Five Takeaways from the 2016 Medicare Trustees Report

This blog post is part of the Schaeffer Initiative for Innovation in Health Policy, a collaboration between the Brookings Institution and the USC Schaeffer Center for Health Policy & Economics.  

Authors: Alice Rivlin and Loren Adler

This year’s Medicare Trustees report provides a look at Medicare’s financial picture, which the Chief Actuary at the Centers for Medicare and Medicaid Services (CMS), Paul Spitalnic, helped dissect at a joint Schaeffer Initiative / AEI event hosted at Brookings on Thursday.

The annual ritual of the Medicare Trustees report requires hard work and meticulous analysis.

Their job is to be our public conscience, to remind us and our elected representatives that we have not yet fully faced up to serious problems that have stared us in the face for years. There are a lot of numbers in this report, but essentially no news. We didn’t just find out that the population is getting older or that a lot of people are crossing retirement age because they were born between 1946 and 1963. We didn’t just find out that health care is becoming both more effective and more expensive at a rapid rate, and that it is demanding a bigger allocation in the budget—no matter whose budget you are talking about, especially the federal government. And you don’t have to be a policy wonk to know that there is a lot of waste and duplication in American health care delivery. You only have to be a patient to know that.

So what we learn from this meticulous, number-heavy report is basically familiar.

1. Medicare spending still expected to grow significantly as a share of GDP over the coming decades

Chief Actuary Spitalnic highlighted that while the impressive Medicare and system-wide health spending slowdown continues on far longer than originally anticipated, Medicare spending is still scheduled to grow significantly faster than the economy for many years, from 3.6 percent of GDP today up to 5.6 percent by 2040 and then eventually leveling out at roughly 6 percent of GDP.

Much of the jump in the near-term is the result of the baby boom continuing to reach age 65 and age through Medicare, with about 10,000 new beneficiaries signing up to the program every day. Per beneficiary spending is also expected to creep back up toward the higher rates experienced historically before the recent slowdown (though not all the way to the days when it routinely grew two percentage points faster than GDP), pushing up program spending relative to the size of the economy.

The Trustees Report also highlights multiple sources of uncertainty surrounding the sustainability of some existing Medicare reforms and with other assumptions that go into their estimates. Specifically, Mr. Spitalnic and panelists at Thursday’s event focused on difficulty of sustaining the ACA’s productivity adjustments for hospitals and other providers and also the relatively low physician payment updates dictated by the Medicare Access and CHIP Reauthorization Act of 2015 over the long-run. The Trustees present an “Illustrative Alternative” projection to show how much worse Medicare’s financial picture could be with alternate assumptions. We believe that this additional projection is highly valuable to policymakers and commend the Trustees and the Medicare Actuary for doing it.

All projections so far into the future are inherently uncertain, though, especially in health care. The Congressional Budget Office, for example, projects significantly faster Medicare Spending growth over the coming decades, reaching 6.3 percent of GDP in 2040 and 11.2 percent in 2080 (as opposed to 5.6 and 6 percent, respectively, in the Actuaries’ projections). In his presentation on Thursday, Mr. Spitalnic highlighted just how much the structure of Medicare has changed over the last 40 years in order to drive home just how difficult it is to predict what the program will look like 40 years from now.

2. Automatic IPAB cuts to Medicare set to be triggered next year

Probably the biggest anticipation for 2016’s Medicare Trustees report was whether cuts determined by the Affordable Care Act’s Independent Payment Advisory Board (IPAB) would be triggered this year. Whether and when those cuts are triggered is determined by the Actuary’s estimates of Medicare per capita growth over a 5-year rolling average around the determination year.

Now it’s official: IPAB is at least one more year away. Current projections in the 2016 report predict that IPAB will be triggered in 2017, with recommendations on those cuts required to be submitted in 2018 (if no one is appointed to IPAB, the Secretary of Health and Human Services will dictate the recommendations). The cuts would then be implemented in 2019.

Spitalnic emphasized that that IPAB would only be required to come up with enough savings to slow Medicare spending growth by 0.2 percentage points.

After next year, the IPAB determination threshold will switch from being based on the average of economy-wide inflation and medical inflation to the generally higher measure of GDP per capita growth plus one percentage point (GDP+1%), and therefore its cuts are not expected to be triggered again until 2022. After that, IPAB cuts are expected to be triggered every two years through 2030 (by law, IPAB cannot be triggered in consecutive years).

While IPAB creates many headlines, its role will be rather limited—at least in the near term— effectively acting as a soft cap on Medicare’s spending growth. With Medicare per beneficiary cost growth projected to barely exceed IPAB’s trigger, the Board will only have to recommend relatively small provider and/or plan payment cuts. Small, but often meaningful, payment reforms from MedPAC and the Office of the Inspector General (OIG) seem likely to guide much of what IPAB recommends.

IPAB, therefore, may play a small role in updating the Medicare program over time. Larger reforms to the program will be left in the hands of legislators.

For more details on exactly how IPAB works, read this excellent primer from the Kaiser Family Foundation.

3. Medicare premiums primed for a huge jump in 2017

The Trustees Report tells us that Part B premiums are currently primed for a big increase in 2017 (22 percent), from $121.80/month this year up to $149/month.

The unusually large jump arises because of a “hold harmless” provision that bars Medicare Part B premium increases from being larger (in dollar amount) than the beneficiary’s Social Security cost-of-living-adjustment (COLA) for most enrollees. This provision rarely has any impact because Social Security benefits are many times larger than a beneficiary’s Part B premium, meaning that even a small COLA generally subsumes any increase in premiums. But in cases like last year when there was no COLA at all, or this year when the COLA is only expected to be a very low 0.2 percent, the hold harmless provision can be triggered and leave many beneficiaries facing a big jump in their Medicare Part B premium and deductible.

Roughly 70 percent of Medicare Part B beneficiaries will be protected from the 2017 increase due to this provision, but the remaining 30 percent then have to cover the entire premium increase necessary to keep premiums at 25 percent of program costs in the aggregate.

The 30 percent of beneficiaries that will need to cover their premium increase are:

• Low-income beneficiaries who have their premiums paid by Medicaid;
• High-income beneficiaries who pay higher premiums between 35 and 80 percent of program costs;
• New Medicare beneficiaries;
• Beneficiaries who have not yet started receiving Social Security; and
• Certain state and local employees who do not participate in Social Security.

A similar issue arose last year because there was no COLA at all for 2016. Without a COLA, roughly 30 percent of beneficiaries not held harmless would have paid the 52 percent premium. Fortunately for those beneficiaries (and the states that cover many of their premiums), Congress addressed the issue in last year’s budget deal by holding the premium increase to its normal amount and dictating that beneficiaries would pay back the Trust Fund over time through a $3 per month premium surcharge for as long as necessary.

Lawmakers probably thought they had thwarted this issue for 2017 as part of the budget deal, by setting in place the same process if there was again no COLA in 2017. What they did not anticipate, though, was the possibility of a very small COLA like the 0.2 percent one now predicted by the actuaries, which would still trigger the hold harmless provision (because the subsequent increase in Social Security benefits would not outpace the natural rise in Medicare Part B premiums, which grow roughly in line with Medicare spending).

As Mr. Spitalnic detailed in his remarks, the measure of inflation that determines the COLA (CPI-W) is currently only up 0.09 percent, as of May 2016. Now there’s still a chance that such inflation turns negative by the official reporting date in October (which would cause a Social Security COLA of zero and automatically put into motion the budget deal’s fix) or jumps high enough to avoid triggering the hold harmless provision, but as of right now, it looks like Congress will have to act if they want to prevent a big Part B premium (and deductible) increase for 2017.

The good news, though, is that the fix is relatively simple and just involves modifying the 2017 safeguard put in place in last year’s budget deal to apply even with a low but non-zero COLA.

4. The Part D prescription drug benefit spending slowdown continues its reversal

Part D spending actually grew remarkably slow for a handful of years before 2014, playing a very large role in Medicare’s spending slowdown. But as the “patent cliff” tapers off and the wave of new specialty drugs – like Harvoni, Sovaldi, and new cancer medications – continues to hit the market, prescription drug spending in Medicare is now growing quite rapidly. Part D spending grew by 15 percent in 2015 and is expected to grow annually, on average, by 10.9 percent between 2015 and 2020.

5. Medicare Trust Fund will be exhausted two years earlier

As recently as 2012, the Hospital Insurance (HI) trust fund (which funds Medicare inpatient services, or Part A) was projected to become exhausted in 2024, and the exhaustion date was expected in 2017 before the ACA’s changes to prolong the Trust Fund’s life. As the Medicare spending slowdown proved longer and deeper than originally anticipated, and care continues to shift from the inpatient to outpatient setting, that exhaustion date had reached 2030 in last year’s report.

Due to a small worsening of Medicare’s financial outlook, the HI Trust Fund is now expected to go negative in 2028, at which point the program would only be able to pay 87 percent of benefits.

Looking forward

Given the fact that Medicare is such a vital program, serves so many people, and is so essential to seniors and disabled people, solving its fiscal and design problems will take bipartisan effort and consensus action. One might think that our highly polarized political system is unable cope with this challenge and despair.

Social Security, for example, presents a simpler problem with less uncertainty and a known set of options that would restore solvency, but nothing is happening. The clock is ticking, the cost of delay is growing, yet no action on Social Security appears likely on the horizon.

But the prospect of Medicare reform is more hopeful. Two basic approaches exist for reining in the growth of health care costs and improving the quality and effectiveness of care:

• Change the payment incentives of providers to reward value and quality over the volume of services rendered.
• Promote consumer choice and market competition to achieve similar ends.

Remarkably, our political system has produced a huge amount of activity on both fronts. An explosion of experiments with payment reform are being tried and evaluated, mostly with Medicare in the lead. At the same time, experiments are ongoing with market approaches, like Health Savings Accounts (HSAs) and competition among health plans on exchanges. The ACA marketplaces are a 50 state experiment with health plan competition on exchanges, from which we are learning a lot, while Medicare Advantage continues to grow in popularity among seniors.

We have even seen bipartisan legislation. Implementing MACRA is a work-in-progress, but it provides a framework for serious action on payment reform, which is a big step in the right direction from SGR.

We don’t have to choose between these two approaches. We should pursue both more aggressively.

• Pursuing payment reform less timidly, for example, means engaging patients and giving them a more active role in improving their own health. Consumers should choose to join an ACO and share in the cost savings. Benefit redesign can help utilize cost-sharing more effectively.
• Pursuing competition more aggressively could start with competitive bidding in Medicare Advantage (MA). If it is working well, one could eventually include traditional Medicare in the bidding process. Improved risk adjustment is still needed to avoid having the sickest people end up in traditional Medicare with premiums spiraling up.

The model of capitated plans competing with each other on exchanges has great promise for improving quality and slowing cost growth, producing more cheerful Medicare Trustees reports in the future.

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Alice Rivlin is a senior fellow in the Center for Health Policy at the Brookings Institution. She is also a visiting professor at the McCourt School of Public Policy at Georgetown University. She was formerly the Director of the Health Policy Center (2013-15).

Loren Adler is the Associate Director, Center for Health Policy, Economic Studies at the Brookings Institution.