We enter this century with an unprecedented federal budget surplus-$4.6 trillion over the next 10 years. A substantial portion of the surplus comes from savings in the health care sector. The 1997 Balanced Budget Act cut payments to Medicare providers and raised the premiums for individual beneficiaries, but we overshot the mark. Instead of balancing the budget, we generated a huge surplus. We underestimated the magnitude of Medicare savings. Medicare savings over the period from 1998 to 2007 represent an estimated 15% of the total budget surplus. Fifteen percent of the 10-year budget surplus from 2001 to 2010 comes to $680 billion. We also underestimated the drop-off in Medicaid coverage, as welfare reform took hold. In the year 2000 Medicare and Medicaid outlays were an estimated $104 billion less than projected just 5 years ago-representing an estimated 45% of the budget surplus this year, or about $1 trillion of the 10-year surplus.