Medicare solvency estimate increased after accounting error discovered

April 20, 2000
Web posted at: 3:51 p.m. EDT (1951 GMT)

WASHINGTON (CNN) -- Due to an accounting error, the Medicare trust fund used to provide health care to senior Americans will remain solvent for two years longer than previously estimated, the Department of Health and Human Services said Thursday.

On March 30, trustees of the Medicare Hospital Insurance (HI) Trust Fund, which covers reimbursements for a variety of hospital and post-hospital care, estimated that the program would remain solvent until 2023.

After discovering that government actuaries had underestimated the value of accumulated interest in the trust fund, the trustees extended the solvency estimate to 2025, according to a Health and Human Services (HHS) memorandum sent to House Minority Leader Richard Gephardt (D-Missouri).

The memo, prepared by Richard Foster, chief actuary for Health and Human Services, said there was "a serious error in our projection of future interest earnings on the assets of the hospital insurance fund."

Foster blamed the error on a programming mistake that caused computers to undercount future estimated earnings on assets in the trust fund by tens of billions of dollars.

"The estimated amounts of interest are understated by $2.1 billion in calendar year 2000 and by gradually increasing amounts through 2014," Foster's memo said.

"The understatement increases substantially in 2015 and later, to $20 billion annually."

The Medicare trust fund is supported through payroll tax collections. Those taxes provide more revenue than is paid out annually in hospital and post-hospital benefits. Post-hospital benefits include reimbursements for skilled nursing care, part-time home health care and hospice care.

The trust fund earns interest annually. An undercounting of interest, estimated at $2.1 billion in 2000, multiplied to $20 billion by 2014. This mistake led to the erroneous estimate of trust fund solvency.

With the new estimates, Medicare trustees now say the Hospital Insurance trust fund can cover annual costs through 2016 and will exhaust all funds in 2025.

"The HI trust continues to meet the trustees' test of short-range financial adequacy, and the program continues to face a serious long-range financial imbalance," the memo said.

Medicare enrollment is due to double from 40 million to 80 million by the year 2035.

By tradition, the Treasury Secretary serves as chairman of the board of trustees for the hospital insurance fund and for a separate fund that provides Social Security payments to retired Americans.

Treasury Secretary Lawrence Summers told Gephardt on Thursday he was "investigating how best to correct the previously transmitted report" to Congress on Medicare.

CNN's Major Garrett and Reuters contributed to this report.