2014 Medicare Trustees Report - CMS

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2014 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 2014 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., July 28, 2014HONORABLE JOHN A. BOEHNER,Speaker of the House of RepresentativesHONORABLE JOSEPH R. BIDEN, JR.,President of the SenateGENTLEMEN:We have the honor of transmitting to you the 2014 Annual Report of the Boards of Trustees of theFederal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance TrustFund, the 49th such report.Respectfully,JACOB J. LEW,Secretary of the Treasury,and Managing Trustee of the Trust Funds.THOMAS E. PEREZ,Secretary of Labor, and Trustee.SYLVIA M. BURWELL,Secretary of Health and Human Services,and Trustee.CAROLYN W. COLVIN,Acting Commissioner of Social Security,and Trustee.CHARLES P. BLAHOUS III,Trustee.ROBERT D. REISCHAUER,Trustee.MARILYN B. TAVENNER,Administrator,Centers for Medicare & Medicaid Services,and Secretary, Boards of Trustees.

CONTENTSI. INTRODUCTION. 1II. OVERVIEW . 7A. Highlights . 7B. Medicare Data for Calendar Year 2013 . 11C. Economic and Demographic Assumptions . 13D. Financial Outlook for the Medicare Program . 19E. Financial Status of the HI Trust Fund . 25F. Financial Status of the SMI Trust Fund . 32G. Conclusion . 42III. ACTUARIAL ANALYSIS . 45A. Introduction. 45B. HI Financial Status . 461. Financial Operations in Calendar Year 2013. 462. 10-Year Actuarial Estimates (2014-2023) . 533. Long-Range Estimates . 624. Long-Range Sensitivity Analysis . 74C. Part B Financial Status. 801. Financial Operations in Calendar Year 2013. 802. 10-Year Actuarial Estimates (2014-2023) . 873. Long-Range Estimates . 100D. Part D Financial Status . 1011. Financial Operations in Calendar Year 2013. 1022. 10-Year Actuarial Estimates (2014-2023) . 1063. Long-Range Estimates . 114IV. ACTUARIAL METHODOLOGY . 117A. Hospital Insurance . 117B. Supplementary Medical Insurance . 1321. Part B . 1322. Part D . 145C. Private Health Plans . 157D. Long-Range Medicare Cost Growth Assumptions . 170V. APPENDICES . 181A. Medicare Amendments since the 2013 Report . 181B. Total Medicare Financial Projections . 191C. Current Law and Illustrative Alternative Projections . 205D. Average Medicare Expenditures per Beneficiary . 213E. Medicare Cost Sharing and Premium Amounts . 217F. Medicare and Social Security Trust Funds and the FederalBudget . 225G. Infinite Horizon Projections . 232H. Fiscal Year Historical Data and Projections through 2023 . 239I. Glossary . 251C. List of Tables . 271C. List of Figures . 275J. Statement of Actuarial Opinion . 276

I. INTRODUCTIONThe Medicare program has two components. Hospital Insurance (HI),otherwise known as Medicare Part A, helps pay for hospital, homehealth following hospital stays, skilled nursing facility, and hospicecare for the aged and disabled. Supplementary Medical Insurance(SMI) consists of Medicare Part B and Part D. Part B helps pay forphysician, outpatient hospital, home health, and other services forthe aged and disabled who have voluntarily enrolled. Part D providessubsidized access to drug insurance coverage on a voluntary basis forall beneficiaries and premium and cost-sharing subsidies for lowincome enrollees. Medicare also has a Part C, which serves as analternative to traditional Part A and Part B coverage. Under thisoption, beneficiaries can choose to enroll in and receive care fromprivate Medicare Advantage and certain other health insuranceplans. Medicare Advantage and Program of All-Inclusive Care for theElderly (PACE) plans receive prospective, capitated payments forsuch beneficiaries from the HI and SMI Part B trust fund accounts;the other plans are paid on the basis of their costs.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 2014 report is the 49th that theBoard has submitted.The basis for the projections in this report has changed since lastyear. Specifically, this year’s projections reflect a second exception tocurrent law, as explained below.1TheSocial 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

OverviewIn last year’s report, with one exception related to Part A, theprojections were based on current law; that is, they assumed thatlaws on the books would be implemented and adhered to with respectto scheduled taxes, premium revenues, and payments to providersand health plans. The exception was that the projections disregardpayment reductions that would result from the projected depletion ofthe Medicare Hospital Insurance trust fund. Under current law,payments would be reduced to levels that could be covered byincoming tax and premium revenues when the HI trust fund wasdepleted. If the projections reflected such payment reductions, thenany imbalances between payments and revenues would beautomatically eliminated, and the report would not serve its essentialpurpose, which is to inform policy makers and the public about thesize of any trust fund deficits that would need to be resolved to avertprogram insolvency. To date, lawmakers have never allowed theassets of the Medicare HI trust fund to become depleted.The exception described above remains in this year’s report. Inaddition, a further exception to current law is being made this yearwith regard to the sustainable growth rate (SGR) formula forphysician fee schedule payment under Part B. Current law requiresCMS to implement a reduction in Medicare payment rates forphysician services of almost 21 percent in April 2015. However, it is avirtual certainty that lawmakers will override this reduction as theyhave every year beginning with 2003. For this reason, the income,expenditures, and assets for Part B shown throughout the reportreflect a projected baseline, which includes an override of theprovisions of the SGR and an assumed annual increase in thephysician fee schedule equal to the average SGR override over the10-year period ending with March 31, 2015. 2 Since 2008, legislationoverriding physician fee reductions has included provisions offsettingthe 10-year cost of the overrides, but the division of those offsetsbetween Medicare savings and savings in other parts of the budgethas varied. Because it is difficult to predict the extent to which policymakers will finance future overrides with other Medicare savings, theprojected Medicare baseline does not include any offsets, which mayresult in overstating program costs.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 economic2See2appendix V.C for projections under current law.

Introductionincentives, the institutions through which care is delivered willevolve, possibly becoming more efficient. While most health caretechnological advances to date have tended to increase expenditures,the health care landscape is shifting. No one knows whether thesefuture developments will, on balance, increase or decrease costs.The Patient Protection and Affordable Care Act, as amended by theHealth Care and Education Reconciliation Act of 2010, introducedlarge policy changes and additional projection uncertainty. Thislegislation, referred to collectively as the Affordable Care Act or ACA,contains roughly 165 provisions affecting the Medicare program byreducing costs, increasing revenues, improving 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 costs. The Board assumes thatthe various cost-reduction measures—the most important of whichare the reductions in the annual payment rate updates for mostcategories of Medicare providers by the growth in economy-widemultifactor productivity—will occur as the Affordable Care Actrequires. The Trustees believe that this outcome is achievable ifhealth care providers are able to realize productivity improvements ata faster rate than experienced historically. However, if the healthsector cannot transition to more efficient models of care delivery andachieve productivity increases commensurate with economy-wideproductivity, and if the provider reimbursement rates paid bycommercial insurers continue to follow the same negotiated processused to date, then the availability and quality of health care receivedby Medicare beneficiaries would, under current law, fall over timerelative to that received by those with private health insurance.In recent years U.S. national health expenditure (NHE) growth hasslowed relative to previous historical patterns. There is some debateregarding the extent to which this cost deceleration reflects one-timeeffects of the recent economic downturn versus the extent to which itreflects positive reforms in the health care sector that may carryforward to produce additional cost savings in the years ahead. TheTrustees are hopeful that U.S. health care practices are in the processof becoming more efficient as providers anticipate a future in whichthe rapid cost growth rates of previous decades, in both the publicand private sectors, do not return. Indeed, the Trustees have reviseddown their projections for near term Medicare expenditure growth inresponse to the recent favorable experience. In addition, themethodology for projecting Medicare finances had already assumed asubstantial long-term reduction in per capita health expenditure3

Overviewgrowth rates relative to historical experience, to which the ACA’scost-reduction provisions would add substantial further savings.Notwithstanding recent favorable developments, both the projectedbaseline and current law projections indicate that Medicare still facesa substantial financial shortfall that will need to be addressed withfurther legislation. Such legislation should be enacted sooner ratherthan later to minimize the impact on beneficiaries, providers, andtaxpayers.Figure I.1 shows Medicare’s projected costs as a percentage of theGross Domestic Product (GDP) under three sets of assumptions:projected baseline, current law, and illustrative alternative, describedbelow. 3The projected baseline, which is shown in the middle line of figure I.1and is the basis of estimates presented throughout the main body ofthis report, assumes that the scheduled SGR reductions areoverridden so that physicians’ payment rates increase at a0.6-percent annual rate from 2016 through 2023. This is the sameaverage update that has been occurring over the 10-year periodending with March 31, 2015. From 2024 through 2038 (after theshort-range valuation period has ended), the payment updates in thisscenario are assumed to gradually rise so that Medicare expendituresper beneficiary for physician services are increasing at the same rateas per capita national health expenditures by 2038.3Atthe request of the Trustees, the Office of the Actuary at CMS has prepared a set ofillustrative Medicare projections under a hypothetical modification to current law. Asummary of the projections under the illustrative alternative is contained inappendix V.C of this report, and a more detailed discussion is available Funds/Downloads/2014TRAlternativeScenario.pdf . Readers should notinfer any endorsement of the policies represented by the illustrative alternative by theTrustees, CMS, or the Office of the Actuary. Appendix V.C also provides additionalinformation on Medicare projections under current law and the uncertaintiesassociated with productivity adjustments to certain provider payment updates.4

IntroductionFigure I.1.—Medicare Expenditures as a Percentage of the Gross Domestic Productunder Current Law, Projected Baseline, and Illustrative Alternative Projections10%8%6%4%Illustrative Alternative2%Projected BaselineCurrent Law0%200020102020203020402050206020702080Calendar yearThe current-law cost projections reflect the scheduled SGR reductionsto physicians’ payment rates and the ACA-mandated reductions inother Medicare payment rates, but not the payment reductions and/ordelays that would result from the HI trust fund depletion. Thedifference between the projected baseline and the current-lawprojections represents the financial impact of the current practice ofoverriding the scheduled SGR reductions.The illustrative alternative shown in the top line of figure I.1incorporates the override of SGR physician payment rates included inthe projected baseline and a partial phase-out of the ACA reductionsin Medicare payment rates from 2020 through 2034, as well as anassumed legislative override of the cost-saving actions of theIndependent Payment Advisory Board (IPAB). The differencebetween the illustrative alternative and the projected baselineprojections demonstrates that the long-range costs could be5

Overviewsubstantially higher than shown throughout much of the report if theACA’s cost reduction measures prove ineffectual or are scaled back. 4As figure I.1 shows, Medicare’s costs under the Trustees’ projectedbaseline assumptions rise from their current level of 3.5 percent ofGDP to 5.6 percent in 2040 and 6.9 percent in 2088. If the SGRreductions under current law were implemented, projected Medicarecosts would rise to 5.5 percent of GDP in 2040 and 6.3 percent in2088. Under the illustrative alternative, in which adherence to theACA cost-saving measures also erodes, projected costs would rise to6.0 percent of GDP in 2040 and 8.4 percent in 2088.As the preceding discussion explains, and as the substantialdifferences among the Trustees’ projected baseline, current-law, andillustrative alternative projections demonstrate, Medicare’s actualfuture costs are highly uncertain for reasons apart from the inherentdifficulty in projecting health care cost growth over time. Because thephysician payment reduction required by current law has beenoverridden for 12 consecutive years, the Trustees decided for the 2014report to emphasize projections that reflect the current practice ofmodest payment increases in the physician fee schedule. Theseprojections do not represent either a policy recommendation or aprediction of legislative outcomes. Nevertheless, the Boardrecommends that readers interpret the projected baseline estimatesin the report as the result of the outcomes that would be experiencedif the productivity adjustments and IPAB measures in the AffordableCare Act could be sustained in the long range under the Trustees’economic and demographic assumptions. Readers are encouraged toreview appendix V.C for further information on this importantsubject. Where applicable, the Trustees note the key financialoutcomes under the current-law and illustrative alternativeprojections in addition to the projected baseline projections that arehighlighted in the text and tables of the report.4Underthe 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 (1.1 percent over the long range). In addition,the IPAB would be charged with recommending cost savings as are necessary to holdoverall per capita Medicare growth to the average of the Consumer Price Index (CPI)and CPI-medical increases in 2015-2019 and to the rate of per capita GDP growth plus1 percentage point thereafter (subject to certain limits). Unless overridden bylawmakers, these recommendations would be implemented automatically.6

HighlightsII. 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 2013In 2013, Medicare covered 52.3 million people: 43.5 million aged 65and older, and 8.8 million disabled. About 28 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 2013 were 582.9 billion, and, for the secondyear in a row, per beneficiary costs were essentially unchanged. Totalincome was 575.8 billion, which cons

such beneficiaries from the HI and SMI Part B trust fund accounts; the other plans are paid on the basis of their costs . The Social Security Act established the Medicare Board of Trustees to oversee the financial operations of the HI and SMI trust funds. 1 The Board has six members. Four members serve by virtue of their

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insurance would fall over time, generating pressure to modify Medicare’s payment rates. Given these uncertainties, future Medicare costs could be substantially larger than shown in the Trustees’ current-law projection. Figure I.1 illustrates how Medicare’s costs would increase from the Trustees’ curre