July 30, 2015

A Warning from the Medicare Trustees

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

My most recent article for e21 summarized the 2015 Social Security trustees’ report released last week. This companion piece does the same for theMedicare report. These are the last annual reports in which I participated as a public trustee based on my term that ended last autumn. The Medicare report shows that the program is on an unsustainable path. Following is some key information from the report about Medicare finances.

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My most recent article for e21 summarized the 2015 Social Security trustees’ report released last week. This companion piece does the same for the Medicare report. These are the last annual reports in which I participated as a public trustee based on my term that ended last autumn. The Medicare report shows that the program is on an unsustainable path. Following is some key information from the report about Medicare finances.

Understanding Medicare finances involves much more than just tracking the solvency status of a trust fund. Medicare has two trust funds, one for Hospital Insurance (HI), the other for Supplementary Medical Insurance (SMI). The HI trust fund operates in some ways analogous to Social Security. For example, it is financed primarily by a payroll tax on wages, it receives some income from taxing Social Security benefits, and each year the trustees estimate its actuarial status and projected duration of solvency. 

The SMI trust fund (from which physician services and prescription drug benefits are financed) operates quite differently. It receives about three-quarters of its revenue from the general government fund, a good portion of the remainder from beneficiary premiums, and is always kept solvent by statutory design. Thus, when SMI cost growth produces financial strains, these are manifested not in the threat of trust fund depletion but in rising cost obligations facing the federal budget as well as program participants. 

HI is the only part of Medicare for which the trustees produce solvency calculations, yet it is less than half of Medicare’s whole. In 2014 Medicare spent $269 billion from its HI trust fund but a larger $344 billion from its SMI trust fund. Any undue emphasis on the trustees’ estimates of actuarial balance will miss well more than half of Medicare’s larger financial picture.

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