplementary Medical Insurance (SMI) program (Medicare Part B and Prescription Drug Coverage). It is the second-largest social insurance program in the U.S. after Social Security, with 52.3 million beneficiaries and total expenditures of $583 billion in 2013. The Trustees Report details a substantial amount of information on the past and estimated future financial operations of the Trust Funds. The report projects that the Medicare HI Trust Fund will face depletion by 2030.

The Trustees project that total Medicare costs (including both HI and SMI expenditures) will grow from approximately 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035, and will increase gradually thereafter to about 6.9 percent of GDP by 2088. The Trustees noted that projected long-term actuarial imbalance is smaller than that of the Social Security trust funds under the assumptions employed in this report.

It is important to note that Part B of SMI, which pays doctors’ bills and other outpatient expenses, and Part D of SMI, which provides access to prescription drug coverage, is outside the Trust Fund. Under current law, it is funded by the Treasury of the United States and is part of the federal budget. As such, the federal government automatically provides financing each year to meet the next year’s expected costs. General revenues finance roughly three-quarters of these costs, and premiums paid by beneficiaries finance almost all of the remaining quarter. SMI receives a small amount of financing from special payments by states and from fees on manufacturers and importers of brand-name prescription drugs.

However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 1.9 percent of the Gross Domestic Product (GDP) in 2013 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.5 percent of GDP by 2088. What this means is that it could bankrupt the federal government. As such, we can expect that health care will remain a top policy issue for the federal government for years to come as they seek solutions to a problem that is growing daily. What providers can expect is increased scrutiny and action by enforcement agencies to find any and all waste, abuse, and fraud that is contributing to the problem.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2014 Strategic Management Services, LLC. Published with permission.