Table Of Content2003ANNUALREPORTOF
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
