What is Medicare?

Medicare is under the Social Security Administration (SSA).  SSA is the bookkeeper for Medicare collecting premiums from Medicare beneficiaries and distributing funds to Medicare and insurance companies with Medicare contracts.  The Centers for Medicare & Medicaid Services (CMS) is the federal agency that manages the Medicare Program. CMS is under the Department of Health and Human Services (HHS).

So who pays for the Medicare bureaucracy?

In 2019, Medicare covered over 61.4 million people. Total expenditures in 2019 were $796.2 billion. A large portion comes from the Medicare Trust Funds, but how else is Medicare funded?

Who Pays For Medicare?

Medicare, like Social Security, is a “pay as you go” program funded each year by current taxpayers.  That means the current income taxpaying workforce is who pays into Medicare.

When workers’ ratio to retirees was much higher in past decades, there was little trouble meeting revenue needs.  With the vast baby boomer population going on Medicare each month, the number of workers is at a record low level compared to those on Medicare.

Other Sources of Medicare Funding

Medicare also has a trust fund.  The U.S. Treasury holds two accounts for Medicare: the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund.  Medicare can only use these monies in the trust funds for Medicare operations.

Payroll Taxes Fund Medicare

I remember when I started working at 14.  I picked up my first paycheck.  Chuck Wagon Buffet on Center St. paid me $1.46 an hour for washing pots and pans in 1975.  While working, I would calculate how much I was making in my head. When my first payday arrived, I was excited.  I was expecting a specific amount of money.  In my mind, it was already wholly spent on useless teenage stuff.  When I got the check, my jaw dropped.  The amount was way lower than the amount, I figured.

I told my dad they had made a mistake.  He explained that the company took out the FICA (Federal Insurance Contribution Act) taxes for Social Security and Medicare. I was not a taxpayer who pays into Medicare.  I told him I wanted my money back.  He just laughed and told me I might see it back when I got older.

The Medicare tax is a percentage taken from your gross pay.  There is no opting out of the Medicare tax.  The more you make, the more you pay.  The employer is required to match the same percentage amount.  You pay 1.45% of your gross wages.  The employer himself matches 1.45% of your wages also.

Medicare and Obamacare

However, there is a difference between the Social Security and Medicare tax. The Social Security tax is higher.  It is 6.2% from the employee and 6.2% match from the employer.  Medicare is 1.45% for both the employee and employer.  The difference between Social Security and Medicare is that the Social Security tax ends at $145,000 in income.  Any income above the $145,000 mark is Social Security tax-free.  The Medicare 1.45% tax, is levied on all earned income, no matter how much.  There is no limit.  You keep paying the 1.45 even if you are making $500,000.  Your income will also affect your Medicare Part B premium.

Further, the government adds an 0.9% Medicare tax for incomes over $200,000 for a total of 2.35%.  Congress, with the Affordable Care Act (ACA), a.k.a Obamacare, in 2013 created this new tax.  FICA taxes accounted for 88% of Part A revenue in 2019.  The taxpaying worker is who pays for Medicare Part A.

Trust Fund Investments Do Little

A  source of income for the trust fund is the trust fund investments. However, the investment interest is not actual interest like in your savings account.

When receipts from taxes exceed the HI Trust Fund’s expenditures, the Treasury takes the cash and replaces it with IOUs.  The debt instruments are called Government Account Series (GAS) securities.  They are nonmarketable, and the US Treasury issues them.  Interagency transfers of funds are done with GASs.  The interest “earned” is the current interest rate on Treasury bonds and notes.  When the actual debt needs to be redeemed, the Treasury must go into the open market to sell US Treasuries to find the cash to cover the Trust fund’s GAS.  At the end of the fiscal year 2019, the trust funds held $5.2 trillion in such securities. The internal debt does not count toward the national debt, which is $28,000,000,000,000 and growing.

The Trust Fund investment interest is a tiny portion of the total trust funds.  The interest credited is an insignificant amount in relation to the whole budget.

Medicare Part A Premiums From Those Who Did Not Work Enough

Sometimes people are surprised that Medicare costs something.  They assume Medicare is free, especially since they paid for Medicare all their working lives.  I assure them that Medicare is “free”–the Part A for the hospital.  They, of course, thought the whole thing was free.

Medicare Part A, however, is not free for everyone.  For those who have worked less than 40 calendar quarters or ten years, Part A has a price.  Your Part A monthly premium will depend on how many years you or your spouse worked and paid FICA taxes in the U.S.  These people are those who pay for Medicare Part A with monthly premiums.

Paying the FICA is critical.  I have known some individuals who worked and earned income, but all of their earnings were not reported to Uncle Sam.  As a consequence, their Social Security is small.  They are not eligible for Medicare or must purchase Medicare Part A if they want health insurance past 65.

Persons getting Railroad Retirement benefits and some federal, state, and local employees fall into other categories.

 How Much Does Medicare Part A Cost?

For individuals or couples who worked between 30 and 39 quarters, which is 7.5 to 10 years, the premium is currently $240 per month.  For individuals or couples who worked less than 30 quarters, the Part A premium is $437 per month.

If you do not meet the criteria above, you will likely pay a monthly premium for Part A. Your monthly Part A premium will depend on how many years you or your spouse worked in any job you paid Social Security taxes in the U.S.

State Medicaid will probably pick up the premium cost for Part A and Part B for low-income individuals.  The Part A premiums paid to go toward the Medicare expenses.

Supplementary Medical Insurance (SMI) Trust Fund Is Not Much of a Source

The Supplemental Medical Insurance (SMI) Trust Fund supports two Medicare programs. Part B is for doctor and outpatient services as well as medical supplies.  Part D started in 2008.  It helps seniors with the cost of medications, especially expensive medications.  Both programs are voluntary.  Monthly premiums from beneficiaries and taxes from the general fund support the programs.

Those enrolled in Part B pay a monthly premium of $170.10 currently out of their Social Security check or paid directly to Social Security.  The premium payment options for Part D prescription drug plans are similar.  However, the Part B and Part D premiums do not cover most of the actual cost.  The general fund supports most of the funding, which is financed with income taxes, corporate taxes, and excise taxes.  Part B and D are not financed by FICA payroll taxes like Part A.

Interest Income

For example, in 2017, the federal government general fund paid $253 billion for the Part B expenses.  Part B premiums Medicare beneficiaries paid amounted to only $93 billion.  Part D revenue from the general fund was $68 billion.  Beneficiaries only paid $16 billion for their prescription drug plan premiums.  General tax revenues fund the vast majority of Medicare.

Medicare is truly a pay-as-you-go program.  There is no stockpile of cash accumulated over decades to cover the expenses.  As the ratio of taxpaying workers to beneficiaries declines, the program will experience significant strain.

The SMI Trust Fund itself has very little money reserves and supplies a small fraction of the Medicare budget through interest income.  The purpose of the fund is to aid in cash flow.  The real source of revenue for Medicare Part B and Part D is taxes.  The Part B and Part D premiums paid are a small percentage of the overall revenue.

Do You Have to Pay For Medicare Benefits?

Who pays for Medicare?  The answer is the tax payor.  The tax payor pays over a lifetime through FICA payroll taxes out of his monthly check.  He pays mostly through income tax that goes into the general fund.  He finally pays in the form of premiums to Medicare directly, Medigap premiums to private insurance companies, copays, and co-insurance to doctors and medical institutions.

That being said, who pays for Medicare begs how it will be paid in the future.  More and more of the burden for the cost of Medicare is falling on seniors in the form of insurance premiums and coinsurance.  The working taxpayer is paying less because there are fewer actively employed in relation to those who are receiving Medicare benefits.

The projects and public policies currently in place make that clear.  The curiosity that prompts someone to ask who pays for Medicare should lead to additional questions about how we will continue to pay and for what level of benefits.