Medicare projections from CBO and the program’s trustees

The Congressional Budget Office (CBO) and the board of trustees charged with overseeing Medicare’s financial health recently released updated forecasts of the program within days of each other. These latest reports are valuable starting points for examining Medicare’s current status and likely future course.

 

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CBO’s Medicare estimates, released on May 25th, are included in its full reassessment of the national economy and federal budget. The volume provides detailed estimates for all federal tax provisions and spending programs over ten years. It also briefly mentions its updated longer-term forecast, covering the next thirty years (the long-term projections will be discussed in detail in a standalone report the agency is planning to issue in July).

On June 2nd, the Medicare trustees released their statutorily-required annual report, which includes income and cost projections covering 75 years.

Neither of the new forecasts breaks significant ground. Medicare’s income and outgo are expected to track fairly closely with the estimates from last year’s reports. Even so, as is always the case, several data points are worth highlighting.

 

  • HI’s Date of Depletion. CBO expects Medicare’s Hospital Insurance (HI) trust fund will be depleted of its reserves in 2030, which is three years later than it projected in July 2021. The Medicare trustees are more pessimistic than CBO, and project HI trust fund exhaustion in 2028.

Both forecasts reveal large cumulative deficits in HI over the coming decade. CBO projects a ten-year HI deficit of $190 billion over the period 2022 to 2031. The Medicare trustees expect a larger deficit, of $380 billion (the trustees forecast covers calendar years, while CBO’s is based on fiscal years).

The trustees note that their projections assume HI spending will continue at the levels specified in current Medicare law even though exhaustion of the trust fund’s reserves would force spending cuts to keep outlays in line with incoming receipts. There is no precedent for how such cuts would be implemented in the unlikely event Congress failed to act to avert insolvency.

  • Sources of Spending Growth. Medicare spending is surging as enrollment grows and spending per person escalates with more intensive use of services. The Medicare trustees expect enrollment to add an average of 2.1 percentage points to annual HI spending growth over the next decade, and 2.2 percentage points to Medicare part B. More use of services, and more intensive services per encounter, will add another 2.5 percentage points to HI spending growth, 4.5 percentage points to part B, and 1.5 percentage points to part D.

Overall, both the Medicare trustees and CBO project total program spending growth will average 7.8 percent annually through 2031.

In 2050, CBO projects gross Medicare spending will reach 7.3 percent of GDP, while the trustees expect it to be lower, at 6.2 percent of GDP. In 2021, the ratio of Medicare spending to GDP was 3.9 percent.

  • Program Enrollment. As noted, Medicare is under financial pressure in part because of growing program enrollment. As the U.S. populations ages (and the full baby boom generation crosses age 65), both Social Security and Medicare are serving many millions of additional beneficiaries.

In 2021, there were 63 million people enrolled in the HI program. By 2031, CBO expects HI enrollment to reach 76 million, while the trustees forecast an increase to 78 million.

  • Medicare Advantage. Both CBO and the trustees expect the trend toward increased enrollment in Medicare Advantage (MA) to continue. By 2031, CBO projections MA enrollment of 43 million, which would be 57 percent of all Medicare participants. The trustees expect MA enrollment to grow to 41 million in 2031, or 53 percent of the full number of Medicare participants.
  • Prescription Drug Costs. CBO’s forecast of prescription drug expenses in Medicare part D reveals more rapid growth than is reflected in the report from the Medicare trustees. Over the period 2022 to 2031, CBO projects part D spending growth will average 8.0 percent annually, while the Medicare trustees forecast an average annual rate of 4.8 percent.
  • Economic Assumptions. Both CBO and the Medicare trustees based their projections on economic assumptions that already might be out of date. CBO assumes the consumer price index (CPI) will rise 4.7 percent in 2022 and 2.7 percent in 2023, and that the economy will grow in real terms by 3.1 percent in 2022 and 2.2 percent in 2023. The Medicare trustees (using the same assumptions that are also used for the Social Security forecast) expect the CPI to rise by 4.5 percent in 2022 and 2.3 percent in 2023 while the economy would grow in real terms by 3.9 percent in 2022 and 2.8 percent in 2023.

With inflation running above 8 percent through at least May, it will be difficult for the CPI to fall to the levels assumed in CBO’s forecast or the Medicare trustees’ report. Further, it is possible that aggressive monetary tightening in the second half of 2022 will trigger a recession (perhaps in 2023), which would substantially disrupt the forecasts in both reports. In a recession, it is possible that the HI trust fund would run through its remaining reserves rapidly.

Further, high inflation is likely to increase the political pressure in Congress to raise what Medicare pays for hospital and physician services. Under current law, Medicare’s payments will rise at rates that are well below general inflation, which means the providers of these services will experience real reductions in their Medicare receipts. If Congress steps in and provides relief, Medicare’s financial outlook may become even more challenging than is reflected in the recently-issued reports.

 

While both CBO and the Medicare trustees project a modest improvement in their forecasts of the HI trust fund relative to projections from 2021, there is a high degree of uncertainty around the current estimates. Thus, it remains important for Congress to act sooner rather than later to stabilize the program’s finances. Delay will only increase the chances that a change in circumstances will force an abrupt legislative response.

James C. Capretta is a columnist for State of Reform and a senior fellow at the American Enterprise Institute.