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, psychiatric hospital, and hospice care services for persons age 65 and older and workers with disabilities under age 65. The Trust Fund is financed mainly through a 2.9% payroll tax paid by employers and employees (1.45% each). Self-employed individuals pay 2.9% of wages.
In their 1999 report to Congress, the HI Trustees indicate that, for the first time since 1994, the Trust Fund's annual income in 1998 exceeded annual spending for Part A services. Expenditures were $135.8 billion, and income from payroll taxes and other sources was $140.5 billion. On December 31, 1998, Trust Fund reserves were $120.4 billion.
Short-Term Financial Status
The Trustees project that the Trust Fund will remain solvent until 2015, seven years later than they projected in their 1998 report. This extended period of solvency is largely due to slower growth in Part A spending and faster growth in revenues than previously projected for 1998.
The Trustees attribute the slower growth in Part A spending to: (1) the implementation of measures in the Balanced Budget Act of 1997 (BBA); (2) a reduction in the growth of health care costs in general; and (3) ongoing efforts to reduce fraud and abuse. The increase in revenues is attributed to robust economic growth, particularly growth in the labor market.
The Trustees project that Part A revenues will continue to exceed expenditures each year between 1999 and 2006, thereby increasing the reserve balance of the Trust Fund. Beginning in 2007, annual expenditures will exceed annual revenues, thereby depleting the Trust Fund reserves in the year 2015. Figure 1 illustrates how 10-year projections of the Trust Fund's financial status have improved since the 1998 report.
Estimates of when the Trust Fund's reserves will be depleted depend upon assumptions about future economic and demographic trends and their effect on the Trust Fund balance. 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 as the actuaries' "best guess," insolvency would occur in 2015. Under more pessimistic assumptions, insolvency would occur in 2007. Under more optimistic assumptions, annual trust fund income will exceed costs beyond 2008; the Trustees do not provide a date for projected insolvency under optimistic assumptions.
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.
While the expected long-term shortfall in the Trust Fund balance has been reduced by almost one-third from the 1998 projections (and by two-thirds from pre-BBA projections), Part A revenues will continue to be less than what will be needed to pay program costs, and the margin of this shortfall will continue to grow larger over time (see Figure 2). In addition, the ratio of workers paying payroll taxes to the number of beneficiaries enrolled will steadily decline as baby boomers become eligible for Medicare and life expectancy continues to increase. While there were 3.9 workers paying for each beneficiary's HI benefit in 1998, there will be only 2.3 workers per beneficiary in 2030 when all of the baby boomers will have reached age 65.
Another measure of the Trust Fund's financial health is the actuarial balance.5 This can be interpreted as the percentage by which current law income rates would need to immediately increase or HI cost rates 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.
Bringing the HI program into actuarial balance over the next 25 years "would require either that outlays be further reduced by 11 percent or that income be increased by 12 percent (or some combination of the two) throughout this 25-year period. That is, the current HI payroll tax of 1.45 percent (for employees and employers, each) would have to be immediately raised to about 1.65 percent, or benefits reduced by a comparable amount. Over the full 75-year projection period, substantially greater changes in income and/or outlays are needed" (p. 16).
The short-term outlook of the HI Trust Fund has improved substantially since the 1998 report. However, the Fund's long-term financial status remains unbalanced. The Trustees urge policy makers to use the time gained by the later depletion of the HI Trust Fund to determine effective solutions to the remaining long-term problems. They also recommend that further reforms occur in the relatively near future. However, they caution that any reform proposals should recognize that the health care system is changing rapidly and that adjustments will need to be made over time as the system continues to evolve.
- Medicare Part A covers up to 100 home health visits following a hospital stay of at least 3 days. Medicare Part B covers visits not preceded by a hospital stay and visits over the 100-day Part A limit.
- In 1998, 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.
- The BBA reduced payments to hospitals, established new payment methodologies for home health agencies and skilled nursing facilities, and shifted certain home health costs from Part A to Part B. The BBA did not enact any measures to increase annual income to the Trust Fund.
- The Trustees do not publish annual projections of the Trust Fund balance beyond a 10-year period.
- 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 a deficit.
Written by Craig Caplan, Normandy Brangan, 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, NW, Washington, DC 20049