Medicare Trustees: Two Charts That Should Scare You

In what is emblematic of every annual Medicare trustee report, the most recent offers a word of warning (which is about as urgent as any warning you can expect from an actuary):

Without unprecedented changes...Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.

Perhaps former CBO director, Douglas Holtz-Eakin summed it up best when he tweeted:

Medicare and Social Security are still broken, going broke...because we've done nothing to fix them.

In a word, yes - this is the message that Medicare's trustees are sending Congress and the President. Neither Democrats (who may otherwise wish to sit on their laurels, confident that the ACA's cuts to Medicare have saved the program), nor Republicans can ignore the fact that Medicare - the health insurance safety net for over 50 million elderly and disabled Americans - is hemorrhaging money and efficiency.

It makes sense then, to take a moment to review how and why, and what can be done about it.

1. When You Assume

All projections - whether they come from the CBO, Medicare's Trustees, the White House, or the private sector - are based on a comprehensive set of assumptions. Assumptions can incorporate the gamut from changes in GDP, productivity, costs and virtually anything else that the authors find is relevant in their modeling efforts.

Of course, as the leading experts in risk-adjustment and financial modeling, actuaries know this well. And while the front-page projections of government accounting are usually based on a "current law" baseline (that law takes effect as written), there are often major differences between what is supposed to occur and what actually does. The latter is known in the policy world as "current policy" - what is expected to happen.

There are several important areas where current policy baselines are important to keep in mind, but one very salient example in the health policy realm is Medicare's infamous "sustainable growth rate" (SGR). The SGR governs the rate at which Medicare's payments to providers changes annually, and for many years the SGR required that physician payment rates be reduced - last year, the reduction would have been close to 30 percent. Because it is widely agreed that reductions in Medicare's payment rate would result in much worse access to care for Medicare's population, Congress has routinely overridden the reductions in its annual "doc fix." So, because it's unlikely that Congress will allow payment rates to be reduced, part of Medicare's "current policy" baseline is to assume that SGR cuts will not happen.

This "alternative scenario" has become so important, that now every report by Medicare's actuaries includes alternatives to current law.


Over time, the difference between current law and the SGR alternative projection will about to about 0.7 percent of GDP (over $100 billion); through the modeling period, the difference in Medicare spending comes to about 11 percent (well over $1 trillion). But that's not all. The top line in the graph assumes that IPAB is relatively ineffective, SGR cuts are overridden, and the ACA's cuts to Medicare will not be sustained past 2020 (a point that was made in the 2011 technical review of Medicare's actuarial reports) - the difference from the current law baseline to the full alternative policy is a massive 3.3 percent. This grows over the modeling period, and while the actuaries don't provide a full estimate, the total difference in Medicare spending between the two scenarios would be massive.

Unfortunately, there is likely no single solution here. The first step (and kudos to President Obama for including this in his FY14 budget) is to eliminate the SGR and immediately develop a new payment formula, replacing the SGR temporarily with a 1 or 2 percent increase in payment rates. The new formula would need to ensure that evaluation and management services are adequately compensated (so as not to skew too far in favor of specialists). This would address part of the issue, eliminating the need for a "doc fix" and moving current policy closer to current law. But ultimately, as long as Congress (and the President) believes in using gimmicks like provider payment reductions to hold down Medicare spending, we will continue to see a disconnect between current law and current policy - this only serves to make Medicare's future less certain, to no one's benefit.

2. Medicare Is (only slightly) More Solvent

During the last election cycle, a popular talking point became the solvency of Medicare's trust fund. For clarification, when we discuss Medicare's trust fund we usually refer to Medicare Part A - Hospital Insurance. This fund pays for inpatient hospital services, Part B (which actually has an increasing fund balance over the modeling period) pays for outpatient services, and Part D (which is funded largely through premiums) covers prescription drugs.

The new ominous deadline for Medicare Part A is now 2026 - a two year improvement from last year's report which projected that the trust fund would be depleted by 2024. This "improvement" is likely due to expenditures last year being lower than expected coupled with more optimistic forecasts about economic growth in later years (which in turn means greater payroll tax revenue).


But there's more to it than that. The 2026 figure comes from "intermediate" assumptions regarding costs - under the worst-case scenario assumptions the trust fund would be depleted 7 years earlier, in 2019.

Perhaps the solution here is simple. The actuaries note several times that there is no provision to pay Medicare Part A benefits with general revenue - so for some, the obvious fix would be to allow general revenue to be used for Part A. However, this would be short-sighted; it misses the entire point that Medicare, as is (even with the ACA's "productivity adjustments"), is unsustainable - both in the short-run and the long-run.

That one federal program alone will eat up at least 6.5 percent of GDP in the future should not be taken lightly by policymakers. Containing Medicare's costs is critical - reworking the SGR (as noted above) and Medicare's payment formula is an important step. Simplifying Medicare, by combining Part A and B deductibles, for instance, can help eliminate some of the program's "hospital favoritism." More drastic measures would forbid MediGap plans from covering deductibles or copays to ensure that beneficiaries still have some skin in the game and make smarter decisions. Going further, Medicare's eligibility age can be raised little by little, which would reduce Medicare spending by $148 billion over ten years.

What policymakers should not do, is rest easy thinking that existing "productivity" adjustments are good enough.

While the Medicare trustees report is rife with scary language (and many other scary charts), the actuaries make one point above all else: Medicare is not sustainable. The program is broken and will not survive without major changes - the earlier the better.

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