Medicare’s trustees will issue their annual assessment of the program’s finances tomorrow. Although we don’t know what the report will show, the public should expect the projections of Medicare’s financial health to vary from one year to the next. That’s normal, and not a source of concern.
Friday’s report will reflect the relatively slow growth of Medicare in recent years. Medicare spending per beneficiary in fiscal year 2012 rose by only 0.4 percent — well below the growth in gross domestic product (GDP) per capita. Over the 2010-2012 period, Medicare spending per beneficiary grew at a 1.9 percent annual rate, while GDP per capita grew by 3.2 percent a year. The trustees’ new projections may assume that some of this slowdown in cost growth will continue, as the Congressional Budget Office has done.
The recommendations of the most recent Medicare technical advisory panel may also alter the projections. Every few years, the trustees appoint a group of outside experts to review the assumptions and methodology underlying the report. The most recent panel issued its recommendations in December 2012. Some of them would reduce projections of future costs, whereas others would increase them.
Last year’s trustees’ report projected that Medicare’s Hospital Insurance (HI) trust fund will remain solvent — that is, able to pay 100 percent of the hospital insurance coverage that Medicare provides — through 2024. In the upcoming report, the projected year of insolvency may move a year or so closer or further away. This does not mean that the program is facing “bankruptcy.” Even when the trust fund is projected for exhaustion, incoming payroll taxes and other revenues will be sufficient to continue paying nearly 90 percent of program costs. Moreover, trustees’ reports have been projecting impending insolvency for four decades, but Medicare has always paid the benefits owed because Presidents and Congresses have taken steps to keep spending and resources in balance in the near term.
Readers should also remember that health reform (i.e., the Affordable Care Act) has significantly improved Medicare’s financial outlook. The trustees reported last year that the Medicare hospital insurance program faces a shortfall over the next 75 years equal to 1.35 percent of taxable payroll — that is, 1.35 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period. This is much less than the 3.88 percent of payroll tax that the trustees estimated before health reform. If health reform were repealed, as the House of Representatives has repeatedly voted to do, HI would become insolvent about eight years earlier, and Medicare’s costs would be significantly higher and rise more rapidly in the years ahead.
You can find our analysis of last year’s report here, and our preview of the Social Security trustees’ report here. We’ll be back tomorrow with our initial reaction to the new reports.