Abstract
Long-term federal outlays for Medicare and Medicaid are projected to increase in the future because of the interaction between demographics and program eligibility. However, the magnitude of the projected increase depends almost entirely on the assumption about cost growth. This growth factor is an unexplained residual—the gap between growth in per-benefi ciary program outlays and growth in GDP per capita not explained by demographics alone. In the last several decades, excess cost has been positive and signifi cant on average, though the annual pattern is volatile. This paper considers the implications of alternative assump- tions about excess cost growth for federal budget and tax policy.
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