BB’s Medicare Funding 101

Medicare funding 101

In all my discussions on the affordability side of Affordable Health Care and Beyond for ALL Americans, it is important to always “follow the money” from the source.  Medicare funding paid out $638.7 billion in benefits and covered 55.3 million people (17% of the U.S. population) in 2015. At around 20% of all healthcare spending in the United States, it is the largest category of spending and therefore merits a closer look at what are the sources for its funding.

Sources of Medicare Funding

Many people are under the mistaken belief that the Medicare program is self-funded through Medicare payroll taxes.  I have repeatedly heard people say “I paid into Medicare all my life and I am entitled to it when I retire”. They think their money is in a special trust fund waiting for them to spend it. It is correct that people are entitled to receive the benefits of the Medicare program, but it is incorrect that this entitlement is related to payment of payroll taxes. Paying payroll taxes for 40 calendar quarters (10 years) only entitles a person to premium-free Medicare Part A. There are also people who are entitled to premium-free Medicare Part A without paying any payroll taxes.  For example, the non-working spouses of persons who qualify and many disabled persons of all ages fall into this category.

As I described in BB’s Medicare Introduction, a person is entitled to Medicare if he/she is an American citizen (or legal resident who has lived in the United States continuously for at least five years) AND is aged 65 (and older) or has certain disabilities (all ages). This common (and erroneous) belief that the Medicare program is self-funded through payroll taxes (currently 1.45% (or more for higher wage earners) paid by the employee and 1.45% by the employer) only serves to mask the truth behind how much taxpayers are really paying for Medicare.

According to the Centers for Medicare & Medicaid Services (CMS), Medicare expenditures are paid using funds from multiple sources and the largest source is the federal government’s general revenue fund (42% of total) and not the Medicare payroll taxes (37% of total) people pay while employed. I have summarized the Medicare funding information in two ways below:


medicare funding tableThe other category includes funds from taxation of social security benefits (for those with incomes greater than $25,000 (individual) or $35,000 (joint)), interest income, and Medicaid transfers from states. Medicare Part C (Medicare Advantage) is not treated as a separate financial entity by CMS and its hospital and medical expenses are included in Parts A and Part B accounting, respectively.  As you can see above, Medicare payroll taxes are only used to fund Medicare Part A (hospital) and they only pay for 88% of that total Part A bill!

Medicare Trust Funds–Holding Place for Medicare Funding

Your Medicare payroll taxes go into a Hospital Insurance (HI) trust fund that pays for Part A expenses (yellow in the figures).  The next time you hear that Medicare is headed for bankruptcy; you should understand what this really means to you. When the term bankruptcy is used to describe Medicare, it doesn’t mean that Medicare has zero dollars left to pay the bills. Given the current trends in spending, it simply means that the Hospital Insurance (HI) trust fund is projected to run short of money to pay all of its bills.  Thanks to Obamacare reforms,  the HI trust fund will be able to meet its obligations until 2029 due to reductions in waste, fraud, and abuse. Inquiring minds might want to ask why the bureaucrats at CMS had to wait for Obamacare to root out waste, fraud, and abuse?  Without additional healthcare reform to bring down the total cost of healthcare before 2029, HI trust fund shortfalls will have to be made up by increasing payroll taxes, increasing the tax on social security benefits, passing greater cost share onto beneficiaries, and/or reducing benefits.

Medicare Part B and Part D are funded out of separate Supplementary Medical Insurance (SMI) trust funds and are financially structured differently than the Hospital Insurance (HI) trust fund. The SMI trust funds cannot run short of funds and therefore cannot go bankrupt. These funds are endlessly supplied by taxpayers with money to spare —either in the form of income taxes or as monthly premiums to beneficiaries!  Tapping the taxpayer for Medicare funding is easier and doesn’t step on any special interest toes than does reforming Medicare to decrease the total costs.

Each year, the government’s actuaries make calculations that set Part B and Part D premiums, deductibles, and coinsurance. For premiums, Medicare beneficiaries must pay 25% of costs (Part B) and 25.5% of standard drug coverage (Part D). The annual deductibles and coinsurance requirements are set for all traditional (original) Medicare beneficiaries.  Medicare Part C (Medicare Advantage) plans define separate plan-specific deductibles and coinsurance requirements for their beneficiaries and are different from plan to plan.

The Part B and Part D premium costs are not passed on to all beneficiaries equally. For example, Medicare beneficiaries with incomes above $85,000 (individuals) and $170,000 (joint) are required to pay higher premiums for Medicare Part B (since 2007) and Part D (since 2011).  The highest monthly premiums paid by high wage earners are $389.80 ($104.90 being the lowest) for Part B and $72.90 + Part D plan drug premium in 2016.  Other Medicare provisions (e.g., hold harmless) further divide beneficiaries into separate Part B premium-paying groups.

If there are shortfalls in either the HI or SMI trust funds in any given year, our federal government has various options it can enforce to plug the gap(s).  The figure below lists the major options available under present laws.

All options for closing Medicare funding shortfalls target American pocketbooks either directly (increased deductibles and coinsurance, reduced coverage, and increased premiums) or indirectly (increased federal and state income taxes) costs.  So far premiums have not been increased uniformly and our government has taken the position to “soak the rich” first.  Like all programs where spending is out of control, the need to tap larger and larger groups of Americans (with lower incomes) is inevitable.

The Bottom Line

I invite you to look at the three figures above and think about the implications from an individual taxpaying American’s standpoint. The largest sources for Medicare funding are the general fund (42%) and Medicare payroll taxes (37%) and both sources come from the individual American’s pocketbook.   If you are tired of paying and paying without a say in Medicare reform, then join BB’s Healthcare Brigade where the interests of individual Americans matters.  Become an engaged American so is an integral part of the solution.

You do not have to be over the age of 65 or disabled to understand that the financial viability of Medicare is important to all Americans. Affordable Health Care and Beyond for ALL Americans.  The Medicare program belongs to ALL Americans!  Our government is politically unable (or unwilling) to tackle the bigger picture of unaffordable health spending as long as individual Americans are acquiescent and HICUP members (BB Healthcare Brigade acronym for those who are engaged in the business of health care in the USA) define healthcare policy without us.


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