The annual report of the Medicare trustees predicted that the program's key hospital trust fund will become exhausted in 2024, prompting Medicare to begin paying out only 87 percent of scheduled hospital benefits to tens of millions of future retirees and disabled beneficiaries.

With the fate of Medicare a hot-button election year issue for the program's 49 million beneficiaries, the report is likely to become fodder for Democrats and Republicans as they battle for control of the White House and Congress.

The 2024 forecast is unchanged from a year ago and shows that the deterioration of $549 billion-a-year program's finances has not accelerated since 2010.

But the outlook is based on assumptions that may be unlikely, including a scheduled 31 percent pay cut for doctors in 2013, which Congress is almost certain to override.

The forecast also assumes that a deficit-reduction agreement to slash Medicare spending by 2 percent a year can be sustained over the coming decade and that the U.S. Supreme Court will not overturn President Barack Obama's healthcare reform law in June.

The trustees also said Medicare is on an unsustainable path over the long term that could cause expenditures to more than double as a percentage of the U.S. economy, from 3.7 percent now to 10.4 percent in 2086, under a worst-case scenario.

Officials said that even the most optimistic sections of the report underscore the need for reform.

"The sooner the policymakers address these challenges, the less disruptive the unavoidable adjustments will be ... and the greater the likelihood that the solutions we adopt will be balanced and equitable," said trustee Robert Reischauer.

Administration officials seized on the report as evidence that Obama's Patient Protection and Affordable Care Act has strengthened Medicare by encouraging efficiencies, combating fraud and waste and eliminating unnecessary costs.

MEDICARE AND MEDIOCRE COVERAGE

"Medicare's in a much stronger position than it was a few years ago, thanks to the Affordable Care Act," said Health and Human Services Secretary Kathleen Sebelius, who told reporters that an estimated $200 billion in Medicare savings from reforms had pushed the expected insolvency date back from 2016.

"This is an approach that will put Medicare on a stable trajectory without eliminating the guaranteed benefits that beneficiaries have counted on for decades or shifting tremendous new costs onto seniors," she said.

But analysts said Medicare could be forced to begin paying only partial hospital benefits earlier if assumptions about physician pay, deficit reduction and the fate of reforms fail to pan out.

"Medicare is in trouble," said Joseph Antos, an analyst at the conservative American Enterprise Institute. "Are we really holding the line? Absolutely not."

Earlier on Monday, a new report from the nonpartisan Government Accountability Office raised new questions about Medicare's ability to improve care delivery, reduce costs and combat waste.

The GAO said Medicare is spending $8.3 billion on a test project that is supposed to improve the quality of private health coverage but has mainly rewarded mediocre insurance plans.

The watchdog agency urged the administration to cancel the Medicare Advantage quality bonus payment initiative, a three-year project described as the largest-scale test to improve Medicare services to date.

The administration defended the program as a necessary effort to determine how best to improve quality and reduce costs in Medicare Advantage, which provides about one-quarter of Medicare beneficiaries with coverage from private insurers.

The demonstration project, designed to promote quality by awarding performance bonuses to private insurers that offer coverage through Medicare, was undertaken to test whether annual quality improvements could be achieved more quickly than under Obama's healthcare overhaul.

"We think this is a really important step," Sebelius said. "At the end of 2014, it will have accomplished just what the goal was, which is to give some financial incentives to those plans that are improving quality results."

Medicare Advantage was adopted under George W. Bush as a way to bring market efficiency to the sprawling government program. Some of the largest providers of Medicare Advantage plans are UnitedHealth Group and Humana Inc.

But Medicare Advantage has proved to be more expensive than traditional Medicare.

Sebelius said that even with the costs of the quality test program, the administration has been able to reduce the cost of Medicare Advantage from 114 percent of the fee-for-service program to 107 percent over the past two years.

(Editing by Maureen Bavdek and M.D. Golan)

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