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Trustees' Report on a Stronger Medicare: Wishful Thinking?

By John Reichard, CQ HealthBeat Editor

August 5, 2010 -- Republicans hoping to uncrate live rounds of rhetorical ammunition against the health care overhaul law had to be disappointed Thursday in flipping through the pages of a new report by Medicare and Social Security trustees on the solvency of those programs — it credited the overhaul with strengthening not only Medicare, but Social Security, too.

At the same time, however, administration officials acknowledged the uncertainties behind the report's conclusion that the overhaul law will extend the solvency of the Medicare hospital trust fund a record 12 years — from 2017 to 2029.

Health and Human Services (HHS) Secretary Kathleen Sebelius said at a press briefing that she'll convene a technical advisory panel to examine the assumptions on which the solvency projections are based. Their findings will be available in time to influence next year's solvency projections, officials said. HHS invited nominations for members of the panel in a July 30 Federal Register notice and is accepting them until Aug. 10. The panel's first meeting is expected to occur this fall.

Panel members will weigh in on the likelihood that productivity gains underlying the law's low hospital payment rate increases can actually be accomplished, an administration official said at a background briefing on the report. Those low rate increases account for much of the $500 billion or more in Medicare savings projected for the first decade of the overhaul.

The savings are a big reason why the law extends the solvency of the hospital trust fund for so many years. Higher payroll taxes on affluent Americans also explain the stronger trust fund. The law increases those taxes by 0.9 percent for earnings above $200,000 in the case of single taxpayers and above $250,000 in the case of married couples filing joint returns.

In his own analysis, released several months ago, Medicare Actuary Richard Foster suggested a strong likelihood that the low rate increases are unsustainable and will be overturned by Congress at some point.

But the overall tone of the report is a big plus for the administration and the overhaul law. In an opening "message to the public" accompanying the report, trustees declared that "the outlook for Medicare has improved substantially" because of the law.

"Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year" before the overhaul law was passed, the message says.

And the projected shortfall in the hospital trust fund over 75 years has been chopped to 0.66 percent of taxable payroll from 3.88 percent in last year's report.

The report said the 75-year outlook for Social Security has somewhat improved because of a provision of the health care overhaul that imposes a tax starting in 2018 on high-cost health plans. The tax is expected to prod insurers to offer more efficient plans. To the extent they do, analysts say workers will have higher incomes, which in turn will yield more revenue from the Social Security payroll tax.

While the trustees express uncertainty about the law's assumption that the health care sector can actually make 1.1 percent gains in productivity each year to generate big Medicare savings, trustees do so in a way builds the law up, rather than suggesting that it is unsustainable and should be changed.

"The improvement in Medicare's finances projected in this report highlights the importance of making every effort to make sure that the Affordable Care Act [the overhaul law] is successfully implemented," the report says.

The hospital trust fund is far from being the only thing that determines the solvency of Medicare overall, which also funds doctor and other outpatient care through Part B of the program, private health plans through Part C and prescription drug benefits through Part D.

Both Part B and Part D will remain adequately financed into the indefinite future "because current law automatically provides financing each year to meet the next year's expected costs," the report says.

Part B spending now accounts for 1.5 percent of the Gross Domestic Product (GDP). Last year's trustees' report projected that would increase to 4.5 percent of the GDP in 75 years. But under current law it's expected to reach only 2.5 percent of the GDP by that time.

But the productivity gains required to achieve Medicare savings under the law may prove difficult over long periods of time, the report acknowledges, "and will probably require that payment and health care delivery systems be made more efficient than they are currently."

An administration official said the changes that will be tested under the law, such as the development of "accountable care organizations" to better coordinate care by multiple providers and "bundled payment" to reduce incentives for high volume care, will help providers make the needed productivity gains.

But whether these changes can be made in a way that consistently brings down the rate of cost growth has yet to be demonstrated. Foster, the Medicare actuary, has estimated that the law must save Medicare $233 billion over ten years through productivity gains in order to meet its savings targets.

The extended solvency of the hospital trust fund doesn't mean it's in good shape either. The report says "the fund is not adequately financed over the next 10 years." Its outlays have exceeded its income annually since 2008 and are expected to do so through 2013. "The shortfalls projected for the next four years can be met by redeeming trust fund assets, which at the beginning of 2010 were $304 billion, but the asset balance would fall below the Trustees' recommended minimum level starting in 2012," the report says.

Depletion of the assets of the fund resulting in its "exhaustion" does not mean it would run completely out of money in 2029, but that its dedicated revenues would only be able to pay 85 percent of hospital costs. Dedicated revenues coming into the fund would be sufficient to cover a declining percentage of its costs over time, dropping from 85 percent in 2029 to 76 percent by 2045, then slowly rising again to 89 percent in 2084.

The improvement in Part B funding also isn't what it's cracked up to be because it assumes that huge cuts in Medicare physicians payments, such as a 23 percent cut scheduled at the end of the year, will actually occur. That's almost certainly not the case.

Actual Part B costs will hinge on what Congress does to block those cuts. An alternative projection in the report estimates that Part B spending will be 5.2 percent of the GDP 75 years from now, not the 2.5 percent projected under current law.

The monthly Part B premiums seniors pay for doctor care also may be rising sharply for some higher income beneficiaries. The report says that "as occurred in 2010, it is expected that about one quarter of Part B enrollees will be subject to unusually large premium increases next year. This occurs because premium rates are set so that total premiums finance a specific share of Part B costs, and it is projected that the other three-quarters of Part B enrollees will not be subject to a premium increase in 2011 due to an expected zero Social Security benefit cost of living adjustment in December 2010."

An administration official said that monthly premiums could rise for some beneficiaries from $110.50 a month now to $129.60 a month next year.

Overall, the trustees concluded that while the overhaul law made improvements in Medicare and Social Security, the "significant longer term financial imbalances of the programs still need to be addressed. The sooner action is taken to address the long-run financial imbalances, the more reform options will be available," they said.

Republicans, however, charge that the report is a sham in that the law doesn't actually save money to be used for Medicare in later years. Instead, it uses the money to finance another entitlement program, coverage of the uninsured, they said.

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