This document summarizes how the Congressional Budget Office prepares long-term projections of federal spending on Social Security and major health care programs like Medicare and Medicaid. CBO uses an actuarial model to project spending for these programs based on historical trends in health care cost growth, population growth, and economic growth. CBO assumes the rate of excess health care cost growth will decline gradually over time to prevent unsustainably high projections of future spending.

1. Congressional Budget Office
How CBO Prepares Projections of
Federal Spending for Social Security
and Major Health Care Programs
Joyce Manchester
Chief, Long-Term Analysis Unit
This presentation contains information published in Updated Budget Projections:
Fiscal Years 2012 to 2022 (March 2012), www.cbo.gov/publication/43119; The
2012 Long-Term Budget Outlook (June 2012), www.cbo.gov/publication/43288;
and Updated Budget Projections : Fiscal Years 2013 to 2023 (May 2013),
http://www.cbo.gov/publication/44172.
May 16, 2013

2. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s Long-Term Projections of
Federal Spending
A big part of pressures on the federal budget
comes from a few major programs
– Social Security
– Medicare
– Medicaid and CHIP (the Children’s Health Insurance
Program)
– Starting in 2014, subsidies for the purchase of health
insurance through exchanges

3. C O N G R E S S I O N A L B U D G E T O F F I C E
Spending for Social Security and Major Health
Care Programs as a Share of GDP
0
2
4
6
8
10
12
14
1973 1983 1993 2003 2013 2023
(Percentage of GDP)

4. C O N G R E S S I O N A L B U D G E T O F F I C E
Spending for Social Security and Major Health Care Programs
as a Share of Federal Spending Other Than Interest
0
10
20
30
40
50
60
70
1973 1983 1993 2003 2013 2023
(Percentage of noninterest federal spending)

5. C O N G R E S S I O N A L B U D G E T O F F I C E
Spending on Social Security and Major Health Care Programs,
Historically and Projected under Current Law
0
1
2
3
4
5
6
1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Net Medicare
Social Security
Medicaid, CHIP, and
exchange subsidies
(Percentage of GDP)
Actual Projected

6. C O N G R E S S I O N A L B U D G E T O F F I C E
Framework for CBO’s Long-Term Projections
CBO makes long-term budget projections in two ways
Within the context of current law
Assuming changes to current law that continue
certain tax and spending policies that people have
grown accustomed to
An “alternative fiscal scenario”

7. C O N G R E S S I O N A L B U D G E T O F F I C E
Framework for CBO’s Long-Term Projections
Budget projections over the next 10 years are based on
detailed program projections underlying CBO’s baseline.
Beyond 10 years, CBO relies on its long-term model
(CBOLT):
A microsimulation model set within an actuarial framework
Governed by an overarching macroeconomic model
Spending on the major federal health care programs is
projected separately in an actuarial framework.

8. C O N G R E S S I O N A L B U D G E T O F F I C E
Longer-Term Budget Projections
CBO’s long-term model, beyond 10 years
Social Security
Medicare
Medicaid, CHIP, and exchange subsidies
Other noninterest spending, which generally is assumed to grow with GDP
Taxes
Value of long-term projections
Highlight trends
Provide baseline for assessing policy changes
Limitations of long-term projections
Uncertainty, especially for health programs
Interaction with macroeconomic conditions

9. C O N G R E S S I O N A L B U D G E T O F F I C E
Noninterest Spending and Revenues Under CBO’s
Long-Term Budget Scenarios as of June 2012
(Percentage of gross domestic product)
2000 2005 2010 2015 2020 2025 2030 2035
-10
-5
0
5
10
15
20
25
30
Noninterest
Spending
Revenues
Differencea
2000 2005 2010 2015 2020 2025 2030 2035
-10
-5
0
5
10
15
20
25
30
Revenues
Noninterest
Spending
Differencea
Actual Projected Actual Projected
Current Law Alternative Fiscal Scenario

10. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s 10-Year Budget Projections,
March 2012
0
2
4
6
8
10
12
14
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Medicaid, CHIP, and
exchange subsidies
Net Medicare
Social Security
Social Security and Major Health Care Programs
(Percentage of gross domestic product)

11. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s 10-Year Budget Projections,
March 2012 vs. May 2013
0
2
4
6
8
10
12
14
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Medicaid, CHIP, and
exchange subsidies
Net Medicare
Social Security
Social Security and Major Health Care Programs
(Percentage of gross domestic product)

12. C O N G R E S S I O N A L B U D G E T O F F I C E
Outlook for the Federal Budget as of June 2012
Social Security and Major Health Care Programs, As Projected and
Compared with the 40-year Average for Noninterest Spending
(Percentage of GDP)
0
5
10
15
20
2012 2037 40-Year Average
10%
15%
19%

13. C O N G R E S S I O N A L B U D G E T O F F I C E
Federal Spending on Major Health Care Programs, by
Category, Under Current Law, June 2012
(Percentage of gross domestic product)
2000 2005 2010 2015 2020 2025 2030 2035
0
2
4
6
8
10
Medicare
Medicaid,
CHIP, and Exchange
Subsidies
Actual Projected

14. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s Methodology for Long-Term Projections of
Federal Health Care Spending
For the June 2012 projections
Spending from 2012 to 2022 followed CBO’s March 2012 baseline.
Under the May 2013 baseline
The 10-year projection for net Medicare spending is slightly lower
than it was in the 2012 baseline.
The 10-year projection for spending for Medicaid, CHIP, and
exchange subsidies is somewhat smaller as well.

15. C O N G R E S S I O N A L B U D G E T O F F I C E
CBO’s Methodology for Projecting Federal
Health Care Spending
Projections beyond the 10-year budget window were based
on historical trends in health care cost growth, population
growth, and economic growth.
CBO will use the most recent data to update those trends.
Assumptions about trends in health care cost growth are
central to CBO’s long-term spending projections for health
care.

16. C O N G R E S S I O N A L B U D G E T O F F I C E
Excess Cost Growth
The concept of excess cost growth (ECG) helps define the
underlying path of the cost of health care.
ECG is the increase in health care spending per person relative to
the growth of potential GDP per person after removing the effects
of demographic changes on health care spending.
CBO calculates historical rates of ECG as a weighted average
of annual rates relative to potential GDP, placing twice as
much weight on the latest year as on the earliest year.
The resulting growth rate used in 2012 was 1.6 percentage points
per year.

17. C O N G R E S S I O N A L B U D G E T O F F I C E
Excess Cost Growth in Spending for Health Care
Medicare Medicaid
Other,
Including
Private Overall
1975 to 2010 2.1 1.8 2.0 2.0
1980 to 2010 1.8 1.4 1.9 1.8
1985 to 2010 1.5 0.9 1.7 1.6
1990 to 2010 1.4 0.3 1.4 1.3
(Percentage points)

18. C O N G R E S S I O N A L B U D G E T O F F I C E
Declining Path for Excess Cost Growth
Using the historical average for ECG for many years into the
future results in a projection of federal health care spending
that is very large.
Continued growth in health care spending will create
mounting pressure to slow the growth of health care costs
in general, even if federal law is unchanged (as is assumed
in CBO’s projections).
CBO assumes that ECG will slow over time.

19. C O N G R E S S I O N A L B U D G E T O F F I C E
2012 Assumptions About Excess Cost Growth in
Spending for Medicare over the Long Term
The underlying annual rate of ECG for Medicare was
assumed to decline from 1.6 percentage points to 1.0
percentage point over 75 years.
From 2023 to 2029 under current law, excess cost growth for
Medicare was assumed to equal the average cost growth
during the last three years of the 10-year projection period,
0.6 percentage points; thereafter, ECG was assumed to
follow the underlying path.
Starting in 2023 under the alternative fiscal scenario, ECG
was assumed to follow the underlying path.

20. C O N G R E S S I O N A L B U D G E T O F F I C E
2012 Assumptions About Excess Cost Growth in
Spending for Medicaid over the Long Term
The underlying rate of ECG was assumed to decline from
1.6 percentage points in the first year to zero in the final
year of the 75-year projection period.
The ending point is lower than that for Medicare because state
governments have more flexibility to respond to the pressures of
rising health care spending than does the federal government,
without changing federal law.
Under both current law and the alternative fiscal scenario,
ECG for Medicaid followed the underlying rates beyond
2022.

21. C O N G R E S S I O N A L B U D G E T O F F I C E
Projecting Population and GDP
CBO projects the U.S. population using estimates of births,
deaths, and immigration.
– CBO uses a cell-based approach to estimate the population
annually by single year of age (0-119) and sex.
– For Medicare only, the population matrix is further
extended by three “time until death” categories (0-12
months, 13-24 months, and survivor).
– Projections of mortality and fertility came from the
actuaries at the Social Security Administration.
– CBO projects rates of immigration.
CBO projects GDP using a macroeconomic growth model.

22. C O N G R E S S I O N A L B U D G E T O F F I C E
Strengths of CBO’s Approach
The long-term projections jump off a detailed 10-year
baseline projection.
The approach is based on historical excess cost growth in
health care spending
Adjusted for age, sex, and time until death (in Medicare).
The long-term projections for Social Security and health
care spending are designed within the context of CBO’s
overall long-term budget projections.
The projections provide a baseline for policy changes.