How Is Medicare Funded?: A Quick Guide

Medicare is a federal health insurance program created in 1965 for seniors in America. A US citizen or legal permanent resident aged 65+ (or under 65 receiving Social Security Disability Insurance or with End-Stage Renal Disease) would qualify for this program. In 2017, as many as 58.4 million individuals were enrolled in the program, and the numbers have steadily increased throughout the years.

Now, this begs the question: how is Medicare funded?

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Sources of Funding

Medicare isn’t a free health care scheme, even though it is a form of social health care. Primarily, Medicare is funded by federal tax revenue (general revenue), payroll taxes paid by employers and employees, and premiums paid by its beneficiaries.

Learning about the many Medicare plans can be confusing, which is why insurance agents such as from are available to help people choose the best plans that suit their requirements and explore the alternatives.

How It’s Funded

Medicare Parts A, B, and D are funded by the Hospital Insurance (HI) Trust Fund and Supplementary Medical Insurance (SMI) Trust Fund, in which, both accounts are held by the U.S Treasury.

Medicare Part A

Medicare Part A benefits are funded by the HI Trust Fund. The HI Trust Fund is backed by the Medicare Tax, which is a requirement for all employers and employees to pay income tax to. Currently, the Medicare Tax for U.S employers and employers is 1.45% for the first $200,000 in wages, and 2.35% on all wages that exceed $200,000. This extra 0.9% is called the Additional Medicare Tax. Your benefits may differ if you are under a Medicare Advantage Plan, but these are the minimum benefits covered under Part A:

  • Nursing home care
  • Inpatient hospital care
  • Hospice care
  • Skilled nursing facility
  • Home health care

According to Centers for Medicare and Medicaid Services (CMS), in 2018, the average per beneficiary cost for the Part A category was $5,241.

Medicare Part B

The SMI Trust Fund backs the Medicare Part B and Part D benefits. Part B covers:

  • Ambulance and preventative care services
  • Outpatient doctor visits
  • Mental health
  • Second opinions before surgery
  • Durable medical equipment (DME)

Part D on the other hand covers:

  • Prescription drugs

It is reported in CMS that in 2018, the average cost per beneficiary funded by the SMI Trust Fund for Parts B and D were $6,253 and $2,171 respectively.

Medicare Part C

Also known as Medicare Advantage (MA), these are private plans being offered by private health insurers that are approved by the government. This is an alternative Medicare route to Parts A and B, or collectively known as Original Medicare. One must enroll in Original Medicare to purchase MA, so that’s already around $135 (depending on income).

Other than that, the costs of Mas vary by plan, but it is capped to no more than $6,700 annually for inpatient and outpatient services. Typically, MAs cover vision, dental, hearing, and prescription drug coverage which aren’t covered by the Original Medicare.

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