This brief explores the factors behind the 25% increase in Medicaid spending that occurred between fiscal years 2000 and 2002. It concludes that the spending increases have been driven by enrollment increases resulting from the loss of income and private insurance during the current economic downturn together with rising health care costs, particularly prescription drugs, which have affected the entire health care sector. Despite slower enrollment growth for the aged and disabled and for children and non-disabled adults, the aged and disabled accounted for almost 60% of the spending growth. Although current growth rates are clearly high relative to state fiscal capacity, per enrollee spending growth is below levels seen in the private health care market.