Medicare’s Worsening Finances: The Other Shoe Drops

Kathryn Nix /

A week ago, the Medicare Trustees issued their annual report, which showed that the program is on the fact track to insolvency. The 2011 analysis projected that the Hospital Insurance Trust Fund (which funds Medicare Part A) will be insolvent in 2024, and the program’s long-term unfunded obligations—promised benefits that are not paid for—amount to $24.6 trillion. Heritage noted the highlights. Page 266 of the official report included a note from Richard Foster, the Medicare Actuary, who said the Trustees’ financial projections “do not represent a reasonable expectation for actual program operations.”

Late Friday afternoon, the Office of the Actuary (OACT) released a separate analysis detailing why the Trustees’ report is unrealistic. While the timing was curious, the reasoning is straightforward. Because the Trustees use assumptions based on current law, OACT warned, “the projections…should not be interpreted as our best expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved.”

The OACT analysis projected a dire future:

Faster Spending; Bigger Debt. OACT cautions that Medicare spending will reach 4.31 percent of gross domestic product (GDP) in 2020, compared to the 3.99 percent predicted by the Trustees. The difference over the long term is even more profound: By 2080, when the Trustees say Medicare spending would reach 6.25 percent of GDP under current law, the Actuaries say it will rise to 10.36 percent of GDP. Based on their analysis of the data, Republican Senate Budget Committee staff show that Medicare’s real long-term unfunded liability (over 75 years) would reach $36.8 trillion, not $24.6 trillion

Reduced Access or Higher Cost. The big differences between the conclusions of the Trustees and the Office of the Actuary are rooted in the severe statutory cuts to Medicare provider reimbursement that are already in current law under Obamacare. The Actuaries and many independent analysts believe Obamacare’s payment cuts to providers in Medicare would harm seniors’ access to health care if Congress allows them to go into effect.

Provider Payment Crunch. First, the flawed Sustainable Growth Rate (SGR) formula calls for scheduled reductions to physician payments, which in 2012 would cut physician reimbursement by a stunning 30 percent. The Trustees assume the cuts will occur, but the Actuaries warn that if they did, Medicare payment rates would fall to 57 percent of private insurance payment rates in 2012. That’s in the neighborhood of Medicaid, the government’s biggest welfare program, which physicians are fleeing in droves. If the SGR formula was applied consistently over the long-term horizon, rates would fall as low as 27 percent of private insurance payments by 2085—half of what Medicaid currently pays. Congress has delayed these Medicare physician payment cuts continually since 2003 to avoid these harmful effects, and it is reasonable to assume they will continue to do so.

The Medicare Actuaries also question the feasibility of Obamacare’s “productivity adjustments” to Medicare’s fee-for-service program, which would reduce reimbursement for hospitals and other providers based on economy-wide productivity gains. OACT explains,

Based on the historical evidence of health sector productivity gains, the labor-intensive nature of health care services, and presumed limits on the extent of current excess costs and waste that could be removed from the system, actual health provider productivity is very unlikely to achieve improvements equal to the economy as a whole over sustained periods.

Obamacare’s across-the-board cuts would cause 15 percent of hospitals, skilled nursing facilities, and home health agencies to become unprofitable by 2019. This number would climb to 25 percent in 2030 and 40 percent by 2050.

The message is clear: Congress must act now to save Medicare for future generations. The Heritage Foundation’s Saving the American Dream proposal explains how best to restore long-term solvency to the Medicare program while improving it for those it serves.

Co-authored by Robert E. Moffit, Ph.D.