A breather for Medicare

Medicare's hospital trust fund gained two years of solvency in the latest federal projections, but it is not clear why.

Friday's annual report of the Social Security and Medicare trustees delayed the bad news for the Hospital Insurance Trust Fund to 2026, two years later than they expected last year.

The change was credited to lower-than-expected growth in Medicare expenses, including lower bids from Medicare Advantage insurers and less use of skilled-nursing facilities last year.

The greater-thank-expected Medicare Advantage savings stemmed from provisions of the Patient Protection and Affordable Care Act.

Reduced spending on skilled-nursing facilities provided the “vast majority” of the $3.6 billion drop in what the trust fund paid out in 2012 compared with last year's projection, said a senior administration official speaking on condition of anonymity.

But the White House could not explain the decline in utilization. Among the possible reasons are that hospitals are retaining patients longer or discharging patients directly into the community, said Juliette Cubanski, a policy analyst at the Kaiser Family Foundation. “Or it could be a one-year statistical anomaly that we won't see again,” she said.

Administration leaders, though, focused on the portion of the lower costs attributed to the Affordable Care Act—principally an expectation of lower future Medicare Advantage bids.

“This confirms that the Affordable Care Act continues to strengthen Medicare,” HHS Secretary Kathleen Sebelius said at a Friday news conference.

Robert Reischauer, a Medicare trustee, said the extended solvency of Medicare made him “cautiously optimistic” about its future. He warned, however, that major challenges remain in establishing the program's long-term sustainability.

“That's not to say that the Affordable Care Act has not had a significant impact and that impact will grow over time,” Reischauer said.

Reduced tax receipts in 2012 partially offset the lower growth estimates.

The report concluded that the trust fund's costs will begin exceeding its income beginning in 2021, with the reserves depleted five years later. By 2026, the fund would only cover 87% of expected hospital charges and drop to 73% by 2087.

Even with the new improvements in projections for the hospital fund, its long-term outlook remained dark. Medicare's hospital insurance trust fund has a long-range actuarial deficit equal to 1.11% of taxable payroll, compared with the 1.35% figure reported in 2012.

Other notable provisions of the report included an expectation that cuts by the Independent Payment Advisory Board are unlikely to be triggered before 2017, due to Medicare cost growth that is slower than the overall economy.

In 2012, Medicare covered 50.7 million people—up from 48.7 million the previous year—including about 42 million aged 65 and older and 8.5 million Americans with disabilities. Expenditures for the program in 2012 totaled $574.2 billion, which was up from $549.1 billion in 2011.

The trustees' report showed that Medicare's supplemental insurance fund—which covers parts B and D—remains adequately financed into the indefinite future. But that is due to the automatic provision of general revenue funds to cover any cost growth. The cost growth of those funds is accelerating, the trustees noted, from 2% of GDP in 2012 to 3.3% of GDP by 2035.

Some of the projections rest on questionable assumptions. For instance, the Part B projections assume that a nearly 25% cut in Medicare physician fees will occur in 2014. But Washington policymakers broadly assume those cuts will be eliminated or delayed, as Congress has done repeatedly since 2003.

The trustees focused an unusual amount of attention on Medicare physician payment. That may portend movement this year on legislation to replace the much-maligned cost containment formula used by Medicare, Cubanski said.

It also remains unclear whether various Affordable Care Act measures the trustees relied on will occur, particularly productivity adjustments.

In April, the CMS replaced a planned 2% cut in Medicare Advantage insurer rates with a 3% increase. The reversal came after insurers and their allies in Congress brought enormous pressure to bear on the CMS.

“Given those uncertainties, future Medicare costs could be substantially higher than shown in the trustees current-law projection,” the report stated.

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