The most recent annual report issued by the trustees in April 2007 shows that Medicare continues to face financial challenges. The report, similar to those issued since 2003, projects the Health Insurance Trust Fund that finances Part A of Medicare will be exhausted within the next 20 years. The 2007 report projects the exhaustion date to be 2019, one year later than the 2006 report. When the trust’s assets are gone, payroll taxes are estimated by the trustees to cover some 79 percent of the costs of Part A. 

Because the law requires that beneficiary premiums and federal government general revenue contributions must annually cover the expected costs of Parts B and D of Medicare, the annual report does not project a shortfall for these Medicare programs.

The challenges facing Medicare are the same as those facing our health care system—increasing health care costs. Addressing the broader issues of health care reform also will strengthen Medicare’s financial situation.

In the short term, Medicare financing could be strengthened by eliminating the overpayments currently made to Medicare Advantage plans. While private managed care and fee-for-service plans were intended to reduce Medicare costs, exactly the opposite has occurred. According to the non-partisan Medicare Payment Advisory Commission (MedPAC) and the Congressional Budget Office (CBO), Medicare Advantage plans are paid, on average, 12 percent more than traditional Medicare pays to treat the same retirees. One subset of these plans, the private fee-for-service plans are paid on average 19 percent more than traditional Medicare. Medicare Payment Advisory Commission, Report to the Congress: Promoting Greater Efficiency in Medicare (June 2007); Peter Orszag, The Medicare Advantage Program: Enrollment Trends and Budgetary Effects, testimony before the Senate Finance Committee, CBO, April 11, 2007. 

These overpayments erode the financial status of Medicare’s Health Insurance Trust Fund. According to Medicare’s Chief Actuary, the overpayments move the fund’s insolvency date forward two years—from 2021 to 2019. BNA Health Care Policy report, CMS Actuary Says Medicare Funding Warning likely Not Needed if Managed Care Pay Cut  (April 30, 2007).

The 2007 report from the Medicare trustees included, for the first time, a “Medicare funding warning.” The warning was triggered because this year’s report is the second one showing that 45 percent of Medicare funding will come from general revenues within the next seven fiscal years.

Under the 2003 Medicare Modernization Act (MMA), the required response to the warning is proposed legislation from the Bush administration for early next year to reduce Medicare expenses below this arbitrary threshold. These proposals are expected to include premium increases and reductions in benefit or provider reimbursements as these are the only options available to lower Medicare expenditures under the MMA.