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Trustees' Report Projects 2017 Insolvency of Medicare Hospital Fund

May 12, 2009 -- By John Reichard, CQ HealthBeat Editor

Trustees of the Medicare program announced Tuesday that the fund that pays for hospital care will be exhausted in 2017, two years earlier than they projected a year ago. Correcting the fiscal imbalance will require "substantial changes" to funds coming in and going out of the fund, "even in the short-range alone," according to the trustees.

Obama administrations officials were vague, however, about how they would respond. Health and Human Services Secretary Kathleen Sebelius said the report "is a wake-up call for everyone who is concerned about Medicare and the health of our economy. And it's yet another sign that we can't wait for real, comprehensive reform."

Medicare trustees also said that one of every four enrollees in Part B of the program would see unusually large premium increases in 2010 and 2011. Seniors usually pay for Part B, which funds doctor care outside the hospital as well as other services, out of their monthly Social Security checks. Many of those seeing the increases face deductions of $104.20 each month next year, up from $96.40 this year. In 2011, the deductions would rise to $120.20. The most affluent seniors pay three times the standard Part B deductions. That means in 2010 they would see monthly deductions for the program of $312.60 and in 2011 of $360.60.

"Exhaustion" of the hospital fund does not mean it would run out of money. What it does mean is that it wouldn't be able to pay full reimbursement come 2017. So for each dollar claimed by hospitals for Part A services, the fund would be able to pay 81 cents. According to the report, the trust fund "could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax . . . or an immediate 53 percent reduction in program outlays, or some combination of the two," according to the report.

The unusually large Part B premium hikes for roughly one quarter of Medicare beneficiaries stem from a "hold harmless" provision in the law that keeps most Social Security recipients from seeing their monthly checks reduced when Part B premium increases are greater than the Social Security "COLAs"—the yearly adjustment in payments meant to keep up with increases in the cost of living. Because of significant increases in the consumer price index in the last five months of 2008, no COLA increase is expected for December 2009. That means the hold harmless provision protects more seniors from increases, reducing Part B revenues coming into the program and requiring higher increases for those not protected by the hold harmless clause.

At a Tuesday afternoon press briefing, Sebelius and Treasury Secretary Timothy F. Geithner leaned on pledges to overhaul health care to explain how they will respond to Medicare's slumping finances, saying that revamping the larger health care system is essential to bending down spending growth. "The most effective entitlement reform measure will be a major health reform that helps bring down the growth rate of national health care spending," Geithner said.

The administration officials also pointed repeatedly to a health industry pledge announced Monday to trim 1.5 percentage points from yearly spending growth over the next 10 years, which they said would save $2 trillion. However, industry groups haven't specified how they would reduce spending and skepticism abounds that they will deliver.

The idea that an overhaul will bend down spending growth is also an untested hypothesis. Asked what the administration will do in a couple of years to rescue the Medicare trust fund if an overhaul isn't producing results, Sebelius said, "we know a couple of things even though they may not have been effectively scored so far" by the Congressional Budget Office as saving money. "We know that preventive care is more cost effective than critical care. We know that coordinating end of life care will help to lower costs in the long run . . . we know that if we can reduce readmission to the hospital after being admitted the first time and cut down on hospital infection that will lower overall costs."

Typically, the Medicare trustees report would start a process known as the "Medicare trigger," which requires the president and Congress to introduce legislation that would extend the program's fiscal viability. Trustees announced that the program's finances are poor enough that under the law they are issuing a warning about its financial condition, the fourth time they have done so. But earlier in the year, the House approved a rules package that Democratic leaders said turned off the requirement, circumventing the process.

Rep. David Camp of Michigan, the top Republican on the House Ways and Means Committee, said "calls for reform are not enough . . . . Entitlement reform should be a bipartisan effort that starts today."

Sen. Charles E. Grassley of Iowa, the top Republican on the Senate Finance Committee, said "Kicking the can down the road isn't an option any more because we're at the end of the road. Necessary policy reforms to add efficiency and improve Medicare's fiscal health without cutting benefits will take time to implement. If Congress waits, the savings from those changes won't materialize until after the program becomes insolvent. At that point, the only options would be cutting provider payments, reducing benefits, or raising payroll taxes."

Rep. Pete Stark, D-Calif., chairman of the House Ways and Means Health Subcommittee, said "while opponents will use this as another excuse to arbitrarily slash and burn Medicare, our energies are better focused on how to reform our health system and rein in rising health costs." Stark added that "we have seen worse reports in years past and the Congress has always stepped in to strengthen the program's financial footing, and we will do so again."

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