THE HENRY J. FOUNDATION OT Uha tem atm 20 Oe ee LTO eae mel mera eye tele July 2016 | Issue Brief The Facts on Medicare Spending and Financing Juliette Cubanski and Tricia Neuman Overview of Medicare Spending Medicare, the federal health insurance program for 57 million people ages 65 and over and people with permanent disabilities, helps to pay for hospital and physician visits, prescription drugs, and other acute and post-acute care services. In 2015, spending on Medicare accounted for 15% of the federal budget (Figure 1). Medicare plays a major role in the health care system, accounting for 20% of total national health spending in 2014, 29% of spending on retail sales of prescription drugs, 26% of spending on hospital care, and 23% of spending on physician services.' This issue brief includes the most recent historical and projected Medicare spending data from the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary (OACT), the 2016 annual report of the Boards of Medicare Trustees’ and the 2016 Medicare baseline and projections from the Congressional Budget Office (CBO).? Medicare benefit payments totaled $632 billion in 2015; just under one-fourth was for hospital inpatient services (23%), 12% for the Part D drug benefit, and 11% for physician services (Figure 2). More than one-fourth of benefit spending (27%) was for Medicare Advantage private health plans covering all Part A and Part B benefits; in 2016, 31% of Medicare beneficiaries are enrolled in Medicare Advantage plans.* Both in the aggregate and on a per capita basis, Medicare spending growth has slowed in recent years. While spending is expected to continue to grow more slowly in the future compared to historical trends, there are signs that spending growth could increase at a faster rate than in recent years, in part due to rising prescription drug spending, growing enrollment in Medicare, increases in provider payments, and higher growth in input prices for medical care.* Net Medicare spending is projected to grow modestly as a share of the federal budget and the nation's economy in the next ten years. Figure 1 Medicare as a Share of the Federal Budget, 2015 AYelolr] IsY-rel0 ainyg 24% yaa) ATS Medicare? Ay Medicaid 9% Total Federal Outlays, 2015: $3.7 trillion Net Federal Medicare Outlays, 2015: $540 billion NOTE: All amounts are for federal fiscal year 2015. 1Consists of mandatory Medicare spending minus income from premiums and other offsetting receipts. includes spending on other mandatory outlays minus income from offsetting receipts. SOURCE: Congressional Budget Office, Updated Budget Projections: 2016 to 2026 (March 2016), Figure 2 Medicare Benefit Payments by Type of Service, 2015 Ta (eo INViKexe orc] 3 PNET e134 27% Hospital outpatient services 7% Hospital inpatient services 23% Total Medicare Benefit Payments, 2015: $632 billion NOTE: *Consists of Medicare benefit spending on hospice, durable medical equipment, Part B drugs, outpatient dialysis, ambulance, lab services, and other Part B services; also includes the effect of sequestration on spending for Medicare benefits and [IWMI amounts paid to providers and recovered. SOURCE: Congressional Budget Office, 2016 Medicare Baseline (March 2016). Historical Trends in Medicare Spending TRENDS IN TOTAL AND PER CAPITA MEDICARE SPENDING The recent years have seen a notable reduction Figure 3 in the growth of Medicare spending compared Average Annual Growth Rates in Medicare and Private Health to prior decades, both overall and per Insurance Spending, 2000-2015 beneficiary. ™ 2000-2010 2010-2015 Total Medicare spending Medicare per capita spending PHI per capita spending 9.0% e Average annual growth in total Medicare spending was 4.4% between 2010 and 2015, down from 9.0% between 2000 and 2010, despite faster growth in enrollment since 2011 with the baby boom generation reaching Medicare eligibility age (Figure 3). e Average annual growth in spending per beneficiary averaged just 1.4% between 2010 and 2015, down from 7.4% between 2000 and 2010. NOTE: PHIIs private health insurance. SOURCE: Kaiser Family Foundation analysis of Medicare spending data from Boards of Trustees; private health insurance spending data from the CMS National Health Expenditure data. Slower growth in Medicare spending in recent years can be attributed in part to policy changes that took effect as part of the Affordable Care Act (ACA) and the Budget Control Act of 2011 (BCA).° The ACA included reductions in Medicare payments to plans and providers and introduced delivery system reforms that aimed to improve efficiency and quality of patient care and reduce costs, including accountable care organizations (ACOs), medical homes, bundled payments, and value-based purchasing initiatives. The BCA lowered Medicare spending through sequestration that reduced payments to providers and plans by 2% beginning in 2013. In addition to policy changes implemented through legislation, the trajectory of Medicare spending in recent years has shifted downward due to slower growth in prescription drug spending, a reduction in inpatient hospital readmissions, a sharp decline in home health spending, and recoveries from program integrity efforts. SPENDING TRENDS FOR MEDICARE COMPARED TO PRIVATE HEALTH INSURANCE Over the past 25 years, Medicare spending has grown at a slightly slower rate than private health insurance spending on a per enrollee basis. With the recent slowdown in the growth of Medicare spending, the difference in growth rates between Medicare and private health insurance spending per enrollee widened. e Between 1989 and 2014, Medicare spending per enrollee grew at an average annual rate of 5.5%, somewhat slower than the 6.3% average annual growth rate in private insurance spending per enrollee over these years.” e Between 2000 and 2010, per enrollee spending growth rates were comparable for Medicare and private insurance (Figure 3). Between 2010 and 2015, however, Medicare per capita spending grew considerably more slowly than private insurance spending, increasing at an average annual rate of just 1.4% over this time period, while average annual growth in private health insurance spending per capita increased at just over twice that rate (3.0%). Medicare Spending Projections SHORT-TERM SPENDING PROJECTIONS FOR THE NEXT TEN YEARS Looking ahead, net Medicare spending (that is, mandatory Medicare spending minus income from premiums and other offsetting receipts) is projected to increase from $591 billion in 2016 to $1.1 trillion in 2026, according to CBO. CBO projects total Medicare spending to increase from $695 billion to $1.3 trillion over this time period The Facts on Medicare Spending and Financing 2 (Figure 4).° Net Medicare spending is projected to grow modestly as a share of the federal budget and the nation's economy over the next ten years. Between 2016 and 2026, Medicare’s share of the budget is projected to increase from 15.2% to 16.8%, while Medicare spending as a share of the gross domestic product (GDP) is projected to increase from 3.2% to 3.9%. SPENDING GROWTH RATE PROJECTIONS e Average annual growth in total Medicare spending is projected to be 7.1% between 2015 and 2025, faster than the 4.4% average annual growth rate between 2010 and 2015. e Ona per capita basis, Medicare spending is projected to grow at a faster rate between 2015 and 2025 (4.3%) than it has in recent years, but somewhat more slowly than average annual growth in per capita private health insurance spending over this time period (4.8%) (Figure 5). e Medicare per capita spending is not expected to grow uniformly across the coming ten- year period, however. Average annual per capita spending growth is expected to be slower in the first five years of the projection period than in the last five years: 3.9% between 2015 and 2020, increasing to 4.7% between 2020 and 2025. RISING PRESCRIPTION DRUG SPENDING e OACT projects a comparatively higher per capita growth rate in the coming years for Part D than for the other parts of the program due to higher costs associated with expensive specialty drugs. Per capita spending growth is projected to be 5.8% for Part D, compared to 3.2% for Part A and 4.6% for Part B (Figure 6). The Facts on Medicare Spending and Financing Figure 4 Actual and Projected Net Medicare Spending, 2010-2026 W Actual Net Outlays J Projected Net Outlays $1,075 {in billions) {in billions) $997 $853 $877 $894 $759 709 $660 > $591 $594 $594 $54 gaag $480 sace 5492 $505 Percent of: 2010 2011 2012 2013 2014 2015!2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Federal Outlays GDP 30 #31 29 30 29 30:32 312 29 32 3.3 12.9 133 132 142 144 #146:152 146 142 14.7 15.0 153 161 159 15.7 165 168 34 36 36 35 38 3.9 NOTE: All amounts are for federal fiscal years; amounts are in billions and consist of mandatory Medicare spending minus income from premiums and other offsetting receipts. SOURCE: Congressional Budget Office, Updated Budget Projections: 2016 to 2026 (March 2016); March 2016 Medicare Baseline. Figure 5 Projected Average Annual Growth Rate in Medicare and Private Health Insurance Spending, 2015-2025 Total Medicare spending Medicare per capita spending PHI per capita spending 7.1% NOTE: PHI is private health insurance. SOURCE: Kalser Family Foundation analysis of Medicare spending data from Boards of Trustees; private health Insurance spending data from the CMS National Health Expenditure data. Figure 6 Average Annual Growth in Medicare Beneficiary Costs for Part A, Part B, and Part D Between 2015 and 2025 5.8% 4.6% PartA Part B Part D Per beneficiary spending: 2015 $5,019 $5,522 $2,203 2025 $6,901 $8,642 $3,861 SOURCE: Kaiser Family Foundation analysis of Medicare spending data from the 2016 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (Table V.D1) LONG-TERM SPENDING PROJECTIONS Over the longer term (that is, beyond the next ten years), both CBO and OACT expect Medicare spending to rise more rapidly relative to GDP due to a number of factors, including the aging of the population and faster growth in health care costs than growth in the economy on a per capita basis. According to CBO's most recent long-term projections, net Medicare spending will grow from 3.2% of GDP in 2016 to 3.9% in 2026, 5.0% in 2036, and 5.7% in 2046.° Over the next 30 years, CBO projects that "excess" health care cost growth"® will account for a somewhat larger share of projected growth in spending on the nation's major health care programs (Medicare, Medicaid, and subsidies for ACA Marketplace coverage) than the aging of the population.'' CBO cites new medical technology and rising personal income as the driving factors behind projections of rising health care costs. At the same time, CBO notes that the projected rate of excess cost growth in Medicare spending for the coming years is lower than the historical rate of growth, based on the expectation that use of Medicare services will continue to grow slowly and on the smaller provider payment updates called for under current law relative to past payment increases.'? How Is Medicare Financed? Medicare is funded primarily from three sources: general revenues (42%), payroll taxes (37%), and beneficiary premiums (13%) (Figure 7). Figure 7 e Part Ais financed primarily through a 2.9% Sources of Medicare Revenue, 2015 tax on earnings paid by employers and employees (1.45% each) (accounting for 88% of Part A revenue). Higher-income taxpayers (more than $200,000/individual and $250,000/couple) pay a higher payroll tax on earnings (2.35%). ™ General revenue Payroll taxes @ Premiums @ Transfers from states I Taxation of Social e Part B is financed through general revenues Security benefits (73%), beneficiary premiums (25%), and interest and other sources (2%). Of Interest Other Beneficiaries with annual incomes over $85,000/individual or $170,000/couple pay TOTAL Part A Part B Part D a higher, income-related Part B premium $644.4 billion $275.4 billion $279.0 billion $90.0 billion reflecting a larger share of total Part B SOURCE: 2O16 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table 1!.B1. spending, ranging from 35% to 80%. The ACA froze the income thresholds through 2019, and beginning in 2020, the income thresholds will once again be indexed to inflation, based on their levels in 2019 (a provision in the Medicare Access and CHIP Reauthorization Act of 2015'%). As a result, the number and share of beneficiaries paying income-related premiums will increase as the number of people on Medicare continues to grow in future years and as their incomes rise. e Part D is financed by general revenues (77%), beneficiary premiums (14%), and state payments for dually eligible beneficiaries (10%). As for Part B, higher-income enrollees pay a larger share of the cost of Part D coverage. e The Medicare Advantage program (Part C) is not separately financed. Medicare Advantage plans such as HMOs and PPOs cover all Part A, Part B, and (typically) Part D benefits. Beneficiaries enrolled in Medicare Advantage typically pay monthly premiums for additional benefits covered by their plan, in addition to the Part B premium. The Facts on Medicare Spending and Financing 4 Assessing Medicare’s Financial Condition Medicare’s financial condition can be assessed in different ways, including estimating the solvency of the Medicare Hospital Insurance (Part A) trust fund, and comparing various measures of Medicare spending—overall or per capita—to other spending measures, such as Medicare spending as a share of the federal budget or as a share of GDP. Such measures are also used in the context of broader discussions of the national budget and federal debt and in the Independent Payment Advisory Board (IPAB) process, described below. SOLVENCY OF THE MEDICARE HOSPITAL INSURANCE TRUST FUND The solvency of the Medicare Hospital Insurance trust fund, out of which Part A benefits are paid, is one way of measuring Medicare's financial status, though because it only focuses on the status of Part A, it does not present a complete picture of program spending overall. The solvency of Medicare in this context is measured by the level of assets in the Part A trust fund. In years when annual income to the trust fund exceeds benefits spending, the asset level increases, and when annual spending exceeds income, the asset level decreases. When spending exceeds income and the assets are fully depleted, Medicare will not have sufficient funds to pay all Part A benefits. Each year, the Medicare Trustees provide an Figure 8 estimate of the year when the asset level is Solvency Projections of the Medicare Part A Trust Fund, 2005-2016 projected to be fully depleted. The Trustees Report Year now project that the Part A trust fund will be noe depleted in 2028, two years earlier than was 2007 projected in 2015, attributable to lower payroll 2008 tax receipts and a slowing rate of reduction in 2009 2010 2029 2011 : . ° 2012 Because of slower growth in Medicare spending oon 1 in recent years, the solvency of the Part A trust 2014 fund has been extended further into the future 2015 inpatient utilization (Figure 8). 2030 2030 compared to projections before the ACA was 2016 2028 passed. Part A trust fund solvency is also 2005 2010 2015 2020 2025 2030 2035 affected by the level of growth in the economy, Solvency Projection (Year) . . > SOURCE: Intermediate projections from 2005-2016 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and which affects Medicare s revenue from payroll Federal Supplementary Medical Insurance Trust Funds. tax contributions, by overall health care spending trends, and by demographic trends—of note, an increasing number of beneficiaries—especially between 2010 and 2030 when the baby boom generation reaches Medicare eligibility age—and a declining ratio of workers per beneficiary making payroll tax contributions. Part B and Part D do not have financing challenges similar to Part A, because both are funded by beneficiary premiums and general revenues that are set annually to match expected outlays. Expected future increases in spending under Part B and Part D, however, will require increases in general revenue funding and higher premiums paid by beneficiaries. THE INDEPENDENT PAYMENT ADVISORY BOARD The Independent Payment Advisory Board (IPAB), authorized by the ACA, is a new approach to controlling Medicare spending. IPAB is required to recommend Medicare spending reductions to Congress if projected spending growth exceeds specified target levels. The Board is to consist of 15 full-time members appointed by the President and confirmed by the Senate. To date, however, no members have been appointed, and in fact there have several attempts by Congress to repeal the Board altogether.'* The Facts on Medicare Spending and Financing 5 IPAB is required to propose spending reductions if the 5-year average growth rate in Medicare per capita spending is projected to exceed the per capita target growth rate, based on general and medical inflation (2015-2019) or growth in the economy (2020 and beyond). If there are no Board members appointed when a proposal for spending reductions is required, the Secretary of Health and Human Services is responsible for making recommendations to achieve the required spending reductions. Based on its most recent Medicare spending Figure 9 growth rate projections relative to the targets, If the Independent Payment Advisory Board (IPAB) Process Is OACT has estimated that the IPAB process will | Triggered in 2017, What Happens Next? first be triggered in 2017 (Figure 9). This JAN 2018 wsae - . . 15%: IPAB submits would initiate a three year cycle ending with APR 2017 nroposal to President spending reductions implemented in 2019. Medicare actuaries andCongress APR 1, 2018 : : : determine if 25th: HHS Secretary Deadline for AUG 15, 2018 OACT also projects that spending growth will Medicare growth submits proposal Congressional HHS Secretary ce 208 exceed the target growth rate in 2022, 2024, rate exceeds target «te Congress committees implements pacommendations . . growth rate if PAB doesn’t to act recommendations . and 2025. CBO has projected that Medicare 1 ' ' ' omen spending growth will be below the target T T T > growth rate for each fiscal year through 2018, SEP 1, 2017 MAR 1, 2018 OCT 1, 2018 . . IPAB submits draft HHS Secretary FY payment rate but will exceed the target growth rate in 2019, recommendations and MedPAC recommendations 2024, and 2026. Based on its IPAB projections, to HHS Secretary report on IPAB effective . . . saae and MedPAC proposal CBO estimates Medicare savings of $8 billion oe NOTE: |PAB is Independent Payment. Advisory Board. HHS is Health and Human Services. MedPAC is Medicare Payment Advisory asa result of the IPAB process between 2019 SOURCE lec Ebelen Tela Newnan and juvette Cubanski, The independent Payment Advisory Board: A New Approach to 15 Controlling Medicare Spending, Kalser Family Foundation, April 2011, and 2026. The Future Outlook While Medicare spending is on a slower upward trajectory now than in past decades, total and per capita annual growth rates appear to be edging away from their historically low levels of the past few years. This raises several questions about recent spending trends and projections for future spending growth: Can the recent slowdown in Medicare spending be sustained and can this be done without adversely affecting access to or quality of care? How are payment and delivery system reforms influencing spending levels? How will future spending be affected by Medicare's new approaches to physician payment that will be established pursuant to the 2015 law known as MACRA?"* What steps could be taken to moderate the projected growth in Medicare spending due to the availability of new specialty drugs and medical technology? A number of changes to Medicare have been proposed that could help to address the health care spending challenges posed by the aging of the population, including: restructuring Medicare benefits and cost sharing; eliminating “first- dollar” Medigap coverage; further increasing Medicare premiums for beneficiaries with relatively high incomes; raising the Medicare eligibility age; shifting Medicare from a defined benefit structure to a “premium support” system; and accelerating the ACA’s delivery system reforms. At the same time, changes have been proposed to improve coverage under Medicare in order to limit the financial burden of health care costs on older Americans and younger beneficiaries with disabilities, though such changes would likely require additional spending. In addition to these potential changes, which would affect future spending levels, revenue options could also be considered to help finance care for Medicare’s growing and aging population.'” The prospects for these and other proposals that would affect Medicare spending and financing are unknown, but few would question the importance of carefully deliberating ways to bolster the Medicare program for today’s beneficiaries and for the growing number of people who will depend on Medicare in the future. The Facts on Medicare Spending and Financing 6 Endnotes ' Author’s calculations based on Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, National Health Expenditures Tables, Table 4: National Health Expenditures by Source of Funds and Type of Expenditures: Calendar Years 2008-2014 (December 2015). ? 9016 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, June 22, 2016, available at https: //www.cms.gov/Research-Statistics-Data-and-Systems/ Statistics-Trends-and- Reports/ReportsTrustFunds/index.html. 3 Congressional Budget Office (CBO), March 2016 Medicare Baseline, March 24, 2016, available at https: //www.cbo.gov/sites/default/files/51302-2016-03-Medicare.pdf. * Gretchen Jacobson, Giselle Casillas Anthony Damico, Tricia Neuman, and Marsha Gold, "Medicare Advantage 2016 Spotlight: Enrollment Market Update," Kaiser Family Foundation, May 2016, available at hitp://kff.org/medicare/issue-brief/medicare- advantage-2016-spotlight-enrollment-market-update/. > Sean Keehan, et al. “National Health Expenditure Projections, 2015-25: Economy, Prices, and Aging Expected to Shape Spending and Enrollment,” Health Affairs, published online July 13, 2016. © For a more detailed discussion of these and other factors, see Chapin White, Juliette Cubanski, and Tricia Neuman, How Much of the Medicare Spending Slowdown Can Be Explained? Insights and Analysis from 2014, Kaiser Family Foundation, December 2014, available at http: //kff.org/medicare/issue-brief/how-much-of-the-medicare-spending-slowdown-can-be-explained-insights-and- analysis-from-2014/. ” Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, National Health Expenditures Tables, Table 21: Expenditures, Enrollment and Per Enrollee Estimates of Health Insurance: United States, Calendar Years 1987-2014 (December 2015). 8 CBO, March 2016 Medicare Baseline. ° CBO, The 2016 Long-Term Budget Outlook, July 2016, available at https://www.cbo.gov/publication/51580. ' CBO defines excess cost growth as the extent to which the growth of health care costs per beneficiary, adjusted for demographic changes, exceeds the growth of potential GDP per person. "| CRO, The 2016 Long-Term Budget Outlook, July 2016, Figure 1.5. '2 CBO, The 2016 Long-Term Budget Outlook, July 2016, Figure 3.2. '3 The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) (Public Law 114-10) is a law to repeal and replace Medicare’s Sustainable Growth Rate (SGR) formula which will establish new payment systems designed to reward quality over quantity of physician services. '4 For details, see Congressional Research Service, The Independent Payment Advisory Board (IPAB): Frequently Asked Questions, October 30, 2015. '5 CBO, March 2016 Medicare Baseline. '6 The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) (Public Law 114-10) is a law to repeal and replace Medicare’s Sustainable Growth Rate (SGR) formula which will establish new payment systems designed to reward quality over quantity of physician services. '7 Kaiser Family Foundation, Policy Options to Sustain Medicare for the Future, January 2013, available at http://kff.org/medicare/report/policy-options-to-sustain-medicare-for-the-future/. The Henry J. 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