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"Unless we modernize and strengthen Medicare, the long-term prognosis for this program is not good," said HHS Secretary Tommy G. Thompson. "The near-term extension in the solvency of the hospital fund is welcome, but we must not mistake it for a clean bill of health. Rather, it is a window of opportunity for us to modernize, improve and protect Medicare. We must take this opportunity now, because every year of delay will narrow our options and make the job more difficult."

Hospital Insurance Trust Fund (HI)

The trustees estimate that the Hospital Insurance trust fund will remain solvent until the year 2029, based on the most probable economic and demographic assumptions. This projected depletion date represents a four-year gain for estimated Part A solvency, from the forecast of 2025 made by the trustees last year. The trustees credited the combination of the recent robust economy, reduced utilization of skilled nursing services, and improved payment accuracy.

At the same time, the trustees reported that long-term projections of the fiscal health of the HI fund have worsened, with the gap between trust fund spending and revenues growing by 63 percent from last year's estimate. As in previous years, the shortfall occurs in part because of the growing number of Medicare beneficiaries. Today, there are about 4 workers for every Medicare beneficiary. By 2075, there will be only about two workers for every beneficiary.

In addition, this year's report includes more realistic assumptions about health care cost growth in future years. Previously, estimates were based on the assumption that expenditures per beneficiary would increase at roughly the same rate as per capita GDP. Based on the recommendation last year by the 2000 Medicare Technical Review Panel, the trustees have raised this growth assumption to the increase in per capita GDP plus 1 percentage point. This more refined assessment of future costs, including improved treatments and technology, is the primary cause of the higher long-term cost estimates this year for both Medicare trust funds.

Supplementary Medical Insurance Trust Fund (SMI)

As in previous years, the trustees find that the Supplementary Medical Insurance (SMI) Trust Fund (covering Part B of Medicare, which pays for physicians' services, outpatient care and other medical services) remains adequately financed into the future. This projection reflects the different financing mechanism for SMI. While the hospital trust fund relies on income from the Medicare payroll tax (1.45 percent each on employees and employers), Part B funding comes from general revenues and premiums paid by beneficiaries, and is adjusted annually to meet costs. This automatic financing mechanism provides guaranteed Part B funding. However, Part B spending is experiencing rapid growth -- 10 percent last year alone. The increases were due to transfer of an additional part of home health costs from the HI trust fund to SMI, the cost of new health screening benefits enacted in 1997 and 1999, and an above-average increase in physician fees.

The trustees noted that Part B's automatic financing mechanism has diverted attention from the rapid growth in SMI costs. Over time, SMI will require a rapidly growing share of general revenues and substantial increases in beneficiary premiums. SMI general revenues accounted for about 5 percent of total Federal income taxes in 2000. If such taxes remain at their current level relative to the national economy, then SMI general revenues will account for about 22 percent of total income taxes in 70 years.

Rising Part B costs also have direct impact on Medicare beneficiaries. In the next 20 years, the typical 65-year-old would see the portion of their Social Security check that is withheld to pay the monthly Part B premium almost double, from 6 percent to 11 percent of their Social Security check. Their total out-of-pocket expenses for Part B services (premiums plus copayments) would increase from 14 percent to 21 percent of their Social Security check.

Combined Medicare Trust Funds

"When we look at the fiscal health of Medicare, we must not confine ourselves to the hospital trust fund alone - we must look at the whole Medicare program," Secretary Thompson said. "We need reform and modernization for all of Medicare. That must include the addition of a prescription drug benefit, plus the reforms needed to support an improved program."

Taken together, Part A and Part B total costs are projected to nearly quadruple over the next 75 years - growing from 2.2 percent of gross domestic product today, to 4.5 percent in 2030, and to 8.5 percent in 2075. At the same time, total trust fund revenues (excluding interest) will grow much more slowly - from 2.4 percent of GDP today, to 3.7 percent in 2030, and to just 5.3 percent in 2075. In 2075, the gap between Medicare revenue and Medicare spending would be the equivalent of more than 3 percent of gross domestic product.

Without changes in the Medicare program, closing the projected HI gap between revenues and expenditures would require that benefits be reduced by 37 percent, or income from the payroll tax would need to be increased by 60 percent, the report said.

Change is needed to avoid such choices, Secretary Thompson said. "This program, designed in the 1960s, was based on the model of health care coverage that worked then. Nearly two generations later, it is time to think creatively and productively about new approaches.

"We have the time and the means to modernize and improve Medicare. This report tells us that we must," he said.

The Medicare trustees are Treasury Secretary and Managing Trustee Paul O'Neill, Secretary of Health and Human Services Tommy G. Thompson, Labor Secretary Elaine Chao and Social Security Acting Commissioner William Halter. Two other members, the public trustees, are appointed by the President with Senate confirmation. The public trustees are John Palmer and Thomas Saving. They serve four-year terms and represent the general public. Michael McMullan, acting deputy administrator of the Health Care Financing Administration, serves as secretary to the board of trustees.

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