It is hardly news that Medicare funding is in deep trouble. But while we usually hear about the plight of the trust fund supporting Part A (the part that funds hospital care), parts B and D are also headed for trouble.

While the trust fund that supports Medicare Part A is currently predicted to run out in 2019, the threat to Part B and Part D is not that their trust fund will be exhausted. That's because their fund's revenues are adjusted annually based on projected expenditures in any given year. At least as the law is currently set up, increasing expenses for physician services and the Medicare drug benefit are balanced by increasing revenue drawn primarily from the general fund of the Treasury and secondarily from beneficiary premiums. But with increases in expenditures far outpacing growth in the U.S. economy, changes in the law may be needed to ensure Medicare's solvency.

In their 2008 report to Congress, the Board of Trustees of Medicare issued their second consecutive annual “Medicare funding warning,” as required by the Medicare Modernization Act (MMA) of 2003. The warning means essentially that expenditures for parts B and D are estimated to grow enough that more than 45 percent of all Medicare funding will come from general revenue within seven years. Actual expenditures have grown dramatically since 2000 – about 11 percent annually. Over the next 10 years, expenditures are estimated to increase by 8 percent to 9 percent annually, while the U.S. economy is projected to grow at a rate of 4.8 percent annually.

The MMA requires the president to submit to Congress proposed legislation to respond to the funding warning within 15 days of submitting the next federal budget to Congress. The “Medicare Funding Warning Response Act of 2008,” currently in committee, is the White House response to the 2007 warning, and presumably a response to the 2008 warning will be released by a new administration next year. As a result of these responses and the upcoming 2008 elections – not to mention the potential for a 10.6 percent cut in physician reimbursement this summer – the coming months could see significant debate and legislative action with regard to Medicare.

The sustainable growth rate system

Part of the solution will no doubt focus on Part B and the sustainable growth rate (SGR) system. When the SGR system was enacted into law in 1997, the plan was that Medicare payments for physicians' services under Part B would be adjusted annually according to the SGR to keep spending for these services in line with growth in the national economy. Every year, the SGR system calculates a physician payment update based on a formula that compares target expenditures to actual expenditures for previous years. Since 2001, actual expenditures for physicians' services have exceeded target expenditures and thus led to a calculated decrease in the physician payment update in each subsequent year.

Every year since 2003, Congress has been called upon to provide temporary legislation to reverse the projected cuts in physician reimbursement. Many dutiful AAFP members have responded to pleas by our Academy to contact our federal legislators to insist that the decreases dictated by the SGR system were not only unacceptable but also would lead many family physicians to stop accepting Medicare patients and hence decrease access to care for many older Americans. In fact, without congressional intervention, Medicare reimbursements to physicians would have decreased by 21 percent between 2001 and 2005,¹ and additional decreases would have been imposed in 2006 and 2007. Unless Congress acts to change the SGR system, an indefinite series of these stopgap “fixes” will be required to fend off a major drop in Medicare reimbursement.

Unfortunately, the fixes legislated by Congress have all been makeshift measures that have actually served to increase the gap between target and actual Medicare spending in subsequent years, thus causing the SGR system to project ever more drastic cuts in physician reimbursement. For instance, when Congress chose to override the SGR formula in 2006, it created a projected 10.1 percent reduction in physician reimbursement for 2007. Now that Congress has again chosen to override the SGR for six months by giving a 0.5 percent increase, the SGR system projects a reduction of 10.6 percent for physicians in July.

Getting to positive updates and increased physician payments that keep up with inflation and overhead will require legislative changes to the method for calculating target expenditures. Target expenditures that reflect the true cost of providing physician services would at least stop the negative projections for the physician fee update.

While policies that address the failed SGR system might help keep physician payments at a reasonable level, they will not correct the potential insolvency of Medicare itself. As the 2007 and 2008 funding warnings indicate, Medicare is dipping more and more deeply into the public pocket. Removing the artificial governor of the SGR system would hasten Medicare's insolvency. Factor in the likelihood of increasing demand for Medicare services in the next two decades, and it becomes clear that a dramatic change in the funding for Medicare or a dramatic change in the services covered by Medicare will likely be necessary.

Many solutions to the Medicare crisis are likely to be hotly debated in Congress in the months ahead. Legislators will be looking for ways to sustain Medicare by reducing health care spending in general through interventions that may include growth of pay-for-performance programs, cuts in payments to Medicare Advantage programs and promotion of electronic health records, sophisticated chronic disease management, preventive health care and the medical home. As the debate unfolds, it is imperative that interested family physicians gain a better understanding of how Medicare is funded and how it determines payment for Medicare services, and then talk with their legislators about the issues involved. For additional information on Medicare's payment systems and projected financial woes, you may find the article cited above and the resources listed in “Suggested Reading” helpful.