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Medicare Financing

The primary source of funding for Part A is a payroll tax contribution of 1.45 percent on both employers and employees, with self-employed workers paying the full 2.9 percent. The tax revenues are added to the Hospital Insurance (HI) Trust Fund along with interest on federal securities held by the trust fund, federal income taxes paid on Social Security benefits, and premiums paid by enrollees not entitled to premium-free Part A. In 2018, total revenue accrued by the HI Trust Fund was $306.6 billion, total expenditures accounted for $308.2 billion, and the HI assets (compiled surpluses from previous years) were reduced by $1.6 billion. The assets were $200.4 billion at the beginning of 2019, which represents about 62 percent of expenditures. The HI assets are predicted to be depleted in 2026, at which point Medicare revenues will cover 89 percent of expenditures (in 2026), declining to 77 percent by 2046, and rising to 83 percent by 2093.

Part B benefits are financed through the Supplementary Medical Insurance (SMI) Trust Fund and are not at risk of insolvency because financing is derived through beneficiary premiums with general revenues filling the gap. Beneficiary premiums are set to finance 25 percent of expected program costs. Total revenue for the SMI Trust Fund in 2018 was $353.7 billion, and total expenditures were $337.2 billion, adding $16.5 billion to the SMI assets, which totaled $96.3 billion at the end of 2018. Payments and spending under MA (Part C) are set based on spending in traditional Medicare and are taken from the HI and SMI Trust Funds.

Medicare Part D is also financed through federal general revenues and beneficiary premiums. Beneficiary premiums are set to cover, on average, 25.5 percent of the cost of a standard Part D plan. Additional revenue comes from state “clawback” payments, which reflect a portion of the amounts that state Medicaid programs would otherwise have had to pay for dual-eligible enrollees’ drug coverage. Part D revenues are included in a separate account within the SMI Trust Fund. In 2018, total Part D expenditures were approximately $95.2 billion, and revenues were $95.4 billion.

 

For more information on Medicare’s financial future, see: