Total Medicare costs are expected to grow from 3.7% of gross domestic product in 2018 to 5.9% by 2038, according to a new report from the Social Security and Medicare boards of trustees released Monday.
The report also projected that Medicare's Federal Hospital Insurance Trust Fund that covers Part A will run out by 2026, which the trustees predicted last year.
Since 2008, national health expenditure growth has been below historical averages, the report said. Medicare costs will increase gradually after 2038 to about 6.5% of GDP as the rolls grow and baby boomers enter retirement age.
Reserves in the trust fund that covers Medicare Part A decreased by $2 billion to a total of $200 billion at the end of last year, according to the report.
Another concern is that the trust fund's spending is "expected to be slightly higher than last year's estimates."
In 2018, the Part A trust fund's spending exceeded income by $1.6 billion. While Medicare can dip into reserves to cover the shortfall, it cannot borrow money from other sources per federal law.
Part A spending is slightly higher than last year's estimates because of higher-than-projected 2018 spending and higher projected payment updates.
Meanwhile, the Hospital Insurance Trust Fund will take in less money than estimated last year because of lower payroll tax revenue and reduced income from taxing Social Security benefits.
Over the next five years, the projected annual growth rate for the trust fund is expected to be 7%. That is a major boost from the growth over the previous five years of 3% annually.
The trend should cause concern for hospitals as Medicare reimbursements could start to stagnate as the Medicare population grows, said Michael Abrams, managing partner of the consulting firm Numerof & Associates.
"Many hospitals now are struggling to show a profit at Medicare rates," he said. "The writing is on the wall that healthcare providers need to figure out how to make money at Medicare rates."
That could involve participating in more value-based programs and shifting away from fee-for-service, Abrams added.
Things are rosier for the Federal Supplementary Medical Insurance Trust Fund, which has $104 billion in assets at the end of the year and is on solid financial footing. That trust fund covers Medicare Part B and Part D. The trustees expect both parts of Medicare will be funded over the next decade and beyond as the fund resets premium income and general revenue income each year.
The projections of both trust funds depend "significantly" on sustaining several cost-saving measures such as the "lower increases in Medicare payment rates to most categories of healthcare providers," the report said.
The report notes there are some caveats to its projections, especially when it comes to provider payment rates.
Trustees use projected rates mandated by the Affordable Care Act and the Medicare Access and CHIP Reauthorization Act. It calculates payment rates as rising by 0.75% each year for qualified physicians in advanced alternative payment models and 0.25% for those in the Merit-based Incentive Program.
But costs for both Part B and D are rapidly increasing, causing concern for trustees.
Costs for Parts B and D are expected to increase from 2.1% of GDP to 4% of GDP over the next 75 years, the trustees predicted.
Part B costs are especially high as drug costs continue to rise. The Trump administration has floated several proposed rules in recent months to clamp down on high drug costs, including applying formulary management tools such as step therapy to Part B and tying drug prices reimbursed under the program to the lower costs paid by foreign countries.
In Part D, the projections for growth are lower than in last year's report primarily due to higher rebates and "slower overall drug price increases."
The Trump administration is in the midst of finalizing a regulation that would eliminate some rebates and replace them with discounts at the point-of-sale.
Both trust fund projections don't include any possible effects of future changes as a result of research directed by the ACA.
For Social Security, the trustees project that benefits will be able to be paid out until 2035, a full year later than projected in last year's report.
The trustees did not endorse specific legislation but issued a warning to Congress to reduce or eliminate both programs' financing shortfalls.
"Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes," the report said.
High-ranking Trump administration officials used the report's release to bash Medicare for All, which has been embraced by many 2020 Democratic presidential hopefuls and some high-ranking Democrats in Congress.
"Instead of trying to expand Medicare into a universal entitlement that even covers wealthy Americans of working age, as some have proposed, we need to fulfill Medicare's promise to our seniors," HHS Secretary Alex Azar said in a statement.
CMS Administrator Seema Verma called the report a "dose of reality."
"Stripping around 180 million Americans of private coverage and adding them to Medicare won't fix the problem," she said in a statement.
Verma and Azar have previously said that Medicare for All, which would expand Medicare to every American, would imperil the current system.
Azar also touted the Trump administration's budget proposal released last month as a way to get Medicare spending under control. The budget proposal, which has received a cool reception from Congress, would shift $500 billion in payments to hospitals for uncompensated care and graduate medical education from the Medicare trust fund to the general fund. This would shrink Medicare's budget by $500 billion.
The budget proposal also hopes to save money by implementing site-neutral payments, which has gotten fierce pushback from the hospital industry.
Democrats in turn blamed Republicans for the looming shortfalls in Medicare.
"We continue to see how the Medicare trust fund has not recovered from years of Republicans' harmful policies," said Rep. Richard Neal (D-Mass.), chairman of the House Ways and Means Committee.
The American Hospital Association said that the report should be a wake-up call for Congress. It called for lawmakers to adopt reforms such as raising the eligibility age to be consistent with Social Security and means testing for higher income beneficiaries.
But Congress has lost a key referee on Medicare reforms.
This is the first trustee report since the 2018 repeal of the Independent Payment Advisory Board, a controversial panel created by the ACA to install cuts if Medicare spending reaches a certain threshold and Congress doesn't intervene. The panel was repealed in February 2018 after repeated Republican complaints that it took spending authority away from Congress.
But the loss of the panel takes away a key incentive for Congress to act on changes to shore up Medicare, said Alex Shekhdar, founder of the consulting firm Sycamore Creek Health Advisors.
"You still have to eat your asparagus and Congress has to do it under its own auspices," he said.