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1974 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND

THE BOARD OF TRUSTEES

The Federal Supplementary Medical Insurance Trust Fund, established on July 30, 1965, is held by the Board of Trustees under the authority of section 1841 (b) of the Social Security Act, as amended. The Board is comprised of three members who serve in an ex-officio capacity. The members of the Board are the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health, Education, and Welfare. The Secretary of the Treasury is designated by law as the Managing Trustee. The Commissioner of Social Security is Secretary of the Board. The Board of Trustees reports to the Congress once each year, in compliance with Section 1841(b) (2) of the Social Security Act. This Report is the annual report for 1974, the ninth such report.

HIGHLIGHTS

(a) The growth of the supplementary medical insurance trust fund during fiscal 1973 was somewhat higher than estimated in the 1973 Report. Income for fiscal 1973 of $2.9 billion was up about 6% from fiscal 1972. Expenditures for benefit payments and administration were $2.6 billion, an increase of about 4% over those for fiscal 1972. The cash balance of the trust fund grew by $265 million to reach $746 million by the end of fiscal 1973.

(b) The solvency of the trust fund, which must be measured on an incurred basis, also improved during fiscal 1973, but the financing was still in a deficit position at the end of that year. The deficit decreased from $368 million at the end of fiscal year 1972 to $225 million at the end of fiscal year 1973.

(c) In December 1973, the standard premium rate for fiscal year 1975 was promulgated at $6.70 per month. Appendix A gives a statement of the actuarial assumptions and bases employed by the Secretary of Health, Education, and Welfare in determining this premium rate. (d) The number of enrollees had by July 1973 reached 20.6 million, about 96% of the total population age 65 and over.

SOCIAL SECURITY AMENDMENTS SINCE THE 1973 REPORT

No major amendments to the Social Security Act have been directed to the Supplementary Medical Insurance Program since the close of fiscal year 1973.

However, a drafting error in P.L. 93-233 specifying the method of computation of automatic cash benefit increases effectively prevents further increases in the SMI standard monthly premium rate at the time of automatic cash benefit increases for years after 1975. This

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report reflects this inadvertent premium freeze in fiscal year 1976 figures. The Trustees recommend that future amendments correct this oversight.

NATURE OF THE TRUST FUND

The Federal supplementary medical insurance trust fund was established on July 30, 1965, as a separate account in the United States Treasury to hold the amounts accumulated under the supplementary medical insurance program. All the financial operations which relate to the system of supplementary medical insurance are handled through this fund.

The major sources of receipts of the trust fund are (1) premiums paid by eligible persons who are voluntarily enrolled in the program and (2) contributions of the Federal government that are authorized to be appropriated and transferred from the general fund of the Treasury according to a fixed ratio to premiums received based on the applicable adequate actuarial rate promulgated for the period in which payable.

Standard monthly premium rates are promulgated each year by the Secretary of Health, Education, and Welfare. The standard premium rates in effect since the beginning of the program, July 1966, through June 1974, and the rate promulgated for the fiscal year beginning July 1974, are shown in table 1.

Expenditures for benefit payments and administrative expenses under the program are paid out of the trust fund. All expenses incurred by the Department of Health, Education, and Welfare and by the Treasury Department in carrying out the supplementary medical insurance provisions of Title XVIII of the Social Security Act are charged to the trust fund. The Secretary of Health, Education, and Welfare certifies benefit payments to the Managing Trustee, who makes the payment from the trust fund in accordance therewith.

Hospitals, at their option, are permitted to combine their billing for both hospital costs and physician components of radiology and pathology services rendered hospital inpatients by hospital-based physicians. Where hospitals elect this billing procedure, payments are made initially from the hospital insurance trust fund, with reimbursement later to it from the supplementary medical insurance trust fund. The reimbursements so made are on a provisional basis and are subject to adjustment, with appropriate interest allowances, as the actual experience develops and is analyzed.

The Social Security Amendments of 1967 and 1972 authorize the Secretary of Health, Education, and Welfare to develop and conduct a broad range of experiments and demonstration projects designed to determine various methods of increasing efficiency and economy in providing health care services, while maintaining the quality of such services, under the hospital insurance and supplementary medical insurance programs. The costs of such experiments and demonstration projects are paid out of the hospital insurance and supplementary medical insurance trust funds. The costs paid out of the supplementary medical insurance trust fund are included as part of benefit payments in the financial statements of operations of the trust fund as set forth in subsequent sections of this report.

Congress has authorized expenditures from the trust fund for construction of office buildings and related facilities for the Social Security Administration. The costs of such construction are included on a

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current basis as part of the administrative expenses in the financial statements of operations of the trust fund as set forth in following sections of this report. The net worth of the resulting facilities-like the net worth of all other fixed capital assets-is not carried as an asset in such statements.

That portion of the trust fund which, in the judgment of the Managing Trustee, is not required to meet current expenditures for benefits and administration is invested in interest-bearing obligations of the United States Government (including special public-debt obligations described below), in obligations guaranteed as to both principal and interest by the United States, or in certain federallysponsored agency obligations that are designated in the laws authorizing their issuance as lawful investments for fiduciary and trust funds under the control and authority of the United States or any officer of the United States. Obligations of these types may be acquired on original issue at the issue price or by purchase of outstanding obligations at their market price.

The Social Security Act authorizes the issuance of special public-debt obligations for purchase exclusively by the trust fund. The law requires that such special public-debt obligations shall bear interest at a rate based on the average market yield (computed by the Managing Trustee on the basis of market quotations as of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States forming a part of the public debt which are not due or callable until after the expiration of four years from the end of such calendar month.

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1 In accordance with limitations on the costs of health care imposed under Phase III of the Economic Stabilization Program, the standard premium rate for July and August 1973 was set at $5.80 and $6.10, respectively. Effective September 1973, the rate increased to $6.30.

SUMMARY OF THE OPERATIONS OF THE TRUST FUND, FISCAL YEAR

1973

A statement of the income and disbursements of the Federal supplementary medical insurance trust fund during fiscal year 1973 and of the assets of the fund at the beginning and end of the fiscal year is presented in table 2. Comparable amounts for fiscal year 1972 are also shown in the table.

The total assets of the trust fund amounted to $481 million on June 30, 1972. During fiscal year 1973, total receipts amounted to $2,902 million and total disbursements were $2,637 million. Total assets thus increased $265 million during the year to a total of $746 million on June 30, 1973.

Of the total receipts, $1,427 million represented premium payments by (or on behalf of) the participants, an increase of 6.5 percent over

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premium payments by participants in the preceding fiscal year. This growth in premiums from participants resulted primarily from (1) the increase from $5.60 to $5.80 per month in the standard premium rate that became effective on July 1, 1972, and (2) the expected growth in the number of persons enrolled in the supplementary medical insurance program.

Matching contributions received from the general fund of the Treasury, less a relatively small interest transfer to the general fund, amounted to $1,430 million. The remaining $45 million of receipts consisted almost entirely of interest on the investments of the trust fund.

Of the $2,637 million in total disbursements, $2,385 million represented benefits paid directly from the trust fund for health services covered under Title XVIII of the Social Security Act and about $104,000 represented amounts paid under incentive reimbursement arrangements. In addition, transfers were made to the hospital insurance trust fund consisting of $6 million for inpatient professional radiology and pathology services that were paid initially from the hospital insurance trust fund but that are liabilities of the supplementary medical insurance trust fund. Total benefit payments from the trust fund in fiscal year 1973, therefore, amounted to $2,391 million, an increase of 6.0 percent over the corresponding amount paid in fiscal year 1972.

The remaining $246 million of disbursements was for net administrative expenses. Administrative expenses are allocated and charged directly to each of the four trust funds-old-age and survivors insurance, disability insurance, hospital insurance, and supplementary medical insurance on the basis of provisional estimates. Periodically, as actual experience develops and is analyzed, adjustments to the allocations of administrative expenses and costs of construction for prior periods are effected by interfund transfers, with appropriate interest allowances.

In table 3, the experience with respect to actual amounts of participants' premiums, Government matching contributions, and benefit payments in fiscal year 1973 is compared with the estimates for fiscal year 1973 which appeared in the 1973 Annual Report of the Board of Trustees. The actual experience was relatively close to the estimates. The assets of the trust fund at the end of fiscal 1973 totaled $746 million, consisting of $700 million in the form of obligations of the United States Government and an undisbursed balance of $46 million. Table 4 shows a comparison of the total assets of the fund and their distribution at the end of fiscal years 1972 and 1973.

The net increase in the par value of the investments held by the fund during fiscal year 1973 amounted to $222 million. New securities at a total par value of $3,186 million were acquired during the fiscal year, through the investment of receipts and reinvestment of funds made available from the redemption of securities. The par value of securities redeemed during the year was $2,965 million. Included in these amounts is $2,905 million in certificates of indebtedness that were acquired and redeemed within the fiscal year.

The effective annual rate of interest earned by the assets of the supplementary medical insurance trust fund during fiscal year 1973 was 6.1 percent. The interest rate on public-debt obligations issued for purchase by the trust fund in June 1973 was 6% percent, payable semiannually.

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