Some Perspective on the Medicare Trustees’ Estimates

The release of the Medicare trustees report last week provided useful information about the state of the program’s finances – but these were unfortunately complicated by the multiple new effects of the health care law.  So I wanted to provide some perspective where possible about how the Medicare actuaries’ assumptions led to the numbers cited in the report – and how differing assumptions could lead to widely diverging estimates about the program’s future funding state.

The best example of this “new math” can be found in the 75-year projections for the Medicare Part A (i.e. Hospital Insurance) trust fund – the one whose insolvency date is estimated in the trustees report.  Last year, the Medicare actuaries estimated that Part A faced unfunded obligations over a 75-year period (i.e. 2009-2083) of $13.4 trillion, or 1.7 percent of GDP over that time period (see Table III.B9 on page 66 of the 2009 trustees report, available here).  This year, that same estimate indicated that the Part A trust fund faced unfunded obligations of only $2.4 trillion, or 0.3% of GDP over the 2010-2084 period (see Table III.B9 on page 81 of the 2010 trustees report, available here).

Medicare Part A Unfunded Obligations over 75-Year Period

2009 Official Estimate:  $13.4 trillion (1.7% of GDP)

2010 Official Estimate:  $2.4 trillion (0.3% of GDP)

So far, so simple.  But it isn’t in practice.  As was widely reported last week, the Medicare actuary – along with all outside experts he consulted – believes that the Medicare productivity adjustments to hospitals and other providers will be difficult, if not impossible, to sustain in practice.  That’s because service-related industries such as health care generally haven’t been able to match productivity gains in the rest of the economy. (As one saying goes, “You can’t make the band play any faster” to increase its productivity – and many economists agree the same dynamic applies in health care.)  But the health care law forces provider reimbursements to grow at much slower rates, reflecting supposed productivity gains, regardless of whether these assumptions are reasonable or not.  The Medicare actuary believes these assumptions are NOT reasonable, will result in significant financial pressure on providers, and will eventually be overridden by Congress as a result.  So for the first time, the actuary’s office created an “illustrative alternative scenario,” which assumes many of the long-term payment reductions will be overridden.  Under that scenario, the 75-year unfunded obligations to the Part A Trust Fund will be $7.0 trillion:

Medicare Part A Unfunded Obligations over 75-Year Period

2009 Official Estimate:  $13.4 trillion (1.7% of GDP)

2010 Official Estimate:  $2.4 trillion (0.3% of GDP)

2010 Illustrative Alternative Scenario:  $7.0 trillion (0.8% of GDP)

Then there’s the issue of the Medicare “double counting” – the fact that all the Medicare savings from the health care law are being re-directed to pay for new entitlements created in the law. (The actuary’s previous comments on double-counting can be found here.)  Many Republicans have argued that such “savings” should be discounted, as they will only result in IOUs being placed into the Medicare trust fund.  The trustees report provides a way to do just that; it distinguishes the effect of legislative changes on the Part A trust fund’s long-term status from changes in demographic and other assumptions that have occurred in the last year.  According to the report, legislative changes reduced Part A’s unfunded obligations by 3.16% of taxable payroll over 75-years, or $12.1 trillion.  If you believe the “savings” from the health law should not be counted towards reducing Medicare’s unfunded obligations, because those savings have already been spoken for to fund other entitlements, then the Part A trust fund’s long-term deficit rose by more than $1 trillion last year, while staying relatively static as a percentage of GDP:

Medicare Part A Unfunded Obligations over 75-Year Period

2009 Official Estimate:  $13.4 trillion (1.7% of GDP)

2010 Official Estimate:  $2.4 trillion (0.3% of GDP)

2010 Illustrative Alternative Scenario:  $7.0 trillion (0.8% of GDP)

2010 Official Estimate with Effects of Legislative Changes Removed:  $14.5 trillion (1.7% of GDP)

There’s one final combination at play here – one which BOTH disregards the legislative “savings” from the health care law (because those savings are being re-directed elsewhere) AND presumes that many of the savings will need to be overridden, due to the unreasonable projections assumed in the law itself.  In that case, Medicare Part A unfunded obligations have rise appreciably both in raw dollar terms, and as a percentage of GDP, when compared to last year’s numbers:

Medicare Part A Unfunded Obligations over 75-Year Period

2009 Official Estimate:  $13.4 trillion (1.7% of GDP)

2010 Official Estimate:  $2.4 trillion (0.3% of GDP)

2010 Illustrative Alternative Scenario:  $7.0 trillion (0.8% of GDP)

2010 Official Estimate with Effects of Legislative Changes Removed:  $14.5 trillion (1.7% of GDP)

2010 Illustrative Alternative Scenario with Effects of Legislative Changes Removed:  $19.1 trillion (2.3% of GDP)

Summing up the possible scenarios then, feel free to pick the one you believe is most likely to occur:

• If you believe the law WILL be implemented as written, and you discount the issues regarding trust fund accounting, you believe that Medicare Part A faces long-term unfunded obligations of $2.4 trillion.
• If you believe the law WILL NOT be implemented as written, and that the productivity adjustments will be overridden, but you discount the issues regarding trust fund accounting, you believe that Medicare Part A faces long-term unfunded obligations of $7.0 trillion.
• If you believe the law WILL be implemented as written, but you disregard the “savings” claimed under the health law, because that money will be spent elsewhere, you believe that Medicare Part A faces long-term unfunded obligations of $14.5 trillion.
• If you believe the law WILL NOT be implemented as written, and that the productivity adjustments will be overridden, AND you disregard the “savings” claimed under the health law, because that money will be spent elsewhere, you believe that Medicare Part A faces long-term unfunded obligations of $19.1 trillion.

The nearly eight-fold difference between the numbers in my first and fourth scenarios illustrates exactly why the Medicare chief actuary felt the need to emphasize the significant uncertainty behind the estimates in the trustees report – which, particularly given the much more sizable deficits under the other scenarios, represents a best-case alternative that may not (will not?) happen.

A final note: I’ve attached comparison charts for the 2009 and 2010 trustees reports, just in case folks were looking for them.  Given all the discussion above, however, keep in mind that the official estimates very likely under-state the scope of the problem.  Unfortunately, the trustees report did not include estimates like those above for Parts B and D of Medicare, even though both are subject to double-counting of savings provisions (Part B much moreso than Part D), and some providers included in Part B (e.g., outpatient hospitals) are subject to the productivity adjustments that the Medicare actuary believes will be unsustainable, and therefore likely to be reversed, in the long term.  (With regard to infinite horizon estimates, the report said Part A’s unfunded obligations over the infinite horizon would be $22.5 trillion, or 1.5% of GDP under the alternative scenario; however, the report didn’t analyze the impact of legislative changes on the infinite horizon projections, so I couldn’t make the comparisons I did above.)  But I hope the (very) extended discussion above gives some helpful perspective about just how understated the “official” projections might be, and just how big a financial hole the Medicare program faces.

Unfunded Obligation Projections for 75-Year Budget Window (2010-2084)

Unfunded Obligation Projections for Infinite Horizon

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