Medical Device Daily Washington Editor

WASHINGTON – Every year, the board of trustees for Medicare makes its report to Congress. The trustees' report is a detailed, lengthy document, with information on the past and estimated future financial operations of both arms of Medicare.

Altogether, the report indicates that Medicare may be a larger drain on the nation's economy – and closer to insolvency – than the Social Security program. And that drain has been widened exponentially by the new Medicare drug benefit.

Overall, the level of Medicare expenditures is expected to exceed that for Social Security in 2024 and, by 2079, to represent almost twice the cost of Social Security.

By way of background (to make the complex a tad simpler), the Medicare program has two components.

The first is hospital insurance, also called Medicare Part A, which pays for hospital visits, home health, and skilled nursing facilities for the elderly and disabled.

The second part is called supplementary medical insurance (SMI), which includes Medicare Part B and Part D. Part B helps pay for physicians, outpatient hospital, home health, and other services for the elderly and disabled who voluntarily enroll. Part D involves the new – and controversial – prescription drug discount cards.

For Part A, the trustees estimate that the hospital insurance trust fund will remain solvent until the year 2020, a one-year gain for estimated Part A solvency made last year.

But in the next 10 years, according to the report, Part A expenditures are expected to grow somewhat faster than income. Comparison with last year's estimates shows that actual payroll tax and other income in 2004 and projected future amounts are slightly higher than previously projected. At the same time, Part A expenditures are slightly lower than before, due to slower growth in inpatient hospital benefits, the government said.

As a result, the trustees reported that long-term projections of the fiscal health of the fund have slightly improved. But the operative term is "slightly."

Long-term, the report says the outlook remains "very problematic" as a result of increases in projected healthcare costs and the growing number of Medicare beneficiaries following the retirement of the baby boom generation.

Part B spending is experiencing dramatic growth, with almost 11% per year over the last five years. And costs are expected to nearly double over the next 10 years as baby boomers enter the program

Overall, total costs for all Medicare costs are projected to increase substantially over the next 75 years – growing from 2.6% of gross domestic product (GDP) today to 13.6% by 2079.

At the same time, total trust fund revenues (excluding interest) will grow more slowly, from 2.6% of GDP today to just 9.7% in 2079. In 2079, the gap between Medicare revenue and Medicare spending would equal almost 4% of gross domestic product, the report says.

Today, the Centers for Medicare & Medicaid Services (CMS; Baltimore) says there are about four workers for every Medicare beneficiary. By 2079, however, the agency predicts, there will be only about two workers for every beneficiary.

Assets for Part B accounts declined by $4.5 billion in 2004. Beneficiary premiums and general revenue financing rates for 2004 were set with the intention of increasing the assets in the Part B account of the trust fund to a more adequate level.

According to the report, increased payments to physicians and other Part B providers in the recent Medicare Modernization Act (MMA), combined with expected expenditure growth, increased Part B expenditures above the level anticipated when the original financing was set.

CMS's financing rates for 2005 were set to try and restore the assets to a more adequate level. The report says, however, that because of higher-than-anticipated 2004 costs, Part B account assets are now expected to increase just slightly in 2005, remaining well below the desired level.

The Part D account within the SMI trust fund was established by the MMA. For 2004 and 2005, a special provision provides transitional assistance to low-income beneficiaries under the prescription drug card program.

Beginning in 2006, beneficiaries will get a new prescription drug benefit through private prescription drug plans or Medicare Advantage health plans, with Medicare providing a subsidy for the prescription drug premiums. Medicare also will pay some or all of the remaining beneficiary drug premiums and cost-sharing liabilities for low-income beneficiaries in addition to special subsidies on behalf of beneficiaries retaining primary drug coverage through qualifying employer-sponsored retiree health plans.

Trustees said MMA helps to address rising healthcare costs for seniors. In addition to the prescription drug coverage, it also brings up-to-date preventive benefits and programs to prevent complications for beneficiaries with chronic illnesses. The benefits will help Medicare and its beneficiaries avoid costs associated with preventable disease complications, the report said.

Critics have panned the prescription drug plan as being ill-conceived.

"If we're going to get out of this hole we're in, we are going to have to deal with drug costs," said Rep. Bart Gordon (D-Tennessee) during a recent American Medical Association (Chicago) meeting here. "We should start by revisiting the Medicare drug program and making it more effective."

He called it "egregious" that the bill prohibits Medicare from negotiating better drug prices for seniors and tax payers. Gordon said the current program used by the Department of Veterans Affairs would be a good model to follow, since the program allows for negotiated pricing.

The Medicare program is the second-largest social insurance program in the U.S., with 42 million beneficiaries and total expenditures of $309 billion in 2004.