CBO’s Revised Health Care Projections—And It’s Not Good

Yesterday, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: 2026 to 2036. Below, I highlight 10 key takeaways related to government health care programs.

First, yesterday’s newsletter discussed a new policy brief from Demetrios Kouzoukas and Jackson Hammond. That brief reviewed major Medicare reforms implemented by the Centers for Medicare and Medicaid Services (CMS) last year, along with a targeted agenda for the agency’s rulemaking in 2026. The newsletter did not include the link to our new policy brief, but you can find it here.

Rising Red Ink from Federal Health Care Programs

In early 2023, Paragon released two important papers, The Contribution of Federal Health Programs to U.S. Fiscal Challenges and the Need for Reform by Paul Winfree, and Turning the Tide on Red Ink: Commonsense Policies to Make Federal Health Programs More Sustainable, which I coauthored with Joe Albanese.

Paul’s paper showed that federal health care programs and their rapid growth represented the largest and most immediate threat to the nation’s fiscal health. According to Paul’s modeling, putting the federal budget on a sustainable trajectory—without a cycle of rising debt and interest rates—would require reducing federal health spending by at least 7.5 percent of baseline program spending across Medicare, Medicaid, and the Affordable Care Act (ACA), or nearly $2 trillion over the decade. Unfortunately, since Paul’s paper was published three years ago, there has been explosive additional spending growth in both Medicaid and the ACA.

Yesterday’s CBO report shows that Medicaid spending surged again last year, exceeding earlier projections. But the bigger story was the rise in unexpected Medicare spending. That unexpected spending is driven by a surge in Medicare Part D. It turns out that the Inflation Reduction Act (IRA), which included a major Part D redesign, has led to escalating premiums—the vast majority of which are paid by taxpayers.

Overall, CBO’s message is clear: rising entitlement program costs and soaring interest costs are driving the federal debt to record levels, with no end in sight. CBO projects that the federal debt held by the public will reach 101 percent of GDP this year, surpass the all-time World War II high of 106 percent of GDP in 2030, and reach 120 percent of GDP by 2036. On this trajectory, mounting interest costs, inflationary pressures, and higher future tax rates threaten long-term American prosperity.

There are policy options to stem this tide of red ink, but it will require policymakers to summon courage to tackle the key challenges. One bit of bright news—just last year, Congress enacted important Medicaid and ACA reforms in the One Big Beautiful Bill (OBBB) to trim waste, fraud, abuse, and corporate welfare. Given this dire CBO report, those reforms are even more important than we thought at the time. And hopefully, they represent stepping stones toward putting Medicare, Medicaid, and the ACA on more sustainable fiscal paths.

10 Key Health Policy Takeaways from CBO’s Update

1) The Medicare baseline is up $1.0T (7 percent) from last year.

2) Medicare’s size and growth already represented the primary fiscal threat to the U.S. budget, so this outlook significantly worsens the fiscal trajectory.

3) Most of the Medicare increase is from the drug program (Part D). CBO raised spending projections for Part D by $0.6T and fee-for-service by $0.5T, while lowering projected Medicare Advantage spending by $0.1T.

4) The failure of the Inflation Reduction Act’s Part D redesign looks complete—having driven Part D spending and premiums sharply higher. Plan bids project a 35 percent increase in per-enrollee costs in 2026, building off a 20 percent increase in 2024 and a 42 percent increase in 2025—much larger increases than the typical low single-digit increases—or even decreases—in the pre-IRA era.

5) The IRA’s drug provisions will likely turn out to be a major budget buster rather than a saver. (CBO also projects that the ‘negotiations’ are saving less than expected.)

6) CBO projects that the 2025 CMS rule addressing the outrageous skin substitute payment scheme will save $250B over 10 years—a massive win for seniors ($130 lower annual Part B premiums) and the nation’s taxpayers.

7) The skin substitute payment change, plus rules addressing improper enrollment and fraud in the ACA exchanges, show that the Trump administration has pursued fiscally responsible regulatory actions—a welcome contrast to years of Biden-era fiscal profligacy at HHS.

8) CBO raised the 10-year Medicaid baseline, excluding the crucial reforms in the One Big Beautiful Bill (OBBB), by $0.7T. This means that the ten-year Medicaid baseline grew by $2T during the Biden era, as improper enrollment, fraud, and corporate welfare expanded in the program.

9) The important Medicaid reforms in the OBBB—to preserve Medicaid for those eligible, reduce corporate welfare, and promote fiscal sustainability—appear even more important now, given the explosion of spending under Biden-era policies.

10) The OBBB did not cut Medicaid. The program continues to grow, albeit at somewhat slower rates, because of the OBBB’s important reforms to ensure benefits go to the vulnerable who are truly eligible and are not lost to fraud and corporate welfare.