In 2017, Medicare benefit payments topped $700 billion. Medicare funding made up 15 percent of total federal spending in the same year, which equaled that of defense spending.1
Medicare is paid for through two Medicare trust funds that get their money from payroll taxes, Social Security benefit taxes and from certain Medicare premiums.
Here we explain more of exactly just how Medicare is paid for.
Medicare has two trust funds
The U.S. Treasury maintains the two Medicare trust funds:
Hospital Insurance (HI) Trust Fund
The Medicare HI Trust Fund is paid for by:
- Payroll taxes paid by employers and employees
- Taxes paid on Social Security benefits
- Interest earned on trust fund investments
- Medicare Part A premiums
The money in this account is used to fund Medicare Part A (hospital insurance). It also pays for Medicare administration costs and fighting Medicare fraud and abuse.
Supplementary Medical Insurance (SMI) Trust Fund
The Medicare SMI Trust Fund is paid for by:
- Funds authorized by Congress
- Medicare Part B and Part D premiums
- Interest earned on trust fund investments.
The money in this account pays for Part B medical insurance benefits such as durable medical equipment and preventive services. It also pays for Medicare Part D prescription drugs.
The percentages of how Medicare is funded
The chart below illustrates Medicare’s total revenue in 2017 for Medicare Part A, Part B and Part D combined.
As you can see, general revenue (which is mostly from federal taxes) along with payroll taxes account for nearly 80 percent of all Medicare funding. Premiums paid by beneficiaries made up just 14 percent of Medicare revenue.
We can further break down how each part of Medicare is funded.
- Medicare Part A received 87 percent of its 2017 revenue from payroll taxes. Employers and employees each pay 1.45 percent on all earnings (for a total of 2.9 percent). Many people will pay Medicare taxes for 40 years or more before ever collecting any Medicare benefits.
- Medicare Part B received 71 percent of its funding in 2017 from general revenue and another 27 percent from premiums. Part B is optional and thus does not receive any funding from payroll taxes. All Part B beneficiaries must pay a monthly premium to maintain coverage (see below for information about Part B premiums).
- Medicare Part D, which consists of privately-sold prescription drug plans, receives 73 percent of its funding from general revenue, with another 15 percent coming from premiums and 11 percent from state payments for beneficiaries who are dual eligible, meaning they get Medicare and Medicaid benefits.
What will I pay for Medicare premiums?
In many (but not all) cases, Medicare beneficiaries must still make premium payments in order to maintain coverage.
- Part A
If you worked and paid Medicare taxes for at least 40 quarters (the equivalent of 10 years), you will not have to pay a premium for Medicare Part A. Most beneficiaries fall into this category.
But if you only paid Medicare taxes for between 30 and 39 quarters, your 2019 premium will be $240 per month in 2019. And if you paid Medicare taxes for fewer than 30 quarters, your monthly payment will be $437 in 2019.
- Part B
The standard Part B premium in 2019 is $135.50 per month. But the Part B premium is based on your reported income from two years prior, so higher-earning individuals may have to pay a Medicare Income-Related Monthly Adjustment Amount (IRMAA).
- Part C
Medicare Part C plans (also called Medicare Advantage) are sold by private insurers, and each insurance provider will determine how much you pay. In 2019, the average Part C premium is projected to be $28.00 per month.2 Some Medicare Advantage plans feature $0 premiums, though $0 premium plans may not be available in all locations.
- Part D
Part D plans are sold by private insurers, so premiums may vary from one plan to the next. In 2019, the average Part D premium is projected to be $32.50 per month.2 Some Part D plans may also feature $0 premiums.
What will I pay for Medicare deductibles?
Before Original Medicare (Part A and Part B) will pay for most qualified expenses, beneficiaries must first satisfy a deductible.
In 2019, the Medicare deductibles are as follows:
- Part A
The Medicare Part A deductible is $1,364 for each benefit period. A benefit period begins the day you are admitted to a hospital and ends once you have been out of the hospital for 60 consecutive days. Theoretically, the Part A deductible can reset multiple times over the course of a year.
- Part B
The Part B deductible is $185 per year.
- Part C
Because Medicare Part C plans are sold by private insurance companies, deductibles can vary according to plan and provider.
- Part D
Part D plans are also sold by private insurers, and deductibles can vary across the board.
Get the answers to your Medicare questions
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1 Cubanski, Juliette; Neuman, Tricia. The Facts on Medicare Spending and Financing. (Jun. 22, 2018). Kaiser Family Foundation. Retrieved from www.kff.org/medicare/issue-brief/the-facts-on-medicare-spending-and-financing.
2 CMS. Medicare Advantage premiums continue to decline while plan choices and benefits increase in 2019. (Sep. 28, 2018). Retrieved from www.cms.gov/newsroom/press-releases/medicare-advantage-premiums-continue-decline-while-plan-choices-and-benefits-increase-2019.