Medicare Trustees Release Annual Report, Need To Act Quickly

Future of Medicare

The Medicare Trustees Report issued yesterday shows that while Medicare's financial outlook remains troubling, the program's outlook has improved slightly compared to last year's estimate. The Trustees note that Medicare expenditures were $408 billion in 2006, or 3.1 percent of gross domestic product (GDP), and are projected to increase to over 11 percent of GDP in 75 years.

HHS Secretary Mike Leavitt said the report points to the need to act quickly and efficiently to strengthen and improve Medicare, including enactment of the steps proposed in the President's budget to address Medicare's fiscal health.

"Medicare reminds us of the great dilemma of health care " the things that are priceless are not price free," Secretary Leavitt said. "We are making progress toward finding peace between the two " toward addressing long-term solvency while providing up-to-date care. But today's report shows us that we have a long way to go."

"We are already beginning to implement steps to protect Medicare for future generations," said Centers for Medicare & Medicaid Services Acting Administrator Leslie V. Norwalk. "Medicare is now providing up-to-date preventive benefits and comprehensive drug coverage and is developing better information on quality and costs of health care to ensure that we pay appropriately for the health care of our beneficiaries. A critical element of this process is the movement we have underway for Medicare to change from being a passive payer of services to becoming an active purchaser of high-quality, efficient care. Until those steps are fully implemented, today's report starkly demonstrates the need to act to change Medicare's current growth trajectory."

In the estimate released today, Medicare's Hospital Insurance Trust Fund is projected to be exhausted in 2019, one year later than estimated in last year's report. This change results from slightly higher projected income and slightly lower projected expenditures than shown in last year's report. HI expenditure growth is estimated to average 7.2 percent per year over the next 10 years.

Because of continued rapid growth in expenditures for the program as a whole, program costs financed by general revenues, rather than by "dedicated revenues," are projected to exceed 45 percent in 2013. Because this result falls within the first seven years of the projection period (2007-2013), the Trustees have issued a determination of "excess general revenue Medicare funding."

This determination has now been made in two consecutive years, triggering a "Medicare funding warning." A Medicare funding warning requires President Bush to propose legislation to respond to the issue within 15 days following the release of the Fiscal Year 2009 Budget, which will be released in early February, 2008. The law requires Congress to consider the President's proposals on an expedited basis. The Medicare funding warning indicates that the level of Federal general revenues required to finance Medicare is an important concern, but it does not signify that program benefits cannot be paid.

As the Trustees note in this report, "These projections demonstrate the need for timely and effective action to address Medicare's financial challenges. Consideration of such reforms should occur in the relatively near future. The sooner the solutions are enacted, the more flexible and gradual they can be."

"This report shows once again that we are on an unsustainable course for Medicare spending," Secretary Leavitt said. "If Congress were to embrace the President's budget, we could not only eliminate this funding warning, we could also extend the life of the Hospital Insurance Trust Fund four years."

An important element of good news in this year's Trustees Report involves the new prescription drug benefit under Medicare Part D. The latest cost projections for Part D through 2015 are 13 percent lower than estimated in last year's report (and substantially lower than the original estimates from 2003). Plan bids for 2007 were 10 percent lower than in 2006, as a result of intense competition among plans to attract and retain enrollees and plans' expectations to further increase use of inexpensive generic drugs, rather than more costly brand-name equivalents. In addition, overall prescription drug costs have increased much more slowly during 2004-2006 than in prior years. Together, these developments reduce projected Part D costs significantly compared to the estimates in last year's Trustees Report. Moreover, because Part D benefits are provided through private drug insurance plans that receive federal subsidies, competition in the free marketplace has provided multiple benefit choices for Medicare beneficiaries at very affordable premiums.

Costs in all three components of Medicare are expected to increase rapidly. Although the Supplementary Medical Insurance trust fund is automatically in financial balance because beneficiary premiums and general revenue financing are reset each year to match the following year's expected costs, Part B benefit payments have increased by an average of 10.7 percent annually over the past five years, driven largely by outpatient hospital, durable medical equipment, and other spending, together with above-average growth in utilization of physician services.

Medicare Part A payments have increased by an average of 6.0 percent annually over the past five years. This continuing rapid growth remains a concern. The Trustees also emphasize that actual Part B costs are very likely to exceed the current-law projections, as the Trustees anticipate that Congress will continue to override an existing provision that would otherwise require substantial reductions in Medicare payments to physicians over the next 10 years.

Under the competitive approach used for Medicare Part D, beneficiaries and their caregivers, with support from Medicare and many local partners around the country, are using information on prices and coverage to choose prescription drug plans that are best for them personally in terms of formulary coverage, monthly premiums, and other benefit features. Competition, together with good information on quality and price, has the potential to lead to cost savings in many other areas of Medicare as well. CMS is implementing competitive reforms in traditional fee-for-service Medicare now as well, including in durable medical equipment, Part B drug pricing, and other areas.

"The Trustees' report is yet another important reminder that we must do all we can to better manage this unsustainable growth in health care costs," Norwalk said. "Similarly, the CMS Office of the Actuary recently note that national health expenditures will double over the next decade. This trend, along with this year's Trustees report and the Medicare funding warning, should be a clear signal that we must accelerate our efforts to improve the efficiency and value of the Medicare program."

Additional reforms and initiatives can help address Medicare's financial condition by shifting the program's focus to preventing costly complications and getting the right care to each patient - rather than simply paying more for more medical services and for more complications. Such initiatives and proposals include the following:

• Implementing reductions in market basket rates of growth, as proposed in the President's 2008 Budget, including a proposed 0.4 percent reduction in the growth rate of Medicare payments if Congress does not pass a specific alternative proposal to achieve needed improvements in sustainability;

• Increasing the share of program costs paid by the highest-income beneficiaries, as proposed in the 2008 budget;

• Pilot-testing quality and efficiency measures and developing strategies to pay more for better results rather than more services; and

• Implementing competitive bidding approaches to the delivery of care.

The Medicare trustees are Treasury Secretary and Managing Trustee Henry M. Paulson, Jr., Secretary of Health and Human Services Mike Leavitt, Labor Secretary Elaine L. Chao, and Social Security Commissioner Michael J. Astrue. Two other members are appointed by the President and represent the public. The public trustees are John L. Palmer and Thomas R. Saving. Leslie V. Norwalk, Acting Administrator of the Centers for Medicare & Medicaid Services, serves as Secretary to the Board of Trustees.