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How is Medicare Funded


There’s such a high demand for health coverage, and everyone in the workforce watches payroll deductions slip from their paychecks. Indeed by now, you’re probably asking yourself how these programs are funded. The federal program takes a percentage of your payroll taxes as a deduction from employers, employees, and self-employed individuals. The U.S. Treasury Department runs two trust funds. One for Social Security and one for Medicare.

How is Medicare Part A Funded?

Your hospital coverage through Part A has funding through the Hospital Insurance trust fund. This trust fund covers inpatient care like hospice, home health care, and skilled nursing facilities.

Typically, people pay 2.9% on Medicare taxes from their payroll earnings. The 2.9% comes from 2 parties; employers contribute 1.45%, and employees contribute 1.45%.

Another source of funding for the program comes from:

  • Income taxes on Social Security benefits
  • Premiums associated with Part A
  • Interest accrued on trust fund investments

How is Medicare Part B Funded?

The Supplementary Medical Insurance trust fund is what’s responsible for funding Part B, as well as operating the Medicare program itself. Part B helps to cover beneficiaries’ doctors’ visits, routine labs, and preventive care.

This trust fund receives funds through the following avenues:

  • Funds that are sanctioned by the United States Congress
  • Interest accrued through trust fund’s investments
  • Part B and D-related premiums
  • The SMI trust fund is also responsible for funding Part D

How is Medicare Advantage Funded?

Medicare Advantage plans are insurance plans that beneficiaries utilize through private insurance companies. Three sources of revenue for Advantage plans include general revenues, Medicare premiums, and payroll taxes.

The government sets a pre-determined amount every year to private insurers for each Advantage member. These funds come from both the HI and the SMI trust funds.

How Do Medicare Advantage Carriers Make Money?

Advantage plan companies receive payments from Medicare. These plans get money per enrollee; it’s a set amount. Medicare makes separate payments for any plans that provide prescription drug coverage. Plans are paid for by Medicare through a bidding procedure. Bids are submitted depending on the costs for each member for services.

Bids that meet all qualifications receive approval. Benchmark amounts vary depending on the region. Benchmark amounts can range from 95% to 115% of Medicare costs. If bids come in higher than benchmark amounts, the enrollees must pay the cost difference in a monthly premium.

When bids are lower than benchmark amounts, Medicare and the health plan provide a rebate to enrollees after splitting the difference in cost. A new bonus system works to compensate for health plans that have high-quality ratings. Advantage plans that have four or more stars receive bonus payments for their quality ratings.

How Much Does the Government Pay Medicare Advantage Plans?

The federal government pays out over $1,000 each month for each enrollment for every individual. $1,000 is a substantial amount when considering the number of enrollees they see, and bonus payments received through the bonus system.

Sometimes the Medicare Advantage plan will get over $9,000 from the government to handle the claims of a “high risk” patient. High risk can include patients with heart disease, diabetes, or other chronic condition.

Will Medicare Funding Run Out?

Many seniors worry about Medicare or Social Security running out of funds. Some say Part A trust fund will be very low or non-existent in 2026. However, some experts suggest it won’t go broke; the cost will be higher.

Of course, this isn’t saying Medicare will halt payments on hospital benefits; more likely, Congress will raise the national debt. Medicare already borrows most of the money it needs to pay for the program. The Medicare program’s spending came to over $600 billion, 15% of the federal budget.

How are Medicare Supplements Funded?

Medicare Supplement plan funding is through beneficiary premiums. These payments go to private insurance companies. Many times, seniors who are retired may have their premiums paid by their former employers.

The federal government doesn’t contribute financially to Medigap premiums.

If you’d like more information on Medicare plans near you, complete an online rate comparison form to have an agent get in contact with you. Also, you can call the number above and speak with a Medicare expert today!

Jagger Esch

Jagger Esch is the Medicare expert for MedicareFAQ and the founder, president, and CEO of Elite Insurance Partners and MedicareFAQ.com. Since the inception of his first company in 2012, he has been dedicated to helping those eligible for Medicare by providing them with resources to educate themselves on all their Medicare options. He is featured in many publications as well as writes regularly for other expert columns regarding Medicare.

One thought on “How is Medicare Funded

  1. How does one find out how much the government pays Medicare for Advantage Plans in 2021 and2022?
    Aetna has an Advantage Plan for federal retirees who have Medicare A and B. I would like to know this amount for this plan and Aetna staff say they don’t know.

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