More than 56 million Americans were covered by Medicare as of 2016, and that number is growing as lifespans increase and more Baby Boomers reach retirement age. Medicare paid out a total of $702 billion in benefits in 2017.
How is Medicare Funded
The money for these benefits comes from a pair of trust funds held by the U.S. Treasury. These funds are mainly made up of general revenues, Medicare premiums, and payroll taxes. But there are differences in the way each of the Medicare parts is funded.
How is Medicare Part A Funded
Part A is Medicare’s hospitalization insurance. It pays for hospital stays, including tests and medications you receive while you are an inpatient at the hospital.
This Part may also pay for your care in a rehabilitation center or skilled nursing facility, or for home health care or hospice care. This coverage does have limitations, including limits on the number of days of care it will cover.
Part A is funded by the Hospital Insurance (HI) Trust Fund. As of 2017, the fund had $299.4 billion in revenue. Eighty-seven percent of it came from Medicare taxes.
Most people pay a 2.9 percent Medicare tax on their earnings (with employers and employees each paying 1.45 percent), but high earners pay more.
The HI fund also gets money from other sources:
- Income tax on Social Security payments
- Interest the trust fund earns on its investments
- Part A premiums
Most people don’t have to pay for their Part A coverage, but some people aren’t eligible for free coverage.
How is Medicare Part B Funded
Part B is Medicare’s medical insurance. It covers medical costs that don’t involve a stay in the hospital, like doctor visits, outpatient surgery and lab work. Part B is funded by a different trust fund, the Supplementary Medical Insurance (SMI) Trust Fund. This fund also pays the costs of administering the Medicare program.
The SMI fund gets its money from general revenue funds authorized by Congress, premiums that Medicare enrollees pay for Part B and Part D (prescription drug) coverage, interest on the trust fund’s investments, and other sources.
General revenues cover 71 percent of Part B costs, with beneficiary premiums covering 27 percent, and the remaining 2 percent paid with interest and other sources. Most people pay a Part B premium of $135 a month, but people with incomes over $85,000 ($170,000 for a couple) pay a higher premium.
How is Medicare Part D Funded
Part D is Medicare’s prescription drug coverage. As of 2017, Part D gets 73 percent of its financing from general revenues, 15 percent from beneficiary premiums, and 11 percent from state payments for beneficiaries who qualify for both Medicare and Medicaid.
Part D premiums vary by plan. As with Part B, people with high incomes pay a higher premium.
How are Medicare Advantage Plans Funded
Unlike Medicare Parts A & B and Part D, Medicare Advantage is provided by private insurers. Each year a set amount is allocated for each Medicare Advantage enrollee to the private insurers by the government for health care expenses. It doesn’t matter how high or low the enrollee’s costs are, the amount is the same for each person.
Medicare Advantage plans have the same benefits as Parts A and B, and many of them also include Part D prescription benefits. The funds for Medicare Advantage come from the same place as the funds for Parts A, B, and D–there is no separate funding for Medicare Advantage.
It’s important to think carefully about your priorities when it comes to medical care and what will work best for your lifestyle, your budget, and your health. For more information on Medicare plans, call us or fill out this form.