I don't know for sure what is going on here, but I asked Bug Guide for help and someone there suggested that this poor caterpillar had been parasitized by a fly of some sort, and this is the fly maggot emerging. Apparently the fly larva will grow and grow inside the body of the caterpillar, who, as the unwitting host, continues to feed and grow, thereby helping the parasite to thrive until such time as the parasitic insect needs to emerge, which may be what is going on here.