CMS spent about a quarter of every federal dollar in fiscal 2025. Zoom in level by level and you reach the surgeon's fee for a knee replacement, a line that keeps shrinking while the totals above it keep growing.
Each bar is a share of the row directly above it. Bases differ slightly by row (fiscal vs. calendar year, net cost vs. benefits vs. allowed charges), so treat the shares as approximate. Sources 1, 2, 3, 4.
CMS is the federal government's single largest health payer. In fiscal 2025 its net cost was $1.69 trillion, covering about 68 million Medicare enrollees, roughly 70 million people in Medicaid and over 7 million in CHIP. More than 12 million people are in both Medicare and Medicaid.
CMS net cost by program, FY2025
Medicaid is jointly financed; states add their own share on top of the federal figure shown. ACA marketplace premium tax credits ($140B in FY2025) flow through the Treasury rather than CMS's budget. Sources 1, 2.
Nationally, all U.S. health spending reached $5.3 trillion in 2024, 18% of GDP, up 7.2% in a year. Medicare accounted for $1.1 trillion of it and Medicaid $932 billion. By service, hospitals took $1.6 trillion, physician and clinical services $1.1 trillion, and retail prescription drugs $467 billion. Source 5.
Medicare benefit spending hit $1.2 trillion in 2025, up from $666 billion a decade earlier. Inside that total, the mix has shifted: hospital insurance (Part A) fell from 43% of benefits in 2016 to 37%, while outpatient and physician-related Part B rose to 48% and drugs (Part D) climbed to 15%.
Traditional Medicare, Parts A and B benefits, 2025
$481 billion. The physician fee schedule pays every doctor, nurse practitioner and therapist billing Medicare, for every procedure, visit and imaging read.
Drugs, SNF and hospice are approximate (8%, 6%, 6% of the total). Source 3.
Where Medicare is headed
CBO baseline, February 2026. Gross outlays in billions of dollars, fiscal years.
| 2025 | 2026 | 2036 | |
|---|---|---|---|
| Gross Medicare outlays | $1,189B | $1,295B | $2,433B |
| Part D (drugs) | $259B | $445B | |
| Enrollees | 68.6M | 80.5M | |
| Medicare as share of GDP (Trustees) | 4.1% | 6.5% by 2050 |
Drivers named by the Trustees: an aging population, rising Medicare Advantage costs including coding, higher provider payment rates, and in Part D, GLP-1 and specialty drugs with lower expected rebates. Sources 6, 7.
Private Medicare Advantage plans covered 51% of beneficiaries in 2026, projected to reach 56% by 2035. Medicare's independent advisers, MedPAC, estimate that in 2026 the government will pay MA plans 14% more than it would have spent on the same people in traditional Medicare, about $76 billion.
MedPAC's estimate of MA payments, as a share of traditional Medicare cost for the same people, 2026
Down from an estimated $84B in 2025 as CMS's revised risk model phased in. The plan industry disputes MedPAC's method and points to supplemental benefits and lower out-of-pocket costs for enrollees. Sources 7, 8.
This is the link to the knee fee. The physician fee schedule is a small share of Medicare, yet it is the only major Medicare payment system with no automatic inflation adjustment. Hospitals, surgery centers, nursing facilities and hospice all start each year with a market-basket raise. Doctors start with whatever Congress patches in, and any internal reshuffle must net to zero.
Proposed 2027 updates
Hospital rates from the FY2027 IPPS and CY2027 OPPS/ASC proposals; physician figure is the proposed non-APM conversion factor change. Sources 9, 10.
What the fix would cost, against other lines
These are different kinds of dollars (a 10-year cost, a one-year estimate, a one-year error rate) shown together only for scale. Sources 1, 7, 11.
Three features of the fee schedule make it the pressure valve:
Budget neutrality. Any revaluation moving spending more than $20 million must be offset inside the fee schedule. Raising pay for primary care or behavioral health means cutting procedures, which is exactly what the 2027 proposal does.
No inflation link. Statutory updates were 0% for 2020 through 2025, then 0.25% or 0.75% from 2026. Congress added temporary bumps most years, but they expire, so the base never catches up. The AMA puts the real decline in physician pay since 2001 at 33%.
It is the cheapest lever. CMS can change RVUs by rule each year. Changing hospital updates, MA payment or drug prices takes legislation or brings larger fights. MedPAC itself recommends a permanent 0.5% raise to the physician base for 2027 rather than a full inflation link.
The 2025 reconciliation law (P.L. 119-21, the One Big Beautiful Bill Act) is the largest change to Medicaid financing since the ACA. CBO estimates its main Medicaid provisions reduce federal deficits by roughly $700 billion over 2025 to 2034, and its Medicaid chapter adds about 7.5 million uninsured by 2034.
Largest Medicaid provisions in P.L. 119-21, CBO estimates, 2025 to 2034
Work requirements, provider taxes and redeterminations are scored as deficit reduction; state-directed payments as reduced federal Medicaid outlays. Source 12.
Separately, the enhanced ACA premium tax credits expired after 2025. Paid marketplace enrollment fell from a 2025 peak of 22.1 million to 19.2 million in February 2026, about 3 million fewer people. Those who stayed paid 58% more in premiums on average, and deductibles rose by over $1,000 per person as many moved to bronze plans. Source 13.
For hospitals and physicians, fewer insured patients means more uncompensated care at the same time Medicare rates tighten, which is part of why provider groups describe the pressure as cumulative rather than one policy at a time.
Drug price negotiation
Price cuts on the first 10 negotiated drugs, effective January 1, 2026. CMS estimated about $6 billion in Medicare savings had the prices applied in 2023, and $1.5 billion lower out-of-pocket costs for enrollees in 2026. A second round of up to 15 drugs follows in 2027. Source 14.
Improper payments, traditional Medicare
6.55% of fee-for-service payments in FY2025, down from 7.66% the year before. Improper means paid without adequate documentation or eligibility, not necessarily fraud. Source 1.
Alongside these, CMS is pushing care into mandatory bundles (TEAM began in 2026; the CJR-X joint replacement model is proposed for October 2027), tightening MA risk coding, and moving procedures to lower-cost outpatient and surgery center settings. Each reduces spend per episode; none changes the underlying demographic growth.
Medicare's hospital insurance trust fund is projected to run short in 2033. At that point payroll taxes would cover about 89% of Part A costs, which would trigger an automatic cut of roughly 11%, growing to 16% by 2040, unless Congress acts. Parts B and D are funded mostly from general revenue and premiums, so they cannot go insolvent, but they draw ever more from the general budget. Source 6.