Unstable Future Predicted for Medicare, Depletion by 2026

June 06, 2018 - The Medicare Board of Trustees (MBT)’s latest report anticipates that Medicare’s Hospital Insurance (HI) Trust Fund will deplete by the year 2026 as Medicare spending continues to outgrow the trust’s collective revenues.

The HI Trust Fund is financed through payroll taxes and additional revenues through Social Security benefits. CMS Chief Actuary Paul Spitalnic told attendees during an American Enterprise Institute (AEI) event that the HI Fund will deplete in the next eight years as the fund’s income streams weaken to a point where it can no longer cover beneficiary care costs.

Spitalnic reiterated the MBT’s predictions that the HI is in danger of running out of funds because of gradual decreases in tax incomes, which cover Medicare’s Part A benefit costs.

Between 2017 and 2018, incomes for the HI fund fell by 6 percent, from $306 billion to $299 billion while its expenditures increased by $1 billion to $296 billion in 2018. In addition, the HI’s $10 billion surplus fell by $7 billion in 2018.

MBT estimates that the HI Fund’s income growth rate is expected to be only half of Medicare’s cost growth. Stiplanic told attendees at the AEI event that higher revenues from sources such as payroll tax increases will likely be necessary to cover Part A expenses.

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“This is predominantly a revenue story,” Spitalnic said. “Payroll taxes were lower in 2017 and as a result there is less income coming into the HI fund. The amount of HI of income coming in over the next few years is significantly lower that is was in previous years.”

Spitalnic briefly mentioned that the repeal of the Affordable Care Act’s individual mandate would likely exacerbate care costs under Part A.

“A repeal of the individual mandate is expected to lead to a higher number of uninsured and will result in a higher number of uncompensated payments to hospitals,” he added.

MBT’s new income and spending projections indicate that the HI is depleting at a faster rate than previously expected. In 2017, CMS and MBT estimated that the HI would run out of funds by the year 2029 because of new policies that limit prescriptions and inpatient spending totals.

However, there were a few bright spots in the MBT’s report related to the financial stability of the Supplemental Medical Insurance (SMI) Trust Fund and Part D spending.

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Beneficiary premiums and other federal revenue streams finance the SMI Fund that in turn helps cover Medicare Part B and Part D health plan benefits. MBT found that SMI Fund incomes were stable and there is less concern for financial stability within the SMI than the HI Fund.

Incomes for the SMI Part D fund increased from $98 billion in 2017 to 100.2 billion in 2018. In addition, SMI’s Part B incomes grew from $302 billion in 2017 to $305 billion for the current year.

CMS also issued a press release explaining that Part D spending is likely to decrease in the future. MBT estimates that higher pharmaceutical manufacturer rebates, a decline in spending for Hepatitis C drugs, and a slowdown in spending growth for diabetes drugs will lead to lower Part D costs.

MBT concluded that the SMI’s Part B and D funds are one of Medicare’s most secure financial channels, but will likely need to increase in future years.

“The Part B and Part D accounts in the SMI trust fund are expected to be adequately financed because premium income and general revenue income are reset each year to cover expected costs. Such financing, however, would have to increase faster than the economy to cover expected expenditure growth.”

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Generally, the MBT found that Medicare as a whole is starting to experience monumental fiscal challenges as total spending continues to climb.

In 2017, Medicare covered 58 million beneficiaries and spent a total of $710.2 billion to cover services across all of Medicare. That year, Medicare’s total revenues only reached $705.1 billion.

Medicare’s spending factors also continue to shift, Spitalnic explained, since the program has gradually moved from primarily covering inpatient costs to a broader range of services.

Over a 40-year period, the majority of Medicare spending has moved from inpatient spending to managed care organization spending. According to Stipalnic, Medicare spending factors will continue to shift in the future as other healthcare services increase in utilization within the Medicare ecosystem.

MBT called for Congressional lawmakers to address the depletion of the HI Fund as well as the exponential growth of Medicare’s total spending, warning Medicare could experience catastrophic financial outcomes without new reforms.

“Consideration of further reforms should occur in the near future. The sooner solutions are enacted, the more flexible and gradual they can be,” MBT said.

“Moreover, the early introduction of reforms increases the time available for affected individuals and organizations—including health care providers, beneficiaries, and taxpayers—to adjust their expectations and behavior.”