A First Look at the New Medicare Trustees Report 
Jeff Lemieux
preliminary March 23, 2004

The headlines will say that the Medicare's financial outlook has worsened significantly because of the 2003 prescription drug law.  That is true in some senses, but not in others.  For example, the drug benefit will substantially increase the overall cost of the program.  But the new drug law didn't contribute much to the fact that Medicare's Part A Trust fund -- the traditional (but incomplete) measure of the program's finances -- is now estimated to be depleted in 2019, seven years earlier than the previous estimate.

Outline:
Projected Medicare Spending as a Percent of GDP
Reasons for the Speedup of the "Part A" Insolvency Date

Projected Medicare Spending as a Percent of GDP:  There are lots of ways to view Medicare spending in the long run.  The new 2004 trustees report experiments with a new "infinite" horizon present value figure, which attempts to convert Medicare's long-run cost into a current dollar figure.  These sorts of numbers seem very scary ($50 trillion is a lot of money, even in Washington), but they are best used when comparing alternative reform plans -- they don't mean much to the average person.

Alternatively, the trustees report now measures when Medicare spending would grow to the point where more than 45 percent of its funding would be from general revenues (as opposed to payroll taxes and beneficiary premiums).  This is interesting.  It would trigger new cost control consternation in Congress under the new Medicare law.  But it also is a bit of an artificial construct.

Probably the most helpful method is to consider projected Medicare spending as a percentage of GDP.  GDP is the measure of the overall size of the economy, which is, in turn, the source of important things like tax revenues.

Table 1 shows Medicare spending as a percent of GDP over the next 25-30 years.  During that time, the new drug benefit will be introduced and most of the baby boom generation (born in the decades after World War II) will have retired.

 Table 1.

Medicare and Social Security Spending
(as a percent of GDP)
	2000	2010	2020	2030
Medicare
Part A (Hospital)	1.3	1.6	2.0	2.6
Part B (Physician)	1.0	1.3	1.8	2.5
Part D (Drugs)	0.0	0.8	1.3	1.8
Total	2.3	3.7	5.1	7.0
Social Security	4.2	4.3	5.3	6.3
Source: Centrists.Org, 2004 Trustees Reports

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Medicare spending is expected to triple between 2000 and 2030, from 2.3 percent of GDP to 7 percent.  By contrast, Social Security spending is only expected to grow by about 50 percent, from 4.2 percent of GDP to 6.3 percent.  Social Security and Medicare combined will double as a percentage of the economy, from 6.5 percent in 2000 to 13.3 percent in 2030. 

Reasons for the Speedup in the Part A Insolvency Date:  Many people associate Medicare's financial health with the status of its Part A (hospital) section, which is mostly financed by payroll taxes.  By contrast Part B is financed by a combination of general revenues (75 percent) and beneficiaries' premiums (25 percent).  The new Part D drug benefit will be financed mostly by general revenues as well, with smaller contributions from beneficiary premiums and assessments on states.

According to today's trustees report, the Part A fund is currently using "interest" to pay for small shortfalls in payroll taxes.  By 2010, the fund will start to decline (interest will no longer be sufficient to make up the shortfall), and by 2019 the fund balance will fall to zero.

Of course, these accounting mechanisms are also artificial (Congress could always inject general revenues into Part A, as it does in Part B and will do for Part D).

What is more interesting is why the Medicare actuaries think the Part A fund's financial situation is getting worse.

For example, Table 2 shows the reasons for the deterioration in the Part A fund's outlook.  Most are technical, relating to a changed estimation period or new assumptions.  About one-quarter of the deterioration is due to the drug bill, which raised payments for rural health providers and private health plans.  Therefore, the drug bill contributed a little less than 2 years to the "speedup" of the Part A insolvency date from 2026 to 2019.

 Table 2.

Change in Medicare Part A Outlook
Previous Shortfall (percent of payroll)				-2.40
Change in Valuation Period (2004-2078)				-0.09
Projection Base (New 2003 Actual Data)				-0.17
Managed Care Risk Adjustment				-0.05
Hospital Assumptions				-0.14
Legislation (Drug Benefit Bill)				-0.17
Economic and Demographic Assumptions				-0.10
New Shortfall (percent of payroll)				-3.12
Source: Centrists.Org, 2004 Trustees Report

Links:
Medicare 2004 Trustees Report

Centrists.Org CBO vs. the Bush Administration on Medicare -- A Difference of Opinion, Not a "Raised" Estimate (March 23, 2004)

Centrist Policy Network Medicare and Rx Drug Resource Page