ECONOMIC AND BUDGET ISSUE BRIEF

Accounting for Sources of Projected Growth in 

Federal Spending on Medicare and Medicaid

CBO A series of issue summaries from

the Congressional Budget Office

MAY 28, 2008

Summary

According to projections by the Congressional Budget 

Office (CBO), federal spending on Medicare and 

Medicaid will grow from 4 percent of gross domestic 

product (GDP) in 2007 to 9 percent in 2032 and 

19 percent in 2082. Spending growth will depend on 

two factors: trends in the cost of health care and the 

aging of the population. If health care costs per beneficiary grew at the same rate as per capita GDP and the 

age distribution of the population did not change, 

Medicare and Medicaid spending would remain a constant share of the economy. In reality, however, health 

care costs per beneficiary will grow more quickly than 

per capita GDP and the population will age. 

Although many observers portray aging as the dominant cause of future growth in federal spending on 

Medicare and Medicaid, most of the increase that 

CBO projects will result from rising costs per beneficiary rather than rising numbers of beneficiaries. The 

effect of an aging population is smaller but still 

accounts for substantial spending growth. Those two 

factors also interact with each other: The rapid growth 

of health care costs is a more important factor when 

the population is aging over time; conversely, population aging looms larger when health care costs are rising over time.

Understanding the relative contributions of those two 

factors to the growth in federal spending on Medicare 

and Medicaid is important. The aging of the population, which has a smaller impact on spending growth, 

cannot be easily influenced by policy changes, but 

efforts can be made to stem the rising costs per beneficiary relative to per capita GDP—by far the larger 

factor in spending growth in the two programs.

To estimate the relative contributions of the two factors, CBO based its projections on three sets of reasonable assumptions. Regardless of the assumptions and 

methods used in the projections, the results were basically the same: More than half of the growth in federal 

spending on Medicare and Medicaid is attributable to 

health care costs per person growing more rapidly than 

per capita GDP. Depending on the approach used, by 

2082 between 53 percent and 60 percent of the accumulated growth is attributable solely to per capita cost 

growth, between 14 percent and 17 percent is attributable solely to aging, and the remainder (between 

26 percent and 32 percent) is attributable to the interaction of those two factors as costs grow and the population ages at the same time.

Over the next 25 years, aging will be relatively more 

important than it will be over the longer term, 

accounting for between 27 percent and 35 percent of 

projected growth by 2032, as the baby-boom generation ages and expands the number of Medicare and 

Medicaid beneficiaries. Even during that period, CBO 

estimates, more than half of the growth in spending 

will result from cost growth.
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

The Congressional Budget Office (CBO) projects that 

total federal spending on Medicare and Medicaid will 

grow from 4 percent of gross domestic product (GDP) in 

calendar year 2007 to 9 percent in 2032 and 19 percent 

in 2082.1 Over that 75-year period, the population will 

become substantially older as life expectancy at age 65 

increases—by 4 years in CBO’s projections—and, in the 

earlier part of the period, as baby boomers become elderly. The resulting growth in the number of beneficiaries 

eligible for Medicare and Medicaid will lead to higher 

spending.

Despite the substantial contribution of aging to federal 

spending on the two programs, most of the projected 

increase in spending stems from CBO’s expectation that, 

as in the past, health care costs per beneficiary will continue to grow more quickly than per capita GDP.2

 The 

magnitude of future cost growth is highly uncertain, but 

CBO assumes that, under current federal law, “excess cost 

growth” will slow gradually from historical levels. (Excess 

cost growth is the percentage by which the growth in per 

capita spending on Medicare and Medicaid exceeds the 

growth in per capita GDP, after adjusting for changes in 

the age distribution of the population.) Still, the assumed 

rate of excess cost growth remains positive throughout 

the projection period, averaging 1.7 percent for Medicare 

and 0.9 percent for Medicaid from 2018 to 2082.3

CBO’s projections of federal spending on Medicare 

and Medicaid incorporate assumptions about the aging 

of the population and excess cost growth. To compute 

how much each factor contributes to growth in total 

spending on Medicare and Medicaid, CBO analyzed four 

scenarios:

B Scenario 1: Spending without population aging or 

excess cost growth (the base-case scenario),

B Scenario 2: Spending with population aging (but no 

excess cost growth), 

B Scenario 3: Spending with excess cost growth (but no 

population aging), and 

B Scenario 4: Spending with both population aging and 

excess cost growth.

The effect of either aging or excess cost growth alone can 

be computed by comparing Scenario 2 or Scenario 3 with 

Scenario 1. However, the total growth (the difference 

between Scenario 4 and Scenario 1) is not simply the sum 

of those two effects because the two effects interact: 

Higher spending per person has a larger influence as the 

number of beneficiaries rises; conversely, having more 

beneficiaries imposes a larger budgetary cost when health 

care costs are high (see Box 1). Thus, in addition to 

spending that can be attributed specifically to either aging 

or cost growth, this analysis identifies a share of the costs 

that results from the combined effects—the interaction—

of the two factors. 

Assumptions and Methods

This analysis considers the various scenarios and the associated allocation of costs under different sets of assumptions. Those assumptions and the approaches used in the 

analysis are discussed below. (The assumptions affect only 

how growth is allocated between aging and cost growth; 

CBO’s projections of total federal spending on Medicare 

and Medicaid do not change.)

Issues in Choosing Assumptions and Analytic 

Methods

Two issues arise in selecting the appropriate way to assess 

the effects of aging and excess cost growth on federal 

spending on Medicare and Medicaid: 

B What value of GDP to use when computing spending 

as a share of GDP, and 

B How to construct spending under the base-case 

scenario (Scenario 1). 

1. Federal spending on Medicare is net of beneficiaries’ premiums.

2. In this brief, “spending” refers to total federal outlays and “costs” 

describes the amount spent on each beneficiary.

3. For details on historical trends and CBO’s assumptions about 

future excess cost growth, see The Long-Term Outlook for Health 

Care Spending (November 2007), especially pp. 6–12.
ECONOMIC AND BUDGET ISSUE BRIEF

ACCOUNTING FOR SOURCES OF PROJECTED GROWTH IN FEDERAL SPENDING ON MEDICARE AND MEDICAID 3

Box 1.

Illustration of the Effects of Aging and Cost Growth on Spending

How aging, cost growth, and the interaction between 

those two factors affect spending can be illustrated 

using a simple example in which there is one elderly 

person and nine nonelderly people (see the accompanying table). Spending in the first year is $1,000 for a 

nonelderly person and $2,000 for an elderly person. 

Total spending is $11,000 ($9,000 for the nine nonelderly people and $2,000 for the elderly person).

In the second year, the situation changes as follows:

Aging Only

If another person becomes elderly but costs do not 

rise, spending in the second year totals $12,000 

($8,000 for the eight nonelderly people plus $4,000 

for the two elderly people). The increase of $1,000 is 

attributable solely to aging.

Cost Growth Only

If the population does not age but costs rise 10 percent, spending in the second year totals $12,100 

($9,900 for the nine nonelderly people plus $2,200 

for the elderly person). The increase of $1,100 is 

attributable solely to cost growth.

Aging and Cost Growth

If another person becomes elderly and costs rise 

10 percent, spending in the second year totals 

$13,200 ($8,800 for the eight nonelderly people plus 

$4,400 for the two elderly people). The resulting 

increase of $2,200 exceeds the sum of the pure 

“aging” effect ($1,000) and the pure “cost growth” 

effect ($1,100) because of the interaction between the 

two (an extra $100 arising because the cost of the 

additional elderly person is magnified by the increase 

in per capita costs).

Source: Congressional Budget Office.

 Nonelderly 9,000 8,000

 Elderly 2,000 4,000 ______ ______

Total 11,000 12,000 1,000

 Nonelderly 9,000 9,900

 Elderly 2,000 2,200 ______ ______

Total 11,000 12,100 1,100

 Nonelderly 9,000 8,800

 Elderly 2,000 4,400 ______ ______

Total 11,000 13,200 2,200

Aging Only

Cost Growth Only

Aging and Cost Growth

 10 Percent Cost Growth from Year 1 to Year 2;

One Elderly Person in Year 1, Two Elderly People in Year 2

Year 1 Year 2 Increase

Cost Per Person Same in Both Years;

10 Percent Cost Growth from Year 1 to Year 2;

One Elderly Person in Both Years

One Elderly Person in Year 1, Two Elderly People in Year 2
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Because older people are less likely to work than younger 

people, scenarios that incorporate projected aging (Scenarios 2 and 4) result in lower GDP than scenarios that 

hold the age distribution constant (Scenarios 1 and 3).4

(By 2082, aging would reduce GDP by about 10 percent, 

CBO projects.) One option is to use the projected GDP 

from Scenario 4 (which reflects both aging and excess 

cost growth) as the denominator for computing spending 

as a share of GDP in all of the scenarios.5

 GDP would 

then be consistent across scenarios, and aging would 

affect only the spending projections. 

Another option is to use the projected GDP from each 

scenario as the denominator for that scenario. In that 

case, the numerator (spending) and denominator (GDP) 

would be consistent within each scenario, and the results 

would reflect the effects of aging on both spending and 

GDP.

The second issue is how to construct spending in Scenario 1, the base-case scenario. Spending could be held 

constant at its 2007 share of GDP (4.1 percent). Alternatively, CBO’s model could be modified to hold the age 

distribution of the population constant and assume that 

federal Medicare and Medicaid spending grows at the 

same rate as per capita GDP.6

 Because the model incorporates some factors that are used to construct CBO’s 

baseline for the first 10 years of the projection period, 

spending in the resulting scenario is not a fixed share of 

GDP; spending increases slightly over those years—to 

4.5 percent of GDP in 2018.

Three Approaches for Analyzing Sources of 

Spending Growth

This brief presents three approaches to analyzing the 

sources of projected growth in Medicare and Medicaid 

spending.7 Although the results vary slightly, all of the 

approaches reach the same basic conclusion: Excess cost 

growth, by itself, accounts for more than half of the anticipated growth in health care spending, regardless of the 

assumptions and methods used; after 75 years, aging, by 

itself, accounts for less than 20 percent of the growth in 

spending.

Approach 1: Base-Case Scenario Is Modeled; GDP Is 

Consistent Across Four Scenarios. In the first approach, 

Scenario 1 incorporates factors from CBO’s 10-year baseline, so federal spending on Medicare and Medicaid 

under that scenario is slightly higher than the 2007 level. 

It also uses the same level of GDP in the denominator 

across scenarios. Under those assumptions, by 2082 

4. Projections of GDP can also vary slightly between scenarios for 

two other technical reasons related to the structure of CBO’s longterm model. First, although the model targets certain macroeconomic assumptions, such as the size of the capital stock and the 

real (inflation-adjusted) interest rate, the targeting process is 

inherently imperfect. Second, the model can be run in either its 

standard microsimulation mode or a simpler actuarial mode; the 

two modes produce consistent but not identical projections. The 

age distribution can be held constant only in the actuarial mode; 

for consistency, this analysis runs all four scenarios using the actuarial mode.

5. That approach was used in CBO’s The Long-Term Budget Outlook

(December 2007) and is the standard procedure for CBO’s longterm modeling efforts under different scenarios.

6. In previous CBO analyses, when the age distribution of the population was fixed, spending decreased slightly in the later decades of 

the projection period. The decrease occurred because, in CBO’s 

projections, health care spending depends on both an individual’s 

age and remaining life expectancy. See Congressional Budget 

Office, Incorporating Longevity Effects Into Long-Term Medicare 

Projections, Technical Paper 2004-02 (January 2004). As projected 

life expectancies increase, annual spending for a given age group 

tends to decline because costs are so concentrated near the end of 

life and because individuals in that group have a larger remaining 

life expectancy than previous generations. This analysis makes no 

adjustment for the remaining life expectancy, so projected spending is a nearly constant share of GDP after the 10th year.

7. The portion of spending growth attributable to aging is computed 

by subtracting spending under the base-case scenario (Scenario 1) 

from spending under the aging-only scenario (Scenario 2). Similarly, the portion of spending growth attributable to excess cost 

growth is computed by subtracting spending under the base-case 

scenario from spending under the scenario that reflects only excess 

cost growth (Scenario 3). The portion of growth caused by the 

interaction is simply the remainder of the total growth—that is, 

the remainder of the difference between Scenario 4 (which reflects 

aging and excess cost growth) and Scenario 1.
ECONOMIC AND BUDGET ISSUE BRIEF

ACCOUNTING FOR SOURCES OF PROJECTED GROWTH IN FEDERAL SPENDING ON MEDICARE AND MEDICAID 5

60 percent of the accumulated spending growth is attributable to excess cost growth (see the top panel of 

Figure 1). Population aging, by itself, accounts for only 

14 percent of the spending growth. The remaining 

26 percent results from the combination of the two 

effects.8

Over a shorter time frame, aging is slightly more important because the baby-boom generation will become elderly, resulting in an increased number of Medicare and 

Medicaid beneficiaries. By 2032, for example, aging 

accounts for more than a quarter of the accumulated 

growth (see the top panel of Figure 2). The portion of 

growth attributable to the interaction between aging and 

excess cost growth increases over time.9

Approach 2: Base-Case Scenario Is Modeled; GDP Varies 

Across Four Scenarios. The second approach allows 

GDP to vary across the scenarios—that is, the level of 

GDP in the denominator of each scenario is specific to 

that scenario. GDP is higher in scenarios that do not 

account for aging than in the scenarios that do. Using the 

scenario-specific GDP therefore results in a lower measure of health care spending as a share of GDP in the noaging scenarios (see the middle panel of Figure 1). From 

that perspective, projected aging results in a slightly larger 

increase in spending than under the first approach (which 

used the same level of GDP in the denominator for each 

scenario). For example, 16 percent of the growth by 2082 

is attributable solely to aging under this scenario-specific 

GDP approach, compared with 14 percent under the first 

approach (see the middle panel of Figure 2). The share of 

growth attributable to the interaction between aging and 

cost growth also is higher in this scenario. Nevertheless, 

the share attributable to excess cost growth is still more 

than half (53 percent).

Approach 3: Base-Case Scenario Holds Spending at Its 

2007 Share of GDP; GDP Varies Across Four Scenarios. 

The third approach also uses scenario-specific GDP, but 

unlike the first two scenarios it holds spending in the 

base-case scenario constant at the 2007 share of GDP. 

That approach attributes slightly more of the growth to 

aging than do the first two approaches.10 For example, 

17 percent of the growth by 2082 is attributable solely to 

aging (see the bottom panel of Figure 2), as opposed to 

14 percent and 16 percent under the other two 

approaches, respectively. Under this approach, 54 percent 

of the increase in spending is attributable to excess cost 

growth.

8. Another way to present those results would be to allocate the 

interaction effect to aging and cost growth in proportion to the 

pure effect of aging and the pure effect of excess cost growth. For 

example, if the 26 percent of the 75-year growth that is attributable to the interaction effect were distributed proportionately in 

that manner, excess cost growth would account for 81 percent of 

overall spending growth and aging would account for 19 percent.

9. Mathematically, total spendingyear 2 = total spendingyear 1

x (1 + growth from aging) x (1 + growth from cost increases) 

= total spendingyear 1 x [(1 + growth from aging + growth from 

cost increases + (growth from cost increases x growth from aging)]. 

The last term in the equation is the interaction factor. In the early 

years of the projection period, growth from cost increases and 

growth from aging are small, so the product of the two factors—

the interaction effect—is especially small.

10. Under the third approach, the size of the interaction effect is particularly small in the first few decades of the projection period. 

That result is an artifact of the methods used. In these calculations, spending as a share of GDP is held constant in the base-case 

scenario. However, the other three scenarios incorporate factors 

from CBO’s 10-year baseline projections.
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 1.

Allocation of Projected Growth in Federal Spending on Medicare and Medicaid, 

by Source

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Notes: The portion of spending growth attributable to aging is computed by subtracting spending under the base-case scenario (Scenario 1) 

from spending under the aging-only scenario (Scenario 2). Similarly, the portion of spending growth attributable to excess cost growth 

is computed by subtracting spending under the base-case scenario from spending under the scenario that reflects only excess cost 

growth (Scenario 3). The portion of growth caused by the interaction between aging and excess cost growth is simply the remainder 

of the total growth—that is, the remainder of the difference between Scenario 4 (which reflects aging and excess cost growth) and 

Scenario 1.

Excess cost growth is the percentage by which the growth in per capita spending on Medicare and Medicaid exceeds the growth in per 

capita GDP, after adjusting for changes in the age distribution of the population.

2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082

0

5

10

15

20

2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082

0

5

10

15

20

2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082

0

5

10

15

20

Approach 1: Base-Case Scenario Is Modeled; GDP Is Consistent Across Four Scenarios

Approach 2: Base-Case Scenario Is Modeled; GDP Varies Across Four Scenarios

Approach 3: Base-Case Scenario Holds Spending at Its 2007 Share of GDP; GDP Varies Across Four Scenarios

Aging

Interaction

Excess Cost Growth

60%

26%

14%

53%

32%

16%

54%

30%

17%

Aging

Interaction

Excess Cost Growth

Allocation

by

2082

Aging

Interaction

Excess Cost Growth
ECONOMIC AND BUDGET ISSUE BRIEF

ACCOUNTING FOR SOURCES OF PROJECTED GROWTH IN FEDERAL SPENDING ON MEDICARE AND MEDICAID 7

Figure 2.

Allocation of Projected Growth in Federal Spending on Medicare and Medicaid 

by 2032, 2057, and 2082, by Source

(Percent)

Source: Congressional Budget Office.

Notes: The portion of spending growth attributable to aging is computed by subtracting spending under the base-case scenario (Scenario 1) 

from spending under the aging-only scenario (Scenario 2). Similarly, the portion of spending growth attributable to excess cost growth 

is computed by subtracting spending under the base-case scenario from spending under the scenario that reflects only excess cost 

growth (Scenario 3). The portion of growth caused by the interaction between aging and excess cost growth is simply the remainder 

of the total growth—that is, the remainder of the difference between Scenario 4 (which reflects aging and excess cost growth) and 

Scenario 1.

Excess cost growth is the percentage by which the growth in per capita spending on Medicare and Medicaid exceeds the growth in per 

capita GDP, after adjusting for changes in the age distribution of the population.

Aging Interaction Excess Cost Growth

0

10

20

30

40

50

60

70

27

18 14 12

21

26

61 61 60

By 2032 By 2057 By 2082

Aging Interaction Excess Cost Growth

0

10

20

30

40

50

60

70

31

20 16 15

25

32

54 55 53

Aging Interaction Excess Cost Growth

0

10

20

30

40

50

60

70

35

22

17

8

22

30

57 56 54

Approach 1: Base-Case Scenario Is Modeled; GDP Is Consistent Across Four Scenarios

Approach 2: Base-Case Scenario Is Modeled; GDP Varies Across Four Scenarios

Approach 3: Base-Case Scenario Holds Spending at Its 2007 Share of GDP; GDP Varies Across Four Scenarios
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

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CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

WASHINGTON, DC 20515

Conclusion

Although the relative contributions of aging and excess 

cost growth depend on how the calculations are made, 

the implications of the three approaches are similar. Even 

if the growth of health care costs slows from its historical 

levels, as CBO assumes, federal spending on Medicare 

and Medicaid will grow substantially for the foreseeable 

future. With the retirement of the baby-boom generation, aging will have a larger effect on spending in the 

next several decades than it will later in the century. However, no matter which technical assumptions are used, the 

projected growth of health care costs per beneficiary is by 

far the larger contributor to the growth of federal spending on Medicare and Medicaid throughout the entire 

projection period.

This brief was written by Noah Meyerson. A related 

publication is The Long-Term Outlook for Health Care 

Spending, which presents in detail the Congressional 

Budget Office’s projections of federal spending on 

Medicare and Medicaid and national spending on 

health care over the next 75 years. These publications 

are available on CBO’s Web site (www.cbo.gov).

Peter R. Orszag

Director