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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.

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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%. There are always rumors going around about Medicare running out of money. However, that is unlikely to happen as congress historically has raised the debt ceiling.

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 Medicare Part B, as well as operating the Medicare program itself. Medicare 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.

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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 citizens worry about Medicare or Social Security running out of funds. Some say the Medicare 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, Medicare enrollees who are retired may have their premiums paid by their former employers.

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

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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 licensed insurance representative today!

Kayla Hopkins

Kayla Hopkins

Content Editor
Kayla Hopkins is an accomplished writer and Medicare educator serving as the Editor of MedicareFAQ.com. Upon completing her Communications degree from Ohio University, Kayla dedicated her time to understanding the ever-evolving landscape of healthcare. With her extensive background as a Licensed Insurance Agent, she brings a wealth of knowledge and expertise to her writing.
Ashlee Zareczny

Ashlee Zareczny

Compliance Manager
Ashlee Zareczny is the Compliance Manager for MedicareFAQ. As a licensed Medicare agent in all 50 states, she is dedicated to educating those eligible for Medicare by providing the necessary resources and tools. Additionally, Ashlee trains new and tenured Medicare agents on CMS compliance guidelines. Ashlee is a Medicare expert who specializes in Medicare Supplement, Medicare Advantage, and Medicare Part D education.

7 thoughts on "How is Medicare Funded"

  1. As a person having worked in Healthcare all my employment life, I want to know why Medicare has not stopped wastful spending of EOBs??? It should be minimized!! Ir is wastful spending!!! Nany older would receuve the EOB via e-mail and all ither oeople can get a NEW SHORTER EOB on paper!
    SHORTEN THE WASTFUL EOBs!!! Get rid of the printing vendor. And, stop the waste of elders hard earned money. Thk U.

  2. Why don’t we get the money on our monthly payments I can buy a plan for less than a $1000 my self an have money left over for other expenses.

  3. One day we will wake up and wonder why some countries have free medical insurance.
    Yes for all their people ,and we do not .However America gives free money to these countries .Now we have in God we trust on are money,but not in our hearts.
    love to everyone

  4. 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.

    1. Why isn’t made public what the insurance gets in payment from the government for every Advantage member that is their customer ?


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