Medicare costs and funding are two of the most hotly contested issues related to healthcare for older adults. Some politicians want to expand Medicare and make it less expensive for the average beneficiary, while others would prefer to see Medicare funding reduced or eliminated entirely. Thus, knowing what is Medicare, how Medicare is paid for and funded is vitally important.

There are two primary ways that Medicare is paid in the United States. First, Medicare is paid by the taxpayer. Second, it is paid for by every individual Medicare beneficiary. For example, when you pay your monthly premium, you’re paying for Medicare. Alternatively, when you pay any costs into the healthcare system (treatment, prescription drugs, meeting your deductible, etc), you’re paying for Medicare.

It’s also important to understand when Medicare is paid. For example, if you go to the doctor to get a treatment that’s covered under Medicare, you will only be required to pay the amount dictated by your Medicare plan. For example, let’s say that you go to visit your doctor’s office for pain in your knees. You’ve already paid your premium for the month, as well as your annual Medicare Part B deductible. This means that you will only need to pay 20% of the cost of the visit upfront. Medicare will later reimburse the facility and physicians for the remaining cost of the visit.

Keep in mind there is also Medicare Part A and knowing the difference between Medicare Part A and Part B is important. 

How Is Medicare Funded?

While Medicare beneficiaries pay for Medicare to a degree, the vast majority of Medicare is funded by taxpayers. More specifically, it is funded through FICA, or the Federal Insurance Contributions Act. Every taxpayer pays approximately 1.45% of their taxable income to FICA. The same holds true for businesses. Every business has to pay 1.45% to the program. In total, FICA receives 2.9% of all taxable income in the United States. These funds are used to pay for Medicare benefits.

FICA is one example of a payroll tax. Payroll taxes are used to fund social programs like Medicare and Social Security. These taxes always come in the form of an automatic percentage deducted from your income or the income of your business. In any case, payroll taxes must be approved by Congress and there are frequent debates over how much to tax citizens for these social programs. Therefore, the future of Medicare funding is never guaranteed. 

Is Medicare Funded by Federal or State?

It’s important to remember that Medicare is a federal program. This means that it is funded through federal tax programs. However, various states have their own programs that add to Medicare in different ways. Additionally, Medicaid, the program to help older adults with low-income pay for Medicare, is jointly funded by federal and state governments. 

Is Medicare Self-Funded?

Since many Medicare beneficiaries receive medical bills in the mail, they often ask the question: Is Medicare self-funded? In a way, the answer is “yes.” You paid taxes all your working life that went to Medicare. If you receive Social Security benefits, you’ll likely have to pay taxes on a portion of your Social Security income. Finally, you have to pay premiums, deductibles, and coinsurances for your Medicare plans. In short, every Medicare beneficiary has to pay for their own Medicare in one way or another.