Medicaid’s Soaring Cost: Time to Step on the Brakes

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Current trends and policies imply unsustainablegrowth in federal Medicaid outlays. In theyear 2006, federal Medicaid spending was 11.9percent of federal general revenues and 1.5 percentof GDP. Making conservative assumptionsabout future growth in Medicaid enrollment andspending per beneficiary, this paper estimatesthat the present value of federal Medicaid outlaysover the next 100 years will take up 24 percentof the present value of federal general revenuesand 3.7 percent of the present value ofGDP calculated over the same period.

By the end of the next 100 years, that is, in theyear 2106, Medicaid's share of federal generalrevenues will be 48 percent — four times largerthan its 11.9 percent share in 2006. In the year2106, federal Medicaid spending as a share ofGDP is estimated to be 7.4 percent — a fivefoldincrease from its current share of 1.5 percent. Ifthe federal government continues to match stateMedicaid outlays at the current rate, Medicaid'sshare of GDP in the year 2106 will become 13percent — or one–eighth of GDP in 2106.

If current policies and trends are maintained,federal Medicaid outlays will take up 36 percentof lifetime federal general revenue taxes formales born in 2025 and 69 percent for femalesborn in that year. For females born after 2050,almost all of their lifetime federal nonpayrolltaxes will be consumed by their lifetime Medicaidbenefits.

Higher tax rates cannot plausibly cover thisgrowing spending commitment. On average,today's 35–year–old males are projected to have 15percent of their lifetime federal general revenuesreturned in the form of Medicaid benefits.Maintaining that ratio for today's newborn maleswould require a 78 percent increase in their lifetimenonpayroll taxes. Limiting Medicaid spendinggrowth is, thus, an essential component ofputting the federal budget on a sustainable coursewithout imposing crushing tax burdens onyounger and future generations, thereby harmingthe prospects for future economic growth.

Jagadeesh Gokhale

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.