Romina Boccia and Ritvik Thakur
Medicare spending is the largest driver of the US debt crisis. Medicare accounts for more than $53 trillion of the long-term unfunded obligations of the US, or about 72 percent of the total. Just over the next decade, Medicare represents $9.5 trillion, or 45 percent of the $21 trillion projected federal deficit. Many prominent figures, including Treasury Secretary Scott Bessent, argue that the US can grow its way out of the debt crisis. So long as the economy expands faster than the debt does, that logic is sound in principle: when gross domestic product (GDP) grows more quickly than debt, the debt-to-GDP ratio falls, easing the burden on taxpayers and future generations.
The problem: As the economy grows, Medicare grows right along with it—in fact, it grows even faster.
Since Medicare’s inception in 1966, its spending has grown about 1.5 times faster than the economy. Figure 1 shows the growth of gross Medicare spending and nominal GDP relative to their starting values in 1967, with Medicare consistently growing at a faster rate than GDP. This track record shows that GDP growth has not—and cannot—keep pace with Medicare spending under current policy. Because Medicare accounts for nearly half of projected additions to the federal debt over the next decade—and because its spending grows faster than the economy—higher GDP growth alone cannot stabilize the debt-to-GDP ratio.
Innovation and Longevity Increase Medicare Spending
What might explain this relationship? Economic growth drives innovation and longer lifespans—but under Medicare’s open-ended design, those gains automatically translate into higher costs for taxpayers. As medical technology advances and Americans live longer, Medicare automatically pays for more treatments, more procedures, and more years of coverage, ensuring that program spending expands.
Chris Pope of the Manhattan Institute argues that most of the rise in Medicare spending is due to Medicare covering new expensive technologies. According to Pope, “From 1997 to 2011, 85% of the increase in real per capita Medicare spending was on newly created procedure codes .… Expansions of coverage are made almost entirely without consideration of (or even efforts to quantify) the additional costs to taxpayers.” The channel here: technological advancements concurrent with GDP growth allow seniors to enjoy the benefits of improved medicine, while Medicare covers most of the cost.
Higher GDP is correlated with higher life expectancy. Increased life expectancy also contributes to higher Medicare spending. As seniors live longer, they spend more years enrolled in Medicare and consume more medical care. Longer lifespans have also increased the prevalence of costly age-related conditions—such as Alzheimer’s and other dementias—that require intensive and prolonged care, further driving up spending. Nardi et al. find “medical expenses more than double between ages 70 and 90.”
One of the causes of the substantial increase in per capita health spending in the US is the introduction of Medicare itself. According to health economist Amy Finkelstein, the introduction of Medicare and spread of health insurance explain about half of the increased health spending in the US from 1950–1990. Medicare subsidies increased demand for healthcare—incentivizing hospitals to enter the market, adopt new technologies, and increase spending on non-Medicare patients. The trend in Medicare spending and US healthcare spending overall has continued upward since then (Figure 2).
Crucially, Medicare covers 65 percent of all elderly expenses. While seniors face some portion of rising out-of-pocket prices, Medicare provides them with an enormous discount. They have low copayments and premiums under Medicare, subsidized by federal taxpayers.
Baumol’s Cost Disease, Wagner’s Law, and Medicare Spending
Healthcare spending also rises because productivity gains are lower in healthcare than in many other sectors. Baumol’s cost disease describes what happens in labor-intensive sectors where productivity improves slowly: wages still have to keep up with the rest of the economy, so costs rise faster than productivity. In healthcare, the wages of doctors, nurses, and other staff increase as the broader economy grows, but a physician can still only see so many patients in a day or perform a limited number of surgeries. By contrast, sectors like consumer electronics can automate and mass-produce output—today’s televisions are vastly cheaper and better than when they were first introduced, thanks to capital-intensive, highly productive manufacturing.
Because healthcare remains so labor-intensive, its prices tend to rise faster than prices in more productive sectors. Under Medicare’s design, those higher prices are largely passed on to taxpayers: the program continues to pay for services at ever-higher rates, turning Baumol’s cost disease into a government spending problem.
As societies grow richer, voters also tend to demand more government involvement in areas such as health, retirement, and social insurance. Wagner’s law of public expenditure captures this tendency: as the economy grows, public demand for government programs increases, and the state’s capacity to spend expands along with GDP. Medicare and other health interventions reflect this dynamic—a richer society with a larger tax base supports a steadily growing federal health program.
Here, the contrast with private payers is important. Private insurers and households face hard budget constraints. When healthcare prices grow faster than income, they must cut elsewhere, raise premiums, narrow networks, or simply consume less care. By contrast, the federal government’s commitment to Medicare is open-ended: federal policy is structured to channel resources into the program regardless of the broader fiscal picture. That makes it easier for public spending to grow faster and for the trade-offs to be postponed, pushing the fiscal costs of rising Medicare spending onto future taxpayers.
Expensive technological advances, longer lifespans, Baumol’s cost disease, and Wagner’s law all point in the same direction: as the economy grows, Medicare spending tends to grow at least as fast—and often faster—because the program automatically pays the bill for more and more healthcare consumption by seniors, even as prices rise.
Reforming Medicare’s Unsustainable Design
For economic growth to meaningfully improve America’s long-term fiscal outlook, Medicare spending would need to grow more slowly than GDP. But under the program’s current structure, it will continue to grow faster than GDP for the foreseeable future. Every pathway through which growth occurs—innovation, longer lives, cost disease—feeds directly into higher Medicare spending.
The conclusion is inescapable: we cannot grow our way out of the Medicare-driven debt crisis without reforming Medicare itself.
The best option would be for the federal government to get out of the business of subsidizing healthcare so heavily. The second best option is for Congress to put Medicare on a budget that limits program spending growth to a more sustainable level.
Reform options include switching Medicare from a fee-for-service design to a fixed cash subsidy, as Michael Cannon suggests, or even a voucher design in which beneficiaries would receive a fixed subsidy to use towards the purchase of health insurance. A cash subsidy allows seniors more choice in their health expenditures, instead of restricting them to purchasing health insurance. Still, both options move towards a more market-oriented design where seniors can make choices about their healthcare, and Medicare’s spending is curtailed.
If policymakers keep Medicare on autopilot—covering every new medical innovation, shielding seniors from price signals, and expanding relentlessly as the population ages—faster economic growth will only speed up the Medicare-driven debt crisis. The only real fix is to reform Medicare’s open-ended design and reduce Washington’s role in healthcare.