Economic and Demographic Drivers of U.S. Medicare Spending (2010–2023): An Econometric Study Using CMS and FRED Data

Abstract

The health insurance system of the U.S. in the older population is under the increasing social and financial strain of Medicare as the age of the population grows. Knowledge on the structural determinants of Medicare spending is the key to long-term sustainability and help in future policy reforms.
The paper will examine the economic and demographic conditions that will impact the Medicare spending in the U.S. in 2010-2023 based on the national data of Centers of Medicare and Medicaid Services (CMS) and Federal Reserve Economic Database (FRED). Retrospective, quantitative study was carried out based on annual data on Medicare expenditures, gross domestic product (GDP), inflation rates (CPI and Medical CPI) and the number of Americans aged 65 and above. R (version 4.3.1) was used with NeweyWest robust standard errors to perform descriptive, correlational and multiple regression analyses. Diagnostic tests were done such as Breusch Pagan, Breusch Godfrey, variance inflation factor and Augmented Dickey Fuller tests to be sure that the model is valid and also to test the robustness of the model was done through a first-difference model.
The results have shown that the nominal Medicare spending has increased nearly 2 times with a 519 billion spent in 2010 and more than 1 trillion in 2023 with inflation-adjusted expenditure growing by about 40 percent. GDP and the population age 65 and above became the best predictors of expenditure growth (p < 0.05) and together with the population age 65 and above they explained over 99% of the total spending (R 2 = 0.996). The overall increase notwithstanding, the real per-capita spending increased comparatively, which implies that there might be certain areas of improvement in the Medicare system. Diagnostic tests showed no major problems in serial correlation, heteroskedasticity and multicollinearity.
Economic growth and population aging are the two key sources of inflation in Medicare spending as the secondary contributor, and inflation is the minor contributor. To achieve the fiscal sustainability of Medicare, policy strategies focusing on productivity-oriented reforms, specific financing adaptations, and structural efficiency will be needed to protect the sustainability of the program as the U.S. population is aging.