Long Run Growth of Medicare and Medicaid Spending

In 2007, Medicare (net of dedicated revenues and premiums) and the federal portion of Medicaid cost the country $560 billion, or about 4.1 percent of GDP. Under the Congressional Budget Office's extended baseline (as detailed in their December 2007 Long-Term Budget Outlook report), by 2082, these two programs will cost 18.5 percent of GDP, or more than quadruple their present share (see Chart C).

Medicaid began paying benefits in 1962 and Medicare in 1966. Because (1) the annual cost of high quality medical care has consistently risen at or above the rate of growth in the overall economy every year and is forecasted to do so in the future and (2) the population is aging, Medicare and Medicaid have grown explosively and threaten to continue to do so indefinitely.

The assumptions underlying these forecasts are key. Chart D shows the relative "bite" that these programs take out of the budget and the economy, based on how optimistic or pessimistic the forecasts are. Under the extended baseline, Medicare and federal Medicaid will claim 18.5 percent of GDP by 2082. More pessimistic assumptions, under CBO’s alternative fiscal scenario, raise it to 19.3 percent of GDP. The more costly scenarios both assume that annual growth of the two programs will exceed the growth of per capita GDP by between 1 and 2.5 percentage points.

Underlying data:download

Underlying data:download