2012 Medicare Trustees Report - CMS

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2012 ANNUAL REPORT OFTHE BOARDS OF TRUSTEES OF THEFEDERAL HOSPITAL INSURANCE ANDFEDERAL SUPPLEMENTARY MEDICAL INSURANCETRUST FUNDSCOMMUNICATIONFromTHE BOARDS OF TRUSTEES,FEDERAL HOSPITAL INSURANCE ANDFEDERAL SUPPLEMENTARY MEDICAL INSURANCETRUST FUNDSTransmittingTHE 2012 ANNUAL REPORT OFTHE BOARDS OF TRUSTEES OF THEFEDERAL HOSPITAL INSURANCE ANDFEDERAL SUPPLEMENTARY MEDICAL INSURANCETRUST FUNDS

LETTER OF TRANSMITTALBOARDS OF TRUSTEES OF THEFEDERAL HOSPITAL INSURANCE ANDFEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS,Washington, D.C., April 23, 2012HONORABLE John A. BoehnerSpeaker of the House of RepresentativesWashington, D.C.HONORABLE Joseph R. BidenPresident of the SenateWashington, D.C.GENTLEMEN:We have the honor of transmitting to you the 2012 Annual Report of the Boards of Trustees of theFederal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance TrustFund, the 47th such report.Respectfully,Timothy F. Geithner, Secretary ofthe Treasury, and ManagingTrustee of the Trust Funds.Hilda L. Solis, Secretary of Labor,and Trustee.Kathleen Sebelius, Secretary ofHealth and Human Services,and Trustee.Michael J. Astrue, Commissionerof Social Security, and Trustee.Charles P. Blahous III, PublicTrustee.Robert D. Reischauer, PublicTrustee.Marilyn B. Tavenner, Acting Administrator of theCenters for Medicare & Medicaid Services, andSecretary, Boards of Trustees.

CONTENTSI. INTRODUCTION. 1II. OVERVIEW . 6A. Highlights . 6B. Medicare Data for Calendar Year 2011 . 10C. Economic and Demographic Assumptions . 12D. Financial Outlook for the Medicare Program . 21E. Financial Status of the HI Trust Fund . 27F. Financial Status of the SMI Trust Fund . 34G. Conclusion . 45III. ACTUARIAL ANALYSIS . 49A. Introduction. 49B. HI Financial Status . 501. Financial Operations in Calendar Year 2011. 502. 10-Year Actuarial Estimates (2012-2021) . 573. Long-Range Estimates . 664. Long-Range Sensitivity Analysis . 84C. Part B Financial Status. 891. Financial Operations in Calendar Year 2011. 892. 10-Year Actuarial Estimates (2012-2021) . 953. Long-Range Estimates . 111D. Part D Financial Status . 1151. Financial Operations in Calendar Year 2011. 1162. 10-Year Actuarial Estimates (2012-2021) . 1203. Long-Range Estimates . 128IV. ACTUARIAL METHODOLOGY . 132A. Hospital Insurance . 132B. Supplementary Medical Insurance . 1461. Part B . 1462. Part D . 161C. Private Health Plans . 173D. Long-Range Medicare Cost Growth Assumptions . 186V. APPENDICES . 198A. Medicare Amendments since the 2011 Report . 198B. Total Medicare Financial Projections . 202C. Illustrative Alternative Projections . 216D. Average Medicare Expenditures per Beneficiary . 222E. Medicare Cost Sharing and Premium Amounts . 226F. Medicare and Social Security Trust Funds and the FederalBudget . 234G. Fiscal Year Historical Data and Projections through 2021 . 241H. Glossary . 253C. List of Tables . 272C. List of Figures . 276I. Statement of Actuarial Opinion . 277

I. INTRODUCTIONThe Medicare program has two components. Hospital Insurance (HI),otherwise known as Medicare Part A, helps pay for hospital, homehealth, skilled nursing facility, and hospice care for the aged anddisabled. Supplementary Medical Insurance (SMI) consists ofMedicare Part B and Part D. Part B helps pay for physician,outpatient hospital, home health, and other services for the aged anddisabled who have voluntarily enrolled. Part D provides subsidizedaccess to drug insurance coverage on a voluntary basis for allbeneficiaries and premium and cost-sharing subsidies for low-incomeenrollees. Medicare also has a Part C, which serves as an alternativeto traditional Part A and Part B coverage. Under this option,beneficiaries can choose to enroll in and receive care from private“Medicare Advantage” and certain other health insurance plans thatcontract with Medicare. These plans receive prospective, capitatedpayments for such beneficiaries from the HI and SMI Part B trustfund accounts.The Social Security Act established the Medicare Board of Trustees tooversee the financial operations of the HI and SMI trust funds. 1 TheBoard has six members. Four members serve by virtue of theirpositions in the Federal Government: the Secretary of the Treasury,who is the Managing Trustee; the Secretary of Labor; the Secretary ofHealth and Human Services; and the Commissioner of SocialSecurity. Two other members are public representatives whom thePresident appoints and the Senate confirms. Charles P. Blahous IIIand Robert D. Reischauer began serving on September 17, 2010. TheAdministrator of the Centers for Medicare & Medicaid Services(CMS) serves as Secretary of the Board.The Social Security Act requires that the Board, among other duties,report annually to the Congress on the financial and actuarial statusof the HI and SMI trust funds. The 2012 report is the 47th that theBoard has submitted.The projections in the annual Trustees Reports, with one additionalspecification, are based on current law; that is, they assume that lawson the books will be implemented and adhered to with respect toscheduled taxes, premium revenues, and payments to providers andhealth plans. The additional specification is that the projectionsdisregard payment reductions that would result from the projected1TheSocial Security Act established separate boards for HI and SMI. Both boards havethe same membership, so for convenience they are collectively referred to as theMedicare Board of Trustees in this report.1

Overviewdepletion of the Medicare Hospital Insurance trust fund. Under aliteral interpretation of current law, payments would be reduced tolevels that could be paid from incoming tax and premium revenueswhen the HI trust fund was depleted. If the projections reflected suchpayment reductions, then any imbalances between payments andrevenues would be automatically eliminated, and the report wouldnot serve its essential purpose, which is to inform policy makers andthe public about the size of any trust fund deficits that would need tobe resolved to avert program insolvency. In practice, lawmakers havenever allowed the assets of a Medicare trust fund to becomeexhausted.Projections of Medicare costs are highly uncertain, especially whenlooking out more than several decades. One reason for uncertainty isthat scientific advances will make possible new interventions,procedures, and therapies. Some conditions that are untreatabletoday will be handled routinely in the future. Spurred by economicincentives, the institutions through which care is delivered willevolve, possibly becoming more efficient. While most technologicaladvances to date have tended to increase costs, the health carelandscape is shifting. No one knows whether these futuredevelopments will, on balance, increase or decrease costs.The financial outlook for Medicare is also uncertain because someprovisions of current law that are designed to reduce costs may not besustained. The clearest example of this issue is the sustainablegrowth rate (SGR) formula for physician fee schedule payment levels.The projections in this report assume that, as required by currentlaw, CMS will implement a reduction in Medicare payment rates forphysician services of more than 30 percent at the start of 2013.However, it is a virtual certainty that lawmakers, cognizant of thedisruptive consequences of such a sudden, sharp reduction inpayments, will override this reduction just as they have every yearsince 2003.The Patient Protection and Affordable Care Act, as amended by theHealth Care and Education Reconciliation Act of 2010, is another,and even larger, source of policy-related uncertainty. This legislation,referred to collectively as the “Affordable Care Act” or ACA, containsroughly 165 provisions affecting the Medicare program by reducingcosts, increasing revenues, improving certain benefits, combatingfraud and abuse, and initiating a major program of research anddevelopment to identify alternative provider payment mechanisms,health care delivery systems, and other changes intended to improvethe quality of health care and reduce its costs to Medicare. The Board2

Introductionassumes that the various cost-reduction measures—the mostimportant of which are the reductions in the payment rate updatesfor most categories of Medicare providers by the growth in economywide multifactor productivity—will occur as the Affordable Care Actrequires. The Trustees believe that this outcome, while plausible, willdepend on the achievement of unprecedented improvements in healthcare provider productivity. If the health sector could not transition tomore efficient models of care delivery and achieve productivityincreases commensurate with economy-wide productivity, and if theprovider reimbursement rates paid by commercial insurers continuedto follow the same negotiated process used to date, then theavailability and quality of health care received by Medicarebeneficiaries relative to that received by those with private healthinsurance would fall over time, generating pressure to modifyMedicare’s payment rates.Given these uncertainties, future Medicare costs could besubstantially larger than shown in the Trustees’ current-lawprojection. Figure I.1 illustrates how Medicare’s costs would increasefrom the Trustees’ current-law projections under two alternativescenarios. 2The bottom curve in figure I.1 shows the projected total cost ofMedicare under current law as a percentage of gross domestic product(GDP). The impact of an alternative to the current SGR provision isdepicted by the middle line in the chart. Under this illustration, theSGR-mandated physician fee schedule payment reductions arereplaced with a 1-percent annual increase throughout the 10-yearshort-range valuation period, or roughly 1 percent slower than theMedicare Economic Index (MEI). This assumption reflects theaverage Medicare physician fee schedule payment update that hasoccurred from 2003 through 2012, a period during which SGRreductions have been consistently overridden by legislative action.After the short-range valuation period, from 2022 through 2036, theassumed payment updates would gradually transition in such a waythat Medicare expenditures per beneficiary for physician services2At the request of the Trustees, the Office of the Actuary at CMS has prepared theseillustrative Medicare projections under hypothetical modifications to current law. Asummary of the illustrative alternative projections is contained in appendix V.C of thisreport, and a more detailed discussion is available at ds/Downloads/2012TRAlternativeScenario.pdf. Readers should not infer any endorsementof the policies represented by the illustrative alternatives by the Trustees, CMS, or theOffice of the Actuary. Appendix V.C also provides additional information on theuncertainties associated with the SGR provision and productivity adjustments to otherprovider payment updates.3

Overviewwould ultimately increase at the same rate as per capita nationalhealth expenditures.Figure I.1.—Medicare Expenditures as a Percentage of the Gross Domestic Productunder Current Law and Illustrative Alternative Projections12%Alternative to SGR,Productivity Adjustments, and IPAB10%Alternative to SGR8%Current endar yearThe illustrative expenditures shown by the top line in figure I.1assume (i) that the SGR payment reductions are overridden as in theprior scenario; (ii) that the productivity-related reductions in the nonphysician provider updates called for by the Affordable Care Act arephased down over the 2020 to 2035 period; and (iii) that the futurecost-saving actions of the Independent Payment Advisory Board(IPAB) are legislatively overridden. 3As can be seen in figure I.1, Medicare’s costs under the Trustees’current-law assumptions rise from their current level of 3.7 percent of3Underthe ACA, Medicare’s annual payment rate updates for most categories ofproviders would be reduced below the increase in providers’ input prices by the growthin economy-wide multifactor productivity (about 1.1 percent). In addition, the IPABwould be charged with recommending cost savings as are necessary to hold overall percapita Medicare growth to the average of the CPI and CPI-medical increases in 20152019 and to the rate of per capita GDP growth plus 1 percentage point thereafter(subject to certain limits). Unless overridden by lawmakers, these recommendationswould be automatically implemented. After 2035, this illustrative projection assumesthat Medicare payment updates will be set at the increase in providers’ input pricesminus a productivity adjustment of 0.4 percent per year so that they equal the growthrates assumed by the Trustees for the private sector; this assumption reflects anestimate of “achievable” productivity growth consistent with the recommendations bythe 2010-2011 Medicare Technical Review Panel.4

IntroductionGDP to 6.0 percent in 2040 and 6.7 percent in 2085. If the SGRrestraint were overridden, as described above, Medicare costs wouldrise to 6.5 percent of GDP in 2040 and 7.8 percent in 2085. Under thefull scenario, in which adherence to the ACA cost-saving measuresalso erodes, costs would rise to 7.0 percent of GDP in 2040 and10.3 percent in 2085.As the preceding discussion explains, and as the substantialdifferences between the Trustees’ current-law projections and thosefor the alternative scenarios illustrate, Medicare’s actual future costsare highly uncertain and are likely to exceed those shown by thecurrent-law projections in this report. Therefore, the Boardrecommends that readers interpret the current-law projections as anillustration of the very favorable financial outcomes that would beexperienced if the physician fee reductions were implemented and ifthe productivity adjustments and IPAB measures in the AffordableCare Act could be sustained in the long range. Readers are alsostrongly encouraged to review appendix V.C for further informationon this important subject. Where possible, the Trustees illustrate thepotential understatement of Medicare costs and other projectionresults by reference to these alternative projections.5

OverviewII. OVERVIEWA. HIGHLIGHTSThe major findings of this report under the intermediate set ofassumptions appear below. The balance of the “Overview” and thefollowing “Actuarial Analysis” section describe these findings in moredetail.In 2011In 2011, Medicare covered 48.7 million people: 40.4 million aged 65and older, and 8.3 million disabled. About 25 percent of thesebeneficiaries have chosen to enroll in Part C private health plans thatcontract with Medicare to provide Part A and Part B health services.Total expenditures in 2011 were 549.1 billion. Total income was 530.0 billion, which consisted of 514.8 billion in non-interestincome and 15.2 billion in interest earnings. Assets held in specialissue U.S. Treasury securities decreased to 324.9 billion.Short-Range ResultsThe estimated exhaustion date for the HI trust fund remains at 2024,the same year shown in last year's report. As in past years, theTrustees have determined that the fund is not adequately financedover the next 10 years. HI taxable earnings in 2011 were about equalto the last year’s estimate. However, the projected rate of growth inthese earnings is lower in 2012 through 2014 but then exceeds lastyear’s growth assumptions after 2014. HI expenditures in 2011 werelower than the previous estimate, but the projected level grows morerapidly than shown in last year’s report because of changes in HIprovider assumptions and the projected faster growth in earningsafter 2014. Most of this faster growth is offset by the expected2-percent reduction in HI outlays under the Budget Control Act of2011 for fiscal years 2013 through 2021.HI expenditures have exceeded income annually since 2008, andprojected amounts continue doing so through the short-range perioduntil the fund becomes exhausted in 2024. In 2011, 27.7 billion intrust fund assets were redeemed to cover the shortfall of incomerelative to expenditures, and 12.0 billion in interest payments weremade from the general fund of the Treasury to the HI trust fund. Theassets were 244.2 billion at the beginning of 2012, representingabout 90 percent of expenditures during the year, which is below theTrustees’ minimum recommended level of 100 percent. The HI trust6

Highlightsfund has not met the Trustees’ formal test of short-range financialadequacy since 2003.The SMI trust fund is adequately financed over the next 10 years andbeyond because premium and general revenue income for Parts B andD are reset each year to match expected costs. Part B and Part Dcosts, however, have been increasing rapidly, having averaged5.9 percent and 7.2 percent annual growth over the last 5 years,respectively. Under current law, the Trustees project an averageannual Part B growth rate of 4.9 percent for the next 5 years. Thisrate is unrealistically constrained due to a physician fee reduction ofalmost 31 percent that is called for in 2013 under current law. Iflawmakers override this reduction, as they have for 2003 through2012, the Part B growth rate would instead average 7.6 percent. ForPart D, the estimated average annual increase in expenditures is8.8 percent through 2021. The projected average annual rate ofgrowth for the U.S. economy is 5.0 percent during this period,significantly slower than for Part D and the probable growth rate forPart B.The difference between Medicare’s total outlays and its “dedicatedfinancing sources” reaches an estimated 45 percent of outlays in fiscalyear 20

2012 annual report of the boards of trustees of the federal hospital insurance and federal supplementary medical insurance trust funds communication from the boards of trustees, federal hospital insurance and federal supplementary medical insurance trust funds transmitting the 2012 annual

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