Cato Institute
Policy Analysis
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No. 597
July 19, 2007
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Medicaid's Soaring Cost
Time to Step on the Brakes
by Jagadeesh Gokhale
Executive Summary
percent--or one-eighth of GDP in 2106.
Current trends and policies imply unsustain-
If current policies and trends are maintained,
able growth in federal Medicaid outlays. In the
federal Medicaid outlays will take up 36 percent
year 2006, federal Medicaid spending was 11.9
of lifetime federal general revenue taxes for
percent of federal general revenues and 1.5 per-
males born in 2025 and 69 percent for females
cent of GDP. Making conservative assumptions
born in that year. For females born after 2050,
about future growth in Medicaid enrollment and
almost all of their lifetime federal nonpayroll
spending per beneficiary, this paper estimates
taxes will be consumed by their lifetime Medic-
that the present value of federal Medicaid out-
aid benefits.
lays over the next 100 years will take up 24 per-
Higher tax rates cannot plausibly cover this
cent of the present value of federal general rev-
growing spending commitment. On average,
enues and 3.7 percent of the present value of
today's 35-year-old males are projected to have 15
GDP calculated over the same period.
percent of their lifetime federal general revenues
By the end of the next 100 years, that is, in the
returned in the form of Medicaid benefits.
year 2106, Medicaid's share of federal general
Maintaining that ratio for today's newborn males
revenues will be 48 percent--four times larger
would require a 78 percent increase in their life-
than its 11.9 percent share in 2006. In the year
time nonpayroll taxes. Limiting Medicaid spend-
2106, federal Medicaid spending as a share of
ing growth is, thus, an essential component of
GDP is estimated to be 7.4 percent--a fivefold
putting the federal budget on a sustainable course
increase from its current share of 1.5 percent. If
without imposing crushing tax burdens on
the federal government continues to match state
younger and future generations, thereby harming
Medicaid outlays at the current rate, Medicaid's
the prospects for future economic growth.
share of GDP in the year 2106 will become 13
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Jagadeesh Gokhale is a senior fellow at the Cato Institute and the coauthor of Fiscal and Generational
Imbalances: New Budget Measures for New Budget Priorities.