Topic: EconomicsTaxation

Last updated: February 27, 2019

Medicare is primarily funded through general revenues, taxes, and premiums paid by beneficiaries. Funds are allocated into two trust fund accounts held by the U.S Treasury.

The first trust fund, known as the Hospital Insurance Trust Fund (HI), funds Part A of Medicare. Part A is primarily financed through a 2.9% payroll tax, paid by employees including those who are self-employed and employers (Davis, 2018). According to the Kaiser Family Foundation, data from the 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 88% of the $251 billion in revenue to the HI Trust Fund consisted of payroll taxes (Cubanski, Swoope, Boccuti, Jacobson, Casillas, Griffin, and Neuman, 2015). In 2013, there was an additional 0.

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9% tax increase on high-income workers with wages over $200,000, for single filers, and $250,000 for joint filers to help accumulate more funds (Davis, 2018). Other sources of funding include premiums from beneficiaries who do not receive premium-free Medicare for Part A. The second trust fund, known as the Supplementary Medical Insurance Trust Fund (SMI), consists of two accounts, Part B and Part D. The majority of the funding for Part B is through a combination of beneficiary premiums and general revenues.

In 2013, the total revenue for the SMI Trust Fund, was $255 billion, of which 25% of the revenue was covered by beneficiary premiums, 75% by general revenues, and 2% by interest and other sources (citation). In 2011, there were additional revenues credited to the SMI Trust Fund, from “an annual fee imposed on certain manufacturers and importers of branded prescription drugs” (Davis, 2018). Similarly to Part B, Part D of Medicare is financed through general revenues and beneficiary premiums, but it includes state transfer payments for beneficiaries who have dual-eligibility (received drug coverage). In 2013, the $69.9 billion revenue for Part D, consisted of 73% general revenue, 14% beneficiary premiums, and 13% transfer state payments. Part C of Medicare, The Medicare Advantage Program, is not separately funded.

It is covered by Part A, Part B, and Part D, but it’s typically through Part D benefits. In the most recent analysis of the Medicare spending data, the reported $705.1 billion revenue total for Medicare, Part A, Part B, and Part D, was financed through 41% of general revenues, 37% payroll taxes, 14% premiums, and other sources that include 2% transfers from states, 3% taxation of social security benefits, 1% interest and 1% other (Cubanski and Neuman, 2018).


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