BUSINESS ENVIRONMENT REPORT C101

Federal funding for Medicare and

Medicaid

July 2019

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Federal funding for Medicare and Medicaid July 2019

Key Statistics Estimated value in 2020: $986.30 billion

2015-2020 Compound Growth: 2.90%

Forecast value in 2025: $1,225.70 billion

2020-2025 Compound Growth: 4.44%

Current Performance With the exceptions of 1999, 2012 and 2017 Medicare and Medicaid funding had trended upward each
year for at least three decades. This is not surprising given the expanding and aging US population, which
implies that a growing number of Americans qualify for one or more of these programs. The rise in
Medicare costs is the more predictable of the two, as it is driven by demographic trends that occur slowly
and are mostly foreseeable. The burgeoning number of seniors has been brought about by a larger
population base compounded by longer life expectancies, made possible by numerous advancements in
the medical field. Additionally, there have been medical developments that can treat or combat conditions
that previously did not exist, further adding to the expenditures. In short, funding for Medicare is
increasing because it covers a greater number of Americans, for a longer period of time and for a wider
array of ailments.

Conversely, Medicaid costs are responsive to changes in the broader economy as well as unemployment
levels, making them less predictable. This is because Medicaid qualification is tied to income levels, which
decline as employees are laid off during economic downturns. The subprime mortgage crises and related
recession provide the most recent example of such a slide, with Medicare and Medicaid expenditures
spiking 14.1% and 5.1% in 2009 and 2010, respectively. These jumps are some of the highest since the dot
com bubble burst in 2001, driving Medicaid outlays up 7.4% in 2002. As these examples show, changes in
costs typically lag the ups and downs of the business cycle by approximately one year. This is because
hiring and firing are nontrivial activities for businesses, and thus are only undertaken when the need is
clear. Moreover, layoffs and hiring are slow processes, which generally cannot be instantaneously
implemented once the decision is made.

In recent quarters, and in the years to come, federal funding for Medicare and Medicaid spending is
anticipated to be driven by the implementation of the Patient Protection and Affordable Care Act (PPACA).
While the total cost of the PPACA is uncertain, it is expected to cost the federal government $1.49 trillion
from 2015 to 2024, according to Congressional Budget Office estimates. The act aims at reducing the
number of uninsured individuals in the United States, which currently stands at an estimated 48.0 million.
Americans are now required to have health insurance, with a range of government subsidies and funding
introduced to aid individuals that cannot afford the full price of insurance. The continued implementation
of the PPACA, coupled with demographic trends, primarily explain the 6.1% growth in federal funding for
Medicare and Medicaid in 2016. However over the five years to 2020, as potential policy change looms, this
indicator is expected to grow at a slower annualized rate of 2.9%, including an increase of 7.9% in 2019 and
3.1% in 2020.

Medicare and Medicaid are programs that provide free or subsidized medical and health-related services.
Medicaid eligibility varies from state to state but is geared toward people with low incomes. Meanwhile,
Medicare covers almost everyone 65 or older, as well as a subset of people on Social Security disability and
some people with permanent kidney failure. Funding for Medicare and Medicaid is part of the mandatory
spending within the annual White House budget. The data for this report, including forecasts, are sourced
from the Office of Management and Budget and presented in chained 2012 dollars.

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Federal funding for Medicare and Medicaid July 2019

Outlook The Office of Management and Budget and IBISWorld project that federal funding for Medicare and
Medicaid will rise at an annualized rate of 4.4% from 2020 to 2025. Meanwhile the average costs of
treating each individual will also increase as a growing number of treatments are made available and
health care inflation pushes these figures up even higher. While Medicaid costs are also projected to trend
up over the outlook period, the Office of Management and Budget expects this to occur at a slower rate.
This relatively sluggish increase can be attributed to the expected economic recovery, which will result in
job and wealth creation, and thus free some individuals from their reliance on Medicaid.

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Federal funding for Medicare and Medicaid July 2019

Data Volatility

Year $ billion % Change Year $ billion % Change

1980 109.05 N/A 2004 525.64 5.8

1981 121.02 11.0 2005 549.56 4.6

1982 130.06 7.5 2006 566.82 3.1

1983 140.07 7.7 2007 612.01 8.0

1984 146.90 4.9 2008 628.07 2.6

1985 162.19 10.4 2009 716.82 14.1

1986 171.01 5.4 2010 753.85 5.2

1987 179.70 5.1 2011 775.21 2.8

1988 185.26 3.1 2012 722.31 -6.8

1989 194.88 5.2 2013 750.06 3.8

1990 218.62 12.2 2014 784.38 4.6

1991 238.52 9.1 2015 855.07 9.0

1992 277.63 16.4 2016 908.89 6.3

1993 299.49 7.9 2017 900.47 -0.9

1994 322.22 7.6 2018 886.06 -1.6

1995 346.49 7.5 2019 956.35 7.9

1996 363.90 5.0 2020 986.30 3.1

1997 383.66 5.4 2021 1,059.44 7.4

1998 390.68 1.8 2022 1,135.40 7.2

1999 390.75 0.0 2023 1,172.35 3.3

2000 403.47 3.3 2024 1,196.92 2.1

2001 434.64 7.7 2025 1,225.70 2.4

2002 466.75 7.4 2026 1,254.36 2.3

2003 496.90 6.5

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