Medicare’s Wobbly Solvency

The Medicare Trustees released their 2012 report this week on the fiscal health of our favorite program and concluded that Medicare’s Part A Trust Fund won’t run out of gas until 2024, the same finding as last year.  That’s welcome news — but the conclusion rests on some shaky assumptions, and therefore the day of reckoning could come sooner.

Last year, the Trustees also predicted that the fund would become insolvent in 2024, five years ahead of its 2010 prediction of 2029 due to the slowdown in the economy and diminished tax receipts for Medicare.  This report acknowledges no further erosion in the economy by the Trustees since last year’s.  The Part A Trust Fund has been paying out more than it has received  since 2008. In 2011 alone, Medicare used $27.7 billion in trust fund assets to cover hospital insurance expenses.

The Trustees found that Medicare’s Part SMI Trust Fund — which covers Parts B and D — is balanced and that general revenue is expected to cover the program’s costs.  A problem here is that expenses for Part B likely will be higher than the report predicts because the report factors in a more than 30% cut to physician reimbursement  rates scheduled for 2013 under the SGR formula. Congress has passed several “doc fixes” since 2002 to offset the cuts scheduled under the SGR and is expected to continue to kick the can down the road.

Over the next 10 years the Part A Fund’s expenditures will grow by an annual average of 5.3%, and its income will grow by 6%. The Trustees expect the Fund to have only enough revenue by 2024 to pay 87% of projected costs that year — and even that conclusion is suspect as it’s based on several assumptions that aren’t realistic, including:

• A scheduled 31 percent pay cut for doctors in 2013, which Congress is almost certain to override and will inevitably use Part A funds to offset the cost.  A permanent fix to the SGR costs almost a half-year of solvency to the Trust Fund;
• That the 2% across-the-board cut to Medicare resulting from the collapse of the Congressional Super-Committee (sequestration) can be sustained over the coming decade;
• That the U.S. Supreme Court will not overturn the entire ACA in June, the possibility of which seems remote but increased given the tenor of the Court’s deliberations earlier this month;
• The trustees also said Medicare is on an unsustainable path over the long term that could cause expenditures to more than double as a percentage of GDP, from 3.7 percent now to 10.4 percent in 2086, under a worst-case scenario.
• The ACA is slated to reduce Medicare payments to hospitals and other providers, which lowers the trustees’ estimate of program spending. CMS Chief Actuary Rick Foster writes that that is unrealistic, noting “the best available evidence indicates that most health care providers cannot improve their productivity to this degree — or even approach such a level — as a result of the labor-intensive nature of these services.”

All of this calls into question whether we really have until 2024 before Medicare is upside down.  The only thing we know for certain is that the program will be the biggest political hot potato in the Washington debates for the foreseeable future, and that program volatility is the “new normal.”