Medicare and Medicaid’s Impact on the Fiscal Cliff

by Steven Schou, CFP, CFO, Senior Partner, Investment Advisor Representative

According to the National Commission on Fiscal Responsibility and Reform Report (NCFRR), federal healthcare spending represents our single largest fiscal challenge over the long-run. A brief history of Medicare shows that the largest change in social insurance occurred not in the cash benefits programs, such as social security, but rather in the area of health insurance. The Medicare program was initiated in 1965. On average, Americans live 14 years longer in retirement so at a time when the baby boomers start to reach age 65, overall health care costs continue to grow faster than the economy and federal health spending threatens to balloon. The $16 trillion debt and the ballooning obligations known as entitlements still haven’t been faced, and they threaten the long-term stability of the U.S. economy. Under its extended baseline scenario, the Congressional Budget Office (CBO) projects that federal health care spending for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the health insurance exchange subsidies will grow from nearly 6% of the GDP in 2010, to about 10% in 2035, and continue to grow thereafter. These projections likely understate true amounts because they count on large phantom savings through the Community Living Assistance Services and Supports Act, or “Class Act.” Commission members and virtually all budget experts agree that the rapid growth of federal healthcare spending is the primary driver of long-term deficits.

Fiscal prudence dictates that to keep Medicare and Medicaid intact along with the other wrap around programs involved, that there must be a target holding growth to the GDP plus 1%. If healthcare costs continue to grow as fast as the CBO and the Medicare actuaries project, it should require Congress and the President to consider actions that make more substantial structural reforms.

Many of the proposed fixes for Medicare, Social Security and other entitlements are not that radical. They include higher eligible ages and higher premiums for higher income seniors according to Robert J. Samuelson of the Washington Post.
According to a January 2012 Congressional Budget Office report; “Many of the people who would otherwise have enrolled in Medicare would face higher health insurance premiums, higher out-of-pocket deductibles, or both.” The same report however, noted that raising the eligibility age from 65 to 67, like Social Security, would cut the program’s cost by $148 billion from 2012 to 2021.

Without change, the U.S. is clearly on a parallel path to the kind of debt and spending problems that have seriously wounded some European nations. With the changing demographics of our country, the fiscal sustainability of Social Security, Medicare, Medicaid and various other programs may prove to be broken promises, without realistic fiscal adjustments.
In the greatest country in the world, we Americans have always pulled together to help each other out. Why should we not hold the President and Congress accountable to do what is best for current and future generations as well?


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Steven (Steve) Schou
Senior Director
Investment Advisor Representative
815-877-8440 (Ext. 128) (Northern Illinois)
608-442-5637 (Southern Wisconsin)

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Steve serves as Chief Financial Officer, and is a co-owner of Klaas Financial, inc., and its’ subsidiary companies. Steve has worked in the financial services industry since 1979 and obtained his Certified Financial Planner certification in 1994. Steve is a member of the Financial Planning Association and locally on the executive board of Patriot’s Gateway Center.