The Soaring Cost of Medicaid

Cato Institute study: Current Medicaid spending trends are unsustainable

July 19, 2007

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WASHINGTON — Federal Medicaid spending will take up 24 percent of all federal government revenue by the year 2107, if current spending trends continue. Those are the findings of Cato Institute senior fellow Jagadeesh Gokhale in “Medicaid’s Soaring Cost: Time to Step on the Brakes.”

If current trends and policies continue, Gokhale writes, federal Medicaid outlays will take up 36 percent of lifetime federal taxes paid by males born in 2025 and 69 percent for females born in that year. For females born after 2050, almost all of their lifetime federal non-payroll taxes will be consumed by their lifetime Medicaid benefits.

Clearly, Gokhale contends, this is a recipe for fiscal disaster. On average, Gokhale writes, today’s 35 year old males are projected to have 15 percent of their lifetime tax contributions returned in the form of Medicaid benefits; for females the percentage is even higher at 69 percent. With the current expected lifespan for Americans in the early 80s, and climbing every year with medical breakthroughs, this is a policy shortfall that cannot be ignored.

The Medicaid program itself is hobbled by its structure; its very design provides incentives to private individuals, medical care providers, and state governments to drive outlays ever upward. This is evidenced by the program’s sustained increases in enrollments, costs per enrollee and the rising share of national output consumed by the program. Federal Medicaid expenditures have increased at a much faster rate than inflation. Growth in the share of the population enrolled in Medicaid, and growth in the spending per enrollee have together added up to a sustained increase in Medicaid outlays as a share of GDP. Last year, federal Medicaid spending was 11.9 percent of federal general revenues, and 1.5 percent of GDP. Over the next 100 years, Gokhale writes, Medicaid outlays will take up 24 percent of the present value of federal general revenues and 3.7 percent of GDP.

Gokhale argues that the current spending trajectory is unsustainable, and that tax increases cannot make up for this drunken sailor governmental spending spree. “Higher tax rates cannot plausibly cover this growing spending commitment,” says Gokhale. “Limiting Medicaid spending growth is, thus, an essential component of putting the federal budget on a sustainable course without imposing crushing tax burdens on younger and future generations.”