Thursday, August 5, 2010

Preliminary Analysis of the “Official” Medicare Trustees Report

Below is a first cut of the highlights of the “official” Medicare trustees report released this morning.  I emphasize the “official” portion because, for reasons that the report makes clear, the trustees (or, more specifically, the Office of the Actuary, which prepares the trustees report) do not believe many of the cost savings in current law – including those created by the health care law – are realistic or sustainable.  Thus they have prepared an alternative technical report with additional information and assumptions. (I’ll summarize that report under separate cover shortly.)

Overall, the report projects significant uncertainty about the impacts of the new law, and questions about whether the law’s reductions can be sustained.  In the longer run though – and irrespective of the effects of double counting in the health care law, which the actuaries have already exposed – it’s clear that Medicare remains on an unsustainable path:  Expenses continue to grow at high rates, as do projections for future Medicare spending (except, interestingly enough, with respect to the privately-provided Part D prescription drug benefit).  Excerpts from the report follow below:

On the substantial uncertainty associated with PPACA:

“The effects of some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are much more uncertain than normal, especially in the longer-range future.” (page 2)

On the dubious nature of the productivity adjustments included in the law:

“It is possible that providers can improve their productivity, reduce wasteful expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price limitations. Similarly, the implementation of payment and delivery system reforms, facilitated by the ACA research and development program, could help constrain cost growth to a level consistent with the lower Medicare payments. These outcomes are far from certain, however. Many experts doubt the feasibility of such sustained improvements and anticipate that over time the Medicare price constraints would become unworkable and that Congress would likely override them, much as they have done to prevent the reductions in physician payment rates otherwise required by the sustainable growth rate formula in current law. (pages 2-3)

“It is important to note that the improved outlook for the HI trust fund depends in part on the feasibility of the productivity adjustments to payment updates for hospitals, skilled nursing facilities, home health agencies, and hospice care organizations. There is a significant likelihood that these providers would not be able to reduce their cost growth rates sufficiently during this period to match the slower increases in Medicare payments per service, in which case they would eventually become unable to continue providing health care services to Medicare beneficiaries. If such a situation occurred, and Congress overrode the productivity adjustments, then actual costs would be higher.” (page 26)

On the trustees’ report’s unrealistic assumptions:

“It is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report. We recommend that the projections be interpreted as an illustration of the very favorable financial outcomes that would be experienced if the productivity adjustments can be sustained in the long range—and we caution readers to recognize the great uncertainty associated with achieving this outcome. Where possible, we illustrate the potential understatement of Medicare costs and projection results by reference to an alternative projection that assumes—for purposes of illustration only—that the physician fee reductions are overridden and that the productivity adjustments are gradually phased out over the 15 years starting in 2020.” (page 3)

On the inadequacy of the Medicare Part A (Hospital Insurance – HI) trust fund:

“The [Hospital Insurance trust] fund is still not adequately financed over the next 10 years. HI expenditures have exceeded income annually since 2008 and are projected to continue doing so under current law through 2013.” (page 5)

“Although much improved, the HI trust fund still does not meet the short-range test of financial adequacy. In the long range, projected HI expenditures and scheduled tax income are much closer to balancing because of the new legislation, if the slower price updates can be continued indefinitely. If not, and prices are increased, then HI income and expenditures will remain substantially out of balance. Under either scenario, the trust fund does not meet the test of long-range close actuarial balance.” (page 8)

On rising tax rates for all Americans as a result of the health care law:

“The standard HI payroll tax rates are not scheduled to change in the future under current law and will remain constant at 2.90 percent. As noted, high-income workers will pay an additional 0.9 percent of their earnings above $200,000 (for single workers) or $250,000 (for married couples filing joint income tax returns) in 2013 and later. Because these income thresholds are not indexed, over time an increasing proportion of workers will become subject to the additional HI tax rate. Thus, HI payroll tax revenues will increase steadily as a percentage of taxable payroll.” (page 27)

On the rapid growth of costs in Medicare Part B:

“Part B costs have been increasing rapidly, having averaged 8.3 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 4.8 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 23 percent for December of 2010. If Congress continues to override these reductions, as they have for 2003 through November of 2010, the Part B growth rate would instead average roughly 8 percent.” (page 6)

On the fifth straight warning under the Medicare “trigger” (included in the prescription drug bill passed by Republicans) that the program is under-funded:

“The difference between Medicare’s total outlays and its “dedicated financing sources” is estimated to reach 45 percent of outlays in fiscal year 2010, the first year of the projection. This threshold is reached much earlier than projected in previous reports primarily due to lower HI payroll taxes in 2010. Based on this result, the Board of Trustees is required to issue a determination of projected “excess general revenue Medicare funding” in this report. This is the fifth consecutive such finding, and it again triggers a statutory “Medicare funding warning,” indicating that Federal general revenues are becoming a substantial share of total financing for Medicare. The law directs the President to submit to Congress proposed legislation to respond to the warning within 15 days after the date of the Budget submission for the succeeding year.” (page 6)

On the decrease in both actual and projected costs for the Part D prescription drug benefit:

“The projected Part D costs shown in table II.F1 and elsewhere in this report are somewhat lower than those in the 2009 report. The difference is primarily attributable to lower-than-expected spending in 2008 and 2009 as well as a reduction in the projected growth in prescription drug spending in the U.S. for the next 10 years. The reduced estimates are due to a higher market penetration of generic drugs and a decline in the number of new drug products that are expected to reach the market during this period. This impact is partially offset by higher costs from the gradual elimination of the Part D coverage gap (or “donut hole”) under the Affordable Care Act.” (page 35)