For the past 40 years, the Congressional Budget Office has been issuing independent, non-partisan projections of federal spending.

Why do you need to know this? Because state programs often depend on federal support. If federal support falls, it will have a major impact on the programs you evaluate. You can help your state avoid costly decisions down the road by preparing for these changes now.

The short story of CBO’s projections is that federal support for medical programs will expand and discretionary spending will shrink in the future.

Medical programs on the rise

CBO projects that the share of federal spending on medical programs will increase by approximately 70 percent over the next 25 years. CBO notes “the number of people receiving benefits from government programs will increase sharply during the next two decades”.

CBO Image 1Key medical programs include Medicaid, Medicare, Children’s Health Insurance Program (CHIP), and health insurance subsidies as part of the Affordable Care Act (ACA).

What is driving up medical costs? According to CBO, there are three primary drivers: 1) an aging population requires more medical care; 2) medical costs continue to grow faster than inflation; and 3) the expansion of Medicaid under the ACA and its related subsidies. Aging accounts for roughly 55 percent of the growth, increasing medical cost inflation per beneficiary accounts for 24 percent, and the ACA accounts for the remaining 21 percent.

On average, the federal government pays 60 percent of the costs of Medicaid. As medical costs continue to grow, states will also face rising expenses for their 40 percent match. CBO predicts that many state governments will manage rising Medicaid costs by restraining the rates paid to providers, limiting the services they choose to cover, or tightening eligibility to reduce the number of beneficiaries.

Discretionary spending will declineCBO Image 3

Since the 1970’s discretionary spending has been falling. CBO believes this trend will continue for decades to come. What used to amount to half of federal spending has declined to approximately a third in recent years. Over the next few decades, it will decline even further.

Discretionary spending spans a wide array of government programs. The list of programs is too exhaustive to name them all, but they include areas such as education, workforce development, social services, transportation, housing, research and public health, criminal justice and natural resources.

It’s likely you see at least one program in your workload that will face challenging fiscal times in the future.

What does this mean for performance auditors?

Auditors should consider these projections within the context of their work. Programs with declining federal support are at risk for fiscal problems in the decade to come. By evaluating these programs, such as those in natural resources, with the view that funding will dry up we can make recommendations to get their fiscal house in order, before the roof collapses.

For medical programs, look for fraud and waste. Gear your evaluations around cost effectiveness and tie outcome measures to program costs. As states take on an increasing financial responsibility over the ACA expansion, also consider how this might pose new fiscal challenges for your state. A key legislator in Oregon recently said that two thirds of increased revenue in the next budget cycle are being directed to Medicaid. That leaves few dollars on the table for other programs with growing expenses.

Uncertainty and changes in law

Long-term forecasts are subject to a high degree of uncertainty. Keep in mind that these numbers can and will change. For example, if a new cost-effective cure for cancer is developed in the next decade, this will have a major impact medical spending.

CBO Image 2

Changes in law will also have a major impact on these projections. For example, if the Supreme Court or a future congress repeals provisions of the ACA it will dramatically change how much money is spent by the federal government on Medicaid.