Abstract
This summary presents an overview of the information contained in the annual reports of the trustees required under Title XVIII of the Social Security Act, Health Insurance for the Aged and Disabled, commonly known as Medicare. There are two basic programs under Medicare:
Hospital insurance (HI), which pays for inpatient hospital care and other related care of those 65 years of age and over and of the long-term disabled.
Supplementary medical insurance (SMI), which pays for physicians' services, outpatient hospital services, and other medical expenses of those 65 years of age and over and of the long-term disabled.
The HI program is financed primarily by payroll taxes, with the taxes paid by current workers used to pay benefits to current beneficiaries. However, the HI program maintains a trust fund that provides a small reserve against fluctuations. This type of financing is generally known as pay-as-you-go financing. By contrast, the SMI program is financed on an accrual basis with a contingency margin. This means that the SMI trust fund should always be somewhat greater than the claims that have been incurred by enrollees but not yet paid by the program. The trust funds hold all of the income not currently needed to pay benefits and related expenses. The assets of the funds may not be used for any other purpose; however, they may be invested in certain interest-bearing obligations of the U.S. Government.
The Secretaries of Treasury, Labor, and Health and Human Services serve as trustees of the HI and SMI trust funds. The Secretary of Treasury is the managing trustee. The Administrator of the Health Care Financing Administration, the agency charged with administering the Medicare program, is the secretary of the Board of Trustees.
Hospital insurance trust fund
The HI trust fund is financed primarily by payroll taxes. The HI contribution rates applicable to taxable earnings in each of the calendar years 1981 and later are shown in Table 1. The maximum taxable amounts of annual earnings are shown for 1981 through 1983. After 1983, the automatic increase provisions in section 230 of the Social Security Act determine the maximum taxable amount.
Table 1. Contribution rates and maximum taxable amount of annual earnings.
| Calendar year | Maximum taxable amount of annual earnings | Contribution rate | |
|---|---|---|---|
|
| |||
| Employees and employers, each | Self-employed | ||
|
| |||
| Percent of taxable earnings | |||
| 1981 | $29,700 | 1.30 | 1.30 |
| 1982 | 32,400 | 1.30 | 1.30 |
| 1983 | 35,700 | 1.30 | 1.30 |
| Changes scheduled in present law: | |||
| 1984 | Subject to automatic increase | 1.30 | 2.60 |
| 1985 | 1.35 | 2.70 | |
| 1986 and later | 1.45 | 2.90 | |
The Social Security Act was amended during 1982 by the Tax Equity and Fiscal Responsibility Act (TEFRA) and during 1983 by the Social Security Admendments of 1983 (Public Law 98-21). The major provisions among the many affecting the HI program were:
TEFRA changed the method by which Medicare reimburses hospitals by replacing the previous per diem limits on routine inpatient costs by limits on total inpatient costs per admission and limits on increases in total inpatient costs per admission expire for cost reporting periods beginning on or after October 1, 1985.
Medicare coverage is extended to Federal employees, who are required to pay the hospital insurance portion of the FICA tax as of January 1, 1983.
Medicare will temporarily cover hospice care for beneficiaries having a life expectancy of 6 months or less. This provision is effective November 1, 1983, and expires October 1, 1986.
Public Law 98-21 changes the method by which Medicare makes payments to hospitals. Hospitals will no longer be reimbursed on a reasonable cost basis for their inpatient operating costs. Hospitals will be paid a prospectively determined price per discharge using diagnosis-related groups. This provision is effective for hospital fiscal years beginning on or after October 1, 1983.
Social Security coverage is mandated for employees of nonprofit organizations. Terminations of coverage are not permitted as of March 31, 1983. Also, no terminations of coverage by State and local governments or entities will be permitted after April 20, 1983. Such entities now outside the system will be permitted to rejoin. This provision is effective upon enactment.
Interfund borrowing among the old age and survivors insurance, disability insurance, and hospital insurance trust funds (authorized in 1981) is extended through 1987 with repayment to be made during 1988-1989 in 24 equal monthly payments. Beginning June 1983, loans would be repayable when the fund ratio of the borrowing fund exceeds 15 percent.
Operations of the HI program
At the end of 1982, 26 million people over 65 years of age and 3 million disabled people under 65 years of age were covered under HI, financed primarily by the contributions of 116 million workers through payroll taxes. Payroll taxes during 1982 amounted to $34.6 billion, accounting for 90.9 percent of all HI income. About 2.7 percent of all income resulted from reimbursements from the general fund of the Treasury for military service credit and benefits for certain uninsured persons. Interest payments to the HI fund amounted to 5.4 percent of all HI income for 1982. The remaining 1.0 percent was contributed through premiums paid by voluntary enrollees and taxes collected from railroad workers. Of the $36.1 billion in HI disbursements, $35.6 billion was for payments while the remaining $0.5 billion was spent for administrative expenses. HI administrative expenses were 1.4 percent of total disbursements.
Table 2 displays the HI fund operations for calendar years 1970-1982. In most years, the HI fund has increased. However, the fund ratio (the fund at the beginning of the year divided by disbursements during the year) has declined every year from its peak of 79 percent in 1975 to 45 percent in 1981. The fund ratio increased slightly at the beginning of 1982 primarily because of the increase in the contribution rate in 1981.
Table 2. HI fund operations, calendar years 1970-1982.
| Calendar year | Total income | Total disbursements | Interfund borrowing transfers | Net increase in fund | Fund at end of year | Ratio at beginning of year |
|---|---|---|---|---|---|---|
|
| ||||||
| Amount in billions | Percent | |||||
| 1970 | $ 6.0 | $ 5.3 | $ 0.7 | $ 3.2 | 47 | |
| 1971 | 5.7 | 5.9 | −0.2 | 3.0 | 54 | |
| 1972 | 6.4 | 6.5 | −0.1 | 2.9 | 47 | |
| 1973 | 10.8 | 7.3 | 3.5 | 6.5 | 40 | |
| 1974 | 12.0 | 9.4 | 2.7 | 9.1 | 69 | |
| 1975 | 13.0 | 11.6 | 1.4 | 10.5 | 79 | |
| 1976 | 13.8 | 13.7 | 0.1 | 10.6 | 77 | |
| 1977 | 15.9 | 16.0 | −0.2 | 10.4 | 66 | |
| 1978 | 19.2 | 18.2 | 1.0 | 11.5 | 57 | |
| 1979 | 22.8 | 21.1 | 1.8 | 13.2 | 54 | |
| 1980 | 26.1 | 25.6 | 0.5 | 13.7 | 52 | |
| 1981 | 35.7 | 30.7 | 5.0 | 18.7 | 45 | |
| 1982 | 38.0 | 36.1 | $−12.4 | −10.5 | 8.2 | 52 |
NOTE: Components may not add to totals because of rounding.
Actuarial status of the trust fund
The Board of Trustees has adopted the general financing principle that annual income to the hospital insurance program should be approximately equal to annual outlays of the program plus an amount to maintain a balance in the trust fund equal to one-half year's disbursements. Because of the $12.4 billion loan to the OASI fund at the end of 1982, the trust fund was far below this desired level. Projections were made under four alternative sets of assumptions: optimistic, two intermediate sets (Alternatives II-A and II-B), and pessimistic. Under both sets of intermediate assumptions, the trust fund ratio is projected to remain around 20 to 30 percent in most years until the late 1980's and then decline rapidly with complete exhaustion of the fund around 1990.
Under the more optimistic set of assumptions (Alternative I), the trust fund is projected to grow until about 1988, then to decline steadily until the fund is completely exhausted in 1996. Under the more pessimistic set of assumptions (Alternative III), the trust fund is projected to decrease steadily with complete exhaustion of the fund by 1988.
Table 3 summarizes the estimated operations of the HI trust fund under the four alternative sets of assumptions. Figure 1 shows historic trust fund ratios for recent years and projected ratios under the four sets of assumptions.
Table 3. Estimated operations of the hospital insurance trust fund during calendar years 1982-96, under alternative sets of assumptions.
| Calendar year | Total income | Total disbursements | Interfund borrowing transfers1 | Net increase in fund | Fund at end of year | Ratio of assets to disbursements2 |
|---|---|---|---|---|---|---|
| Alternative I (Optimistic) |
Amount in billions | Percent | ||||
| 19823 | $ 38.0 | $ 36.1 | $−12.4 | $−10.6 | $ 8.2 | 52 |
| 1983 | 44.8 | 41.2 | 3.6 | 11.8 | 20 | |
| 1984 | 46.0 | 46.2 | 1.0 | 0.9 | 12.6 | 26 |
| 1985 | 52.0 | 51.1 | 1.6 | 2.5 | 15.2 | 25 |
| 1986 | 59.1 | 55.7 | 9.1 | 12.5 | 27.6 | 27 |
| 1987 | 63.6 | 60.5 | 0.7 | 3.8 | 31.4 | 46 |
| 1988 | 68.0 | 65.9 | 2.1 | 33.5 | 48 | |
| 1989 | 71.9 | 70.8 | 1.1 | 34.6 | 47 | |
| 1990 | 76.8 | 77.1 | −0.4 | 34.2 | 45 | |
| 1991 | 80.8 | 82.4 | −1.6 | 32.6 | 42 | |
| 1992 | 86.1 | 89.1 | −3.1 | 29.5 | 37 | |
| 1993 | 90.1 | 95.8 | −5.7 | 23.9 | 31 | |
| 1994 | 95.3 | 102.8 | −7.6 | 16.3 | 23 | |
| 1995 | 99.4 | 110.2 | −10.8 | 5.5 | 15 | |
| 1996 | 104.5 | 117.6 | −13.2 | (4) | 5 | |
| Alternative II-A (Intermediate) |
||||||
| 19823 | 38.0 | 36.1 | −12.4 | −10.6 | 8.2 | 52 |
| 1983 | 44.7 | 41.2 | 3.6 | 11.7 | 20 | |
| 1984 | 45.8 | 46.5 | 0.6 | −0.1 | 11.6 | 25 |
| 1985 | 51.3 | 51.8 | −0.5 | 11.2 | 22 | |
| 1986 | 58.2 | 57.1 | 4.8 | 5.9 | 17.1 | 20 |
| 1987 | 61.9 | 62.6 | 6.8 | 6.1 | 23.2 | 27 |
| 1988 | 65.7 | 68.9 | 0.2 | −3.0 | 20.3 | 34 |
| 1989 | 69.8 | 75.8 | −6.0 | 14.3 | 27 | |
| 1990 | 73.9 | 83.5 | −9.6 | 4.7 | 17 | |
| 1991 | 77.5 | 91.5 | −14.0 | (5) | 5 | |
| Alternative II-B (Intermediate) |
||||||
| 19823 | 38.8 | 36.1 | −12.4 | −10.6 | 8.2 | 52 |
| 1983 | 44.7 | 41.2 | 3.5 | 11.7 | 20 | |
| 1984 | 45.6 | 46.6 | 0.5 | −0.5 | 11.2 | 25 |
| 1985 | 51.3 | 52.3 | −1.0 | 10.2 | 21 | |
| 1986 | 58.4 | 58.0 | 1.1 | 1.5 | 11.8 | 18 |
| 1987 | 62.5 | 64.1 | 2.4 | 0.8 | 12.6 | 18 |
| 1988 | 66.0 | 71.0 | 8.4 | 3.5 | 16.1 | 18 |
| 1989 | 70.0 | 78.4 | −8.4 | 7.8 | 21 | |
| 1990 | 73.9 | 86.6 | −12.6 | (6) | 9 | |
| Alternative III | ||||||
| (Pessimistic) | ||||||
| 19823 | 38.0 | 36.1 | −12.4 | −10.6 | 8.2 | 52 |
| 1983 | 44.4 | 41.2 | 3.2 | 11.4 | 20 | |
| 1984 | 44.5 | 46.8 | −2.3 | 9.1 | 24 | |
| 1985 | 50.5 | 54.1 | −3.6 | 5.5 | 17 | |
| 1986 | 58.2 | 61.9 | −3.7 | 1.8 | 9 | |
| 1987 | 62.6 | 70.5 | 12.4 | 4.5 | 6.3 | 3 |
| 1988 | 66.5 | 80.4 | −13.9 | (7) | 8 |
A loan to the OASI trust fund would still be an asset of the HI trust fund. However, since these assets are not immediately available for payment of HI benefits, they are subtracted from the HI fund balance. A negative amount is a loan to the OASI trust fund. A positive amount is a repayment of principal to the HI trust fund.
Ratio of assets in the trust fund at the beginning of the year to disbursements during the year.
Figures for 1982 represent actual experience.
Trust fund depleted in calendar year 1996.
Trust fund depleted in calendar year 1991.
Trust fund depleted in calendar year 1990.
Trust fund depleted in calendar year 1988.
NOTE: Totals do not necessarily equal the sum of rounded components.
Figure 1. Short term hospital insurance trust fund ratios.
The adequacy of the financing of the HI program on a long-range basis is measured by comparing on a year-by-year basis the actual tax rates specified by law with the corresponding total costs of the program, expressed as percentages of taxable payroll. The actuarial balance is defined to be the excess of the average tax for the 25-year valuation period (1983-2007) over the average cost of the program expressed as a percent of taxable payroll. The average tax rate for the 25-year period 1983-2007 is 2.87 percent. The average cost of the program under Alternatives II-A and II-B is 3.97 and 4.11 percent of taxable payroll, respectively. Table 4 compares the actuarial balance under each of the four sets of assumptions. Figure 2 shows the year-by-year cost as a percent of taxable payroll for each of the four sets of assumptions, as well as the scheduled tax rates. The cost figures in Table 4 and Figure 2 include amounts for building and maintaining the trust fund at the level of a half year's disbursements as recommended by the Board of Trustees. Figure 2 emphasizes the inadequacy of the financing of the HI program by illustrating the divergence of the program costs and scheduled tax rates under each set of assumptions.
Table 4. Actuarial balance of the hospital insurance program, under alternative sets of assumptions.
| Item | Alternative assumptions | |||
|---|---|---|---|---|
|
| ||||
| I | II-A | II-B | III | |
|
| ||||
| Percent | ||||
| Average contribution rate, scheduled under present law1 | 2.87 | 2.87 | 2.87 | 2.87 |
| Average cost of the program, for expenditures and for trust fund building and maintenance2 | 3.21 | 3.97 | 4.11 | 5.38 |
| Actuarial balance3 | −0.34 | −1.10 | −1.24 | −2.51 |
Average for the 25-year period 1983-2007.
Average for the 25-year period 1983-2007, expressed as a percent of taxable payroll. Taxable payroll is adjusted to take into account the lower contribution rates on self-employment income in 1983, on tips, and on multiple-employer “excess wages,” compared with the combined employer-employee rate.
The actuarial balance of the hospital insurance program is defined to be the excess of the average tax rate for the 25-year valuation period over the average cost of the program, expressed as a percent of taxable payroll, for the same period.
Figure 2. Estimated hospital insurance (HI) cost and tax rates.
Under all four sets of assumptions used in the 1983 report, the outlook for the hospital insurance trust fund is slightly more optimistic than it was in the 1982 report. This is primarily the result of the major legislation during 1982 and 1983 which will help curtail the rapid increase in hospital costs. Table 5 below presents a comparison of the projected experience in the 1982 and 1983 reports.
Table 5. Status of the hospital insurance trust fund.
| Alternative assumptions | Year in which the trust fund is exhausted as published in the— | Actuarial balance of the HI program1 as published in the— | ||
|---|---|---|---|---|
|
|
|
|||
| 1982 Report | 1983 Report | 1982 Report | 1983 Report | |
| I (Optimistic) | 1991 | 1996 | −0.86 | −0.34 |
| II-A (Intermediate) | 1989 | 1991 | −1.63 | −1.10 |
| II-B (Intermediate) | 1987 | 1990 | −2.07 | −1.24 |
| III (Pessimistic) | 1986 | 1988 | −3.73 | −2.51 |
The actuarial balance of the hospital insurance program is defined to be the excess of the average tax rate for the 25-year valuation period over the average cost of the program, expressed as a percent of taxable payroll, for the same period.
Conclusion
The present financing schedule for the hospital insurance program is barely adequate to ensure the payment of benefits through the end of this decade if the assumptions underlying the estimates are realized. The trust fund is exhausted in 1991 and 1990 under Alternatives II-A and II-B, respectively. Under the more pessimistic assumptions, the fund is exhausted in 1988. Even under the more optimistic Alternative I, the present financing schedule will result in the fund being exhausted in 1996. In order to bring the hospital insurance program into close actuarial balance, either disbursements of the program will have to be reduced by 30 percent or financing will have to be increased 43 percent. Despite the short-term uncertainties, the enactment of TEFRA in 1982 and Public Law 98-21 has substantially reduced the long-range deficit of the HI fund. More importantly, the prospective payments of Public Law 98-21 have made the outlays of the HI program potentially less vulnerable to excessive rates of growth in the hospital industry by providing the Secretary of Health and Human Services with some discretion over the level of payments to hospitals.
The quadrennial Advisory Council on Social Security, appointed by the Secretary, will be addressing the financial status of the hospital insurance trust fund. The council's report is due by the end of 1983. The Board recommends that Congress study carefully the advisory council's recommendations as it takes further action to curtail the rapid growth in the cost of the hospital insurance program which has occurred in recent years and which is anticipated in the future.
Supplementary medical insurance trust fund
Financing for the supplementary medical insurance program is established annually on the basis of standard monthly premium rates (paid by or on behalf of all participants) and monthly actuarial rates determined separately for aged and disabled beneficiaries (on which general revenue contributions are based). Prior to the 6-month transition period (July 1, 1983 through December 31, 1983) these rates were applicable to the 12-month periods ending June 30. Beginning January 1, 1984, the annual basis will change to the 12-month periods ending December 31. Monthly actuarial rates are equal to one-half the monthly amounts necessary to finance the SMI program. These rates determine the amount to be contributed from general revenues on behalf of each enrollee. Based on the formula in the law, the Government contribution effectively makes up the difference between twice the monthly actuarial rates and the standard monthly premium rate. Figure 3 presents these values for financing periods since 1974. The extent to which general revenue financing is becoming the major source of income for the program is clearly indicated in this figure.
Figure 3. Supplementary medical insurance monthly per capita income.
Standard monthly premium rates and monthly actuarial rates have been announced for periods through December 31, 1983. For the 6-month period ending December 31, 1983 (transitional semester (TS)), the standard monthly premium rate is $12.20, and the monthly actuarial rates are $27.00 and $46.10 for the aged and disabled, respectively.
The Social Security Act was amended during 1982 and 1983. The major provisions among the many affecting the SMI program were:
The premium rates applicable July 1, 1983 through December 31, 1983 is frozen at the rate that applied June 1983. Some general revenues shall be added from July through December to compensate for keeping the smaller June 1983 premium for that period. From January 1984 through December 1985, the monthly SMI premium is set at one-half of the actuarial rate for aged enrollees. After December 1985, the determination of the premium rate will revert to the method used before enactment of this provision and future increases shall apply on a calendar year basis.
Medicare becomes the secondary payer for employees 65 through 69 years of age (and their spouses of the same age) who are covered by health plan benefits of an employer.
The basis upon which provider-based physicians are reimbursed are to be prescribed in regulations which distinguish between (a) professional component, and (b) provider component.
Operations of the SMI program
In fiscal year 1982, 28.2 million people were covered under SMI. General revenue contributions during 1982 amounted to $13.3 billion, accounting for 75.6 percent of all SMI income. About 21.7 percent of all income resulted from the premiums paid by the participants, with interest payments to the SMI fund accounting for the remaining 2.7 percent. Of the $15.6 billion in SMI disbursement, $14.8 billion was for benefit payments while the remaining $0.8 billion was spent for administrative expenses. SMI administrative expenses were 4.8 percent of total disbursements. The historical operations of the SMI trust fund since fiscal year 1977, as well as the projected operations of the fund for fiscal years through 1985, for both Alternative II-A and Alternative II-B are shown in Table 6. As can be seen, income has exceeded disbursements for most of the historical years and the trust fund balance is projected to continue to increase through fiscal year 1985. However, as the report notes, the financial status of the program depends on both the total net assets and liabilities. It is, therefore, necessary to examine the incurred experience of the program since it is this experience which is used to determine the actuarial rates discussed above and which forms the basis of the concept of actuarial soundness as it relates to the SMI program.
Table 6. SMI fund operations, fiscal years 1977-1985.
| Fiscal year | Total income | Total disbursements | Net increase in fund | Fund at end of year |
|---|---|---|---|---|
|
| ||||
| Amount in billions | ||||
| 1977 | $ 7.4 | $ 6.3 | $ 1.0 | $ 2.3 |
| 1978 | 9.0 | 7.4 | 1.7 | 4.0 |
| 1979 | 9.8 | 8.8 | 1.0 | 5.0 |
| 1980 | 10.3 | 10.7 | −0.5 | 4.5 |
| 1981 | 12.4 | 13.2 | −0.8 | 3.7 |
| 1982 | 17.6 | 15.6 | 2.1 | 5.8 |
| Alternative II-A | ||||
| 1983 | 19.1 | 18.3 | 0.7 | 6.5 |
| 1984 | 22.4 | 21.3 | 1.1 | 7.6 |
| 1985 | 25.3 | 24.5 | 0.8 | 8.5 |
| Alternative II-B | ||||
| 1983 | 19.1 | 18.3 | 0.7 | 6.5 |
| 1984 | 22.4 | 21.3 | 1.1 | 7.6 |
| 1985 | 25.5 | 24.6 | 0.9 | 8.5 |
NOTE: Components may not add to totals because of rounding.
Actuarial soundness of the SMI program
The concept of actuarial soundness, as it applies to the supplementary medical insurance program, is closely related to the concept as it applies to private group insurance. The supplementary medical insurance program is essentially yearly renewable term insurance intended to be self-supporting from premium income paid by the enrollees and from income contributed from general revenue in proportion to premium payments.
In testing the actuarial soundness of the supplementary insurance program, it is not appropriate to look beyond the period for which the enrollee premium rate and level of general revenue financing have been established. The primary tests of actuarial soundness, then, are that (1) income for years for which financing has been established be sufficient to meet the projected benefits and associated administrative expenses incurred for that period, and (2) assets be sufficient to cover projected liabilities which will have been incurred by the end of that time but will not have been paid yet. Even if these tests of actuarial soundness are not met, the program can continue to operate if the trust fund remains at a level adequate to permit the payment of claims as presented. However, to protect against the possibility that cost increases under the program will be higher than assumed, assets should be sufficient to cover the impact of a moderate degree of projection error.
The initial tests for actuarial soundness and trust fund adequacy can be viewed by direct examination of absolute dollar levels. In providing an appropriate contingency or margin for error, however, there must be some relative measure. The relative measure or ratio used for this purpose is the ratio of net surplus or deficit to the following year's incurred expenditures. Figure 4 shows this ratio for historical years and for projected years under one of the intermediate assumptions (Alternative II-B), as well as high- and low-cost sensitivity scenarios.
Figure 4. Actuarial status of the supplementary medical insurance trust fund.
Financing for the 12-month period ending June 30, 1983, was established to maintain assets at the same level relative to program expenditures which existed prior to June 30, 1982. The resulting excess of assets over liabilities as of June 30, 1983, represents 9.4 percent of the projected incurred expenditures for the following 12-month period.
The actuarial rates for the 6-month period ending December 31, 1983, as implemented, will reduce this excess to a more appropriate level. Under more pessimistic assumptions as to cost increases, assets based on financing already established will be insufficient to cover outstanding liabilities. However, the trust fund would remain positive allowing claims to be paid.
Conclusion
The financing established through December 1983 is sufficient to cover projected benefit and administrative costs incurred through that time period and to build a level of trust fund assets which is adequate to cover the impact of a moderate degree of projection error. Thus, the SMI program can be said to be actuarially sound.
Footnotes
NOTE: This report was compiled during the first quarter of calendar year 1983. As expected, actual experience since the publication of the 1983 Trustees Reports indicates that minor revisions in the underlying projection assumptions would be appropriate. However, such revisions would not materially alter the conclusions of the reports. Copies of the complete 1983 HI and SMI Annual Reports may be obtained from the Health Care Financing Administration, Office of Public Affairs, Room 658, East High Rise Building, 6325 Security Boulevard, Baltimore, Md. 21235.