Spending for Medicare and Medicaid has grown quickly in recent decades, in part because of rising enrollment. Rising costs per enrollee also have driven spending growth in those programs—much like growth in private spending for health care. In 1975, a decade after the enactment of legislation creating the Medicare and Medicaid programs, federal spending on those programs, net of offsetting receipts, accounted for 1.2 percent of gross domestic product (GDP). That share rose to 2.0 percent of GDP by 1985 and has more than doubled since then, as net federal spending for the two programs grew to 4.6 percent of GDP in 2013, by CBO’s estimates. Between 1985 and 2013, the share of the population enrolled in Medicare rose from 13 percent to 16 percent, and average annual enrollment in Medicaid rose from 8 percent to 18 percent of the population. Including the smaller CHIP (which was established in 1997), 20 percent of the population was enrolled in either Medicaid or CHIP, on average, in 2013, according to CBO’s estimates.
Per capita spending for health care in this country has been rising in recent decades. A key reason has been the emergence, adoption, and widespread diffusion of new medical technologies and services. Other factors contributing to the growth of health care spending include increases in personal income and the expanded scope of health insurance coverage. Altogether, health care spending per person has expanded more rapidly than the economy for a number of years, although the rate of increase in health care spending has slowed recently.
The tax expenditure stemming from the exclusion from taxable income of employers’ contributions for health care and workers’ premiums for health insurance and long-term-care insurance—described in this report as the exclusion for employment-based health insurance—also depends on health care spending per person. That tax expenditure equaled 1.5 percent of GDP in 2013, CBO estimates.
Discretionary spending related to health also has grown significantly in recent decades. From 1973 to 1998, it rose at an average annual rate of about 7 percent, and that rate increased to 10 percent between 1998 and 2004. Since then, health-related discretionary spending has risen more slowly overall—at an average annual rate of about 5 percent—although spending in different program areas has grown at markedly different rates. For example, from 2004 to 2012, outlays for veterans’ health care rose at an average annual rate of 8 percent, whereas spending for health research and training (mostly by the National Institutes of Health) grew by an average of about 3 percent per year.
Over the next decade, the government’s health care programs will be a continuing source of budgetary pressure—primarily because of a sharp increase in the numbers of beneficiaries enrolled in those programs but also because of ongoing growth in health care costs per beneficiary. Assuming that current laws governing those programs generally do not change, net federal spending for Medicare, Medicaid, CHIP, and subsidies for premiums and cost sharing in the health insurance exchanges is projected by CBO to reach 5.9 percent of GDP in 2023, compared with 4.6 percent in 2013 (see Figure 5-1). By comparison, outlays for Social Security are projected to be 5.3 percent of GDP in 2023. The tax expenditure for employment-based insurance (including income and payroll taxes) will remain close to 1.5 percent of GDP during the coming decade, CBO projects. Although health care costs per person are expected to continue to grow faster than the economy, which will tend to push up the tax expenditure relative to GDP, an excise tax on high-cost employment-based plans (set to begin in 2018) will work in the opposite direction.
The projected rise in the number of beneficiaries of federal health care programs has two main causes. First is the aging of the population—particularly the retirement of the baby-boom generation—which, over the next 10 years, will result in an increase of about one-third in the number of people who receive benefits from Medicare. Second is the expansion of federal support for health insurance under current law, which will boost the number of Medicaid recipients and make other people eligible for subsidies as they purchase health insurance through exchanges. Despite the significant expansion of federal support for health care for lower-income people over the next 10 years, only about one-fifth of federal spending for the major health care programs in 2023 will finance care for able-bodied, nonelderly people. CBO projects that roughly another one-fifth will fund care for people who are blind or disabled, and about three-fifths will go toward care for people who are 65 or older.
Projecting the growth of per capita spending for health care is particularly challenging in light of the recent slowdown in that growth. A key question is the extent to which the slowdown can be attributed to temporary factors such as the recession and the slow recovery, and the extent to which it instead reflects more enduring developments in the health care system. In CBO’s judgment, per capita health care spending will continue to grow slowly over the next decade. Accordingly, during the past few years, CBO has substantially reduced its projections of spending on Medicare and Medicaid for the coming decade and slightly lowered its estimate of the underlying rate of growth for health care spending per person for the country as a whole.