5 Points to Know on the 2012 Medicare Trustees Report

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The Medicare Board of Trustees released its annual report (pdf) today, and it showed the hospital trust fund, or Medicare Part A, has an insolvency date of 2024.

Every year, the Medicare Trustees report projects financial operations of the hospital insurance trust fund as well as the supplementary medical insurance fund, which consists of Medicare Part B and Part D. The Part A insolvency date estimate is the same as last year's, and CMS said "action is needed to secure [the trust fund's] long-term future." However, the trustees said the hospital trust fund insolvency date could have been eight years earlier, at 2016, if it weren't due to the Patient Protection and Affordable Care Act.

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"The Trustees Report tells us that while Medicare is stable for now, we have a lot of work ahead of us to guarantee its future," said Acting CMS Administrator Marilyn Tavenner in the release. As such, here are the main highlights of the year's report.

•    Hospital trust fund insolvency date. Nothing elicits more reaction from the Medicare Trustees report than the insolvency date of the HI trust fund. The trustees estimated Medicare Part A will remain solvent until 2024, but the fund is "not adequately financed over the next 10 years." The fund deficit increased to $27.7 billion in 2011, but the PPACA, Budget Control Act of 2011 (Medicare sequestration cuts of 2 percent to hospitals) and an assumed economic recovery are expected to grow the hospital trust's income faster than its expenses through 2018.

Medicare Trustees first began issuing the annual reports in 1970, and although they have predicted numerous dates over the years of when Medicare would go bankrupt, none have come to fruition. For example, in 1970, they projected the year of Medicare's insolvency would be 1972. In 1978, the bankruptcy date of Medicare was 1990. However, each annual report is based on the current law of the era and assumes that the law will go into effect. With this year's report, the Medicare Trustees gave projections as though the PPACA would stay in effect.

As such, the Trustees said the estimates give substance to the current-day picture of Medicare. "Although the current-law projections are probably poor indicators of the future financial status of Medicare, they serve the useful purpose of illustrating the exceptional improvement that would result if viable means could be found to permanently slow the growth in healthcare expenditures," the Trustees wrote. "The projections in this year's annual report provide an unequivocal incentive to vigorously pursue the development of effective and sustainable new approaches, with the potential to make quality healthcare more affordable."

•    SMI trust fund finances. The SMI trust fund, or Medicare Parts B and D, has sufficient financing over the next 10 years and beyond because premium and general revenue income for Parts B and D are reset each year to match expected costs. However, costs for each supplement have been increasing at a rapid pace. Over the past five years, Part B costs have increased by an average of 5.9 percent per year, and Part D costs have gone up by an average of 7.2 percent per year.

The sustainable growth rate continues to be a major impediment to the stability of Part B. Under current law, the Trustees projected an average yearly Part B growth rate of 4.9 percent for the next five years. However, if the SGR is not repealed or reformed before Jan. 1, 2013, there will have to be a 31 percent cut to the physician fee schedule, which is artificially keeping the Part B growth rate down. If lawmakers override the SGR, the Part B growth rate would average 7.6 percent over those five years.

Part D expenditures are expected to increased 8.8 percent through 2021, which is still far ahead of the project 5 percent growth rate of the U.S. economy overall.

•    Actuarial findings. In 2011, Medicare covered roughly 48.7 million people — 40.4 million who were 65 of age or older and 8.3 million disabled people. Roughly 25 percent of those beneficiaries are enrolled in Medicare Part C, better known as Medicare Advantage and is the managed care alternative.

Overall expenditures in 2011 for both Part A and Part B were $549.1 billion. Total income was $530 billion — of that total, $514.8 billion was non-interest income, and $15.2 billion was interest earnings.

•    Long-term finances. In addition to Medicare's short-term financial projections, the annual report always issues 75-year estimates of the HI trust fund and the SMI trust fund. From 2045 to 2085, tax revenues would only cover about 67 to 69 percent of projected Medicare hospital expenditures, and the HI costs would be roughly 2 percent higher than income.

For Part B, expenditures currently represent 1.53 percent of gross domestic product, and that figure is expected to increase to 2.52 percent by the time 2085 rolls around. Part B expenditures are tough to predict currently, though, as the SGR still plays a major factor into how the physician fee schedule would be set. For Part D, expenditures are roughly 0.44 percent of GDP, and that figure is expected to be around 1.5 percent in 2085.

•    Average per beneficiary costs. Parts A, B and D are all expected to see increases in average per beneficiary costs over the next decade. For Part A, the average per beneficiary cost in 2011 was $5,232, and intermediate estimates put that cost at $6,452 by 2021, an increase of 23 percent. However, the year-over-year increases for Part A are expected to be modest between 2012 and 2015 as the PPACA takes shape.

The average per beneficiary cost for Part B in 2011 was $5,222, and that figure is projected to be $6,847 in 2021. For Part D, the average per beneficiary cost was $1,870 in 2011, and that will spike to $3,230 in 2021.

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