By Alex Wayne & Anna Edney; Bloomberg ~ May 31, 2013 

The $574 billion Medicare health system, the second-largest U.S. social services program, will exhaust its main financial trust fund in 2026, two years later than predicted as the Affordable Care Act helps control costs. 

Assets for the Part A trust that pays for hospital visits, nursing care and related services for Medicare’s 51 million elderly and disabled beneficiaries, fell $23.8 billion in 2012, according to a report today from the program’s trustees. That compares with a net drop in assets of $27.7 billion for 2011. 

The decrease was the smallest since 2009 as debt-reduction legislation enacted two years ago included payment cuts that begin taking effect this year. The data should be useful in the debate between President Barack Obama and Republicans over the best approach to improving Medicare’s long-term footing.

“This is meaningful, but two years, I don’t think anyone should get too excited,” said Marilyn Moon, a senior vice president at the American Institutes for Research in Washington. “There is no reason to believe things have gotten worse, things have gotten a little better and we will get some breathing room over time to decide what to do with Medicare.”

Republicans have considered raising the Medicare eligibility age and switching to a system in which beneficiaries get subsidies to buy private insurance, instead of the government paying for their care. Obama has sought to mostly keep the current structure and instead find ways to boost efficiency of the program and reduce excess costs, partly through provisions in the 2010 health-care law he helped create.

ACA Effect

“With the health-care law, our goal was to put Medicare on more stable footing,” Health and Human Services Secretary Kathleen Sebelius said at a news conference. “The past few years have borne out that promise.”

Medicare will be bankrupt in 13 years and the report shouldn’t provide comfort, Senator Orrin Hatch, a Republican from Utah, said in a statement.

“Slower economic growth means that fewer Americans are purchasing health care,” said Hatch, the top-ranking Republican on the Senate committee that oversees Medicare. “As our economy improves, there will be a greater deterioration in the health of the Medicare program for our seniors.”

Hatch has suggested allowing private health plans to compete for Medicare beneficiaries as a way to reduce costs along with raising the program’s eligibility age.

Funding Warning

Moon said the improvement in Medicare resulted from a combination of “the economy, the fact that the new people on the Medicare rolls are swelling it but they are healthier because they are younger, and some of the reforms are starting to kick in.”

While the data today showed improvement, the program’s financial condition was still enough to trigger the eighth consecutive “Medicare funding warning.” That designation by the trustees requires Obama to propose new funding or cuts in benefits, a mandate that he and his presidential predecessor have ignored.

“To date, lawmakers have never allowed the assets of the Medicare HI trust fund to become depleted,” the trustees said, referring to the Part A hospital insurance fund.

If Congress weren’t to prevent insolvency, steep cuts in payments to hospitals would result.

Private Plans

In a report released alongside the Medicare data today, the projection for the 2033 exhaustion of the U.S. Social Security trust funds, used to make retirement and disability payments, was left unchanged.

Medicare’s total spending rose about 4.6 percent to $574 billion in 2012, from $549 billion in 2011, the report shows.

The program has three parts — A, B and D — that cover hospital in-patient stays, outpatient services and prescription drugs. Part C is the Medicare Advantage program, in which private insurers including UnitedHealth Group Inc. (UNH) and Humana Inc. (HUM) contract to provide those services in place of the government.

Parts B, C and D, whose trusts are collectively referred to as SMI, are adequately financed for now, the trustees said.

Medicare’s trustees include Lew, Sebelius, the Labor Department secretary, Social Security commissioner and two members of the public. The board annually reports on the program’s financial condition.

“It doesn’t look like the trail we are on quite gets to the cliff as fast as we might have thought, but it doesn’t mean we can afford to coast and say things have slowed down and everything is OK,” said Stuart Guterman, a vice president at the Commonwealth Fund, a New York-based nonprofit group that advocates for better health care.

To contact the reporters on this story: Alex Wayne in Washington at awayne3@bloomberg.net; Anna Edney in Washington at aedney@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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