A few days ago I wrote about the Trustees’ report and the relatively light (but growing) work we need to do on the Social Security program to get it to self-sustainability–assuming the goal of having Social Security income adequately cover Social Security costs. (Note to touchy readers: my answer is not to eliminate the costs nor to immediately raise the income.)
My boss, Bob Bixby, took on the larger task of deciphering what the Trustees’ report tells us about the future of Medicare. In his post on Concord’s “The Tabulation” blog, he explains:
Good news comes and goes rather quickly in the 2010 Medicare Trustees’ Report. It begins with the optimistic news that Medicare’s finances have improved substantially as a result of this year’s health care reform bill, the Affordable Care Act (ACA). However, the report then goes on to explain in great detail why this apparently good news is probably not as good as it sounds.
According to the trustees, “actual future Medicare expenditures are likely to exceed the intermediate projections shown in this report, possibly by quite large amounts.” A separate memo prepared by the Center for Medicare and Medicaid Services (CMS) Office of the Actuary bluntly states that “the projections in the report do not represent the ‘best estimate’ of actual future Medicare expenditures.”
For one thing, it is important to keep in mind that Medicare’s finances remain very problematic, even with the improvements assumed to occur as a result of health care reform. If total expenditures increase as projected to 5.76 percent of GDP in 2040, it will represent a 60 percent increase from today. Increasing amounts of general revenues will be needed to pay promised benefits. This will put a growing strain on the rest of the budget, crowding out other priorities or forcing higher taxes. Even the extra dozen years of Part A trust fund solvency leave that part of the program insolvent by the time people who are now age 46 and younger qualify for benefits.
It is also important to note that the improvement in Medicare’s finances resulting from the health care reform legislation does not translate into a substantial improvement in the federal government’s long-term budget outlook. Most of the ACA’s Medicare savings and added payroll tax income have been dedicated to an expansion of Medicaid and to subsidies for those who need help purchasing mandated health insurance. In other words, the health care legislation does not “bank” its Medicare reforms for future Medicare expenses.
However, the most significant caveat noted by the trustees is that two key assumptions in the official projections are not realistic.
The first of these assumptions is that Medicare’s current law Sustainable Growth Rate (SGR) for physician payments will be followed, starting with a 30 percent cut over the next three years. The ACA did not change this requirement, even though Congress has routinely overridden it and is widely expected to do so again.
The second questionable assumption is that annual adjustments to non-physician provider payments will be limited to the growth of economy-wide productivity. This change was a major cost-saving initiative in the ACA. However, productivity gains in the health care sector have generally not kept pace with economy-wide gains. So maintaining this new standard would necessitate substantial and continuous efficiencies. The CMS actuaries estimate that payments would be 28 percent lower after 30 years than under the pre-ACA law and 56 percent lower after 75 years.
In the actuaries’ view, “neither of these [payment] update reductions is sustainable in the long range and Congress is very likely to legislatively override or otherwise modify the reductions in the future to ensure that Medicare beneficiaries continue to have access to health care services.”
In short, much of the apparent improvement in Medicare’s finances may prove to be illusory…
Bob goes on to highlight the Office of the Actuary’s “alternative scenario” in which physician payments are allowed to increase with medical inflation, and the changes in non-physician payment updates are phased out after 2019. Much like the warning from CBO’s “alternative fiscal scenario” (in their long-term budget outlook) about both tax policy and health reform, the Medicare actuaries’ alternative scenario provides a good cautionary tale about the policy choices that would veer us off the path to fiscal sustainability.