SECTION II: FINANCIAL SECTION - Part 2
Topics In This Section: Message from the Chief Financial Officer | Report of the Independent Auditors | Department’s Response to the Report of the Independent Auditors | Principal Financial Statements | Notes to the Principal Financial Statements | Required Supplementary Stewardship Information | Required Supplementary Information
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Reporting Entity
The accompanying financial statements include activities and operations of the U.S. Department of Health and Human Services (HHS or the Department).
HHS is a Cabinet-level agency within the executive branch of the federal government. Its predecessor, the Department of Health, Education, and Welfare (HEW), was officially established on April 11, 1953. In 1979, the Department of Education Organization Act was signed into law, creating a separate Department of Education. The HEW officially became HHS on May 4, 1980. HHS is responsible for protecting the health of all Americans and providing essential human services, especially for those who are least able to help themselves.
Organization and Structure of HHS
HHS is composed of the Office of the Secretary (OS) and 11 Operating Divisions (OpDivs) with diverse missions and programs. OS and the OpDivs are each responsible for carrying out a mission, conducting a major line of activity, or producing one or a group of related products and/or services. Although organizationally located within OS, the Program Support Center (PSC) is a responsibility segment and reports separately due to the business activities conducted on behalf of other federal agencies and HHS OpDivs. The Agency for Toxic Substances and Disease Registry (ATSDR) is combined with the Centers for Disease Control and Prevention (CDC) for financial reporting purposes. Therefore, references to the CDC responsibility segment include ATSDR. Managers of the responsibility segments report directly to the Department’s top management and the resources and results of operations can be clearly distinguished from those of other responsibility segments. The 12 responsibility segments are:
- Administration for Children and Families (ACF)
- Administration for Community Living (ACL)
- Agency for Healthcare Research and Quality (AHRQ)
- Centers for Disease Control and Prevention (CDC) and Agency for Toxic Substances and Disease Registry (ATSDR)
- Centers for Medicare and Medicaid Services (CMS)
- Food and Drug Administration (FDA)
- Health Resources and Services Administration (HRSA)
- Indian Health Service (IHS)
- National Institutes of Health (NIH)
- Office of the Secretary (OS) – excluding the Program Support Center
- Program Support Center (PSC)
- Substance Abuse and Mental Health Services Administration (SAMHSA)
Pursuant to Public Law 113-128, Section 491 of the Workforce Innovation and Opportunity Act, ACL received three groups of programs from the Department of Education, Office of Special Education and Rehabilitation Services. These programs include the National Institute on Disability, Independent Living and Rehabilitation Research programs; the Independent Living programs; and the Assistive Technology programs. The transfer was effective March 30, 2015.
B. Basis of Accounting and Presentation
HHS financial statements have been prepared to report the financial position and results of operations of the Department, pursuant to the requirements of 31 U.S. Code (U.S.C.) §3515(b), the Chief Financial Officer Act, as amended by the Government Management Reform Act, and presented in accordance with the requirements in the Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements (OMB Circular A-136). These statements have been prepared from HHS’s financial records in conformity with accounting principles generally accepted in the U.S. The generally accepted accounting principles (GAAP) for federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB) and recognized by the American Institute of Certified Public Accountants as federal GAAP. Therefore, these statements are different from financial reports prepared pursuant to other OMB directives that are primarily used to monitor and control the use of budgetary resources.
Transactions are recorded on an accrual and budgetary basis of accounting. Under the accrual method of accounting, revenues are recognized when earned and expenses are recognized when resources are consumed, without regard to the payment of cash. Budgetary accounting principles are designed to recognize the obligation of funds according to legal requirements, which, in many cases, is prior to the occurrence of an accrual-based transaction. The recognition of budgetary accounting transactions is essential for compliance with legal constraints and controls over the use of federal funds.
The financial statements consolidate the balances of approximately 250 appropriations and fund accounts. The fund accounts include accounts used for suspense, collection of receipts, and general government functions. Transactions and balances within HHS have been eliminated in the presentation of the Consolidated Balance Sheets and Statements of Net Cost and Changes in Net Position. The Combined Statements of Budgetary Resources are presented on a combined basis. Therefore, transactions and balances within HHS have not been eliminated from these statements. Supplemental information is accumulated from the OpDivs’ reports, regulatory reports and other sources within HHS. These statements should be read with the realization that they are for a component of the U.S. government, a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation providing resources and budget authority for HHS.
In FY 2016, changes have been made to the Statement of Budgetary Resources to reflect the new format prescribed by OMB Circular A-136.
C. Use of Estimates in Preparing Financial Statements
Financial statements prepared in accordance with accounting principles generally accepted in the U.S. are based on a selection of accounting policies and the application of significant accounting estimates. Some estimates require management to make significant assumptions. Further, the estimates are based on current conditions that may change in the future. Actual results could differ materially from the estimated amounts. The financial statements include information to assist the reader in understanding the effect of changes in assumptions on the related information.
D. Parent/Child Reporting
Allocation transfers are legal delegations by one agency of its authority to obligate budget authority and outlay funds to another agency. HHS is party to allocation transfers with other federal entities as both a transferring (parent) entity and a receiving (child) entity. All financial activity related to these allocation transfers is reported in the financial statements of the parent entity, from which the underlying legislative authority, appropriations, and budget apportionments are derived.
HHS received an exception to the parent/child reporting requirements of OMB Circular A‑136, as it pertains to the allocation transfer from Department of Homeland Security to HHS for the Biodefense Countermeasures Fund for FY 2008 and beyond. Under this exception, HHS, as the child, assumed the financial statement reporting responsibilities of this fund.
Under the Affordable Care Act, HHS has established a child relationship with the Internal Revenue Service (IRS) of the Department of the Treasury (Treasury) for the payment of the advance premium tax credits and cost-sharing reductions to insurance providers. No financial activity is included in HHS’s financial statements.
HHS also receives allocation transfers, as the child, from the Departments of Agriculture, Justice, and State. HHS allocates funds, as the parent, to the Bureau of Indian Affairs of the Department of the Interior (DOI), Treasury, and Social Security Administration (SSA).
E. Reclassifications and Adjustments
Certain FY 2015 balances have been reclassified to conform to FY 2016 financial statement presentations. The effects are immaterial.
F. Funds from Dedicated Collections
Generally, funds from dedicated collections are financed by specifically identified revenues, provided to the government by non-federal sources, often supplemented by other financing sources, which remain available over time. Dedicated collections must meet the following criteria:
- A statute committing the federal government to use specifically identified revenues and/or other financing sources that are originally provided to the federal government from a non-federal source only for designated activities, benefits, or purposes;
- Explicit authority for the fund to retain revenues and/or other financing sources not used in the current period for future use to finance the designated activities, benefits, or purposes; and
- A requirement to account for and report on the receipt, use, and retention of the revenues and/or other financing sources that distinguishes the dedicated collections from the federal government’s general revenues.
HHS’s major funds from dedicated collections are described in the sections below.
Medicare Hospital Insurance (HI) Trust Fund – Part A
Section 1817 of the Social Security Act established the Medicare HI Trust Fund. Medicare contractors are paid by HHS to process Medicare claims for hospital in-patient services, hospice, and select skilled nursing and home health services. Benefit payments made by the Medicare contractors for these services as well as administrative costs, are charged to the HI Trust Fund. A portion of HHS payments to Medicare Advantage Plans is also charged to this fund. The financial statements include the HI Trust Fund activities administered by Treasury. The HI Trust Fund has permanent indefinite authority.
Employment tax revenue is the primary source of financing for the Medicare HI program. Medicare’s portion of payroll and self-employment taxes is collected under the Federal Insurance Contributions Act (FICA) (26 U.S.C. Ch 21) and Self Employment Contributions Act (SECA) of 1954 (Ch 2 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §1401 through §1403). Employees and employers are both required to contribute 1.45 percent of earnings, with no limitation, to the HI Trust Fund. Self-employed individuals contribute the full 2.9 percent of their self-employment income. The Social Security Act requires the transfer of these contributions from the Treasury General Fund to the HI Trust Fund based on the amount of wages certified by the Commissioner of Social Security from the SSA records of wages. The SSA uses the wage totals reported by employers to the IRS via the Employer’s Quarterly Federal Tax Return, as the basis for its quarterly certification of regular wages.
Medicare Supplementary Medical Insurance (SMI) Trust Fund – Part B
Section 1841 of the Social Security Act established the Medicare SMI Trust Fund. Medicare contractors are paid by HHS to process Medicare claims for physicians, medical suppliers, hospital outpatient services and rehabilitation, ambulatory surgical centers, end–stage renal disease treatment, rural health clinics, laboratory services, and select skilled nursing and home health services. Benefit payments made by the Medicare contractors for these services as well as administrative costs are charged to the SMI Trust Fund. A portion of HHS payments to Medicare Advantage Plans is also charged to this fund. The financial statements include SMI Trust Fund activities administered by the Treasury. The SMI Trust Fund has permanent indefinite authority.
SMI benefits and administrative expenses are generally financed by monthly premiums paid by Medicare beneficiaries and are matched by the federal government through the General Fund appropriation, Payments to the Health Care Trust Funds. Section 1844 of the Social Security Act authorizes appropriated funds to match SMI premiums collected and prescribes the ratio for the match as well as the method to fully compensate the Trust Fund if insufficient funds are available in the appropriation to match all premiums received in the fiscal year.
Medicare SMI Trust Fund – Part D
The Medicare Prescription Drug, Improvement and Modernization Act established the Medicare Prescription Drug Benefit – Part D. The program makes a prescription drug benefit available to all Medicare beneficiaries who opt into the program. Beneficiaries eligible for both Medicare and Medicaid are automatically enrolled unless they have other credible drug coverage. HHS reports the Prescription Drug Benefit within the financial statements as part of the SMI Trust Fund, in the Medicare column. Drug plans are offered by insurance companies and other private companies approved by Medicare and are of two types: Medicare Prescription Drug Plans, which add coverage to fee-for-service Medicare; and Medicare Advantage Prescription Drug Plans and other Medicare Health Plans in which drug coverage is offered as part of a benefit package that includes Part A and Part B services. Medicare helps employers and unions continue to provide retiree drug coverage that meets Medicare’s standards through the Retiree Drug Subsidy. The Low Income Subsidy helps those with limited income and resources.
Medicare Integrity Program
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established the Medicare Integrity Program and codified the Medicare Integrity Program activities previously known as “payment safeguards.” The HIPAA also established the Health Care Fraud and Abuse Control Account, which includes a dedicated appropriation for carrying out the Medicare Integrity Program. Through the Medicare Integrity Program, HHS contracts with eligible entities to perform such activities as medical and utilization reviews, fraud reviews, and cost report audits. In addition, the Department educates providers and beneficiaries, with respect to payment integrity and benefit quality assurance issues. The Medicare Integrity Program is funded by the HI Trust Fund.
G. Revenue and Financing Sources
HHS receives the majority of funding needed to support its discretionary programs through Congressional appropriation and user fees. The U.S. Constitution prescribes that no money may be expended by an agency unless the funds have been made available by Congressional appropriation. Appropriations are recognized as financing sources when related expenses are incurred or assets are purchased. Revenues from reimbursable agreements are recognized when the goods or services are provided by HHS. Other financing sources, such as donations and transfers of assets without reimbursements, are also recognized on the Consolidated Statement of Changes in Net Position.
Appropriations
HHS receives annual, multi-year, and no-year appropriations that may be used within statutory limits. For example, funds for general operations are normally made available for one fiscal year. Funds for long-term projects such as major construction will be available for the expected life of the project, and funds used to establish revolving fund operations are generally available indefinitely (i.e., no-year funds).
Permanent Indefinite Appropriations
HHS permanent indefinite appropriations are open-ended; the dollar amount is unknown at the time the authority is granted. These appropriations are available for specific purposes without current year action by Congress.
Borrowing Authority
HHS uses indefinite borrowing authority under the Federal Credit Reform Act, as amended, for its loan programs. Borrowing authority increases budgetary resources and enables costs to be financed by borrowing from Treasury. Any unobligated borrowing authority does not carry forward to the next fiscal year. HHS has two programs with borrowing authority: the CMS Consumer Operated and Oriented Plan (CO-OP) Loan Program and the Health Center Loan Program.
HHS reports loans in accordance with the Federal Credit Reform Act. Budgetary related activity is reported separately within the Combined Statement of Budgetary Resources.
Exchange Revenue
Exchange revenue results when HHS provides goods or services to another entity for a price and is recognized when earned (i.e., when goods have been delivered or services have been rendered). These revenues reduce the cost of operations.
HHS pricing policy for reimbursable agreements is to recover full cost and should result in no profit or loss for HHS. In addition to revenues related to reimbursable agreements, HHS collects various user fees to offset the cost of its programs. Certain fees charged by HHS are based on an amount set by law or regulation and may not represent full cost.
With minor exceptions, all revenue receipts by federal agencies are processed through the Treasury Central Accounting System. Regardless of whether they are derived from exchange or non-exchange transactions, all receipts not earmarked by Congressional appropriation for immediate HHS use are deposited in the General or Special Funds of the Treasury. Amounts not retained for use by HHS are reported as Transfers-in/out Without Reimbursement to other government agencies on the HHS Consolidated Statement of Changes in Net Position.
Non-Exchange Revenue
Non-exchange revenue results from donations to the government and from the government’s sovereign right to demand payment, including taxes. Non-exchange revenues are recognized when a specifically identifiable, legally-enforceable claim to resources arises, but only to the extent that collection is probable and the amount is reasonably estimable.
Non-exchange revenue is not considered to reduce the cost of the Department’s operations and is separately reported on the Consolidated Statement of Changes in Net Position. Employment tax revenue collected under FICA and SECA is considered non-exchange revenue.
Imputed Financing Sources
In certain instances, HHS’s operating costs are paid out of funds appropriated to other federal entities. For example, by law, certain costs of retirement programs are paid by the Office of Personnel Management (OPM) and certain legal judgments against HHS are paid from the Judgment Fund maintained by the Treasury. When costs are identifiable to HHS, directly attributable to HHS’s operations, and paid by other agencies, HHS recognizes these amounts as imputed costs within the Consolidated Statement of Net Cost and as an imputed financing source on the Consolidated Statement of Changes in Net Position.
H. Intragovernmental Transactions and Relationships
Intragovernmental transactions are business activities conducted between two different federal entities. Transactions with the public are transactions in which either the buyer or seller of the goods or services is a non-federal entity.
If a federal entity purchases goods or services from another federal entity and sells them to the public, the exchange revenue is classified as with the public, but the related costs would be classified as intragovernmental. The purpose of the classifications is to enable the federal government to provide consolidated financial statements and not to match public and intragovernmental revenue with costs incurred to produce public and intragovernmental revenue.
In the course of operations, HHS has relationships and financial transactions with numerous federal agencies including SSA and Treasury. SSA determines eligibility for Medicare programs and also deducts Medicare Part - B premiums from Social Security benefit payments for Social Security beneficiaries who elect to enroll in the Medicare Part - B program and elect to deduct their premiums from their benefit checks. SSA then transfers those funds to the Medicare Part-B Trust Fund. Treasury receives the cumulative excess of Medicare receipts and other financing over outlays and issues interest-bearing securities in exchange for the use of those monies. Medicare Part - D is primarily financed by the General Fund of the Treasury, as well as beneficiary premiums and payments from states.
I. Entity and Non-Entity Assets
Entity assets are assets the reporting entity has authority to use in its operations (i.e., management has the authority to decide how the funds are used), or management is legally obligated to use the funds to meet entity obligations.
Non-entity assets are assets held by the reporting entity, but not available for use. HHS non-entity assets are composed of delinquent child support payments for the Child Support Enforcement Program, which are withheld from federal tax refunds, interest accrued on over-payments, and cost settlements reported by the Medicare contractors.
J. Fund Balance with Treasury (FBwT)
HHS maintains its available funds with the Treasury. The FBwT is available to pay current liabilities and finance authorized purchases. Cash receipts and disbursements are processed by the Treasury. HHS FBwT accounts are reconciled with those of Treasury on a regular basis.
K. Custodial Activity
In accordance with guidance set forth in OMB Circular A-136, HHS reports custodial activities on its Consolidated Balance Sheets. However, HHS does not prepare a separate Statement of Custodial Activity since custodial activities are incidental to its operations and the amounts collected are immaterial.
ACF receives funding from the IRS for outlay to the states for child support. This funding represents delinquent child support payments withheld from federal tax refunds. FDA custodial activity involves collections of Civil Monetary Penalties assessed by the Department of Justice on behalf of the FDA. FDA is charged with assessing penalties for violations in areas such as illegally manufactured, marketed, and distributed animal food and drug products. CDC's custodial activity consists of the collection of interest on outstanding receivables and funds received from debts in collection status.
L. Investments, Net
HHS invests entity Medicare Trust Fund balances in excess of current needs in U.S. securities. The Treasury acts as the fiscal agent for the U.S. government’s investments in securities. Sections 1817 and 1841 of the Social Security Act require that funds in the HI and SMI Trust Funds not necessary to meet current expenditures be invested in interest-bearing obligations or in obligations guaranteed as to both principal and interest by the U.S. government. The cash receipts, collected from the public as dedicated collections, are deposited with the Treasury, which uses the cash for general governmental purposes. Treasury securities are issued by the Bureau of the Fiscal Service to the HI and SMI Trust Funds as evidence of their receipt and are reported as an asset for the Trust Funds and a corresponding liability of the Treasury. The federal government does not set aside assets to pay future benefits or other expenditures associated with the HI or SMI Trust Funds.
The Treasury securities provide the HI and SMI Trust Funds with authority to draw upon the U.S. Treasury to make future benefit payments or other expenditures. When the Trust Funds require redemption of these securities to make expenditures, the government finances the expenditures by raising taxes, raising other receipts, borrowing from the public or repaying less debt, or curtailing other expenditures. This is the same way that the government finances all expenditures.
The Treasury securities issued and redeemed to the HI and SMI Trust Funds are Non-Marketable (Par Value) securities. These investments are carried at face value as determined by Treasury. Interest income is compounded semi-annually (i.e., June and December) by Treasury; and at fiscal year-end, interest income is adjusted to include an accrual for interest earned from July 1 to September 30 (See Note 4).
The Vaccine Injury Compensation Trust Fund, a dedicated collections fund similar to the HI and SMI Trust Funds, invests in Non-Marketable, Market-Based securities issued by the Bureau of the Fiscal Service in the form of One Day Certificates and Market-Based Bills, Notes, and Bonds.
The NIH Gift Funds are invested in Non-Marketable, Market-Based Securities issued by the Bureau of the Fiscal Service. Funds are invested for either a 90 or 180-day period based on the need for funds. No provision is made for unrealized gains or losses on these securities, since it is HHS’s intent to hold investments to maturity.
The Children’s Health Insurance Program Reauthorization Act established a Child Enrollment Contingency Fund to provide additional funding to states that experience shortfalls in their Children’s Health Insurance Programs (CHIP). The Affordable Care Act extended the availability of the fund through 2015, and MACRA extended the fund for an additional two years, through 2017. This fund is invested in Non-Marketable, Market-Based Bills issued by the Bureau of the Fiscal Service. These investments will be redeemed as funds are needed by the states to cover short-term shortfalls in the program.
M. Accounts Receivable, Net
Accounts Receivable, Net consists of the amounts owed to HHS by other federal agencies and the public for the provision of goods and services, less an allowance for uncollectible amounts on public receivables. Intragovernmental accounts receivable consists of the amounts owed to HHS by other federal agencies for reimbursable work. No allowance for uncollectible amounts is established for intragovernmental accounts receivable because they are considered fully collectible. Accounts Receivable, Net from the public is primarily composed of provider and beneficiary over-payments: Medicare Prescription Drug over-payments, Medicare premiums, civil monetary penalties and other restitutions, state phased-down contributions, Medicaid/CHIP overpayments, audit disallowances, and the recognition of Medicare Secondary Payer accounts receivable.
Accounts Receivable, Net from the public is presented net of an allowance for uncollectible amounts. The allowance is based on past collection experience and an analysis of outstanding balances. For Medicare accounts receivable, HHS calculates the allowance for uncollectible amounts based on the collection activity and the age of the debt for the most current fiscal year, while taking into consideration the average uncollectible percentage for the preceding five years. The Medicaid accounts receivable have been recorded at a net realizable amount based on historical analyses of actual recoveries and the rate of disallowances found in favor of the states. Other accounts receivable have been recorded to account for amounts due from Marketplace activities.
N. Advances and Accrued Liabilities
HHS awards grants to various grantees and provides advance payments to meet grantees’ cash needs in carrying out HHS programs. Advance payments are liquidated upon grantees reporting expenditures on the quarterly Federal Financial Report. In some instances, grantees incur expenditures before drawing down funds that, when claimed, would reduce the Advances account to a negative balance. An Accrued Grant Liability occurs when the accrued grant expenses exceed outstanding advances to grantees.
HHS grants are classified into two categories: Grants Not Subject to Grant Expense Accrual and Grants Subject to Grant Expense Accrual. Grants Not Subject to Grant Expense Accrual represents formula grants, commonly referred to as block grants under which grantees provide a variety of services or payments to individuals and local agencies. Expenses are recorded as the grantees draw funds. These grants are funded based on allocations determined by budgets and agreements approved by the sponsoring OpDiv.
For Grants Subject to Grant Expense Accrual, commonly referred to as non-block grants, grantees draw funds based on their estimated cash needs. As grantees report their actual disbursements quarterly, the amounts are recorded as expenses and their advance balances are reduced. At year-end, the OpDivs report both actual payments made through the fourth quarter and an unreported grant expenditure estimate for the fourth quarter based on historical spending patterns of the grantees.
O. Inventory and Related Property, Net
Inventory and Related Property, Net primarily consists of Inventory Held for Sale, Operating Materials and Supplies, and Stockpile Materials.
Inventory Held for Sale consists of small equipment and supplies held by the Service and Supply Funds (SSF) for sale to HHS components and other federal entities. Inventories Held for Sale are valued at historical cost using the weighted average valuation method for the PSC’s SSF inventories and using the moving average valuation method for the NIH’s SSF inventories.
Operating Materials and Supplies include pharmaceuticals, biological products, and other medical supplies used to provide medical services and conduct medical research. They are recorded as assets when purchased and are expensed when consumed. Operating Materials and Supplies are valued at historical cost using the first-in/first-out (FIFO) cost flow assumption.
Stockpile Materials are held in reserve to respond to local and national emergencies. HHS maintains several stockpiles for emergency response purposes, which include the Strategic National Stockpile (SNS), Vaccines for Children (VFC) and Avian Influenza (H5N1). The H5N1 vaccine stockpile is held in reserve to respond to an avian flu pandemic declaration. The stockpile contains several million doses of vaccine in bulk which are stored and maintained for possible use.
Project BioShield has increased the preparedness of the nation by procuring medical countermeasures that include anthrax vaccine, anthrax antitoxins, botulin antitoxins, and blocking and decorporation agents for a radiological event. All stockpiles are valued at historical cost, using various cost flow assumptions, including the FIFO for SNS and specific identification for VFC and H5N1.
P. General Property, Plant and Equipment, Net
The General Property, Plant, and Equipment, Net consists of buildings, structures, and facilities used for general operations, land acquired for general operating purposes, equipment, assets under capital lease, leasehold improvements, construction-in-progress; and internal use software. The basis for recording purchased Property, Plant and Equipment is full cost, including all costs incurred to bring the Property, Plant, and Equipment to a form and location suitable for its intended use and is presented net of accumulated depreciation.
The cost of Property, Plant, and Equipment acquired under a capital lease is the amount recognized as a liability for the capital lease at its inception. When property is acquired through a donation, the cost recognized is the estimated fair market value on the date of acquisition. The cost of Property, Plant and Equipment transferred from other federal entities is the transferring entity’s net book value. Except for internal use software, HHS capitalizes all Property, Plant, and Equipment with an initial acquisition cost of $25,000 or more and an estimated useful life of two years or more.
HHS has commitments under various operating leases with private entities as well as the General Services Administration (GSA) for offices, laboratory space, and land. Leases with private entities have initial or remaining non-cancelable lease terms from 1 to 50 years; however, GSA leases are cancelable with 120 days’ notice. Under an operating lease, the cost of the lease is expensed as incurred.
Property, Plant and Equipment is depreciated using the straight-line method over the estimated useful life of the asset. Land and land rights, including permanent improvements, are not depreciated. Normal maintenance and repair costs are expensed as incurred.
In accordance with Statement of Federal Financial Accounting Standards (SFFAS) Number 10, Accounting for Internal Use Software, capitalization of internally developed, contractor-developed/commercial off-the-shelf software begins in the software development phase. HHS’s capitalization threshold for internal use software costs for appropriated fund accounts is $1 million and the threshold for revolving fund accounts is $500 thousand. Costs below the threshold levels are expensed. Software is amortized using the straight line method over a period of 5 to 10 years consistent with the estimated life used for planning and acquisition purposes. Capitalized costs include all direct and indirect costs.
Q. Stewardship Land
HHS stewardship land (i.e., land not acquired for or in connection with general property, plant, and equipment) is Indian Trust land used to support the IHS day-to-day operations of providing health care to American Indians and Alaskan Natives in remote areas of the country where no other facilities exist. In accordance with SFFAS Number 29, Heritage Assets and Stewardship Land, HHS does not report a related amount on the Balance Sheet.
HHS asset accountability reports differentiate Indian Trust land parcels from General Property, Plant and Equipment situated thereon.
R. Liabilities
Liabilities are recognized for amounts of probable and measurable future outflows or other sacrifices of resources as a result of past transactions or events. Since HHS is a component of the U.S. government, a sovereign entity, its liabilities cannot be liquidated without legislation that provides resources to do so. Payments of all liabilities other than contracts can be abrogated by the sovereign entity. In accordance with public law and existing federal accounting standards, no liability is recognized for future payments to be made on behalf of current workers contributing to the Medicare HI Trust Fund, since liabilities are only those items that are present obligations of the government. HHS’s liabilities are classified as covered by budgetary resources or not covered by budgetary resources.
Liabilities Covered by Budgetary Resources
Available budgetary resources include new budget authority, spending authority from offsetting collections, recoveries of expired budget authority, unobligated balances of budgetary resources at the beginning of the year, permanent indefinite appropriation, and borrowing authority.
Liabilities Not Covered by Budgetary Resources
Sometimes funding has not yet been made available through Congressional appropriation or current earnings. The major liabilities in this category include contingencies, employee annual leave earned, but not taken, and amounts billed by the Department of Labor (DOL) for disability payments. The actuarial FECA liability determined by the DOL but not yet billed is also included in this category.
S. Accounts Payable
Accounts Payable primarily consists of amounts due for goods and services received, progress in contract performance, interest due on accounts payable, and other miscellaneous payables.
T. Accrued Payroll and Benefits
Accrued Payroll and Benefits consists of salaries, wages, leave, and benefits earned by employees but not disbursed at the end of the reporting period. A liability for annual and other vested compensatory leave is accrued as earned and reduced when taken. At the end of each fiscal year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. Annual leave earned but not taken is considered an unfunded liability, since it will be funded from future appropriations when it is actually taken by employees. Sick leave and other types of leave are not accrued and are expensed when taken. Intragovernmental Accrued Payroll and Benefits consists primarily of HHS’s current FECA liability to DOL.
U. Entitlement Benefits Due and Payable
Entitlement Benefits Due and Payable represents a liability for Medicare, Medicaid and CHIP owed to the public for medical services Incurred But Not Reported (IBNR) as of the end of the reporting period. The Medicare and Medicaid programs are the largest entitlement programs in HHS.
Medicare
The Medicare liability is developed by the CMS Office of the Actuary and includes:
- An estimate of claims incurred that may or may not have been submitted to the Medicare contractors, but not yet approved for payment;
- Actual claims approved for payment by the Medicare contractors for which checks have not yet been issued;
- Checks issued by the Medicare contractors in payment of claims that have not yet been cashed by payees;
- Periodic interim payments for services rendered in the current fiscal year but paid in the subsequent fiscal year;
- An estimate of retroactive settlements of cost reports submitted to the Medicare contractors by health care providers.
HHS develops estimates for medical costs IBNR using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, medical care professional contract rate changes, medical care consumption and other medical cost trends. HHS estimates liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies.
Each period, HHS re-examines previously established medical cost payable estimates based on actual claim submissions and other changes in facts and circumstances. As the liability estimates recorded in prior periods become more exact, HHS adjusts the amount of the estimates and includes the changes in estimates in medical costs in the period in which the change is identified. In every reporting period, HHS operating results include the effects of more completely developed Medicare benefits payable estimates associated with previously reported periods.
Medicaid and CHIP
The Medicaid and CHIP estimates represent the net federal share of expenses incurred by the states but not yet reported to HHS. This estimate is developed based on historical relationships between prior net payables to the states and current activity.
V. Federal Employee and Veterans’ Benefits
HHS administers the Public Health Service (PHS) Commissioned Corps Retirement System (authorized by the Public Health Service Act), a defined non-contributory benefit plan, for its active duty officers, retiree annuitants and survivors. The plan does not have accumulated assets and funding is provided entirely on a pay-as-you-go basis by Congressional appropriation. HHS records the present value of the Commissioned Corps pension and post-retirement health benefits.
The liability for federal employee and veterans’ benefits also includes an actuarial liability for estimated future payments for workers’ compensation pursuant to the FECA. FECA provides income and medical cost protection to federal employees who are injured on the job or who sustained a work-related occupational disease. It also covers beneficiaries of employees whose deaths are attributable to job-related injury or occupational disease. The FECA program is administered by DOL, which pays valid claims and subsequently bills the employing federal agency. The FECA liability consists of two components: (1) actual claims billed by the DOL to agencies but not yet paid; and (2) an estimated liability for future benefit payments as a result of past events such as death, disability, and medical costs. The claims that have been billed by DOL are included in Accrued Payroll and Benefits.
Most HHS employees participate in the Civil Service Retirement System (CSRS), a defined benefit plan, or the Federal Employees Retirement System (FERS), a defined benefit and contribution plan. For employees covered under CSRS, the Department contributes a fixed percentage of pay. Most employees hired after December 31, 1983, are automatically covered by the FERS. The FERS plan has 3 parts: a defined benefit payment, Social Security benefits, and the Thrift Savings Plan. For employees covered under FERS, HHS contributes a fixed percentage of pay for the defined benefit portion and the employer’s matching share for Social Security and Medicare Insurance. HHS automatically contributes one percent of each employee’s pay to the Thrift Savings Plan and matches the first three percent of employee contributions dollar for dollar. Each additional dollar of the employee’s next two percent of basic pay is matched at 50 cents on the dollar.
OPM is the administering agency for both of these benefit plans and, thus, reports CSRS and FERS assets, accumulated plan benefits, and unfunded liabilities applicable to federal employees. Therefore, HHS does not recognize any liability on its Consolidated Balance Sheets for pensions, other retirement benefits, or other post-employment benefits of its federal employees with the exception of the PHS Commissioned Corps. However, HHS does recognize an expense in the Consolidated Statement of Net Cost and an imputed financing source for the annualized unfunded portion of pension and post-retirement benefits in the Consolidated Statement of Changes in Net Position. Gains or losses from changes in assumptions in the PHS Commissioned Corps retirement benefits are recognized at year-end.
W. Contingencies
A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to HHS. The uncertainty ultimately should be resolved when one or more future events occur or fail to occur. The likelihood that the future event or events will confirm the loss or the incurrence of a liability can range from probable to remote. SFFAS Number 5, Accounting for Liabilities of the Federal Government, as amended by SFFAS Number 12, Recognition of Contingent Liabilities from Litigation, contains the criteria for recognition and disclosure of contingent liabilities.
HHS and its components could be parties to various administrative proceedings, legal actions, and claims brought by or against it. With the exception of pending, threatened or potential litigation, a contingent liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is more likely than not to occur, and the related future outflow or sacrifice of resources is measurable. For pending, threatened, or potential litigation, a contingent liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is likely to occur and the related future outflow or sacrifice of resources is measurable.
HHS has no material obligations related to cancelled appropriations for which there is a contractual commitment for payment or for contractual arrangements which many require future financial obligations.
X. Statement of Social Insurance
The Statement of Social Insurance presents the projected 75-year actuarial present values of the income and expenditures of the HI and SMI Trust Funds. Future expenditures are expected to arise from the health care payment provisions specified in current law for current and future program participants and from associated administrative expenses. Actuarial present values are computed on the basis of the intermediate set of assumptions specified in the Annual Report of the Medicare Board of Trustees. These assumptions represent the Trustees’ best estimate of likely future economic, demographic, and health care-specific conditions. The projected potential future income and expenditures under current law are not included in the accompanying Consolidated Balance Sheets, Statements of Net Cost and Changes in Net Position or Combined Statement of Budgetary Resources.
In order to make projections regarding the future financial status of the HI and SMI Trust Funds, various assumptions have to be made. The projections in this report (with one exception related to depletion of the HI Trust Fund), are based on current law; that is, they assume that laws on the books will be implemented and adhered to with respect to scheduled taxes, premium revenues, and payments to providers and health plans. The estimates depend on many economic, demographic, and health care-specific assumptions. These include changes in per beneficiary health care cost, wages, the gross domestic product (GDP), the consumer price index (CPI), fertility rates, mortality rates, immigration rates and interest rates. In most cases, these assumptions vary from year to year during the first 5 to 30 years before reaching their ultimate values for the remainder of the 75-year projection period. The assumed growth rates for per beneficiary health care costs vary throughout the projection period.
The assumptions underlying the Statement of Social Insurance actuarial projections are drawn from the Social Security and Medicare Trustees Reports for 2016. Specific assumptions are made for each of the different types of service provided by the Medicare program (for example, hospital care and physician services). These assumptions include changes in the payment rates, utilization, and intensity of each type of service.
Y. Affordable Care Act
In FY 2010, President Barack Obama signed health insurance reform legislation giving Americans more control over their health care. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act collectively referred to as the Affordable Care Act ensures that all Americans have access to quality, affordable health care, while helping to reduce health care costs. Further information is available at http://www.healthcare.gov.
The Affordable Care Act contains the most significant changes to health care coverage since passage of the Social Security Act. The Affordable Care Act provided funding for the establishment by CMS of a Center for Medicare and Medicaid Innovation to test innovative payment and service delivery models to reduce program expenditures while preserving or enhancing the quality of care furnished to individuals. It also allowed for the establishment of a Center for Consumer Information and Insurance Oversight (CCIIO). The programs under CCIIO include: Health Insurance Marketplaces (the “Marketplace”) and the CO-OP program. A brief description of these programs and their impact on the financial statement is presented below.
Health Insurance Marketplaces and the Basic Health Program
Grants have been provided to the States to establish Health Insurance Marketplaces. The initial grants were made by the HHS to the States “not later than one (1) year after the date of enactment.” Thus, HHS made the initial grants by March 23, 2011. Subsequent grants were issued by CMS through December 31, 2014, after which time no further grants could be made. All Marketplaces were launched on October 1, 2013.
To help make health insurance more affordable to consumers, HHS makes payments of advance premium tax credits (APTC) and cost-sharing reductions (CSR) to health insurance issuers on behalf of consumers who are eligible for financial assistance. States may also opt to cover some Marketplace-eligible individuals through the Basic Health Program (BHP), and a state that operates a BHP receives federal funding equal to 95 percent of the amount of the premium tax credits and CSRs that would have otherwise been provided to (or on behalf of) eligible individuals if those individuals enrolled in Qualified Health Plans through the Marketplace. APTC, CSR, and BHP payments (which are included in the IRS financial statements; see Note 1-D) are a critical component of the Marketplace, and $42 billion has been allocated for these payments. In addition to these payments on behalf of consumers, HHS collects Marketplace user fees from issuers participating in the Federally-facilitated Marketplace.
Consumer Operated and Oriented Plan Program
The CO-OP Program fosters qualified non-profit health insurance issuers created to offer qualified health plans to the individual and small group markets. Under this program, HHS provides assistance to organizations applying to become qualified non-profit health insurance issuers through loans to assist in meeting start-up costs and to assist the applicant meet state solvency requirements. In accordance with regulations as well as legislative requirements, start-up loans shall be repaid within five years and the solvency loans within 15 years after disbursement, considering state reserve requirements and solvency regulations.
Transitional Reinsurance Program
The Transitional Reinsurance Program was established in each state to help stabilize premiums for coverage in the individual market from 2014 through 2016. All health insurance issuers and third party administrators, on behalf of self-insured group health plans, must make contributions to support reinsurance payments that cover high-cost individuals in non-grandfathered plans in the individual market, inside and outside the Marketplace. The Transitional Reinsurance Program is a critical element in helping to ensure a stabilized individual market in the initial years of the implementation of the Affordable Care Act’s insurance market reforms.
Risk Adjustment Program
The Risk Adjustment Program is a permanent program. It applies to non-grandfathered individuals and small group plans inside and outside the Marketplaces. It provides payments to health insurance issuers that disproportionately attract higher-risk populations (such as individuals with chronic conditions) and transfers funds from plans with relatively lower risk enrollees to plans with relatively higher risk enrollees to protect against adverse selection. States may operate risk adjustment programs; CMS will operate a risk adjustment program for each state that does not operate its own. In 2015 and 2016, Massachusetts is the only state that operated its own risk adjustment program.
Risk Corridor Program
The temporary Risk Corridors Program will operate during the years 2014 through 2016. This program applies to qualified health plans in the individual and small group markets, inside and outside the Marketplaces and protects against inaccurate rate-setting by sharing risk (gains and losses) on allowable costs between CMS and qualified health plans to help ensure stable health insurance premiums.
Note 2. Entity and Non-Entity Assets (in Millions)
| 2016 | 2015 | |
|---|---|---|
| Non-Entity Intragovernmental Assets | ||
| Fund Balance with Treasury | $- | $8 |
| Accounts Receivable | 5 | 3 |
| Total Non-Entity Intragovernmental Assets | 5 | 11 |
| Accounts Receivable With the Public | 37 | 27 |
| Total Non-Entity Assets | 42 | 38 |
| Total Entity Assets | 562,611 | 528,757 |
| Total Assets | $562,653 | $528,795 |
Note 3. Fund Balance with Treasury (in Millions)
| Fund Balance with Treasury | 2016 | 2015 |
|---|---|---|
| Trust Funds | $54,050 | $45,056 |
| Revolving Funds | 2,443 | 1,433 |
| Appropriated Funds | 172,984 | 170,155 |
| Special Funds and Other Funds | 8,282 | 2,815 |
| Total | 237,759 | 219,459 |
| Status of Fund Balance with Treasury | ||
| Unobligated Balance | ||
| Available | 17,280 | 23,828 |
| Unavailable | 43,230 | 41,796 |
| Obligated Balance not yet Disbursed | 231,154 | 214,439 |
| Non-Budgetary Fund Balance with Treasury | (53,905) | (60,604) |
| Total | $237,759 | $219,459 |
The FBwT are funds primarily available to pay current expenditures and liabilities. Special Funds includes the CHIP Child Enrollment Contingency of $5.4 billion and Affordable Care Act Risk Programs of $2.2 billion. Other Funds includes balances in deposit funds, management funds and related non-spending accounts. The Unobligated Balance includes funds that are restricted for future use and not apportioned for current use of $8.8 billion and $14.5 billion as of September 30, 2016 and September 30, 2015, respectively. The restricted amount is primarily for the Affordable Care Act programs, CHIP, CMS Program Management, and State Grants and Demonstrations.
Note 4. Investments, Net (in Millions)
| 2016 | Cost | Amortized (Premium) | Interest Receivable | Investments, Net | Market Value Disclosure |
|---|---|---|---|---|---|
| Intragovernmental Securities | |||||
| Non-Marketable: Par Value | $255,545 | $- | $2,256 | $257,801 | $257,801 |
| Non-Marketable: Market-Based | 4,446 | (195) | 25 | 4,276 | 4,276 |
| Total, Intragovernmental | 259,991 | (195) | 2,281 | 262,077 | 262,077 |
| 2015 | Cost | Amortized (Premium) | Interest Receivable | Investments, Net | Market Value Disclosure |
|---|---|---|---|---|---|
| Intragovernmental Securities | |||||
| Non-Marketable: Par Value | 261,585 | - | 2,408 | 263,993 | 263,993 |
| Non-Marketable: Market-Based | 5,825 | (194) | 27 | 5,658 | 5,658 |
| Total, Intragovernmental | $267,410 | $ (194) | $2,435 | $269,651 | $269,651 |
HHS investments consist primarily of Medicare Trust Fund (i.e., funds from dedicated collections) investments. Medicare Non-Marketable: Par Value Bonds are carried at face value and have maturity dates ranging from June 30, 2017 through June 30, 2031 with interest rates ranging from 1.875 percent to 5.25 percent. Medicare Non-Marketable: Par Value Certificates of Indebtedness mature on June 30, 2017 with an interest rate from 1.625 percent to 1.875 percent.
Securities held by the Vaccine Injury Compensation Trust Fund (i.e., funds from dedicated collections) will mature in FY 2017 through FY 2021. The Market-Based Notes paid from 1.0 percent to 3.875 percent during October 1, 2015 to September 30, 2016 and 1.0 percent to 3.875 percent during October 1, 2014 to September 30, 2015. The Market-Based Bonds pay 9.125 percent through FY 2018.
The Market Based Bills held in the NIH gift funds held during 12 months of FY 2016, yielded from 0.0050 percent to 0.5163 percent depending on date purchased and length of time to maturity.The investments held by the CHIP Child Enrollment Contingency Fund in the amount of $0.6 billion as of September 30, 2016, are short term Non-Marketable Market-Based Bills purchased at a discount which are fully amortized at the maturity date.
Note 5. Accounts Receivable, Net (in Millions)
| 2016 | Accounts Receivable Principal | Interest Receivable | Accounts Receivable, Gross | Allowance | Net HHS Receivables |
|---|---|---|---|---|---|
| Intragovernmental | |||||
| Entity | $1,007 | $- | $1,007 | $- | $1,007 |
| Non-Entity | 5 | - | 5 | - | 5 |
| Total, Intragovernmental | 1,012 | - | 1,012 | - | 1,012 |
| With the Public | |||||
| Entity | |||||
| Medicare | 10,193 | - | 10,193 | (2,740) | 7,453 |
| Medicaid | 8,382 | - | 8,382 | (1,186) | 7,196 |
| Other | 9,722 | 278 | 10,000 | (483) | 9,517 |
| Non-Entity | 3 | 58 | 61 | (24) | 37 |
| Total With the Public | $28,300 | $336 | $28,636 | $ (4,433) | $24,203 |
| 2015 | Accounts Receivable Principal | Interest Receivable | Accounts Receivable, Gross | Allowance | Net HHS Receivables |
|---|---|---|---|---|---|
| Intragovernmental | |||||
| Entity | $1,002 | $ - | $1,002 | $ - | $1,002 |
| Non-Entity | 3 | - | 3 | - | 3 |
| Total, Intragovernmental | 1,005 | - | 1,005 | - | 1,005 |
| With the Public | |||||
| Entity | |||||
| Medicare | 8,806 | - | 8,806 | (2,031) | 6,775 |
| Other | 16,713 | 269 | 16,982 | (1,869) | 15,113 |
| Non-Entity | - | 53 | 53 | (26) | 27 |
| Total With the Public | $25,519 | $322 | $25,841 | $ (3,926) | $21,915 |
As of September 30, 2016, the other accounts receivable with the public is primarily related to collections for Marketplace activities.
Note 6. Inventory and Related Property, Net (in Millions)
| Category | 2016 | 2015 |
|---|---|---|
| Inventory Held for Current Sale, Net | $7 | $7 |
| Operating Materials and Supplies Held for Use | 68 | 73 |
| Stockpile Materials Held for Emergency or Contingency | 9,324 | 9,436 |
| Inventory and Related Property, Net | $9,399 | $9,516 |
Note 7. General Property, Plant and Equipment, Net (in Millions)
| 2016 | |||||
|---|---|---|---|---|---|
| Category | Depreciation Method | Estimated Useful Lives | Acquisition Cost | Accumulated Depreciation | Net Book Value |
| Land & Land Rights | - | - | $54 | $- | $54 |
| Construction in Progress | - | 772 | - | 772 | |
| Buildings, Facilities & Other Structures | Straight Line | 5-50 Yrs | 5,980 | (2,919) | 3,061 |
| Equipment | Straight Line | 3-20 Yrs | 2,029 | (1,208) | 821 |
| Internal Use Software | Straight Line | 7-10 Yrs | 1,998 | (1,132) | 866 |
| Assets Under Capital Lease | Straight Line | 1-30 Yrs | 139 | (63) | 76 |
| Leasehold Improvements | Straight Line | *Life of Lease | 52 | (37) | 15 |
| Totals | $11,024 | $(5,359) | $5,665 | ||
| 2015 | |||||
|---|---|---|---|---|---|
| Category | Depreciation Method | Estimated Useful Lives | Acquisition Cost | Accumulated Depreciation | Net Book Value |
| Land & Land Rights | - | - | $53 | $- | $53 |
| Construction in Progress | - | - | 650 | - | 650 |
| Buildings, Facilities & Other Structures | Straight Line | 5-50 Yrs | 6,140 | (2,788) | 3,352 |
| Equipment | Straight Line | 3-20 Yrs | 1,922 | (1,134) | 788 |
| Internal Use Software | Straight Line | 5-10 Yrs | 1,955 | (965) | 990 |
| Assets Under Capital Lease | Straight Line | 1-30 Yrs | 126 | (59) | 67 |
| Leasehold Improvements | Straight Line | *Life of Lease | 51 | (34) | 17 |
| Totals | $10,897 | $(4,980) | $5,917 | ||
*7 to 15 years or the life of the lease, whichever is shorter.
Note 8. Advances (in Millions)
| Category | 2016 | 2015 |
|---|---|---|
| Intragovernmental | ||
| Advances to Other Federal Entities | $239 | $178 |
| With the Public | ||
| Travel Advances & Emergency Employee Salary Advances | 2 | 5 |
| Other Payments & Deferred Changes | 18 | 28 |
| Prescription Drug and Medicare Advantage | 21,460 | - |
| Total With the Public | $21,280 | $33 |
Note 9. Liabilities Not Covered by Budgetary Resources (in Millions)
| Category | 2016 | 2015 |
| Intragovernmental | ||
| Accrued Payroll and Benefits | $59 | $58 |
| Other | 4,867 | 1,699 |
| Total Intragovernmental | 4,926 | 1,757 |
| Federal Employee and Veterans’ Benefits (Note 11) | 12,892 | 12,072 |
| Accrued Payroll and Benefits | 650 | 632 |
| Contingencies and Commitments (Note 14) | 12,394 | 9,105 |
| Other Accrued Liabilities (Note 12) | 14,250 | 14,250 |
| Other | 210 | (1,512) |
| Total Liabilities Not Covered by Budgetary Resources | 45,492 | 36,304 |
| Total Liabilities Covered by Budgetary Resources | 115,790 | 115,084 |
| Total Liabilities | $161,282 | $151,388 |
The Bipartisan Budget Act of 2015 (Section 601) authorized a transfer from the General Fund to SMI, to temporarily replace the reduction in Medicare Part B premiums. Section 601 created an “additional premium” charged alongside the normal Medicare Part B monthly premiums, beginning in 2016, which will be used to pay back the General Fund transfer without interest. As of September 30, 2016, $3,289 million is still owed and reported under Other Liabilities.
Note 10. Entitlement Benefits Due and Payable (in Millions)
| Category | 2016 | 2015 |
|---|---|---|
| Medicare FFS | $44,866 | $45,268 |
| Medicaid Advantage/Prescription Drug Program | 19,045 | 20,953 |
| Medicaid | 35,419 | 36,758 |
| CHIP | 978 | 773 |
| Other | 7,922 | 4,397 |
| Totals | $108,230 | $108,149 |
Entitlement Benefits Due and Payable represents a liability for Medicare fee-for-service, Medicare Advantage and Prescription Drug Program, Medicaid, and CHIP owed to the public for medical services/claims IBNR as of the end of the reporting period.
The Medicare fee-for-service liability is primarily an actuarial liability which represents (a) an estimate of claims incurred that may or may not have been submitted to the Medicare contractors but were not yet approved for payment; (b) actual claims that have been approved for payment by the Medicare contractors for which checks have not yet been issued; (c) checks that have been issued by the Medicare contractors in payment of a claim and that have not yet been cashed by payees; (d) periodic interim payments for services rendered in the current FY but paid in the subsequent FY; and (e) an estimate of retroactive settlements of cost reports. The September 30, 2016 and 2015 estimate also includes amounts which may be due/owed to providers for previous years’ disputed cost report adjustments for disproportionate share hospitals and teaching hospitals as well as amounts which may be due/owed to hospitals for adjusted prospective payments.
The Medicare Advantage and Prescription Drug program liability represents amounts owed to plans after the completion of the Prescription Drug payment reconciliation and estimates relating to risk and other payment related adjustments including the estimate for the first nine months of calendar year 2016. In addition, it includes an estimate of payments to plan sponsors of retiree prescription drug coverage incurred but not yet paid as of September 30, 2016.
The Medicaid and CHIP estimates represent the net federal share of expenses that have been incurred by the states but not yet reported to CMS.
The Other Liability line item includes estimates of payments due to those participating in Marketplace activities.
Note 11. Federal Employee and Veterans’ Benefits (in Millions)
| Category | 2016 | 2015 |
|---|---|---|
| With the Public | ||
| Liabilities Not Covered by Budgetary Resources | ||
| PHS Commissioned Corp Pension Liability | $11,995 | $11,227 |
| PHS Commissioned Corp Post-retirement Health Benefits | 625 | 574 |
| Workers’ Compensation Benefits (Actuarial FECA Liability) | 272 | 271 |
| Total Federal Employee and Veterans’ Benefits | $12,892 | $12,072 |
Public Health Service (PHS) Commissioned Corps
HHS administers the PHS Commissioned Corps Retirement System for 6,583 active duty officers and 6,734 retiree annuitants and survivors. As of September 30, 2016, the actuarial accrued liability for the retirement benefit plan was $12.0 billion and $0.6 billion for non-Medicare coverage of the Post-Retirement Medical Plan.
The Commission Corp Retirement System and Post-Retirement Health Benefits are not funded. Therefore, in accordance with SFFAS Number 33, Pensions, Other Retirement Benefits and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates (SFFAS Number 33), the discount rate should be based on long-term assumptions, for marketable securities (i.e., Treasury marketable securities) of similar maturity to the period over which the payments are to be made. The discount rates should be matched with the expected timing of the associated expected cashflow. A single discount rate may be used for all the projected cashflow, as long as the resulting present value is not materially different than the resulting present value using multiple rates.
The significant assumptions used in the calculation of the pension and medical program liability, as of September 30, 2016 and September 30, 2015, were:
| 2016 | 2015 | |
|---|---|---|
| Interest on federal securities | 4.26 percent | 4.44 percent |
| Annual basic pay scale increase | 2.51 percent | 2.68 percent |
| Annual inflation | 2.01 percent | 2.18 percent |
| 2016 | 2015 | |
|---|---|---|
| Beginning Liability Balance | $11,081 | $11,691 |
| Expense | ||
| Normal Cost | 326 | 321 |
| Interest on the liability balance | 493 | 508 |
| Actuarial (Gain)/Loss | ||
| From experience | 107 | (98) |
| From assumption changes | ||
| Change in discount rate assumption | 303 | 326 |
| Change in inflation/salary increase assumption | (259 | (508) |
| Change in Others | 332 | 31 |
| Net Actuarial (Gain)/Loss | 483 | (249) |
| Total expense | 1,302 | 580 |
| Less amounts paid | (483) | (470) |
| Ending Liability Balance | $12,620 | $11,801 |
The following shows key valuation results as of September 30, 2016 and 2015, in conformance with the actuarial reporting standards set forth in the SFFAS Number 5, Accounting for Liabilities of the Federal Government and SFFAS Number 33. The valuation is based upon the current plan provisions, membership data collected as of June 30, 2016 and actuarial assumptions. The September 30, 2016 valuation includes an increase in liabilities of $819 million resulting from an increase in normal cost and an actuarial loss from changes in assumptions and experience. Volatility of the discount rate significantly affects the liabilities for these benefits. Therefore, to mitigate the impact of this volatility, SFFAS Number 33 also provides for the use of historical average rates to prevent the undue influence of current or near term rates.
Workers’ Compensation Benefits
The actuarial liability for future workers’ compensation benefits includes the expected liability for death, disability, medical and miscellaneous costs for approved compensation cases, plus a component for incurred but not reported claims. The liability utilizes historical benefit payment patterns to predict the ultimate payment related to that period. In FY 2015, the fund effected a change in accounting estimate to refine the methodology used for selecting the interest rate assumptions and enhance matching between the timing of cash flows and interest rates. For FY 2016, discount rates were based on averaging the Treasury's Yield Curve for Treasury Nominal Coupon Issues (the TNC Yield Curve) for the current and prior 4 years for FY 2016 and FY 2015, respectively. Interest rate assumptions utilized for discounting as of September 30, 2016 and September 30, 2015 appear below.
| 2016 | 2015 | |
|---|---|---|
| Wage Benefits | 2.781% in Year 1 | 3.134% in Year 1 |
| and years thereafter | and years thereafter | |
| Medical Benefits | 2.261% in Year 1 | 2.496% in Year 1 |
| and years thereafter | and years thereafter | |
To provide specifically for the effects of inflation on the liability for future workers’ compensation benefits, wage inflation factors (i.e., cost of living adjustments [COLA]) and medical inflation factors (i.e., consumer price index-medical [CPIM]) are applied to the calculations of projected future benefits. These factors are also used to adjust historical payments to current year constant dollars. The compensation COLAs and CPIMs used in the projections are:
| FY | COLA | CPIM |
|---|---|---|
| 2016 | N/A | N/A |
| 2017 | 1.31% | 2.99% |
| 2018 | 1.13% | 3.09% |
| 2019 | 1.23% | 3.40% |
| 2020 | 1.45% | 3.68% |
| 2021 | 1.85% | 3.87% |
Note 12. Accrued Liabilities (in Millions)
| Category | 2016 | 2015 |
|---|---|---|
| Grant Liability | $4,915 | $3,831 |
| Other Accrued Liabilities | 9,505 | 10,419 |
| Net Accrued Liabilities | $14,420 | $14,250 |
Note 13. Other Liabilities (in Millions)
| 2016 | 2015 | |||
|---|---|---|---|---|
| Category | Intra- governmental | With the Public | Intra- governmental | With the Public |
| Accrued Payroll & Benefits | $136 | $960 | $118 | $969 |
| Advances from Others | 609 | 744 | 446 | 720 |
| Deferred Revenue | - | 1,066 | - | 642 |
| Custodial Liabilities | 407 | 5 | 729 | 12 |
| Legal Liabilities (Note 14) | 1,021 | - | 941 | - |
| Other | 4,890 | 2,188 | 1,375 | 977 |
| Total Other Liabilities | $7,063 | $4,963 | $3,609 | $3,320 |
Note 14. Contingencies and Commitments
HHS is a party in various administrative proceedings, legal actions, and tort claims which may ultimately result in settlements or decisions adverse to the federal government. HHS has accrued contingent liabilities where a loss is determined to be probable and the amount can be estimated. Other contingencies exist where losses are reasonably possible and an estimate can be determined or an estimate of the range of possible liability has been determined. Selected contingencies and commitments are described below.
Medicaid Audit and Program Disallowances
The Medicaid amount of $10.2 billion ($7.5 billion in FY 2015) consists of Medicaid audit and program disallowances of $2.8 billion ($2.4 billion in FY 2015) and of $7.4 billion ($5.1 billion in FY 2015) for reimbursement of State Plan amendments. Contingent liabilities have been established as a result of Medicaid audit and program disallowances that are currently being appealed by the states. The funds could have been returned or HHS can decrease the state’s authority. HHS will be required to pay these amounts if the appeals are decided in favor of the states. In addition, certain amounts for payment have been deferred under the Medicaid program when there is a reasonable doubt as to the legitimacy of expenditures claimed by a state. There are also outstanding reviews of the state expenditures in which a final determination has not been made.
Appeals at the Provider Reimbursement Review Board
Other liabilities do not include all provider cost reports under appeal at the Provider Reimbursement Review Board (PRRB). The monetary effect of those appeals is generally not known until a decision is rendered. However, historical cases that have been appealed and settled by the PRRB are considered in the development of the actuarial Medicare IBNR liability. As of September 30, 2016, 10,005 cases (9,737 in FY 2015) remain on appeal. A total of 2,515 new cases(3,473 in FY 2015) were filed and 10 cases were reopened (9 in FY 2015). The PRRB rendered decisions on 66 cases(84 in FY 2015) and 2,191 additional cases(2,972 in FY 2015) were dismissed, withdrawn, or settled prior to an appeal hearing. The PRRB receives no information on the value of these cases that are settled prior to a hearing.
Other Accrued Contingent Liabilities
The U.S. Supreme Court decision in Salazar v. Ramah Navajo Chapter, dated June 18, 2012, is likely to result in additional claims against the IHS. As a result of this decision, many tribes have filed claims. Some claims have been paid and others have been asserted but not yet settled. It is expected that some tribes will file additional claims for prior years. An estimated loss related to this matter was accrued last year and the remaining unpaid accrued liability is included on the Consolidated Balance Sheet.
The Vaccine Injury Compensation Program is administered by HRSA and provides compensation for vaccine-related injury or death. A contingent liability has been accrued in the financial statements for the estimated future payment of injury claims.
Note 15. Revenue (in Millions)
2016 Consolidated Gross Cost and Exchange Revenue by Budget Function Classification
| Education Training & Social Services | Health | Medicare | Income Security | OpDiv Combined Totals | Intra-HHS Eliminations | Consolidated Totals | |
|---|---|---|---|---|---|---|---|
| Intragovernmental | |||||||
| Gross Cost | $119 | $6,275 | $840 | $73 | $7,307 | $ (2,338) | $4,969 |
| Exchange Revenue | (17) | (2,973) | (12) | (7) | (3,009) | 2,044 | (965) |
| Net Cost, Intragovernmental | 102 | 3,302 | 828 | 66 | 4,298 | (294) | 4,004 |
| With the Public | |||||||
| Gross Cost | 14,823 | 467,160 | 646,201 | 38,643 | 1,166,827 | - | 1,166,827 |
| Exchange Revenue | - | (15,113) | (80,915) | (31) | (96,059) | - | (96,059) |
| Net Cost, With the Public | 14,823 | 452,047 | 565,286 | 38,612 | 1,070,768 | - | 1,070,768 |
| Total Gross Cost | 14,942 | 473,435 | 647,041 | 38,716 | 1,174,134 | (2,338) | 1,171,796 |
| Total Exchange Revenue | (17) | (18,086) | (80,927) | (38) | (99,068) | 2,044 | (97,024) |
| Total Net Cost of Operations | $14,925 | $455,349 | $566,114 | $38,678 | $1,075,066 | $ (294) | $1,074,772 |
2015 Consolidated Gross Cost and Exchange Revenue by Budget Function Classification
| Education Training & Social Services | Health | Medicare | Income Security | OpDiv Combined Totals | Intra-HHS Eliminations | Consolidated Totals | |
|---|---|---|---|---|---|---|---|
| Intragovernmental | |||||||
| Gross Cost | $122 | $6,517 | $1,026 | $20 | $7,685 | $(2,548) | $5,137 |
| Exchange Revenue | (33) | (3,116) | (12) | (7) | (3,168) | 2,344 | (824) |
| Net Cost, Intragovernmental | 89 | 3,401 | 1,014 | 13 | 4,517 | (204) | 4,313 |
| With the Public | |||||||
| Gross Cost | 13,978 | 453,400 | 621,810 | 38,002 | 1,127,190 | - | 1,127,190 |
| Exchange Revenue | - | (25,769) | (75,689) | (16) | (101,474) | - | (101,474) |
| Net Cost, With the Public | 13,978 | 427,631 | 546,121 | 37,986 | 1,025,716 | - | 1,025,716 |
| Total Gross Cost | 14,100 | 459,917 | 622,836 | 38,022 | 1,134,875 | (2,548) | 1,032,327 |
| Total Exchange Revenue | (33) | (28,885) | (75,701) | (23) | (104,642) | 2,344 | (102,298) |
| Total Net Cost of Operations | $14,067 | $431,032 | $547,135 | $37,999 | $1,030,233 | $ (204) | $1,030,029 |
Exchange Revenue
HHS recognizes its revenue from exchange transactions when goods and services are provided. Total exchange revenue was $97.0 billion and $102.3 billion through September 30, 2016 and 2015, respectively. HHS’s exchange revenue consists primarily of Medicare premiums collected from beneficiaries. HHS also charges user fees and collects revenues related to reimbursable agreements with other government entities.
Note 16. Legal Arrangements Affecting Use of Unobligated Balances
The unobligated balances on the Combined Statement of Budgetary Resources consist of Trust Funds, appropriated funds, revolving funds, management funds, gift funds, Cooperative Research and Development Agreement funds, and royalty funds. Annual appropriations are available for new obligations in the year of appropriation and for adjustments to valid obligations for 5 subsequent years. Other appropriations are available for obligation for multiple years or until expended based on Congressional authority.
All Trust Fund receipts collected in the fiscal year are reported as new budget authority in the Combined Statement of Budgetary Resources. The portion of Trust Fund receipts collected in the fiscal year that exceeds the amount needed to pay benefits and other valid obligations in that fiscal year is precluded by law from being available for obligation. This excess of receipts over obligations is Temporarily Not Available Pursuant to Public Law and is included in the calculation for appropriations on the Combined Statement of Budgetary Resources; therefore, it is not classified as budgetary resources in the fiscal year collected. However, all such excess receipts are assets of the Trust Funds and become available for obligation, as needed. The entire Trust Fund balances in the amount of $201.6 billion, as of September 30, 2016, ($201.1 billion as of September 30, 2015), are included in Investments on the Consolidated Balance Sheets.
Exempt from Apportionment
This amount includes the FY 2016 recording of obligations required by law, where such obligations are in excess of available funding. These obligations were incurred by operation of law; thus, they are reflected as exempt from apportionment. The Anti-Deficiency Act has not been violated, as “[t]he prohibitions contained in the Anti-Deficiency Act are directed at discretionary obligations entered into by administrative officers.” B-219161 (Oct. 2, 1985).
Note 17. Explanation of Differences between the Combined Statement of Budgetary Resources and the Budget of the United States Government (in Millions)
2015 |
Budgetary Resources | Obligations Incurred | Distributed Offsetting Receipts | Outlays, net (total) (discretionary and mandatory) |
|---|---|---|---|---|
| Statement of Budgetary Resources | $1,543,105 | $1,477,481 | $380,187 | $1,408,128 |
| Expired Accounts | (35,401) | 2 | - | - |
| Other | (334) | (545) | 43 | 67 |
| Budget of the U.S. Government | $1,507,370 | $1,476,938 | $380,230 | $1,408,195 |
The Budget of the United States Government (also known as the President’s Budget), with the actual amounts for FY 2016, has not been published, therefore, no comparisons can be made between FY 2016 amounts presented in the Combined Statement of Budgetary Resources with amounts reported in the Actual column of the President’s Budget. The FY 2018 President’s Budget is expected to be released in February 2017 and may be obtained from OMB’s website, www.whitehouse.gov/omb/budget, or from Government Publishing Office’s website, www.gpo.gov.
HHS reconciled the amounts of the FY 2015 column on the Combined Statement of Budgetary Resources to the actual amounts for FY 2015 from the Appendix in the FY 2017 President’s Budget for budgetary resources, obligations incurred, offsetting receipts, and net outlays (i.e., gross outlays less offsetting collections), as presented above.
For the budgetary resources reconciliation, the amount used from the President’s Budget was the total budgetary resources available for obligation. Therefore, a reconciling item that is contained in the Combined Statement of Budgetary Resources and not in the President’s Budget is the budgetary resources that were not available. The Expired Accounts line in the above schedule includes expired authority, recoveries, and other amounts included in the Combined Statement of Budgetary Resources that are not included in the President’s Budget.
The Other differences in the budgetary resources and obligations incurred are due to gift funds and trust funds reported on the HHS Combined Statement of Budgetary Resources but not in the President's Budget. Governmentwide Treasury Account Symbol revision window adjustments are not included in the HHS Combined Statement of Budgetary Resources but are included in the President's Budget. In addition, there are differences related to adjustments made to recoveries and spending authority.
Note 18. Apportionment Categories of Obligations Incurred and Undelivered Orders (in Millions)
|
2016 |
|||
|---|---|---|---|
| Category |
Direct |
Reimbursable | Total |
| Category A (Distributed by Quarter) | $102,101 | $8,418 | $110,519 |
| Category B (Restricted and Distributed by Activity) | 768,700 | 4,293 | 772,993 |
| Exempt from Apportionment | 724,276 | 15 | 724,291 |
| Total Obligations Incurred | $1,595,077 | $12,726 | $1,607,803 |
|
2015 |
|||
| Direct | Reimbursable | Total | |
| Category A (Distributed by Quarter) | $95,359 | $7,487 | $102,846 |
| Category B (Restricted and Distributed by Activity) | 700,591 | 3,832 | 704,423 |
| Exempt from Apportionment | 670,199 | 13 | 670,212 |
| Total Obligations Incurred | $1,466,149 | $11,332 | $1,477,481 |
Obligations incurred consist of expended authority and the change in undelivered orders. OMB has exempted CMS from the Circular Number A-11, Preparation, Submission and Execution of the Budget, requirement to report Medicare’s refunds of prior year obligations separately from refunds of current year obligations on the SF-133, Report on Budget Execution and Budgetary Resources.
Undelivered Orders include obligations that have been issued but are not yet drawn down and goods and services ordered that have not been received. HHS reported $140.2 billion of budgetary resources obligated for undelivered orders as of September 30, 2016 and $105.8 billion as of September 30, 2015.
Note 19. Funds from Dedicated Collections (in Millions)
Medicare is the largest dedicated collections program managed by HHS and is presented in a separate column in the schedule below. The Medicare program includes the HI Trust Fund; the SMI Trust Fund which includes both Part B, medical insurance, and the Prescription Drug Benefit – Part D; and the Medicare Integrity Program. Portions of the Program Management appropriation have been allocated to the HI and SMI Trust Funds. See Note 1 for a description of each fund’s purpose and how HHS accounts for and reports the funds.
| 2016 | |||
| Balance Sheet as of September | Medicare | Other | Total |
|---|---|---|---|
| Fund Balance with Treasury | $53,806 | $6,892 | $60,698 |
| Investments | 257,801 | 3,706 | 261,507 |
| Other Assets | 28,385 | 10,470 | 38,855 |
| Total Assets | 339,992 | 21,068 | 361,060 |
| Entitlement Benefits Due and Payable | 63,911 | 7,915 | 71,826 |
| Accrued Liabilities (Note 12) | - | 9,505 | 9,505 |
| Other Liabilities | 7,479 | 2,868 | 10,347 |
| Total Liabilities | 71,390 | 20,288 | 91,678 |
| Unexpended Appropriations | 36,012 | (100) | 35,912 |
| Cumulative Results of Operations | 232,590 | 880 | 233,470 |
| Total Liabilities and Net Position | 339,992 | 21,068 | 361,060 |
| Statement of Net Cost for the Period Ended September 30 | |||
| Gross Program Costs | 647,041 | 18,653 | 665,694 |
| Less: Exchange Revenues | 80,927 | 13,114 | 94,041 |
| Net Cost of Operations | 566,114 | 5,539 | 571,653 |
| Statement of Changes in Net Position for the Period Ended September 30 | |||
| Net Position Beginning of Period | 246,863 | 4,801 | 251,664 |
| Non-Exchange Revenue | 264,044 | 346 | 264,390 |
| Other Financing Sources | 323,809 | 1,172 | 324,981 |
| Net Cost of Operations | (566,114) | (5,539) | (571,653) |
| Change in Net Position | 21,739 | (4,021) | 17,718 |
| Net Position End of Period | $268,602 | $780 | $269,382 |
| 2015 | |||
| Balance Sheet as of September 30 | Medicare | Other | Total |
|---|---|---|---|
| Fund Balance with Treasury | $44,785 | $6,598 | $51,383 |
| Investments | 263,993 | 3,606 | 267,599 |
| Other Assets | 7,327 | 10,661 | 17,988 |
| Total Assets | 316,105 | 20,865 | 336,970 |
| Entitlement Benefits Due and Payable | 66,221 | 4,195 | 70,416 |
| Accrued Liabilities (Note 12) | - | 10,419 | 10,419 |
| Other Liabilities | 3,021 | 1,405 | 4,471 |
| Total Liabilities | 69,242 | 16,064 | 85,306 |
| Unexpended Appropriations | 30,284 | (100) | 30,184 |
| Cumulative Results of Operations | 216,579 | 4,901 | 221,480 |
| Total Liabilities and Net Position | 316,105 | 20,865 | 336,970 |
| Statement of Net Cost for the Period Ended September 30 | |||
| Gross Program Costs | 622,836 | 26,545 | 649,381 |
| Less: Exchange Revenues | 75,701 | 23,813 | 99,514 |
| Net Cost of Operations | 547,135 | 2,732 | 549,867 |
| Statement of Changes in Net Position for the Period Ended September 30 | |||
| Net Position Beginning of Period | 237,110 | 6,656 | 243,766 |
| Non-Exchange Revenue | 252,045 | 3387 | 252,383 |
| Other Financing Sources | 304,843 | 539 | 305,382 |
| Net Cost of Operations | (547,135) | (2,732) | (549,867) |
| Change in Net Position | 9,753 | (1,855) | 7,898 |
| Net Position End of Period | $246,863 | $4,801 | $251,664 |
Note 20. Stewardship Land
IHS provides federal health services to American Indians and Alaska Natives to help raise their health status to the highest possible level. IHS provides health care to approximately 2.2 million American Indians and Alaska Natives who belong to 567 federally recognized tribes in 36 states. Health services are provided on tribal/reservation trust land that was transferred to IHS by the DOI for this purpose. Although the structures on this land are operational in nature, the land on which these structures reside is managed in a stewardship manner. All trust land, when no longer needed by IHS, must be returned to the DOI’s Bureau of Indian Affairs for continuing trust responsibilities and oversight. In FY 2016, the number of sites in Phoenix is reduced as a result of a reevaluation.
The table below presents stewardship land held by HHS:
Indian Trust Land by Number of Sites and Location
| Site | 2016 | 2015 |
|---|---|---|
| Albuquerque | 4 | 4 |
| Bemidji | 2 | 2 |
| Billings | 7 | 7 |
| Great Plains | 9 | 9 |
| Navajo | 36 | 35 |
| Oklahoma City | 1 | 1 |
| Phoenix | 10 | 12 |
| Portland | 3 | 3 |
| Tucson | 5 | 5 |
| Total | 77 | 78 |
Note 21. Incidental Custodial Collections
HHS reports custodial activities on the Consolidated Balance Sheets; however, HHS does not prepare a separate Statement of Custodial Activity, since custodial activities are incidental to its operations and the amounts collected are immaterial.
The majority of the custodial collections is funding ACF receives from the IRS for outlays to the states for child support. This funding represents delinquent child support payments withheld from federal tax refunds. In addition, ACF transfers to the General Fund the federal share of state collections that were collected on behalf of children in the Temporary Assistance for Needy Families program and Foster Care Programs.
In FY 2016, the Department had custodial collections of $2.9 billion of which $2.6 billion was related to ACF. The Department made disbursements of $2.9 billion of which $2.6 billion was related to ACF.
In FY 2015, the Department had custodial collections of $2.1 billion of which $1.9 billion was related to ACF. The Department made disbursements of $2.1 billion of which $1.9 billion was related to ACF.
Note 22. Reconciliation of Net Cost of Operations (Proprietary) to Budget (in Millions)
| 2016 | 2015 | |
|---|---|---|
| Resources Used to Finance Activities: | ||
| Budgetary Resources Obligated | ||
| New Obligations and Upward Adjustments | $1,607,803 | $1,477,481 |
| Spending Authority from Offsetting Collections and Recoveries | (63,331) | (60,006) |
| Obligations Net of Offsetting Collections and Recoveries | 1,544,472 | 1,417,475 |
| Distributed Offsetting Receipts | (428,128) | (380,187) |
| Net Obligations | 1,116,344 | 1,037,288 |
| Other Resources | ||
| Net Non-Budgetary Resources Used to Finance Activities | 367 | 1,332 |
| Total Resources Used to Finance Activities | 1,116,711 | 1,038,620 |
| Resources Used to Finance Items Not Part of the Net Cost of Operations: | ||
| Change in Budgetary Resources Obligated for Goods, Services and Benefits Ordered but Not Yet Provided |
33,922 | (10,625) |
| Resources That Fund Expenses Recognized in Prior Periods | 12 | 43 |
| Budgetary Offsetting Collections and Receipts That Do Not Affect Net Cost of Operations | 10,092 | 9,965 |
| Resources That Finance the Acquisition of Assets or Liquidations of Liabilities | 694 | 2,092 |
| Other Resources or Adjustments to Net Obligated Resources That Do Not Affect Net Cost of Operations |
(2,511) | 3,405 |
| Total Resources Used to Finance Items Not Part of the Net Cost of Operations | 42,209 | 4,880 |
| Total Resources Used to Finance the Net Cost of Operations | 1,074,502 | 1,033,740 |
| Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period | ||
| Components Requiring or Generating Resources in Future Periods | (1,024) | (2,844) |
| Components Not Requiring or Generating Resources | 1,294 | (827) |
| Total Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period | 270 | (3,711) |
| Net Cost of Operations | $1,704,772 | $1,030,029 |
Note 23. Combined Schedule of Spending
The Combined Schedule of Spending presents an overview of how departments or agencies are spending (i.e., obligating) money. The Combined Schedule of Spending presents total budgetary resources, total new obligations, and upward adjustments for the reporting entity. The data used to populate this schedule are the same underlying data used to populate the Combined Statement of Budgetary Resources. Simplified terms are used to improve the public’s understanding of the budgetary accounting terminology used in the Combined Statement of Budgetary Resources.
OMB makes available a searchable website, USAspending.gov 1, that provides information on federal awards of contracts and financial assistance awards (including grants) and is accessible to the public at no cost. When comparing USAspending.gov data to the Combined Schedule of Spending one must take into account that the website has a fundamentally different purpose. There are differences due to object classes not reported to USAspending.govthat include but are not limited to personnel compensation, travel, utilities, and leases, intra-departmental and interagency spending, and various other categories of financial awards. In addition, the reporting entity between the financial statements and www.USAspending.gov differs for awards resulting from funding allocations between agencies, and/or HHS OpDivs. Also, recovery of prior year obligations are reported as deobligations on www.USAspending.gov but are not reported on the Combined Schedule of Spending. As a result, www.USAspending.gov data will differ from the Combined Schedule of Spending.
What Money is Available to Spend? This section presents resources that were available to spend, as reported in the Combined Statement of Budgetary Resources. Total Resources refers to Total Budgetary Resources as described in the Combined Statement of Budgetary Resources and represents amounts approved for spending by law. Amount Available but Not Agreed to be Spent represents amounts that HHS was allowed to spend but did not take action to spend by the end of the FY. Amount Not Available to be Spent represents amounts that HHS was not approved to spend during the current FY. Total Amounts Agreed to be Spent represents spending actions taken by HHS – including contracts, orders, grants, or other legally binding agreements of the federal government – to pay for goods or services. This line total agrees to the New Obligations and Upward Adjustments line in the Combined Statement of Budgetary Resources.
Who did the Money Go To? This section identifies the recipient of the money by federal and non-federal entities. Amounts in this section reflect amount agreed to be spent and agree to the New Obligations and Upward Adjustments line on the Statement of Budgetary Resources.
How was the Money Spent/Issued? This section presents services or items that were purchased, categorized by Treasury Symbol. Those Treasury Account Symbols that have a material impact on the Statement of Budgetary Resources are presented separately. Other Treasury Account Symbols, such as National Institute of Allergy and Infectious Diseases, Payments to States for Child Support Enforcement and Family Support Programs, Low Income Home Energy Assistance, National Heart, Lung, and Blood Institute, and Child Care Entitlement to States, are summarized under Other Agency Budgetary Accounts.
Combined Schedule of Spending
As of September 30, 2016 and 2015
(in Millions)
| What Money is Available to Spend: | ||
|---|---|---|
| FY 2016 | FY 2015 | |
| Total Resources | $1,668,313 | $1,543,105 |
| Less Amount Available but Not Agreed to be Spent | 17,280 | 23,828 |
| Less Amount Not Available to be Spent | 43,230 | 41,796 |
| Total Amounts Agreed to be Spent | 1,607,803 | 1,477,481 |
| Who did the Money Go To: | ||
| Federal | 9,105 | 8,142 |
| Non-Federal | 1,598,698 | 1,469,339 |
| $1,607,803 | $1,477,481 | |
Combined Schedule of Spending
As of September 30, 2015 and 2014
(in Millions)
| How was the Money Spent/Issued: | ||
| FY 2016 | FY 2015 | |
|---|---|---|
| Medicaid | $398,217 | $378,897 |
| Grants, Subsidies, and Contributions | 393,919 | 375,142 |
| Supplies and Materials | 4,172 | 3,637 |
| Other Contractual Services | 108 | 101 |
| Other | 18 | 17 |
| Payments to Trust Funds | 310,112 | 262,902 |
| Grants, Subsidies, and Contributions | 215,830 | 195,385 |
| Financial Transfers | 94,282 | 67,445 |
| Other | - | 72 |
| Federal Supplementary Medical Insurance Trust Fund | 306,562 | 281,640 |
| Financial Assistance Direct Payments | 300,768 | 276,841 |
| Financial Transfers | 5,668 | 4,755 |
| Other | 126 | 44 |
| Federal Hospital Insurance Trust Fund | 296,848 | 285,074 |
| Financial Assistance Direct Payments | 291,525 | 277,004 |
| Financial Transfers | 5,594 | 8,068 |
| Other | 2 | 2 |
| Medicare Prescription Drug Account | 92,804 | 80,583 |
| Financial Assistance Direct Payments | 92,039 | 80,429 |
| Financial Transfers | 765 | 154 |
| Taxation on OASDI Benefits, HI | 23,022 | 20,208 |
| Grants, Subsidies, and Contributions | 23,022 | 20,208 |
| Temporary Assistance for Needy Families | 16,722 | 16,717 |
| Grants, Subsidies, and Contributions | 16,649 | 16,657 |
| Other | 73 | 60 |
| State Children’s Health Insurance Fund | 14,070 | 11,496 |
| Grants, Subsidies, and Contributions | 14,022 | 11,486 |
| Other | 68 | 10 |
| Children and Families Services Programs | 10,975 | 10,545 |
| Grants, Subsidies, and Contributions | 10,509 | 10,121 |
| Other Contractual Services | 291 | 262 |
| Personnel Compensation and Benefits | 151 | 143 |
| Other | 24 | 19 |
| Payments for Foster Care and Permanency | 7,858 | 7,387 |
| Grants, Subsidies, and Contributions | 7,822 | 7,360 |
| Other | 36 | 27 |
| Transitional Reinsurance Program | 7,846 | 8,249 |
| Financial Assistance Direct Payments | 7,842 | 8.249 |
| Other | 4 | - |
| National Cancer Institute | 5,392 | 5,386 |
| Grants, Subsidies, and Contributions | 3,300 | 3,609 |
| Other Contractual Services | 1,457 | 1,178 |
| Personnel Compensation and Benefits | 511 | 504 |
| Other | 124 | 95 |
| Indian Health Services | 5,250 | 5,702 |
| Grants, Subsidies, and Contributions | 2,339 | 2,834 |
| Personnel Compensation and Benefits | 1,361 | 1,332 |
| Other Contractual Services | 847 | 803 |
| Other | 703 | 733 |
| Primary Health Care | 5,041 | 4,700 |
| Grants, Subsidies, and Contributions | 4,733 | 4,449 |
| Other Contractual Services | 232 | 200 |
| Other | 76 | 51 |
| Other Agency Budgetary Accounts | 107,084 | 97,995 |
| Grants, Subsidies, and Contributions | 57,034 | 51,862 |
| Other Contractual Services | 23,789 | 23,811 |
| Other | 14,117 | 12,664 |
| Financial Assistance Direct Payments | 12,144 | 9,658 |
| Total Amounts Agreed to be Spent | $1,477,481 | $1,374,378 |
Note 24. Statement of Social Insurance (Unaudited)
The Statement of Social Insurance presents, for the 75-year projection period, the present values of the income and expenditures of the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds for both the open group and closed group of participants. The open group consists of all current and future participants (including those born during the projection period) who are now participating or are expected to eventually participate in the Medicare program. The closed group comprises only current participants—those who attain age 15 or older in the first year of the projection period.
Actuarial present values are computed under the intermediate set of assumptions specified in the 2016 Annual Report of the Medicare Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. These assumptions represent the Trustees’ reasonable estimate of likely future economic, demographic, and healthcare-specific conditions. As with all of the assumptions underlying the Trustees’ financial projections, the Medicare-specific assumptions are reviewed annually and updated based on the latest available data and analysis of trends. In addition, the assumptions and projection methodology are subject to periodic review by independent panels of expert actuaries and economists. The most recent review occurred with the 2010-2011 Technical Review Panel.
Actuarial present values are computed as of the year shown and over the 75-year projection period, beginning January 1 of that year. The Trustees’ projections are based on the current Medicare laws, regulations, and policies in effect on June 22, 2016 and do not reflect any actual or anticipated changes subsequent to that date. The present values are calculated by discounting the future annual amounts of non-interest income and expenditures (including benefit payments and administrative expenses) at the projected average rates of interest credited to the HI trust fund. HI income includes the portion of FICA and SECA payroll taxes allocated to the HI trust fund, the portion of Federal income taxes paid on Social Security benefits that is allocated to the HI trust fund, premiums paid by, or on behalf of, aged uninsured beneficiaries, and receipts from fraud and abuse control activities. SMI income includes premiums paid by, or on behalf of, beneficiaries and transfers from the general fund of the Treasury. Fees related to brand-name prescription drugs, required by the Affordable Care Act, are included as income for Part B of SMI, and transfers from State governments are included as income for Part D of SMI. Since all major sources of income to the trust funds are reflected, the actuarial projections can be used to assess the financial condition of each trust fund.
Beginning with this year’s projections, the Part A present values in the Statement of Social Insurance include the income and expenditures for the roughly 1 percent of beneficiaries who are 65 or over but are uninsured because they do not meet the normal insured status or related requirements to qualify for entitlement to Part A benefits. The reason that these beneficiaries were previously excluded is that their costs were separately funded either through general revenue appropriations or through premium payments, and accordingly the exclusion of such amounts did not materially affect the financial balance of Part A.
Actuarial present values of estimated future income (excluding interest) and estimated future expenditures are presented for three different groups of participants: (1) current participants who have not yet attained eligibility age; (2) current participants who have attained eligibility age; and (3) new entrants, those who are expected to become participants in the future. Current participants are the closed group of individuals who are at least age 15 at the start of the projection period and are expected to participate in the program as either taxpayers, beneficiaries, or both.
The Statement of Social Insurance sets forth, for each of these three groups, the projected actuarial present values of all future expenditures and of all future non-interest income for the next 75 years. The Statement of Social Insurance also presents the net present values of future net cash flows, which are calculated by subtracting the actuarial present value of estimated future expenditures from the actuarial present value of estimated future income. The HI trust fund is expected to have an actuarial deficit indicating that, under these assumptions as to economic, demographic, and health care cost trends for the future, HI income is expected to fall short of expenditures over the next 75 years. Neither Part B nor Part D of SMI has similar deficits because each account is automatically in financial balance every year due to its statutory financing mechanism.
In addition to the actuarial present value of the estimated future excess of income (excluding interest) over expenditures for the open group of participants, the Statement of Social Insurance also sets forth the same calculation for the closed group of participants. The closed group consists of those who, in the starting year of the projection period, have attained retirement eligibility age or have attained ages 15 through 64. In order to calculate the actuarial net present value of the excess of estimated future income over estimated future expenditures for the closed group, the actuarial present value of estimated future expenditures for or on behalf of current participants is subtracted from the actuarial present value of estimated future income (excluding interest) for current participants.
Since its enactment in 1965, the Medicare program has experienced substantial variability in expenditure growth rates. These different rates of growth have reflected new developments in medical care, demographic factors affecting the relative number and average age of beneficiaries and covered workers, and numerous economic factors. The future cost of Medicare will also be affected by further changes in these inherently uncertain factors and by the application of future payment updates. Consequently, Medicare’s actual cost over time, especially for periods as long as 75 years, cannot be predicted with certainty and could differ materially from the projections shown in the Statement of Social Insurance. Moreover, these differences could affect the long-term sustainability of this social insurance program.
To develop projections regarding the future financial status of the HI and SMI trust funds, various assumptions have to be made. As stated previously, the estimates presented here are based on the assumption that the trust funds will continue to operate under the law in effect on June 22, 2016. In addition, the estimates depend on many economic, demographic, and healthcare-specific assumptions, including changes in per beneficiary health care costs, wages, and the consumer price index (CPI); fertility rates; mortality rates; immigration rates; and interest rates. In most cases, these assumptions vary from year to year during the first 5 to 30 years before reaching their ultimate values for the remainder of the 75‑year projection period. The assumed growth rates for per beneficiary health care costs vary throughout the projection period. The following table includes the most significant underlying assumptions used in the projections of Medicare spending displayed in this section. The assumptions underlying the 2016 Statement of Social Insurance actuarial projections are drawn from the Social Security and Medicare Trustees Reports for 2016. Specific assumptions are made for each of the different types of service provided by the Medicare program (for example, hospital care and physician services). These assumptions include changes in the payment rates, utilization, and intensity of each type of service. The projected beneficiary cost increases summarized below reflect the overall impact of these more detailed assumptions. Similar detailed information for the prior years is publicly available on the CMS website at http://www.cms.hhs.gov/CFOReport/.2
Table 1: Significant Assumptions and Summary Measures Used
for the Statement of Social Insurance 2016
| Fertility rate1 | Net immigration2 | Mortality rate3 | Real-wage differential4 | Annual percentage change in: | Real-interest rate9 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Wages5 | CPI6 | Real GDP7 | Per beneficiary cost8 | ||||||||
| HI | SMI | ||||||||||
| B | D | ||||||||||
| 2016 | 1.90 | 1,579,000 | 773.0 | 2.08 | 2.94 | 0.86 | 2.8 | 0.9 | 2.1 | 0.9 | 1.2 |
| 2020 | 2.00 | 1,508,000 | 742.8 | 1.68 | 4.28 | 2.60 | 2.8 | 3.9 | 5.6 | 6.7 | 1.9 |
| 2030 | 2.00 | 1,332,000 | 679.1 | 1.30 | 3.90 | 2.60 | 2.1 | 3.9 | 4.5 | 4.7 | 2.7 |
| 2040 | 2.00 | 1,284,000 | 624.5 | 1.22 | 3.82 | 2.60 | 2.2 | 4.7 | 4.0 | 4.7 | 2.7 |
| 2050 | 2.00 | 1,259,000 | 576.8 | 1.25 | 3.85 | 2.60 | 2.2 | 3.8 | 3.7 | 4.6 | 2.7 |
| 2060 | 2.00 | 1,244,000 | 534.8 | 1.21 | 3.81 | 2.60 | 2.1 | 3.6 | 3.6 | 4.5 | 2.7 |
| 2070 | 2.00 | 1,235,000 | 497.6 | 1.15 | 3.75 | 2.60 | 2.1 | 3.8 | 3.6 | 4.4 | 2.7 |
| 2080 | 2.00 | 1,230,000 | 464.6 | 1.14 | 3.74 | 2.60 | 2.1 | 3.8 | 3.6 | 4.4 | 2.7 |
| 2090 | 2.00 | 1,228,000 | 435.1 | 1.15 | 3.75 | 2.60 | 2.0 | 3.4 | 3.4 | 4.3 | 2.7 |
| 1Average number of children per woman. 2Includes legal immigration, net of emigration, as well as other, non-legal, immigration. 3The age-sex-adjusted death rate per 100,000 that would occur in the enumerated population as of April 1, 2000, if that population were to experience the death rates by age and sex observed in, or assumed for, the selected year. 4Difference between percentage increases in wages and the CPI. 5Average annual wage in covered employment. 6Consumer price index represents a measure of the average change in prices over time in a fixed group of goods and services. 7The total dollar value of all goods and services produced in the United States, adjusted to remove the impact of assumed inflation growth. 8These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the Medicare program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment rates, utilization, and intensity of each type of service. 9Average rate of interest earned on new trust fund securities, above and beyond rate of inflation. |
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The projections presented in the SOSI are based on various economic and demographic assumptions. The values for each of these assumptions move from recently experienced levels or trends toward long-range ultimate values. Table 2 below summarizes these ultimate values assumed for the current year and the prior 4 years, based on the intermediate assumptions of the respective Medicare Trustees Reports.
Table 2: Significant Ultimate Assumptions Used for the Statement of Social Insurance
FY 2016-2012
| Fertility rate1 | Net immigration2 | Mortality rate3 | Real-wage differential4 | Annual percentage change in: | Real-interest rate9 |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| Wages5 | CPI6 | Real GDP7 | Per beneficiary cost8 | ||||||||
| HI | SMI | ||||||||||
| B | D | ||||||||||
| FY 2016 | 2.0 | 1,228,000 | 435.2 | 1.15 | 3.75 | 2.60 | 2.0 | 3.4 | 3.4 | 4.3 | 2.7 |
| FY 2015 | 2.0 | 1,060,000 | 458.4 | 1.13 | 3.83 | 2.70 | 2.1 | 3.8 | 4.1 | 4.4 | 2.9 |
| FY 2014 | 2.0 | 1,055,000 | 419.8 | 1.13 | 3.93 | 2.80 | 2.1 | 3.8 | 3.8 | 4.5 | 2.9 |
| FY 2013 | 2.0 | 1,030,000 | 446.0 | 1.12 | 3.92 | 2.80 | 2.0 | 3.7 | 3.8 | 4.5 | 2.9 |
| FY 2012 | 2.0 | 1,030,000 | 443.2 | 1.2 | 4.0 | 2.80 | 2.1 | 3.3 | 3.7 | 4.4 | 2.9 |
| 1Average number of children per woman. The ultimate fertility rate is assumed to be reached in the 13th year of the projection period. 2Includes legal immigration, net of emigration, as well as other, non-legal, immigration. The ultimate level of net legal immigration is 790,000 persons per year, and the assumption for annual net other immigration varies throughout the projection period. Therefore, the assumption presented is the value assumed in the year 2080. 3The age-sex-adjusted death rate per 100,000 that would occur in the enumerated population as of April 1, 2000, if that population were to experience the death rates by age and sex observed in, or assumed for, the selected year. The annual rate declines gradually during the entire period so no ultimate rate is achieved. The assumption presented is the value assumed in the year 2080. 4Difference between percentage increases in wages and the CPI. The value presented is the average of annual real-wage differentials for the last 65 years of the 75-year projection period, is consistent with the annual differentials shown in Table 1, and is displayed to two decimal places. The assumption varies slightly throughout the projection period. Therefore, the assumption presented is the value assumed in the year 2080. 5Average annual wage in covered employment. The value presented is the average annual percentage change from the 10th year of the 75-year projection period to the 75th year and is displayed to two decimal places. The assumption varies slightly throughout the projection period. Therefore, the assumption presented is the value assumed in the year 2080. 6Consumer price index represents a measure of the average change in prices over time in a fixed group of goods and services. The ultimate assumption is reached within the first 10 years of the projection period. 7The total dollar value of all goods and services produced in the United States, adjusted to remove the impact of assumed inflation growth. The annual rate declines gradually during the entire period so no ultimate rate is achieved. The assumption presented is the value assumed in the year 2080. 8These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the Medicare program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment rates, utilization, and intensity of each type of service. The annual rate of growth declines gradually during the entire period so no ultimate rate is achieved. The assumption presented is the value assumed in the year 2080. 9Average rate of interest earned on new trust fund securities, above and beyond rate of inflation. The ultimate assumption is reached soon after the 10th year of each projection period. |
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Note 25: Alternative SOSI Projections (Unaudited)
The Medicare Board of Trustees, in its annual report to Congress, references an alternative scenario to illustrate, when possible, the potential understatement of Medicare costs and projection results.
The Trustees assume that the various cost-reduction measures—the most important of which are the reductions in the annual payment rate updates for most categories of Medicare providers by the growth in economy-wide private nonfarm business multifactor productivity and the specified physician updates put in place by MACRA—will occur as current law requires. The Board of Trustees believes that this outcome is achievable if health care providers are able to realize productivity improvements at a faster rate than experienced historically. For those providers affected by the productivity adjustments and the specified updates to physician payments, sustaining the price reductions will be challenging, as the best available evidence indicates that most providers cannot improve their productivity to this degree for a prolonged period given the labor-intensive nature of these services and that physician costs will grow at a faster rate than the specified updates. As a result, actual Medicare expenditures are highly uncertain for reasons apart from the inherent difficulty in projecting health care cost growth over time.
The specified rate updates could be an issue in years when levels of inflation are high and would be problematic when the cumulative gap between the price updates and physician costs becomes large. The gap will continue to widen throughout the projection, and the Trustees anticipate that physician payment rates under current law will be lower than they would have been under the sustainable growth rate (SGR) formula by 2048. Absent a change in the delivery system or level of update by subsequent legislation, the Trustees expect access to Medicare-participating physicians to become a significant issue in the long term under current law. Overriding the productivity adjustments and specified physician updates, as lawmakers repeatedly did in the case of physician payment rates, would lead to substantially higher costs for Medicare in the long range than those projected in this report.To help illustrate and quantify the potential magnitude of the cost understatement, the Trustees asked the Office of the Actuary at CMS to prepare an illustrative Medicare trust fund projection under a hypothetical alternative that assumes that, starting in 2020, the economy-wide productivity adjustments gradually phase down to 0.4 percent and, starting in 2025, physician payments transition from a payment update of 0.0 percent to an increase of 2.2 percent. In addition, the illustrative alternative assumes that the 5 percent bonuses paid to physicians in alternative payment models (APMs) would continue and that the Independent Payment Advisory Board (IPAB) requirements would not be implemented.3 This alternative was developed for illustrative purposes only; the calculations have not been audited; no endorsement of the policies underlying the illustrative alternative by the Trustees, CMS, or the Office of the Actuary should be inferred; and the examples do not attempt to portray likely or recommended future outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result from future legislation affecting the productivity adjustments and physician updates under Medicare and of the broad range of uncertainty associated with such impacts.
The table below contains a comparison of the Medicare 75-year present values of estimated future income and estimated future expenditures under current law with those under the illustrative alternative scenario.
Medicare Present Values
(in Billions)
| Current law (Unaudited) |
Alternative scenario1, 2 (Unaudited) |
|
|---|---|---|
| Income | ||
| Part A | $20,701 | $20,874 |
| Part B | 27,484 | 34,465 |
| Part D | 12,213 | 12,411 |
| Expenditures | ||
| Part A | 24,523 | 30,598 |
| Part B | 27,484 | 34,465 |
| Part D | 12,213 | 12,411 |
| Income less expenditures | ||
| Part A | (3,822) | (9,723) |
| Part B | - | - |
| Part D | - | - |
| 1These amounts are not presented in the 2016 Trustees Report. 2At the request of the Trustees, the Office of the Actuary at CMS has prepared an illustrative set of Medicare trust fund projections that differs from current law. No endorsement of the illustrative alternative by the Trustees, CMS, or the Office of the Actuary should be inferred. |
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The difference between the current-law and illustrative alternative projections is substantial for Parts A and B. All Part A fee-for-service providers and roughly half of Part B fee-for-service providers are affected by the productivity adjustments, so the current-law projections reflect an estimated 1.1 percent reduction in annual cost growth each year for these providers. If the productivity adjustments were gradually phased out, the physician updates transitioned to the Medicare Economic Index update of 2.2 percent, the 5 percent bonuses paid to physicians in APMs did not expire, and the IPAB requirements were not implemented, as illustrated under the alternative scenario, the estimated present values of Part A and Part B expenditures would each be higher than the current-law projections by roughly 25 percent. As indicated above, the present value of Part A income is basically unaffected under the alternative scenario, and the present value of Part B income is also 25 percent higher under the illustrative alternative scenario, since income is set each year to mirror expenditures.
The Part D values are similar under each projection because the services are not affected by the productivity adjustments or the physician updates. The very minor effect is the result of the removal of the IPAB impact and a slight change in the discount rates that are used to calculate the present values.
The extent to which actual future Part A and Part B costs exceed the projected amounts due to changes to the productivity adjustments and physician updates depends on what specific changes might be legislated and whether Congress would pass further provisions to help offset such costs. As noted, these examples reflect only hypothetical changes to provider payment rates.
Note 26. Statement of Changes in Social Insurance Amounts (Unaudited)
The Statement of Changes in Social Insurance Amounts reconciles the change (between the current valuation and the prior valuation) in the (1) present value of estimated future income (excluding interest) for current and future participants; (2) present value of estimated future expenditures for current and future participants; (3) present value of estimated future noninterest income less estimated future expenditures for current and future participants (the open-group measure) over the next 75 years; (4) assets of the combined Medicare Trust Funds; and (5) present value of estimated future non-interest income less estimated future expenditures for current and future participants over the next 75 years plus the assets of the combined Medicare Trust Funds. The Statement of Changes in Social Insurance Amounts shows the reconciliation from the period beginning on January 1, 2015 to the period beginning on January 1, 2016, and the reconciliation from the period beginning on January 1, 2014 to the period beginning on January 1, 2015. The reconciliation identifies several components of the change that are significant and provides reasons for the changes.
Because of the financing mechanism for Parts B and D of Medicare, any change to the estimated future expenditures has the same effect on estimated total future income, and vice versa. Therefore, any change has no impact on the estimated future net cash flow. In order to enhance the presentation, the changes in the present values of estimated future income and estimated future expenditures are presented separately.
The five changes considered in the Statement of Changes in Social Insurance Amounts are, in order:
- change in the valuation period,
- change in projection base,
- changes in the demographic assumptions,
- changes in economic and health care assumptions, and
- changes in law.
All estimates in the Statement of Changes in Social Insurance Amounts represent values that are incremental to the prior change. As an example, the present values shown for demographic assumptions represent the additional effect that these assumptions have, once the effects from the change in the valuation period and projection base have been considered. In general, an increase in the present value of net cash flows represents a positive change (improving financing), while a decrease in the present value of net cash flows represents a negative change (worsening financing).
Assumptions Used for the Statement of Changes in Social Insurance Amounts
The present values included in the Statement of Changes in Social Insurance Amounts are for the current and prior year and are based on various economic and demographic assumptions used for the intermediate assumptions in the Trustees Reports for those years. Table 1 of Note 24 summarizes these assumptions for the current year.
Period beginning on January 1, 2015 and ending January 1, 2016
Present values as of January 1, 2015 are calculated using interest rates from the intermediate assumptions of the 2015 Trustees Report. All other present values in this part of the Statement are calculated as a present value as of January 1, 2016. Estimates of the present value of changes in social insurance amounts due to changing the valuation period, projection base, demographic assumptions, and law are presented using the interest rates under the intermediate assumptions of the 2015 Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the prior change, the estimates of the present values of changes in economic and health care assumptions are calculated using the interest rates under the intermediate assumptions of the 2016 Trustees Report.
Period beginning on January 1, 2014 and ending January 1, 2015
Present values as of January 1, 2014 are calculated using interest rates from the intermediate assumptions of the 2014 Trustees Report. All other present values in this part of the Statement are calculated as a present value as of January 1, 2015. Estimates of the present value of changes in social insurance amounts due to changing the valuation period, projection base, demographic assumptions, and law are presented using the interest rates under the intermediate assumptions of the 2014 Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the prior change, the estimates of the present values of changes in economic and health care assumptions are calculated using the interest rates under the intermediate assumptions of the 2015 Trustees Report.
Change in the Valuation Period
From the period beginning on January 1, 2015 to the period beginning on January 1, 2016
The effect on the 75-year present values of changing the valuation period from the prior valuation period (2015-89) to the current valuation period (2016-90) is measured by using the assumptions for the prior valuation period and extending them, in the absence of any other changes, to cover the current valuation period. Changing the valuation period removes a small negative net cash flow for 2015, replaces it with a much larger negative net cash flow for 2090, and measures the present values as of January 1, 2016, one year later. Thus, the present value of estimated future net cash flow (including or excluding the combined Medicare Trust Fund assets at the start of the period) decreased (became more negative) when the 75-year valuation period changed from 2015-89 to 2016-90. In addition, the effect on the level of assets in the combined Medicare Trust Funds of changing the valuation period is measured by assuming all values projected in the prior valuation for the year 2015 are realized. The change in valuation period slightly increased the starting level of assets in the combined Medicare Trust Funds.
From the period beginning on January 1, 2014 to the period beginning on January 1, 2015
The effect on the 75-year present values of changing the valuation period from the prior valuation period (2014-88) to the current valuation period (2015-89) is measured by using the assumptions for the prior valuation period and applying them, in the absence of any other changes, to the current valuation period. Changing the valuation period removes a small negative net cash flow for 2014 and replaces it with a much larger negative net cash flow for 2089. The present value of estimated future net cash flow (including or excluding the combined Medicare Trust Fund assets at the start of the period) was therefore decreased (made more negative) when the 75-year valuation period changed from 2014-88 to 2015-89. In addition, the effect on the level of assets in the combined Medicare Trust Funds of changing the valuation period is measured by assuming all values projected in the prior valuation for the year 2014 are realized. The change in valuation period decreased the level of assets in the combined Medicare Trust Funds.
Change in Projection Base
From the period beginning on January 1, 2015 to the period beginning on January 1, 2016
Actual income and expenditures in 2015 were different than what was anticipated when the 2015 Trustees Report projections were prepared. Part A income and expenditures were higher than anticipated, based on actual experience. Part B total income and expenditures were lower than estimated based on actual experience. For Part D, actual income and expenditures were both higher than prior estimates. The net impact of the Part A, B, and D projection base changes is a decrease in the estimated future net cash flow. Actual experience of the Medicare Trust Funds between January 1, 2015 and January 1, 2016 is incorporated in the current valuation and is slightly less than projected in the prior valuation.
From the period beginning on January 1, 2014 to the period beginning on January 1, 2015
Actual income and expenditures in 2014 were different than what was anticipated when the 2014 Trustees Report projections were prepared. Part A income was very slightly lower and expenditures were very slightly higher than anticipated, based on actual experience. Part B total income and expenditures were also higher than estimated based on actual experience. For Part D, actual income and expenditures were both higher than prior estimates. The net impact of the Part A, B, and D projection base changes is a decrease in the estimated future net cash flow. Actual experience of the Medicare Trust Funds between January 1, 2014 and January 1, 2015 is incorporated in the current valuation and is slightly more than projected in the prior valuation.
Changes in the Demographic Assumptions
From the period beginning on January 1, 2015 to the period beginning on January 1, 2016
The demographic assumptions used in the Medicare projections are the same as those used for the Old-Age, Survivors and Disability Insurance (OASDI) and are prepared by the Office of the Chief Actuary at the Social Security Administration (SSA).
The ultimate demographic assumptions for the current valuation (beginning on January 1, 2016), with the exception of a small change in marriage rates, are the same as those for the prior valuation. However, the starting demographic values and the way these values transition to the ultimate assumptions were changed.
- Final birth rate data for 2013 and 2014 indicated lower birth rates than were expected in the prior valuation. The data also show an increase in birth rates starting in 2014, one year later than assumed in the prior valuation.
- Incorporating mortality data obtained from the National Center for Health Statistics at ages under 65 for 2012 and 2013 and from Medicare experience at ages 65 and older for 2013 resulted in slightly higher death rates than were projected in the prior valuation.
- Assumed ultimate marriage rates were decreased somewhat to reflect a continuation of recent trends.
- More recent legal and other-than-legal immigration data and historical population data were included.
There were two changes in demographic methodology:
- The transition from recent mortality rates to the ultimate rates starts sooner, immediately after the year of final data. The approach used for the prior valuation extended the trend of the last 10 years through the valuation year for the report and only thereafter started the transition to assumed ultimate rates of decline.
- Historical non-immigrant population counts were revised to match recent totals provided by the Department of Homeland Security. In addition, emigration rates for the never-authorized and visa-overstayer populations were recalibrated to reflect a longer historical period and to be less influenced by the high emigration rates experienced during the recent recession. Finally, the method for projecting emigration of the never-authorized population was altered to reflect lower rates of emigration for those who have resided here longer.
These changes slightly lowered overall Medicare enrollment for the current valuation period and resulted in an increase in the estimated future net cash flow. The present value of estimated expenditures is lower for all parts of Medicare; and the present value of estimated income is also lower for Parts B and D but very slightly higher for Part A.
From the period beginning on January 1, 2014 to the period beginning on January 1, 2015
The demographic assumptions used in the Medicare projections are the same as those used for the OASDI and are prepared by the Office of the Chief Actuary at the SSA.
The ultimate demographic assumptions for the current valuation (beginning on January 1, 2015), with the exception of changes made due to the execution on immigration, are the same as those for the prior valuation. However, the starting demographic values and the way these values transition to the ultimate assumptions were changed.
- Final birth rate data for 2012 and preliminary data for 2013 indicated lower birth rates than were expected in the prior valuation. In this year’s report, the total fertility rate reaches the ultimate in 2027, which is eleven years earlier than in last year’s projections.
- Incorporating mortality data obtained from Medicare experience at ages 65 and older for 2012 resulted in slightly higher death rates for 2012 and a slightly slower rate of decline in mortality over the next 25 years than were projected last year. Incorporating mortality data obtained from the National Centers for Health Statistics at ages under 65 for 2011 resulted in slightly lower death rates for 2011 and a slightly faster rate of decline in mortality over the next 25 years than were projected last year.
- Historical legal immigration was revised to include single age data (rather than 5-year age groups); including more recent marriage, legal immigration, and other-than-legal immigration data; historical data since 2001 was revised to be more consistent with the most recent estimates from the Census Bureau.
These changes slightly lowered overall Medicare enrollment for the current valuation period resulting in a decrease in the estimated future net cash flow, and had a very minor impact on the present value of estimated income and estimated expenditures for Part A, Part B, and Part D.
Changes in Economic and Health Care Assumptions
For the period beginning on January 1, 2015 to the period beginning on January 1, 2016
The economic assumptions used in the Medicare projections are the same as those used for the OASDI and are prepared by the Office of the Chief Actuary at SSA.
For the current valuation (beginning on January 1, 2016), there were three changes to the ultimate economic assumptions.
- The ultimate rate of price inflation (CPI-W) was lowered by 0.1 percentage point, to 2.6 percent from 2.7 percent for the previous valuation.
- The ultimate average real wage differential is assumed to be 1.20 percent in the current valuation period, compared to 1.17 percent in the previous valuation period.
- The ultimate real interest rate was lowered by 0.2 percentage point, to 2.7 percent from 2.9 percent for the previous valuation period.
While very low inflation in recent years is reflective of U.S. and international supply and demand factors that have been affected by the global recession, the average rate of change in the CPI-W over the last two complete business cycles (from 1989 to 2007) is 2.63 percent.
The higher real wage differential assumption is based on new projections by the CMS of slower growth in employer-sponsored group health insurance premiums. Because these premiums are not subject to the payroll tax, slower growth in these premiums means that a greater share of employee compensation will be in the form of wages that are subject to the payroll tax.
Real interest rates have been low since 2000, and particularly low since the start of the recent recession. An ongoing and much-debated question among experts is how much of this change is cyclic or a temporary response to extraordinary events, versus a fundamental permanent change. The Trustees believe that lowering the long-term ultimate real interest rate somewhat is appropriate at this time. The long-range present values are very sensitive to the ultimate interest rate assumption because they are used as the discount factor. The reduction in the ultimate interest rate assumption from 2.9 percent to 2.7 percent increases each of the present values by roughly 15-16 percent.
Otherwise, the ultimate economic assumptions for the current valuation are the same as those for the prior valuation. However, the starting economic values and the way these values transition to the ultimate assumptions were changed.
- A reduction in the ultimate level of actual and potential gross domestic product (GDP) of about 1.0 percent is assumed. Thus, by the end of the short-range period (2025) and for all years thereafter, projected GDP in 2009 dollars is about 1.8 percent below the level in last year's report.
The health care assumptions are specific to the Medicare projections. The following health care assumptions were changed in the current valuation.
- Utilization rate assumptions for inpatient hospital services were increased.
- The number of beneficiaries enrolled in Medicare Advantage plans and their relative costs are slightly different from last year’s assumptions.
- Lower productivity increases through 2021, resulting in higher provider payment updates.
- Greater reductions in expenditures attributable to the Independent Payment Advisory Board.
- Inclusion of the income and expenditures for aged non-insured beneficiaries in the Part A long-range analysis.
- Higher projected drug cost trend, particularly for certain high-cost specialty drugs.
The net impact of these changes resulted in a decrease in the estimated future net cash flow for total Medicare. For Part A, these changes resulted in an increase to the present value of estimated future expenditures and income, with an overall decrease in the estimated future net cash flow. For Part B and Part D, these changes increased the present value of estimated future expenditures (and also income).
For the period beginning on January 1, 2014 and the period beginning on January 1, 2015
The economic assumptions used in the Medicare projections are the same as those used for the OASDI and are prepared by the Office of the Chief Actuary at the SSA.
For the current valuation (beginning on January 1, 2015), there was one change to the ultimate economic assumptions.
- The ultimate real-wage differential is assumed to be 1.17 percent in the current valuation period, compared to 1.13 percent in the previous valuation period.
The higher real wage differential assumption is more consistent with recent experience and expectations of slower growth in employer-sponsored group health insurance premiums from the Office of the Actuary at the CMS. Because these premiums are not subject to the payroll tax, slower growth in these premiums means that a greater share of employee compensation will be in the form of wages that are subject to the payroll tax.
Otherwise, the ultimate economic assumptions for the current valuation are the same as those for the prior valuation. However, the starting economic values and the way these values transition to the ultimate assumptions were changed.
- The ratio of average taxable earnings to the average wage averages about 0.6 percentage point higher during the long-range period, compared to the previous valuation period.
- The projected suspense file contains fewer wage items, which is consistent with having fewer workers (many of whom are undocumented immigrants) with wages on the suspense file and more of these workers with earnings in the underground economy, compared to the previous valuation.
The health care assumptions are specific to the Medicare projections. The following health care assumptions were changed in the current valuation.
- Lower long-range growth rate assumptions.
- Utilization rate assumptions for inpatient hospital services were decreased.
- Lower assumed hospice spending.
- Higher assumed enrollment in Medicare Advantage plans where benefits are more costly.
- Introduction of high-cost specialty drugs used to treat hepatitis C.
The net impact of these changes resulted in an increase in the estimated future net cash flow for total Medicare. For Part A, these changes resulted in an increase to the present value of estimated future expenditures and income, with an overall increase in the estimated future net cash flow. For Part B and Part D, these changes decreased the present value of estimated future expenditures (and also income).
Changes in Law
For the period beginning on January 1, 2014 to the period beginning on January 1, 2015
Most of the provisions enacted as part of Medicare legislation since the prior valuation date had little or no impact on the program. The following provisions did have a financial impact on the present value of the 75-year estimated future income, expenditures, and net cash flow.
- The Trade Preference Extension Act of 2015 requires Medicare coverage for renal dialysis services provided by outpatient renal dialysis facilities to individuals with acute kidney injury, effective January 1, 2017.
- The Bipartisan Budget Act of 2015 (BBA) included provisions that affect the HI and SMI programs.
- The BBA required that the 2016 actuarial rate for enrollees aged 65 and older be determined as if the hold-harmless provision did not apply, thereby lowering the standard Part B premium rate from what it otherwise would have been. The premium revenue that was lost by using the resulting lower premium (excluding the forgone income-related premium revenue) was to be replaced by a transfer of general revenue from the Treasury, which will be repaid over time to the general fund. Starting in 2016, in order to repay the balance due (which is to include the transfer amount and the forgone income-related premium revenue), the monthly Part B premium otherwise determined is to be increased by $3.00. These repayment amounts are to be added to the Part B premium otherwise determined each year and paid back to the general fund of the Treasury. This $3.00 increase will not be matched by government contributions. These repayment amounts are to continue until the total amount collected is equal to the beginning balance due. (In the final year of the repayment, the additional amounts may be modified to avoid an overpayment). The repayment amounts (excluding those for high-income enrollees) are subject to the hold-harmless provision. The BBA also stipulated that if the Social Security cost-of-living adjustment (COLA) was 0 percent in 2017, then an additional transfer (and $3 repayment amount) would have will again applied. However, the 2017 COLA of 0.3 percent was released on October 18, 2016.
- Most outpatient hospital services provided on or after January 1, 2017 by new off-campus hospital provider-based outpatient departments (that is, those established on or after the BBA date of enactment of November 2, 2015 and located more than 250 yards from the campus) are excluded from the outpatient hospital prospective payment system, and are instead to be reimbursed under the applicable Part B payment system.
- The sequestration process that is in place should Congress fail to address the budget deficit by certain deadlines is extended by one year, through FY 2025. In addition, Medicare benefit payments for services provided under periods of sequestration incur a payment reduction limited to 2 percent, so that the former differential payment reduction limits imposed for fiscal years 2023 and 2024 are replaced with 2 percent limits. Finally, the 2 percent limit is raised to 4.0 percent for the first six months of FY 2025 and reduced to 0.0 percent for the last six months of FY 2025.
- The Consolidated Appropriations Act of 2016 included provisions that affect the HI and SMI programs.
- The payment calculation associated with inpatient hospital operating costs for Puerto Rico hospital discharges on or after January 1, 2016 is to be based on 0 percent of the applicable Puerto Rico percentage and 100 percent of the applicable Federal percentage. (In addition, CMS announced that both the FY 2016 Inpatient Prospective Payment System Pricer and the Long-Term Care Hospital Pricer, which are used to determine all inpatient hospital payment rates and certain long-term care hospital payment rates, respectively, for providers nationwide, are to incorporate the Puerto Rico inpatient hospital payment modification. These conforming changes are applicable to inpatient hospital discharges and long-term care hospital discharges on or after January 1, 2016.)
- Puerto Rico hospitals are eligible to receive incentive payments under the Medicare Electronic Health Records Incentive Program, effective January 1, 2016.
- Effective January 1, 2017, separate Medicare payment is authorized to home health agencies when they use cost-effective disposable alternatives to negative pressure wound therapy equipment.
- To incentivize the transition from traditional x-ray imaging to digital radiography, Part B payment for the technical component of film x-rays, under the hospital outpatient prospective payment system and under the physician fee schedule, is reduced by 20 percent beginning in 2017. In addition, payment for the technical component of x-rays taken using computed radiography technology is reduced by 7 percent during 2018 through 2022 and by 10 percent beginning in 2023. Also, the discount in payment for the professional component of multiple imaging services furnished on or after January 1, 2017 is reduced from 25 percent to 5 percent, and the reduction is taken in a non-budget neutral manner.
- A one-year moratorium for calendar year 2017 is placed on the annual fee to be paid by health insurance providers. This fee, which was established by the Affordable Care Act, is imposed on certain large health insurance providers, including those furnishing coverage under Medicare Advantage (Part C) and Medicare Part D. (Since Medicare Advantage is paid for by the HI trust fund and the Part B account of the SMI trust fund, this provision affects all parts of Medicare.)
Overall these provisions resulted in a slight increase in the estimated future net cash flow for total Medicare. For Part A, these changes resulted in a slight decrease to the present value of estimated future expenditures, with an overall increase in the estimated future net cash flow. For Part B, these changes decreased the present value of estimated future expenditures (and also income). For Part D, the above-mentioned changes also resulted in a lower present value of estimated future expenditures (and also income) but only very slightly.
For the period beginning on January 1, 2014 to the period beginning on January 1, 2015
Although Medicare legislation was enacted since the prior valuation date, some of the provisions have a negligible impact on the present value of the 75-year estimated future income, expenditures, and net cash flow. The Veteran’s Access, Choice, and Accountability Act of 2014 established a temporary program that allows eligible veterans to receive hospital care and medical services from eligible providers outside of the Department of Veterans Affairs (VA) system, rather than waiting for a VA appointment or traveling to a VA facility. The Improving Medicare Post-Acute Care Transformation Act of 2014 standardized the collection of data for post-acute providers and aligned the inflation of the hospice aggregate cap with that of hospice reimbursement. The Tax Increase Prevention Act of 2014 accelerated the start date for the payment adjustment of misvalued codes under the physician fee schedule from 2017 to 2016, and delayed inclusion of oral-only end-stage renal disease (ESRD)-related drugs into the ESRD bundled payment system from 2024 to 2025. MACRA included many provisions affecting Medicare spending, including the repeal of the SGR formula for determining payments under the physician fee schedule, the continuation of extensions for several provisions from prior legislation, a reduction in payment updates for most post-acute providers in 2018, the replacement of a 3.2 percent reduction to inpatient hospitals in 2018 with a 0.5 percent reduction in 2018 through 2023, and a revision to the income thresholds for determining the income-related monthly adjustment amounts under Part B and Part D.
Overall these provisions resulted in an increase in the estimated future net cash flow for total Medicare. For Part A, these changes resulted in a decrease to the present value of estimated future expenditures, with an overall increase in the estimated future net cash flow. For Part B, these changes increased the present value of estimated future expenditures (and also income). For Part D, the above-mentioned changes increased the present value of estimated future expenditures (and also income) only very slightly.
Potential Impact on the Social Insurance Statements of the June 23, 2016 Supreme Court Judgment on the 2014 DACA and DAPA Executive Actions
In November 2014, Presidential executive actions expanded the Deferred Action for Childhood Arrivals program (DACA) and established the Deferred Action for Parents of Americans program (DAPA). On June 23, 2016, the Supreme Court was divided (tied 4-4) on the ruling of the legality of the expanded DACA and DAPA programs, so the lower court’s ruling, temporarily blocking these programs from being implemented, was upheld. As a result, the expanded DACA and DAPA programs will be either delayed or never implemented. The SSA Office of the Chief Actuary has concluded that the Supreme Court’s judgment has an effect on the actuarial methods and assumptions used in developing the estimates presented in the Statement of Social Insurance and the Statement of Changes in Social Insurance Amounts. Whether the expanded DACA and DAPA programs are delayed or never implemented, we expect the judgment will not have a material impact on the present value of future noninterest income less future costs for current and future participants (open group measure) presented in the Statements of Social Insurance and Statement of Changes in Social Insurance Amounts.
Also see these sections of the Agency Financial Report:
- Section I: Management, Discussion and Analysis
- Section II: Financial Section - Subsection 1
- Section II: Financial Section - Subsection 3
- Section III: Other Information
- Appendices
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[1] Please refer to Note 9 - Liabilities Not Covered By Budgetary Resources for details.
[2] The notes to the financial statements include URL references to certain websites. The information contained on those websites is not part of the financial statement presentation.
[3] The notes to the financial statements include URL references to certain websites. The information contained on those websites is not part of the financial statement presentation.
