Bloomberg News

Medicare’s Financial Condition Holds Pat After Debt Deal

April 23, 2012

The Centers for Medicare and Medicaid Services office, part of the U.S. Department of Health and Human Services, stands in Woodlawn, Maryland.  Photographer: Jay Mallin/Bloomberg

The Centers for Medicare and Medicaid Services office, part of the U.S. Department of Health and Human Services, stands in Woodlawn, Maryland. Photographer: Jay Mallin/Bloomberg

The deal President Barack Obama made last year with Republicans to reduce the U.S. deficit may have stalled a worsening in the financial condition of Medicare.

The debt-reduction legislation included cuts to Medicare payments that will be enacted in 2013. Those pending reductions are offsetting gloomier assumptions about the nation’s future economic performance, leading to no change in the 2024 date that trustees said Medicare will exhaust its main trust fund.

“While Medicare is stable for now, we have a lot of work ahead of us to guarantee its future,” Marilyn Tavenner, acting administrator for the Centers for Medicare, said in a statement.

The insolvency date didn’t change, in part, because of 2 percent payment cuts called for in the congressional debt- reduction deal, according to a report today from the trustees. The long-term projections for the U.S. health program, which covers the elderly and disabled, still worsened because the trustees adopted more conservative assumptions about economic growth, which would lead to reduced revenue from Medicare’s payroll tax, and the growth of Medicare’s costs.

“Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible,” the trustees said in a summary of the report. The trustees include Treasury Secretary Timothy F. Geithner and Health and Human Services Secretary Kathleen Sebelius.

Costs Rise

Medicare costs rose about 5 percent to $549 billion last year as the program covered about 49 million people. The program is central to congressional debate over the nation’s debt, with Republicans proposing to convert Medicare to a system in which the elderly would receive subsidies to buy private insurance, instead of the government paying hospitals and doctors for their care.

Medicare has three parts -- A, B, and D -- that cover hospital inpatient services, outpatient care and prescription drugs. Each of those parts is paid for with trusts funded by taxpayers. Part C, known as Medicare Advantage, includes care paid for by health plans run by insurance companies such as UnitedHealth Group Inc. (UNH:US) and Humana Inc. (HUM:US)

The Part A trust fund, which pays for hospital care, is the one that will run out of money. Parts B and C share a separate trust fund that doesn’t face insolvency because it automatically draws money from the U.S. Treasury.

$5.5 Trillion Deficit

A mix of negative and positive observations and assumptions about Medicare’s spending added up to no change in the projected date of the Part A trust fund’s insolvency, senior administration officials told reporters. The officials asked not to be identified as a condition of the briefing.

Fewer Medicare beneficiaries than expected were admitted to hospitals in 2011, and when they were, their care was less costly than anticipated, one official said.

Medicare’s leaders don’t yet know why hospitalization fell and plan to study the development, the official said. One explanation: the first members of the Baby Boom generation began enrolling in Medicare last year, and younger Medicare beneficiaries tend to be healthier and less costly.

Over the next 75 years, the Part A trust fund faces a $5.5 trillion deficit, $2.3 trillion more than in 2011, according to the report. That projection assumes planned cuts in payments to doctors, hospitals and other health providers aren’t blocked by Congress.

Blocking those cuts would boost the long-term deficit to about $9.7 trillion in 2012 dollars.

Payments for hospitals and other inpatient care would be cut automatically if the Part A trust fund reaches insolvency, the trustees said.

“Lawmakers have never allowed the assets of a Medicare trust fund to become exhausted” in practice, the trustees said.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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