2011A PrimermeDiCAre SPeNDiNG AND FiNANCiNGFebruAry 2011A PrimermeDiCAre SPeNDiNG AND FiNANCiNGPrepared by:Lisa PotetzHealth Policy Alternatives, Inc.andJuliette Cubanski and Tricia NeumanThe Henry J. Kaiser Family Foundation13.5%5.8%8.5%12.1%15.1%17.4%1970 1980 1990 2000 2010 2020Medicare Spending as a Share of Federal Budget Outlays, 1970‐2020SOURCE: Congressional Budget Office, Budget and Economic Outlook, January 2010 (for 1970 data) and January 2011 (for 1980‐2020 data, except 2010 which comes from CBO August 2010 Baseline: Medicare). Historical total spending for 1970‐2000 from 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Su pplementary Medical Insurance Trust Funds.NOTE: *Es timates for 1970‐2010 represent total Medicare outlays, estimate for 2020 represents projection of mandatory Medicare outlays. CBO (August 2010) projects discretionary Medicare outlays will be $9 billion in 2020.ProjectedTota l Medicarespendingin billions$7 $35 $110 $219 $524 $949*ActualExhibit 1 A PRIMER ON MEDICARE SPENDING AND FINANCING INTRODUCTION For 45 years, Medicare has successfully provided access to health care services for the elderly ages 65 and over and many nonelderly people with disabilities, and currently covers 47 million Americans. Persistently high rates of growth in national health expenditures combined with demographic trends, however, pose a serious challenge to the financing of Medicare in the 21st century. This paper provides a detailed overview of Medicare spending and financing, beginning with a review of the factors contributing to the growth in Medicare spending, including the effects of the 2010 health reform law. Next, it explains the structure of the Medicare program’s financing, reviews various measures of fiscal status, and discusses the expected effects of rising Medicare costs on beneficiaries. The paper concludes with a discussion of the program’s long‐run financial challenges. With Medicare being the nation’s single largest health insurance program covering a large population for a broad range of health services, the program’s influence extends well beyond the assistance it provides to its beneficiaries. Medicare expenditures and the policies under which the program operates have a large impact on the natio n ’ s health care system. One in five dollars used to purchase health services in 2008 came through the Medicare program, which finances nearly four in ten hospital stays nationally.1 TRENDS IN MEDICARE SPENDING Since its enactment in 1965, spending on Medicare has grown steadily, as measured in absolute dollars, as a share of the federal budget, and as a share of the gross domestic product (GDP), and these trends are expected to continue (Exhibits 1 and 2). In fiscal year 2010, Medicare’s $524 billion in total expenditures represented 15 percent of all federal outlays, exceeded only by Social Security benefits and defense spending, which each accounted for 20 percent (Exhibit 3).2 By 2020, Medicare is projected to reach 17 percent of budget outlays a n d 4 percent of the GDP. Between 1985 and 2009, growth in Medicare spending averaged almost 9 percent annually, compared with 5 percent growth in both the GDP and medical care inflation during those years (Exhibit 4). The average annual growth in aggregate Medicare spending (9 percent) exceeds the average growth in Medicare per capita spending (7 percent) during this period because it includes costs attributable to the growth in the 20.7%1.2%1.9%2.2%3.6%4.2%1970 1980 1990 2000 2010 2020Medicare Spending as a Share of Gross Domestic Product (GDP), 1970‐2020SOURCE: Congressional Budget Office, Budget and Economic Outlook, January 2010 (for 1970 data) and January 2011 (for 1980‐2020 data).Exhibit 2 ProjectedActualMedicare Spending as a Share of Total Federal Outlays, FY 2010All Other Combined231%Defense 20%Social Security20%Medicare115%Medicaid8%Net Interest6%SOURCE: Kaiser Family Foundation based from Congressional Budget Office, Historical Budget Data, January 2011.NOTE: FY is fiscal year. 1Amount for Medicare is mandatory spending and excludes offsetting premium receipts (premiums paid by beneficiaries, amounts paid to providers and later recovered, and state contribution (clawback) payments to Medicare Part D). 2”A ll Other Combined” category includes other mandatory outlays, offsetting receipts, and negative outlays for Troubled Asset Relief Program.FY 2010 Total Federal Outlays = $3.5 trillionExhibit 3 Average Annual Growth in Medicare Spending, 1985‐2009Compared with Economic Benchmarks8.5%6.7%5.2%4.1%2.9%5.1%Medicare spendingMedicare spending per enrolleeGDP GDP per capita CPI CPI‐Medical careSOURCE: Economic Report of the President, 2010, except Medicare data from the 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.NOTE: GDP is gross domestic product. CPI is consumer price index. Exhibit 4 Medicare population, which increased by almost 2 percent annually during this period. The addition of the Part D prescription drug benefit in 2006 contributed to the rate of growth; excluding Part D, average annual Medicare growth in total spending was just under 8 percent overall and 6 percent per enrollee. Looking to the decade ahead, Medicare spending is projected to grow more slowly (about 6 percent annually), and on a per‐beneficiary basis, will be closer to growth in GDP and general inflation.3 However, current projections of Medicare spending also assume large cuts in physician fees that will occur under current law due to the physician payment formula known as the Sustainable Growth Rate (SGR). If reductions in physician fees are avoided in the future, as they have been numerous times in recent years, Medicare spending will exceed the current projections. For example, under one alternative scenario, the Medicare actuaries estimate that Medicare spending could be about 9 percent higher in 2019 than it is projected to be under current law.4 Medicare spending growth generally reflects trends in national health spending, which for many years has outpaced growth in the economy, rising from 7 percent of GDP in 1970 to nearly 18 percent in 2009, and is projected to reach 20 percent by the end of the decade.5 Over the long run, average growth in Medicare spending per beneficiary has been slightly lower than per