¹ 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, Washington, D.C., April 1998; 1998 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund, Washington, D.C., April 1998; and 1998 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Washington, D.C., April 1998.

² Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 1995, HCFA Pub. No. 03374, September 1995.

³ PPRC Annual Report to Congress, 1996, Physician Payment Review Commission, p. 282. Estimate is for 1992.

⁴ Two notable items not generally covered are prescription drugs and long-term care.

⁵ PPRC Annual Report to Congress, 1996, p. 291.

⁶ For an analysis see Bernice Steinhardt, "Medicare: Fewer and Lower-Cost Beneficiaries with Chronic Conditions Enroll in HMOs," General Accounting Office, Washington, D.C., August 18, 1997.

⁷ For example, an actuarial study of Medicare Part A legislation estimated it would cost $900 million in its first year and $1.7 billion by the tenth year. Actually, the Medicare hospitalization program cost $2.7 billion and $10.9 billion, respectively. See Donald Quinlan, "The Assumptions Behind Political Medicine are False: A Study of the Truth," Testimony delivered before the Health Subcommittee, House Ways and Means Committee, September 12, 1975, pp. 7-8.

⁸ To create these estimates we take the projected expenditure stream and subtract from it the projected tax revenues. For the Hospitalization Insurance portion, this is a fairly straightforward calculation using the numbers reported by the Medicare trustees. To estimate the SMI unfunded liability, we assume that beneficiaries will continue to pay 25 percent of the projected expenditures, which grow at the same rate as the dedicated HI costs. Present values were calculated using the nominal discount rate implied by the trustees' intermediate assumptions. (See the Appendix for more detail.)

⁹ Alan Auerbach, Jagadeesh Gokhale and Laurence J. Kotlikoff, "Generational Accounts: A Meaningful Alternative to Deficit Accounting," in D. Bradford, ed., Tax Policy and the Economy 5 (Cambridge Mass.: MIT Press, 1991), pp. 55-110.

¹⁰ Auerbach, Gokhale and Kotlikoff.

¹¹ In last year's report a tax increase of 69 percent was required for actuarial balance for the next 25 years and a 150 percent increase for actuarial balance for the 75-year horizon. The improvement between the two years lies in limiting payment increases to providers, moving toward prospective payments and away from reimbursements and shifting home health care costs to Part B.

¹² The real rate of return used here is 5.4 percent and the medical expenditures per capita grow at a real rate of 1 percent.

¹³ Risk adjustment is the process whereby a government entity reimburses an insurer a larger portion of funds for people with medical conditions.

¹⁴ See Joseph P. Newhouse, Melinda Beeuwkes Buntin and John D. Chapman, "Risk Adjustment and Medicare: Taking a Closer Look," Health Affairs, vol. 16, no. 5, Sept/Oct 1997, pp. 26-43.

¹⁵ This section is based partly on Phil Gramm, Andrew J. Rettenmaier and Thomas R. Saving, "Medicare Policy for Future Generations - A Search for a Permanent Solution," New England Journal of Medicine, vol. 338, no. 18, April 30, 1998, pp. 1307-10.

¹⁶ For more detail on estimating each component in the forecasts, see Andrew J. Rettenmaier and Thomas R. Saving, "Medicare Reform: A Cohort Based Solution," Private Enterprise Research Center, Working Paper no. 9804, December 1997. In particular, we forecast future earnings growth by sex, age and education, based on historical rates, and therefore we do not vary a single earnings growth rate parameter in our projections as is done in the Trustees Reports.

¹⁷ James M. Poterba and Andrew Samwick, "Stock Ownership Pattern, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, 1995:2, pp. 295-357.

¹⁸ Martin Feldstein and Andrew Samwick, "The Economics of Prefunding Social Security and Medicare Benefits," NBER Working Paper 6055, 1997.

¹⁹ These costs are estimated from the 1994 Annual Person Summary (APS) Medicare reimbursement data. These data are used in preparing some of the tables in the Annual Statistical Supplement to the Health Care Financing Review. Here the data are used to impute the claims distribution by age. For the low- and intermediate-cost calculations, the claims distribution is adjusted downward to reflect the effects of a higher deductible on expenditures. The effects of the higher deductible are drawn from the RAND Health Insurance Experiment results. See Emmett B. Keeler, Joan L. Buchanan, John E. Rolph, Janet M. Hanley and David M. Reboussin, "The Demand for Episodes of Medical Treatment in the Health Insurance Experiment," RAND Corporation, March 1988. Because Medicare's two-part structure is not directly comparable to any of the insurance instruments simulated in the RAND report, the low-cost and intermediate-cost estimates are presented to show the bounds of the effects of a higher deductible on medical care utilization. The current Medicare package is the average age-adjusted reimbursement based on the APS data. For more detail on how the Annual Person Summary data were used to estimate the cost of the higher-deductible policy, see Rettenmaier and Saving, "Medicare Reform: A Cohort Based Solution."

²⁰ Since individuals up to the age of 42 can fund their own retirement medical insurance for less than 4.39 percent of their remaining life time earnings, they are contributing toward the retirement health insurance of those in the old system and those over 42 in the new system. Thus, a full 2.61 percent of the earnings of all new entrants to the labor force during the transition is available to defray the transition cost. In addition, contributions to the cohort-based insurance for individuals ages 43 to 51, which are in excess of the 4.39 percent implied tax, are counted against the transition tax revenues; but all of the tax revenues collected from those 52 and above would be counted as transition tax revenues.