Government Spending for Health Entitlement Programs
Key Points From This Brief:
- Spending through the two principal health entitlement programs — Medicare and Medicaid — accounts for well over a third of U.S. health care spending and for one-fifth of all federal spending. On average, states spend almost 25 percent of their budgets on Medicaid.
- Health entitlement spending is projected to grow quickly in the next decade as the baby boom generation ages onto Medicare in very large numbers, costs per enrollee continue to rise, and if more people become eligible for Medicaid as currently expected under national health reform.
- Despite receiving beneficiary contributions through dedicated payroll taxes, increasing premium payments, and beneficiary cost sharing — and despite the existence of the Part A Trust Fund — Medicare is heavily reliant on general revenue financing. Such financing crowds out other uses of general revenue, contributes significantly to annual deficits and cumulating debt, and places upward pressure on taxes.
- The Medicare Trustees have issued a Medicare “fund warning” for each of the past six years, signaling consistent near-term projections that more than 45 percent of the program’s annual outlays will be financed from general revenues. Congress has failed to take corrective action in response to these warnings.
- The average person retiring today can expect to receive significantly more in Medicare benefits during retirement than he paid into the program via payroll taxes while working and will pay in annual premiums once retired.
- Based on legislation currently on the books, the Congressional Budget Office projects an improving but still very challenging fiscal outlook for the next decade. More realistic assumptions that result in higher Medicare spending and lower tax revenue yield an even more sobering picture of our future fiscal situation.
- Over the longer term, if federal health entitlement spending grows as it has in the past instead of as projected under current law, our deficits and debt will grow exponentially.
In 2010 spending through Medicare and Medicaid, the principal government health entitlement programs, amounted to $525 and $401 billion, respectively — accounting for a combined totalof 35 percent of all health spending in the U.S. (Figure 1). By 2011 Medicare expenditures had risen to $549 billion.1 Health entitlement program spending also comprises a significant share of the total federal budget. The Congressional Budget Office (CBO) now projects that more than one of every five dollars spent by the federal government in 2012 will go to cover health entitlement expenditures, comparable to total spending on Social Security and outpacing both defense and non-defense discretionary spending (Figure 2).2 The money to finance all federal spending comes predominantly from individual income and payroll taxes, supplemented by very significant borrowing to cover revenue shortfalls. CBO expects that 32 cents of every federal dollar spent in 2012 will be borrowed. In this brief we take a closer look at spending under the Medicare and Medicaid programs and the implications for the government fiscal situation going forward.
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