Medicare is funded through a combination of taxes deposited into trust funds, beneficiary monthly premiums, and additional funds approved through Congress.
According to the Centers for Medicare and Medicaid Services, Medicare expenditures in 2019 totaled $796.2 billion.
This article looks at the ways in which Medicare is funded. It also discusses changes in Medicare costs.
We may use a few terms in this piece that can be helpful to understand when selecting the best insurance plan:
- Deductible: This is an annual amount that a person must spend out of pocket within a certain time period before an insurer starts to fund their treatments.
- Coinsurance: This is a percentage of a treatment cost that a person will need to self-fund. For Medicare Part B, this comes to 20%.
- Copayment: This is a fixed dollar amount that an insured person pays when receiving certain treatments. For Medicare, this usually applies to prescription drugs.
Medicare is the federal healthcare program for adults aged over 65, adults with disabilities, and people with end stage renal disease. The program provides coverage for inpatient and outpatient services, and prescription drugs.
Medicare gets money from two trust funds: the hospital insurance (HI) trust fund and the supplementary medical insurance (SMI) trust fund.
The trust funds get money from payroll taxes, as allowed by the Federal Insurance Contributions Act (FICA) enacted in 1935. Also, Medicare taxes at a tax rate of 2.9% are taken from people who are self-employed. Other trust funding money includes premiums and income from investments.
Hospital insurance trust fund
Taxes paid by employers, employees, and self-employed people provide money for the HI trust fund, which was founded in 1965. The trust fund also garners the interest earned on its investments, income taxes from some Social Security benefits, and income from Medicare Part A premiums.
The HI trust fund covers the services provided through Medicare Part A, which pays for inpatient hospital stays and care, including nursing care, meals, and a semi-private room. Part A also covers skilled nursing care, hospice services, and home health.
The HI trust fund also pays for Medicare administrative costs, including tax collection, and fighting fraud.
The HI trust fund’s expenditures in 2019 totaled $328.2 billion.
Supplementary medical insurance trust fund
The SMI trust fund has two parts, namely Part B and Part D, funded by the premiums paid for each part. In addition, it receives funds authorized by Congress, and the interest from trust fund investments.
The SMI trust fund covers the services offered by Medicare Part B, a portion of Part D, and some of the Medicare program’s administrative costs.
Medicare Part B includes outpatient services, such as doctor’s visits, lab tests, certain cancer screenings and preventative care, and ambulance transport.
Medicare Part D provides coverage for prescription drugs. It gets some funding from the SMI trust fund, and from premiums.
As with the HI fund, the SMI fund uses some of its funding to cover Medicare administrative costs.
Total expenditures for the SMI fund in 2019 was $467.9 billion.
Medicare costs include premiums, copays, and coinsurance, all of which are adjusted each year. Increases in 2021 involve Part A deductibles, and coinsurance, along with Part B premiums and the deductible.
According to the 2020 Medicare Trustees Report, it is difficult to predict future Medicare costs because of the uncertainty of changes and advances in technology and medicine.
Each Medicare part has different costs, which help fund Medicare services.
Part A costs
Most people qualify for premium-free Part A through payroll taxes. For instance, a person who worked for more than 40 calendar quarters qualifies for premium-free Part A.
If a person worked between 30–39 quarters, they can enroll in Part A, although they will pay a premium. In 2021, the premium is $259, which is $7 higher than in 2020.
A person who worked less than 30 quarters can also enroll in Part A, although the premium in 2021 is $471, $13 more than in 2020.
A person enrolled in Part A will also pay an inpatient deductible before Medicare covers services. Most recently, the deductible increased from $1,408 in 2020 to $1,484 in 2021.
The deductible covers the first 60 days of an inpatient hospital stay. In 2021, if a person needs to be an inpatient for more than 60 days, they pay $371 per day from day 61–day 90, and then $742 from 91 days, known as lifetime reserve days, onwards.
Part B costs
The Medicare Part B cost for 2021 includes the monthly premium. In 2021, the basic premium for most people is $148.50, which is an increase of 2.7% from $144.60 in 2020.
The monthly premium increases with a person’s income. An individual who makes more than $88,000 annually will pay a higher monthly premium. The premiums increase with each income band, to a maximum of $504.90 a month for an annual income of at least $500,000.
In addition to an increase in premium cost, the deductible also increased in 2021. The Part B deductible in 2021 is $203, which is a $5 increase from 2020.
Part C costs
Part C is a Medicare Advantage plan, which is an alternative to original Medicare. Advantage plans offer the same coverage as Medicare Part A and B and may offer other coverage for services such as dental care.
The 2021 costs of Part C vary greatly. Private insurance companies offer Medicare Advantage plans, and the costs depend on the individual provider, location, and plan specifics, such as any additional coverage.
Costs associated with Part C may include a monthly premium, copays, and deductibles.
Part D costs
Medicare Part D offers coverage for prescription drugs.
The 2021 cost of Medicare Part D varies by plan. A person’s income also plays a role in how much they pay for their Part D plan.
For example, a person who earns more than $88,000 annually will pay an adjusted monthly fee in addition to their Part D premium. The adjusted monthly fee for 2021 ranges from $12.30 to a maximum of $77.10. The upper adjustment is for a person earning $500,000 or more.
Medigap
Medigap is optional supplemental health insurance coverage for certain items that original Medicare does not cover, such as deductibles and copays.
The policies are offered by private companies. If a person enrolled in original Medicare also has a Medigap policy, the health costs are shared between Medicare and Medigap.
A person with Medigap will pay a premium for the policy, plus the Medicare Part B premium. The costs of Medigap coverage vary by provider, a person’s needs, and location.
Medicare is funded through two trust funds held by the U.S. Treasury. Funding sources include premiums, payroll and self-employment taxes, trust fund interest, and money authorized by the government.