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Current trends and policies imply unsustain-able growth in federal Medicaid outlays. In theyear 2006, federal Medicaid spending was 11.9percent of federal general revenues and 1.5 per-cent of GDP. Making conservative assumptionsabout future growth in Medicaid enrollment andspending per beneficiary, this paper estimatesthat the present value of federal Medicaid out-lays over the next 100 years will take up 24 per-cent of the present value of federal general rev-enues and 3.7 percent of the present value of GDP 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 of GDP is estimated to be 7.4 percent—a fivefoldincrease from its current share of 1.5 percent. If the 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 Medic-aid benefits.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 life-time nonpayroll taxes. Limiting Medicaid spend-ing growth is, thus, an essential component of putting the federal budget on a sustainable coursewithout imposing crushing tax burdens onyounger and future generations, thereby harmingthe prospects for future economic growth.
 Medicaid’s Soaring Cost 
Time to Step on the Brakes
by Jagadeesh Gokhale
_____________________________________________________________________________________________________
 Jagadeesh Gokhale is a senior fellow at the Cato Institute and the coauthor of 
Fiscal and GenerationalImbalances: New Budget Measures for New Budget Priorities
.
Executive Summary 
No. 597July 19, 2007
� 
 
Introduction
Federal budget watchers usually considerSocial Security and Medicare the mainsources of long-term budgetary concern.
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ButMedicaid, as projected under current policies,will also impose tremendous additional pres-sures on federal and state budgets. AllowingMedicaid spending to grow as in the pastwould either significantly crowd out spend-ing on other government operations or in-crease pressure for more tax hikes. This papermainly focuses on the impact of Medicaidspending growth on the
 federal 
budget.
2
Medicaid consists of a collection of state-operated health care programs for individu-als with (1) low incomes and assets and/or (2)high medical expenses. Many groups havestrong incentives to lobby for expanding tax-financed health care subsidies for low-income and high-health-risk populations.Their success is evidenced by the progressiveexpansion of Medicaid over the years so that,today, as much as one-fifth (20.3 percent) of the U.S. population is dependent on its bene-fits at some point during the year.Both state and federal governments fi-nance Medicaid’s outlays. Federal Medicaidoutlays have been growing especially rapidly since the early 1990s. Federal financial partic-ipation for each state is determined under a “matching grant” formula. Federal outlayshave increased over time as states have liber-alized Medicaid eligibility rules and extendedcoverage to medically or economically disad- vantaged groups.To project future federal outlays, this paperfirst estimates Medicaid enrollment and spend-ing per beneficiary from various years of theCurrent Population Survey. A cohort data set isconstructed beginning with data from the 1988CPS on Medicaid enrollment and benefits perrecipient, by both age and gender. Those data provide estimates of age- and gender-specificgrowth rates of Medicaid enrollment and bene-fits per enrollee. The two growth rates are usedtogether with the Social Security Administra-tion’s population projections by age and genderand the Congressional Budget Office’s estimateof Medicaid’s expenditure-to-GDP ratio in2075 to calibrate projections of total Medicaidexpenditures beyond 2075. The projectionmethodology yields Medicaid benefits per capi-ta by age and gender that can be used to project(1) the extent of budget pressure that Medicaidwill generate for the federal budget and (2) how large Medicaid benefits would become relativeto projected federal general revenues on a cohort-by-cohort basis.To preview the results, today’s newbornmales would receive about 28 percent, andfemales about 54 percent, of their lifetimefederal nonpayroll taxes back by way of feder-al Medicaid benefits, per capita. If those poli-cies and trends continue for a few moredecades, federal Medicaid outlays will takeup 36 percent of lifetime federal general rev-enue taxes for males born in 2025 and 69 per-cent for females born in that year. Forfemales born after 2050, Medicaid outlays asa share of federal general revenues will beclose to 100 percent.Returning such a high share of each gen-eration’s general tax revenues by way of Medicaid benefits—a result of Medicaid’srapid outlay growth—is inconsistent withmaintaining growth in other federal servicesat the same pace as GDP
and
maintainingtaxes at current rates. However, increasingincome and other nonpayroll taxes by enough to reduce Medicaid’s expenditureshare of nonpayroll revenues would imposeimplausibly large fiscal burdens on futuregenerations.For example, today’s 35-year-olds are pro- jected to receive 15 percent of their general rev-enue taxes back in the form of lifetimeMedicaid benefits, on average. Ensuring thatthe same result holds for today’s newbornswould require a 78 percent increase in theirlifetime nonpayroll taxes. A similar calculationfor newborn females shows that their lifetimenonpayroll taxes would have to be increasedby 62 percent. Those projections and calcula-tions indicate that limiting Medicaid spend-ing growth is necessary to place the federalbudget on a sustainable course.
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Today, as muchas one-fifth(20.3 percent)of the U.S.population isdependent onMedicaid benefitsat some pointduring the year.
 
The Deficit Reduction Act of 2005 enactedreductions in the growth of future Medicaidoutlays of less than $5 billion between fiscalyears 2006 and 2010.
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Congress further enact-ed a $10 billion reduction in Medicaid outlay growth in 2006, though not without consider-able resistance from the program’s supporters.However, compared to the reductions infuture outlay growth required to keep the fed-eral budget on a sustainable path, thoseMedicaid cuts are small potatoes. They wouldhardly dent future spending pressures ema-nating from growing enrollments and rapidly rising health care costs. The stark arithmeticof the generational results reported in thispaper would remain largely unchanged.
Projecting Medicaid’sFuture Cost
Many groups have strong incentives tolobby for expanding Medicaid, includinghealth care providers, estate planners advisingclients about how to qualify for Medicaid’s valuable long-term care and nursing homebenefits, and employers and insurers wishingto improve the health risk characteristics of private insurance purchasers. State govern-ments also typically seek to maximize federalMedicaid matching contributions.Figure 1 shows the historical growth of both state and total Medicaid outlays as sharesof total federal and state spending. The figureclearly shows that most of the post-1990 surgein the share of total Medicaid spending in totalgovernment (federal and state) spending isfrom exploding
 federal 
Medicaid outlays.Changes in federal financial participationrules—Disproportionate Share Hospital reim-bursements without caps—allowed states toclaim additional Medicaid reimbursementsfrom the federal government.
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States’ incen-tives to increase access to federal fundsthrough that mechanism were strengthenedbecause of the severe budget crunch and steepincreases in Medicaid enrollments caused by the 1991 recession. According to the historical
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Most of thepost-1990 surgein Medicaidspending as ashare of totalgovernmentspending is fromexploding federalMedicaid outlays.
0.01.02.03.04.05.06.07.08.09.019701975198019851990199520002005State Medicaid/Total Federal Plus State OutlaysTotal Medicaid/Total Federal Plus State Outlays
Figure 1State and Total Medicaid Outlays as Shares of Total Federal Plus State Outlays
Year
   P  e  r  c  e  n   t
Source: Congressional Budget Office.
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