Over the next decade, total federal health-care expenditures will approach $35 trillion. On February 7, the Congressional Budget Office (CBO) published its Budget and Economic Outlook with a sobering topline projection: Federal debt as a percentage of gross domestic product (GDP), or the size of the American economy each year, will reach a record amount in 2028 and continue to skyrocket thereafter. Other budget experts have written broadly about CBO's budget outlook and how the actual situation is more dire for two reasons: (1) CBO must assume that current tax and spending programs expire, and Congress will almost certainly override the expiration for many of them, and (2) CBO assumes relatively low long-run interest rates, and if interest rates are higher, net-interest payments will increase. This post deals with the No. 1 problem: high and rapidly increasing spending on federal health-care programs.

Main Problem: Rising Cost of Federal Health-Care Programs and Interest Payments

Rising deficits and debt are largely the result of the growth in federal health-care programs and interest payments on the debt. While Social Security is also a problem, the program stabilizes as a share of GDP in the next decade under current law.

Figure 1 shows the percentage of federal spending by five categories: federal health-care programs, Social Security, discretionary spending (spending subject to the annual congressional appropriations process), other mandatory spending, and net-interest payments. Within two decades, nearly one-third of the federal budget will consist of health-care programs, largely Medicare, Medicaid, and Affordable Care Act (ACA) subsidies to health-insurance companies. Importantly, however, the CBO baseline assumes that the large expansion in ACA subsidies to health insurers expires after 2025.

Figure 2 shows current law expenditures by category as a percentage of GDP. The main takeaways:

(1) Federal health-care programs are the one area of non-interest expenditures that continues to increase as a share of the economy.

(2) Net-interest payments will explode as a share of GDP, becoming the primary government expense in about 25 years.

(3) Social Security stabilizes as a percent of GDP, albeit at a high level.

(4) As federal health-care programs and net interest crowd out other priorities, every other major government-spending category – like national defense – will become a significantly smaller portion of spending.

According to CBO, 2023 federal health-care spending was $1.733 trillion, split up among four programs:

• Medicare – $1.009 trillion
• Medicaid – $616 billion
• ACA insurer subsidies – $91 billion
• Children's Health Insurance Program (CHIP) – $18 billion

Of note, this does not include federal health-related spending on the military, veterans, and federal employees and retirees.

Remarkably, as shown in Figure 3, this is almost the exact amount of federal health-care spending that CBO projected for 2023 ten years ago in its February 2014 budget and economic outlook. However, ACA exchange enrollment and related ACA subsidy expenditures on insurers are far below what CBO expected a decade ago while Medicaid expenditures are much higher than what CBO expected last decade (although the latter is partly because of Medicaid's unprecedented growth during the pandemic).

As shown in Figure 4, by 2034, CBO expects federal spending on health-care programs to nearly double to $3.203 trillion, shared across the same four programs:

• Medicare – $2.161 trillion
• Medicaid – $898 billion
• ACA insurer subsidies – $129 billion
• CHIP – $15 billion

Over the next decade, total federal health-care expenditures will approach $35 trillion. Last year, in a paper published by Paragon Health Institute, Economic Policy Innovation Center president and budget guru Paul Winfree estimated that federal expenditures needed to be trimmed by about 8 percent over the next decade to get the federal budget back to a sustainable trajectory. This means a reduced risk that the U.S. Treasury will no longer be able to borrow money in credit markets. Assuming the 7.5 percent estimate still holds (and it may be higher due to increased interest rates since his study), Congress must find a way to trim $2.6 trillion from federal health-care programs over the next decade. To help present solutions, Paragon experts evaluated a variety of options to reduce federal health-care spending and released a paper that explains how significant savings can be accomplished without cuts to benefits or major restructuring of programs.

It's past time for Washington to get serious about massive annual budget deficits and rising levels of debt. Without significant policy change, more and more of the government's annual budget will consist of interest payments; government borrowing will crowd out private investment; future interest rates, inflation, and taxes will be higher; and American's standard of living will decline. American families deserve better.

Brian Blase is the founder and president of Paragon Health Institute. From 2017 to 2019, he served as a special assistant to the president for economic policy at the White House's National Economic Council. He coordinated the promulgation of the 2018 rule that expanded short-term plans while a special assistant to the president at the White House's National Economic Council.
Drew Gonshorowski is a senior research fellow at Paragon Health Institute, where he specializes in data analysis and visualization.