Medicare and the Federal Budget: Past Experience, Current Policy, Future Prospects

In an era of budget surpluses and after several years of slower spending growth, containing Medicare expenditures seems like less of an urgent policy consideration than it has perhaps at any time in the history of the program. Yet Medicare remains a major component of the Federal budget, accounting for almost one-seventh of all Federal spending, and seems inevitable to become even more important in the years ahead, as a result of both Baby Boom aging and especially continued cost-increasing technological progress. This paper presents a primer on Medicare budgeting. I review of Medicare financing and budgetary history, and use some alternative plausible forecasts of long-run spending growth to highlight the considerable uncertainty about forecasts of future program expenditures. In particular, it seems plausible that future Medicare spending will increase more rapidly than the most widely cited recent forecasts have suggested. Using the alternative forecasts, I then discuss the possible short- and long-term budgetary effects of a range of "accounting" and "real" reforms in the Medicare program.