Status of the Trust Fund
The Federal Hospital Insurance (HI) Trust Fund finances Medicare Part A. It pays for covered inpatient hospital, home health, skilled nursing facility, and hospice care services for persons age 65 and older and certain persons with disabilities. The Trust Fund is financed mainly through payroll taxes; the combined employer-employee tax rate is 2.9% of wages (or 1.45% each). Self-employed individuals pay 2.9% of wages.
In their annual report to Congress, the HI Trustees indicate that spending for Part A services exceeded the Trust Fund's annual income in calendar year 1997. Expenditures were $139.5 billion, and income from payroll taxes and other sources was $130.2 billion. The balance of the expenditures, $9.3 billion, was paid from Trust Fund reserves. On December 31, 1997, Trust Fund reserves were $115.6 billion.
Short-Term Financial Status
The Trustees project that the Trust Fund will remain solvent until 2008, seven years later than they projected in their 1997 report. This extended period of solvency is largely attributed to measures in the Balanced Budget Act of 1997 (BBA). Earlier estimates by the Congressional Budget Office of the BBA's impact had projected that the Trust Fund would remain solvent until fiscal year 2010.
The BBA is projected to slow the growth of Part A spending between 1998 and 2002 by reducing payments to hos pitals, establishing new payment methodologies for home health agencies and skilled nursing facilities, and shift-ing certain home health care costs from Part A to Part B of Medicare. The BBA did not enact any measures to increase annual income to the Trust Fund.) Figure 1 illustrates both 1997 and 1998 projections of how the Trust Fund's re-serve balance is expected to diminish over time.
Estimates of when the Fund's reserves will be depleted depend upon assumptions about future economic and demographic trends and their effect on Trust Fund finances. The Trustees make three estimates using different sets of assumptions about factors such as: general and health care inflation, wage growth, mortality, and fertility rates. Under the intermediate estimate, which is the most commonly cited and the "best guess" of what will happen, insolvency would occur in 2008. Under more optimistic assumptions, it would occur in 2030; under more pessimistic assumptions, insolvency would occur in 2004.
Long-Term Financial Status
The Trustees also look at the financial health of the Trust Fund for the next 25, 50, and 75 years. They examine the Fund's financial health by comparing the projected income from taxes with projected costs. Income and costs are expressed as a percentage of taxable payroll in the long-term projections.
Figure 2 shows that, while the BBA significantly reduced the long-term shortfall in the Trust Fund balance, Trust Fund revenues will continue to be less than what will be needed to pay Part A costs. Also, the margin of the shortfall will grow larger over time.
Another measure of the Trust Fund's financial health is the actuarial balance. This can be interpreted as the percentage by which current law payroll tax rates would need to immediately increase or HI costs would need to immediately decrease (or some combination of the two) to ensure that the Trust Fund stays in balance. The projected actuarial balance indicates the scale of additional resources needed to preserve the Part A program in its present legal form. The Trustees report that, for income to keep up with costs over the next 25 years, 0.73 percentage points (or 0.365 percentage points each for employers and employees) would immediately need to be added to the current payroll tax of 2.9 percent. Increases of 1.61 and 2.10 percentage points above current law would be required to keep up with projected costs for the next 50 and 75 years, respectively. (In 1997, prior to enactment of the BBA, the Trustees projected that the payroll tax would have to rise by 2.02, 3.50, and 4.32 percentage points to maintain 25, 50, and 75 years of solvency, respectively. )
As the Trustees observe, the coming eligibility of the "baby boomers" and the shrinking number of workers paying payroll taxes relative to the number of beneficiaries will strain income to the Trust Fund in the future. While there were 3.9 workers paying for every beneficiary's HI benefit in 1997, there will be only 2.3 workers per beneficiary in 2030. Figure 3 illustrates this trend.
Conclusions and Recommendations
The Trustees believe that-while the BBA extended short-term solvency of the Trust Fund and reduced the magnitude of long-term shortfalls-prompt, effective, and decisive action is necessary to achieve long-term solvency. In this regard, they believe that the work of the National Bipartisan Commission on the Future of Medicare will be of critical importance to the American public.
- Part A covers up to 100 home health visits following a hospital stay of at least three days. Medicare Part B covers visits not preceded by a hospital stay and visits over the 100-day Part A limit.
- In 1997, payroll taxes made up about 88% of the HI Trust Fund's income. Additional sources of income include interest on federal securities, taxation of a portion of Social Security benefits, premiums paid by voluntary enrollees, and government credits.
- Congressional Budget Office, Economic and Budget Outlook: Fiscal Years 1999-2008, Appendix F, Washington, DC, January 1998.
- Prior to BBA, Part A paid for all covered home health costs.
- The actuarial balance is the difference between the annual income rates and cost rates summarized over a period of years. It is adjusted to include the beginning fund balance and the cost of ending the projection period with a fund balance equal to estimated spending for the following year. A negative balance means the fund has an actuarial deficit.
- 1997 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund.
Written by Craig Caplan and David Gross, AARP Public Policy Institute
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, N.W., Washington, DC 20049