NCPA - National Center for Policy Analysis


August 3, 2007

In 2006, federal Medicaid spending grew to 11.9 percent of federal general revenues and 1.5 percent of gross domestic product (GDP).  Making conservative assumptions about future growth in Medicaid enrollment and spending per beneficiary, this trend implies an unsustainable growth in federal Medicaid outlays, says Jagadeesh Gokhale, senior fellow at the Cato Institute.

According to Gokhale:

  • Medicaid outlays over the next 100 years will take up 24 percent of the present value of federal general revenues 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 the year 2106, Medicaid's share of federal general revenues will be 48 percent -- four times larger than its 11.9 percent share in 2006.
  • In the year 2106, federal Medicaid spending as a share of GDP is estimated to be 7.4 percent -- a fivefold increase from its current share of 1.5 percent.
  • If the federal government continues to match state Medicaid outlays at the current rate, Medicaid's share of GDP in the year 2106 will be 13 percent -- or one-eighth of GDP.

Further, higher tax rates cannot plausibly cover this growing spending commitment, says Gokhale:

  • On average, today's 35-year-old males are projected to have 15 percent of their lifetime federal general revenues returned in the form of Medicaid benefits.
  • Maintaining that ratio for today's newborn males would require a 78 percent increase in their lifetime nonpayroll taxes.

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, thereby harming the prospects for future economic growth, says Gokhale.

Source: Jagadeesh Gokhale, "Medicaid's Soaring Cost," Policy Analysis No. 597, Cato Institute, July 19, 2007.

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