Table Of Content

2003ANNUALREPORTOF THEBOARDSOFTRUSTEESOFTHE FEDERALHOSPITALINSURANCEAND FEDERALSUPPLEMENTARYMEDICALINSURANCE TRUSTFUNDS COMMUNICATION From THEBOARDSOFTRUSTEES, FEDERALHOSPITALINSURANCEAND FEDERALSUPPLEMENTARYMEDICALINSURANCE TRUSTFUNDS Transmitting THE2003ANNUALREPORTOF THEBOARDSOFTRUSTEESOFTHE FEDERALHOSPITALINSURANCEAND FEDERALSUPPLEMENTARYMEDICALINSURANCE TRUSTFUNDS LETTEROFTRANSMITTAL BOARDSOFTRUSTEESOFTHE FEDERALHOSPITALINSURANCEAND FEDERALSUPPLEMENTARYMEDICALINSURANCETRUSTFUNDS, Washington,D.C.,March17,2003 HONORABLEJ.DennisHastert SpeakeroftheHouseofRepresentatives Washington,D.C. HONORABLERichardB.Cheney PresidentoftheSenate Washington,D.C. GENTLEMEN: Wehavethehonoroftransmittingtoyouthe2003AnnualReportoftheBoardsofTrusteesofthe FederalHospitalInsuranceTrustFundandtheFederalSupplementaryMedicalInsuranceTrustFund, the38thsuchreport. Respectfully, /S/ /S/ JohnW.Snow,Secretaryofthe ElaineL.Chao,Secretaryof Treasury,andManaging Labor,andTrustee. TrusteeoftheTrustFunds. /S/ TommyG.Thompson,Secretaryof JoAnneB.Barnhart,Commissioner HealthandHumanServices, ofSocialSecurity,andTrustee. andTrustee. /S/ JohnL.Palmer,Trustee. ThomasR.Saving,Trustee. /S/ ThomasA.Scully,Administratorofthe CentersforMedicare&MedicaidServices, andSecretary,BoardsofTrustees. CONTENTS I.OVERVIEW 1 A.Introduction 1 B.Highlights 2 C.MedicareDataforCalendarYear2002 3 D.EconomicandDemographicAssumptions 4 E.FinancialOutlookfortheMedicareProgram 6 F.FinancialStatusoftheHITrustFund 10 G.FinancialStatusoftheSMITrustFund 15 H.Conclusion 18 II.ACTUARIALANALYSIS 20 A.MedicareFinancialProjections 20 B.HIFinancialStatus 26 1.HIFinancialOperationsinFiscalYear2002 26 2.10-YearActuarialEstimates(2003-2012) 33 3.75-YearActuarialEstimates(2003-2077) 45 4.Long-RangeHISensitivityAnalysis 58 C.SMIFinancialStatus 64 1.SMIFinancialOperationsinFiscalYear2002 64 2.10-YearActuarialEstimates(2003-2012) 71 3.75-YearActuarialEstimates(2003-2077) 84 4.ImplicationsofSMICostGrowth 85 III.ACTUARIALMETHODOLOGY 89 A.HospitalInsurance 89 B.SupplementaryMedicalInsurance 102 IV.APPENDICES 116 A.MedicareAmendmentssincethe2002Report 116 B.AverageMedicareExpendituresperBeneficiary 117 C.MedicareCostSharingandPremiumAmounts 119 D.SupplementaryAssessmentofUncertaintyinSMICost Projections 122 E.Glossary 132 ListofTables 148 ListofFigures 151 StatementofActuarialOpinion 152 v I.OVERVIEW A.INTRODUCTION TheMedicareprogramiscomposedoftwoparts.HospitalInsurance (HI),orMedicarePartA,helpspayforhospital,homehealth,skilled nursing facility, and hospice care for the aged and disabled. SupplementaryMedicalInsurance(SMI),orMedicarePartB,pays forphysician,outpatienthospital,homehealth,andotherservicesfor theagedanddisabled. The HItrustfundisfinancedprimarilybypayrolltaxespaid by workersandemployers.Thetaxespaideachyearareusedmainlyto paybenefitsforcurrentbeneficiaries.TheSMItrustfundisfinanced primarilybytransfersfromthegeneralfundoftheU.S.Treasuryand bymonthlypremiumspaid bybeneficiaries. Incomenotcurrently neededtopaybenefitsandrelatedexpensesisheldintheHIand SMItrustfundsandinvestedinU.S.Treasurysecurities. TheMedicareBoardofTrusteeswasestablishedundertheSocial SecurityActtooverseethefinancialoperationsoftheHIandSMI trustfunds.1TheBoardiscomposedofsixmembers.Fourmembers serve by virtue oftheir positions in the federal government: the Secretary of the Treasury, who is the Managing Trustee; the SecretaryofLabor;theSecretaryofHealthandHumanServices;and the CommissionerofSocial Security. Theothertwomembers are appointedbythePresidentandconfirmedbytheSenatetoserveas publicrepresentatives:JohnL.PalmerandThomasR.Saving,the current public Trustees, began serving their 4-year terms on October28,2000.TheAdministratoroftheCentersforMedicare& MedicaidServices(CMS)isdesignatedasSecretaryoftheBoard. This2003reportisthe38thtobesubmitted.Thereportevaluatesthe near-termandlonger-termfinancialstatusofboththeHIandSMI trustfundsunderarangeofpossiblefutureconditions. Technically,separateboardsareestablishedforHIandSMI.Becausebothboards havethesamemembership,forconveniencetheyarecollectivelyreferredtoasthe MedicareBoardofTrusteesinthisreport. 1 Overview B.HIGHLIGHTS The major findings ofthis report under the intermediate set of assumptionsaresummarizedbelow. •MedicareProgram—CombinedHI and SMI expenditures asa percentageoftheGrossDomesticProduct(GDP)areprojectedto increaserapidly,from2.6percentin2002to5.3percentby2035 andthento9.3percentby2077.Inthefuture,undercurrentlaw, an increasing proportion ofMedicare costs will be financed by general revenues and beneficiary premiums, and a decreasing proportionofcostswillbemetthroughpayrolltaxes. •HI TrustFund—In the shortrange(2003-2012), thefinancial statusofthefundisfavorable,withHIassetsestimatedtoincrease from137percentofannualexpendituresin2002to192percentin 2012.TheHItrustfundeasilymeetstheTrustees'testofshort- range financial adequacy. However, overthenext 10years, the average annualincreaseinbenefitpaymentsis estimatedtobe 5.9percent, compared to a growth rate of5.3percent for the economyasawhole,asmeasuredbyGDP.After2012,projectedHI taxincomewouldfallshortofexpendituresunderpresentlawbya rapidly expanding margin. Tax income currently equals 105percent ofexpenditures butwould cover only 73percent of costsin2026andjust30percent75yearsfromnow.Currentlaw providesformeetingsuchHIrevenueshortfallsbydrawingonHI trustfundassets(andassociatedinterestincome),redeemingthese assetsthroughtransfersfromthegeneralfund ofthetreasury. Doing so would deplete the trust fund in 2026 under the intermediateassumptions.Asubstantial75-yearactuarialdeficitof 2.40percentoftaxablepayrollisprojected,andtheHItrustfund failsbyawidemargintomeettheTrustees'long-rangetestofclose actuarialbalance. •SMI Trust Fund—Under current law the SMI trust fund is scheduledtobemaintainedatadequatelevels,bothinthenear term and into the indefinite future, because ofthe automatic financingestablishedforthefundbylaw.Overthenext10years, theaverageannualincreaseinbenefitpaymentsisestimatedtobe 7.1percent,comparedtoagrowthrateof5.3percentforGDP.SMI outlayswere1.1percentofGDPin2002andareprojectedtogrow toabout4.2percentby2077. 2 MedicareData C.MEDICAREDATAFORCALENDARYEAR2002 HI and SMI have separate trust funds, sources ofrevenue, and categories ofexpenditures. TableI.Cl presentsMedicaredatafor calendaryear2002,intotalandforeachpartoftheprogram.The largest category ofHI expenditures is inpatient hospital services, whilethelargestSMIexpenditurecategoryisphysicianservices. TableI.C1.—MedicareDataforCalendarYear2002 HI Qui Total Assetsatendof2001(billions) $208.7 $41.3 $250.0 Totalincome(billions) $178.6 $106.2 $284.8 Payrolltaxes 152.7 152.7 Interest 14.4 2.7 17.1 Taxationofbenefits 8.3 8.3 Premiums 1.6 25.1 26.7 Generalrevenue 0.6 78.3 79.0 Other 1.0 0.0 1.0 Totalexpenditures(billions) $152.5 $113.2 $265.7 Benefits 149.9 111.0 260.9 Hospital 104.9 15.4 120.3 SHPkhoiylmslieecdihnaeunarlfsteihencgsacfraheceildiutyle 146.61 454..04 411540...065 Managedcare 19.4 17.3 36.7 Other 4.9 28.8 33.7 Administrativeexpenses $2.6 $2.2 $4.8 Netchangeinassets(billions) $26.1 -$7.0 $19.1 Assetsatendof2002(billions) $234.8 $34.3 $269.1 Enrollment Aged(millions) 34.6 32.9 35.1 Disabled(millions) 6.0 5.2 6.0 Total(millions) 40.6 38.1 41.1 Averagebenefitperenrollee $3,689 $2,915 $6,604 ForHI,theprimarysourceoffinancingisthepayrolltaxoncovered earnings. Employers and employees each pay 1.45percent of earnings,whileself-employedworkerspay2.9percentoftheirnet income. OtherHIrevenuesourcesincludeaportionofthefederal incometaxesthatpeoplepayontheirSocialSecuritybenefits,and interestpaidontheU.S.TreasurysecuritiesheldintheHItrust fund. ForSMI,transfersfromthegeneralfundofthetreasuryrepresent thelargestsourceofincome,coveringroughly75percentofprogram costs. Beneficiaries pay monthly premiums that finance about 25percentofcosts.AswithHI,interestispaidontheU.S.Treasury securitiesheldintheSMItrustfund. 3 Overview D.ECONOMICANDDEMOGRAPHICASSUMPTIONS Actual future Medicare expenditureswill depend on anumber of factors,includingthesizeandcompositionofthepopulationeligible forbenefits,changesin thevolume and intensityofservices, and increasesinthepriceperservice.ForHI,futuretrustfundincome willdependonthesizeandcharacteristicsofthecoveredworkforce andthelevelofworkers'earnings.Thesefactorswilldependinturn uponfuturebirthrates,deathrates,laborforceparticipationrates, wage increases, and many other economic and demographic circumstancesaffectingMedicare.Toillustratetheuncertaintyand sensitivity inherent in estimates of future Medicare trust fund operations,projectionshavebeenpreparedundera"lowcost"anda "highcost"setofassumptionsaswellasunderanintermediateset. TableI.D1 summarizes the key assumptions used in this report. Many ofthe demographic and economicvariables thatdetermine MedicarecostsandincomearecommontotheOld-Age,Survivors, and Disability Insurance (OASDI) program and are explained in detailinthereportoftheOASDIBoardofTrustees.Thesevariables includechangesintheConsumerPriceIndex(CPI)andwages,real interestrates,fertilityrates,andmortalityrates.("Real"indicates thattheeffects ofinflationhavebeenremoved.)The assumptions vary,inmostcases,fromyeartoyearduringthefirst5to30years beforereachingtheirso-called"ultimate"valuesfortheremainderof the75-yearprojectionperiod.OtherassumptionsarespecifictoHI andSMI.AswithalloftheassumptionsunderlyingtheTrustees' financial projections, the HI- and SMI-specific assumptions are reviewedannuallyandupdated based onthelatestavailabledata andanalysisoftrends. TableI.D1.—UltimateAssumptions Intermediate LowCost HighCost Economic: Annualpercentagechangein: GrossDomesticProduct(GDP)percapita 4.3 4.0 4.6 ACvoenrsaugmeerwaPgreiceinIcnodveexr(eCdPIe)mployment 43..10 23..06 44..60 Real-wagedifferential(percent) 1.1 1.6 0.6 Realinterestrate(percent) 2.9 3.6 2.1 Demographic: Totalfertilityrate(childrenperwoman) 1.95 2.2 1.7 Averageannualpercentagereductionintotalage-sex adjusteddeathratesfrom2027to2077 0.76 0.35 1.33 Healthcostgrowth: AnnualpercentagechangeinperbeneficiaryMedicare SeeesxepcetnidointuIIr.Besfo(rexfucrltuhdeirngexdpelmanoagtriaopn.hicimpacts).. 5.3 1 1 4