WASHINGTON (CNNfn) -
The trust fund that supports hospital benefits for the nation's elderly, under the federal Medicare program, will become insolvent in 2019, seven years earlier than had been predicted, according to the annual report of trustees of the Social Security and Medicare programs.
Health and Human Services Secretary Tommy Thompson cited decreased revenues and increased health care costs as the primary drivers of the changed forecast in this year's report on the financial health of Medicare and Social Security, the nation's biggest entitlement programs. Click here to see the report.
The Social Security Trust Fund, from which regular retirement benefits are paid, is in healthier condition, said Treasury Secretary John Snow. That fund is not expected to become insolvent until 2042, which is unchanged from last year's projection.
Still, it too needs change, Snow said.
Snow and Thompson -- citing the aging Baby Boom generation, said Social Security and Medicare need to be changed in order to return them to long-term solvency. "Inaction is not a responsible course, and the longer we wait, the more difficult the ultimate solution will be," Snow told reporters.
Thompson predicted that changes to the program called for under the new Medicare law will help slow the growth in spending. The changes encourage seniors to enroll in managed-care plans, which some conservatives predict will reduce the cost of delivering their care.
"When you use the opportunity to allow the free-market system to work, it has the tendency to drive down costs," Thompson said.
Critics say there is no reason to believe the changes will slow the growth in health-care costs. Instead, they contend, managed care companies will make it more difficult for seniors to see specialists, and pocket the resulting profits.
The Medicare trustees report said higher spending and lower tax revenues last year were responsible for trimming two years off the estimated time until the trust fund's insolvency, changes in assumptions accounted for 1.5 years, better information on the health status of beneficiaries accounted for one year and changes in estimates of hospital costs were responsible for half a year.
From 1998 to 2002, health care costs spiked 35 percent. By 2002, the last year for which figures are available, such costs accounted for nearly 15 percent of the nation's gross national product, "but it is surely higher today," Thompson said. Last year, employer-sponsored health insurance premiums rose by 14 percent, he said.
But, he added, "a hopeful note" exists: "If we could reduce the growth of cost increases in the Medicare system to GDP itself, rather than GDP plus one [percentage point]," the program would be sustainable over the long term.
"If we were able to do that, the Medicare claim on GDP in 2050 would fall from 11 percent of GDP to just 6 percent of GDP. That's a tremendous change."
The report noted that the figures are not cast in stone: "It is important to note that the forecasts we are dealing with in Medicare are based on assumptions whose validity cannot be known with any high degree of certainty," it said.
"Although uncertainty in these numbers is inescapable, we must make public policy judgments given the importance of these programs to current and future beneficiaries and the fiscal condition of the country."
Snow touted Medical Savings Accounts as "a very important idea ... which would help deal with the whole issue of long-term sustainability of the Social Security system."
Critics say the accounts favor wealthy individuals, and do nothing to help those who cannot afford them.
----CNNfn Senior Producer Scott Spoerry contributed to this story.