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Medicare Financing

In Brief: The Status of the Medicare HI and SMI Trust Funds: The Trustees’ 2006 Annual Report

Research Report

Dan Ermann, AARP Public Policy Institute

Leigh Purvis, AARP Public Policy Institute

May 2006


Table of Contents:

The Trustees of the Federal Hospital Insurance (HI) and the Supplementary Medical Insurance (SMI) Trust Funds report annually to Congress on these trust funds’ short- and long-term financial health. Key findings from their year 2006 projections follow.

The HI Trust Fund—Medicare Part A

  • The Trustees project that, under their intermediate or “best guess” assumptions, the HI Trust Fund will remain solvent until 2018, two years earlier than the 2005 projection.

  • The earlier date of HI Trust Fund insolvency is the result of slightly higher inpatient hospital costs in 2005 than previously estimated and some upward revisions in the short-range assumptions about utilization of HI services.

  • The Trustees’ estimates of solvency are sensitive to changes in actuarial assumptions. Under high cost assumptions, the HI Trust Fund’s assets would be depleted in 2013. Under low cost assumptions, insolvency would occur in 2041.

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The SMI Trust Fund—Medicare Part B and Part D

  • Federal general revenues finance about 75 percent of Part B costs while beneficiary premiums cover about 25 percent. Income from the federal government is adjusted each year to ensure that all expenses are covered, so, by design, the SMI Trust Fund will remain adequately financed into the indefinite future.

  • SMI costs are projected to increase at a faster rate than the economy (as measured by growth in the Gross Domestic Product, or GDP), both through 2015 and beyond.

  • Over time, Part B spending is projected to consume an increasingly large share of the economy. In 2005, Part B expenditures accounted for 1.3 percent of GDP, but are expected to increase to 3.8 percent of GDP by 2080.

  • The Trustees project that the monthly Part B premium in 2007 will be $98.20. At this level, the Part B premium would have increased by 67 percent since 2003.

  • Income and expenditures for the new Medicare prescription drug benefit (Part D) and the discount card program are handled by a separate account within the SMI Trust Fund. SMI costs will grow more rapidly in the future because of the Part D benefit, which began in January 2006.

  • Based on recent drug spending trends and initial program experience regarding plan bids and beneficiary enrollments, the Trustees have lowered their previous projections of Part D costs.

Trustees’ Conclusions

  • The Trustees believe that prompt, effective, and decisive action is needed to address Medicare’s financial challenges.

  • The Trustees believe that the sooner reforms are enacted, the more flexible and gradual they can be. Moreover, the early introduction of reforms will increase the time available for affected individuals and organizations to adjust their expectations.

Source: 2006 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 1, 2006.

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Written by Dan Ermann and Leigh Gross, AARP Public Policy Institute
May 2006
©2006 AARP
All rights are reserved and content may be reproduced, downloaded, disseminated, or transferred, for single use, or by nonprofit organizations for educational purposes, if correct attribution is made to AARP.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

Pub ID: INB123