Medicare trustees give warning

Thursday, 02 June 2011 01:00

We had written last month, concerning Medicare, that the Hospital Insurance (“HI”) Trust Fund “has faced problems with solvency almost since inception.

The Patient Protection and Affordable Care Act (“ACA”) of 2010 extended the officially projected date of HI insolvency from 2017 to 2029. However, examined more carefully, this improvement is based primarily on projections of greatly increased health care productivity, which may never be realized.”

This gets a little technical — please stay with me. By way of background, the HI Trust pays for Medicare, Part A, which includes hospital, nursing home, home and hospice care, and other services for the aged and disabled. There is a second trust fund, Supplementary Medical Insurance (SMI). It pays for Medicare, Part B, including doctors and outpatient care, and part D, which is for prescriptions and was enacted under President George W. Bush. SMI is called a trust fund, but it does not have long-term capital.

Each year, Congress must allocate enough to fund government obligations. Finally, as to Medicare Part C, “Medicare Advantage,” which is a private and public sector combo plan, it is paid on a per patient basis from both the HI and SMI trusts.

The trustees of the HI and SMI trusts have just published their annual report at cms.gov. The report is not comforting.

The report notes that the 2010 Patient Protection and Affordable Care Act — sometimes called “Obamacare” — requires the trustees to assume a series of future improvements in medical productivity and accompanying payment decreases.

Moreover, the act requires the trustees to assume a 30% reduction in Medicare payment rates for physician services, to be implemented in 2013, “despite the virtual certainty that Congress will override this provision,” and also despite the fact that this is economically unrealistic, given that many physicians decline to provide Medicare service even under the existing rate schedule. As a result, “it is important to note that the actual future costs for Medicare are likely to exceed those shown by ... this report.”

The report advances the official insolvency date for the HI Trust Fund from 2029 to 2024, five years earlier, despite the assumption of the expected benefits of Obamacare. The reason is simple: Income fell and expenses rose. In particular, payroll receipts for Medicare declined 1.3%, while expenditures increased 3.5%. This led to a depletion of $32.3 billion in the HI Trust.

As to the SMI Trust, its expenses under Part B are projected by the trustees to increase by 7.5% a year if Congress overrides the physician payment decrease, while expenses for Part D are soaring upward at 9.7%. How long can Congress afford to allocate additional funds as these rates increase?

The overall picture: Medicare payroll revenues in 2010 were about $58 billion. Another $205 billion had to be added by general revenues to meet the gap with expenses. SMI general revenues now equal 1.5% of U.S. gross domestic product. Overall Medicare spending for 2010 was $523 billion, or about 3.6% of U.S. GDP. These percentages will be increasing over time, as the population ages, health care costs rise faster than the general price index, and if program eligibility remains unchanged.

How to address these problems? I believe that it would take radical measures.

First, possibly raising the age of initial eligibility for most Medicare benefits, to be phased in over time. Second — although this would ignite political dynamite — setting income limits for Medicare eligibility.

Third, restructuring American medicine toward a more preventive model and away from reactive approaches. Fourth, getting away from the fee for service model of medicine and more toward rewards for maintaining the health of patients.

Andrew Szabo CFA is Managing Director of Greenwich Financial Management Inc. (dba). Securities offered exclusively through Choice Investments, Inc., member FINRA/SIPC. Questions, contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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