How is Medicare Funded?

No, funding won't dry up in the near future. Here's why

An elderly couple who receives a doctor 's diagnosis.

 Getty Images; kokouu

If you’re contemplating future health care coverage options, you may be concerned whether Medicare, the government health care program for people 65 and over, is likely to run out of funding at some point. If you dig into the sources of Medicare funding, however, you’ll quickly realize that the future of the program isn’t as bleak as some would have you believe.

What Is Medicare?

First, some background. Medicare is the United States federal health insurance program for people 65 and older, and certain younger people with disabilities. The program comes in three parts. Part A is known as hospital insurance, covering inpatient hospital stays, care in a skilled nursing facility, hospice, and some home health care.

Part B is the medical insurance portion, which covers certain doctor services, outpatient care, medical supplies, and preventative services. Part D is prescription drug coverage.

Most people don’t pay anything for Part A, but pay a premium for Parts B and D.

The Trust Funds

One thing is for sure: Medicare costs the U.S. government plenty. As of 2018, Medicare covered more than 56 million people at a cost of over $600 billion. That’s about 15% of the federal budget.

In order to keep track of receipts and payments, all funds earmarked for Medicare are held in two government trust funds that are managed by the U.S. Treasury. Medicare is paid for by these funds: The Hospital Insurance Trust Fund, or HI, and the Supplementary Medical Insurance (SMI) Trust Fund. The funds have different revenue sources, and cover different parts of Medicare.

The HI Fund, which makes up 43% of the total Medicare budget, is funded largely by the payroll taxes paid by employees, employers, and the self-employed. 

If you work for a company, you and your employer share this tax. Look at your paycheck, and you'll see a Medicare withholding of 1.45% of your wages. Your employer is responsible the other 1.45%.

If you’re self-employed you pay Medicare taxes as both an employer and an employee, at a combined rate of 2.9%.

Additional revenue for HI comes from interest earned on the funds, taxation of Social Security benefits, and Part A benefits for the very wealthy. There is also a 0.9% payroll tax withholding for anybody that makes $200,000 or more in a calendar year.

Medicare Parts B and D are covered by the Supplementary Medical Insurance (SMI) Trust Fund. Although roughly the same size as the HI fund, it gets most of its funding through general tax revenues. The rest comes from the monthly premiums most Medicare recipients pay for Part B and Part D insurance, state payments, taxes on Social Security benefits, and interest earned on the trust.

Other Costs of Medicare

The total Medicare costs include more than just the care of its recipients. There are administrative costs, which amount to some $8 billion, according to the Centers for Medicare and Medicaid Services.

There’s also fighting Medicare Fraud—a number that reached $52 billion in fiscal year 2017, according to the Government Accountability Office.

Is Medicare at Risk?

You may have seen news reports that Medicare will become insolvent by 2026. That sounds scary, but the reality is a lot less dramatic.

At worse, less than half of the Medicare program is in danger of insolvency--and even then, the program would have sufficient funds to continue the vast majority of its operations.

According to Medicare’s trustees, if nothing changes, the HI fund will cover 100% of costs through 2026. After that, the fund would technically be insolvent—but payroll taxes and other revenue will still allow it to pay 91% of costs through 2042, and drop only to 85% coverage by 2092.

The SMI trust fund, on the other hand, is in no danger of becoming insolvent, because premiums and general funding are regularly adjusted to keep the fund on solid financial ground.

Still, while you don’t have to worry about Medicare running out of money in the near future, know that lawmakers take the future of Medicare financing seriously--and most agree that they have some work to do before 2026 arrives.