Medicare's finances have deteriorated sharply in the last year, according to its annual trustees' report released Tuesday.

The decline is due to higher benefit spending, higher drug costs, lower tax revenues and the new prescription drug benefit.

Medicare's hospital fund, which pays for inpatient care, is expected to become insolvent in 2019. That is seven years earlier than last year's report projected.

The 2004 report by the Social Security and Medicare Boards of Trustees also showed Social Security faces similar but more distant long-term financial problems.

The trustees urged lawmakers to address entitlement funding.

"The weighty concerns raised by the trustees' reports demand the attention of America 's policy-makers and the public," said Treasury Secretary John Snow, a trustee.

The report may be politically explosive since it's the first since President Bush signed the Medicare Modernization Act, which adds a prescription drug benefit.

Drug Benefit Backfires

Administration officials had hoped the benefit would be political gold, but the reaction from seniors has been tepid. Democrats have harshly criticized it, as have many conservative groups.

Medicare provides subsidized medical care for the elderly. One part is hospital insurance, sometimes called Part A, which is financed via payroll taxes. Today's workers pay for today's elderly.

The program has a surplus, but that will quickly change as demographics swell the numbers of the elderly.

As recently as 2002, the trustees said costs for Part A would exceed revenues by 2016 and that Part A wouldn't become insolvent until 2030. Now the trustees say costs will exceed revenues by 2010 and exhaust trust funds by 2019.

Medicare will have to tap interest on its earnings this year. Last year's report predicted that wouldn't happen until 2013.

Snow said the situation is not unprecedented.

"While this decline in cash flow is a substantial change . . . we saw similar negative cash flow for much of the 1990s," he said.

The other part of Medicare is Supplementary Medical Insurance, which is paid for through enrollee premiums (25%) and the federal government's general revenues (75%). This pays for doctor and outpatient services and is sometimes called Part B.

The new drug benefit will be added to SMI as Part D. Because SMI is mostly funded by general tax revenues, the report doesn't estimate long-term financing issues. But the benefit will be costly.

Congress narrowly OK'd the benefit when forecasts said it would cost $400 billion over 10 years. But this year, the Health and Human Services Department revised the cost to $534 billion.

"These benefits will increase the total cost of Medicare by an estimated one-fourth when they begin in 2006, and are expected to grow more rapidly than Part B costs," HHS said in a news release.

The report put fans of the prescription drug benefit on the defensive. They said reforms included in the benefit will hold down long-term costs, but added more were needed.

"We must continue building on the reforms we added to Medicare," said HHS Secretary Tommy Thompson.

Social Security's finances are bad, but no worse than last year's forecast, the trustees noted. Costs are still expected to exceed payroll tax revenues by 2028. Social Security will drain its trust fund by 2042.

But the "trust fund" consists of Treasury securities. To redeem them, the government will have to raise taxes, cut spending, cut benefits or some combination thereof.

"There is nothing in the trust fund," said John Goodman, president of the National Center for Policy Analysis. "Those are not bonds that you can sell on the marketplace. They are literally IOUs the government wrote to itself."

Democrats blamed Bush's tax and economic policies.

"His inability to regenerate jobs and put our nation's workers on sound financial footing is directly reducing revenues coming into the federal government," said Rep. Pete Stark, D-Calif., ranking Democrat on the House Ways and Means Committee.