Medicaid and Medicare: 50 Years of Budget Busting

This week marks the fiftieth anniversary of Medicare and Medicaid, the crown jewels of Lyndon B. Johnson’s “Great Society.” Unfortunately, the programs’ real legacy is their cost, which is enough to make the real Crown Jewels look like a bunch of cubic zirconia set in fool’s gold.

There is no doubt that Medicare, which provides subsidized health insurance for the elderly, and Medicaid, which offers low-cost health care to the poor, are important patches in the American quilt. In some ways it has made the fabric stronger, preventing many older Americans from falling into poverty in the face of enormous medical bills and  allowing the poor access to care. But it has weakened it in other important ways, inserting disastrous financial incentives into the health care system and diverting money away from key government priorities like education.

Now, having been so deeply woven into the fabric of America, the program’s finances threaten to tear it apart. Tellingly, this wasn’t always projected to be the case. As former Sen. Jim DeMint wrote in the Wall Street Journal:

Nearly 50 years ago, at the time of Medicare’s enactment, it was projected that the federal government would spend $9 billion on Part A hospital services in 1990. Actual spending in that year totaled $67 billion—an increase of 644% compared with initial estimates.

“Likewise, government officials originally projected that Medicare Part B physician services would require ‘federal appropriations of about $500 million a year from general tax revenues.’ Last year, the federal outlay for that program was $163.8 billion—overshooting the original estimate by more than 4,400%.”

Sadly, those numbers are just peanuts compared to what Medicare costs today. In 2014, gross spending on Medicare was $600 billion, a nearly ten fold increase over the last 25 years.

It’s much the same story for Medicaid. In 1965 the House Ways and Means Committee estimated that Medicaid would cost $238 million in its first year. But the program immediately began to blow through projections, costing more than $1 billion in its first year. As John Daniel Davidson reports for The Federalist:

Within a few years, everyone seemed to understand cost growth in these programs was a major problem. In President Lyndon Johnson’s 1968 State of the Union Address, he promised action “to stem the rising costs of medical care.” It wasn’t just a federal problem, of course. States were also hit with unexpectedly high Medicaid costs. In 1966, the administration of New York Gov. Nelson Rockefeller (an early Medicaid champion) estimated the program would cost $80 million. Three years later, the price tag was $330 million.

Projections, then as now, didn’t count for much. Another chart from that 1969 report shows how quickly federal budgeters had to revise cost estimates for these programs. In December 1967, they thought total federal spending in 1969 would be $1.58 billion. A month later, they increased the estimate by $450 million. A year later, in the revised budget submitted to Congress, the estimate had gone up another $240 million. “The current estimate of $2.5 billion,” the report states, “is almost 50 percent greater than the estimate made 19 months ago.”

Unfortunately, speaking in millions rather than billions seems quaint when discussing Medicaid these days. The CBO’s most recent report finds that in 2014, federal spending for Medicaid amounted to $301 billion and states spent $195 billion on Medicaid (the program is expected to grow another $33 billion this year).

Taken together, these programs cost more than $1 trillion annually, a number that is expected to grow unsustainably, gobbling up an ever increasing percentage of federal and state budgets in the future. But, as former CBO Director Douglas Elmendorf testified earlier this year, these are more than just numbers on a balance sheet, they in many ways define the future of our nation.

“Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments, restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually heightening the risk of a fiscal crisis,” Elmendorf told Congress.

So although there is little doubt that the passage of Medicare and Medicaid has done much good for many Americans, it now threatens the future of many more. Unless something is done to put these programs on a sustainable path, the bankrupting of one of the most prosperous nations on earth could be the true legacy of Medicaid and Medicare.