How Medicare is funded

Medicare’s funding comes from two trust funds held by the United States Department of the Treasury. The money in the two trust fund accounts can only be used for Medicare.

Medicare Part A covers hospital insurance, inpatient care, and hospice care.

Medicare Part A is primarily funded through a portion of payroll taxes paid by employees, employers, and the self-employed. Currently, the employer and employee both contribute an amount equal to 1.45 percent of the employee’s income to the funding of Medicare Part A. That results in Medicare Part A getting an amount equal to 2.90 percent of an employee’s salary. The Affordable Care Act created a special 0.9 percent Medicare tax. This tax applies to income of married couples filing jointly at $250,000. If a married couple files separately, the new tax applies at $125,000. For single filers, the tax kicks in at $200,000. Other sources of funding for Medicare Part A include: income paid on Social Security benefits; premiums paid by those who aren’t eligible for free Medicare Part A; and interest earned on trust fund investments.

Medicare Part B covers doctor visits, lab tests, screenings, and a host of regular medical needs. Medicare Part D covers prescription drugs.

Medicare Part B and Part D are both funded by the Supplementary Medical Insurance (SMI) trust fund. The funds that go into the SMI are authorized by Congress; they aren’t automatically distributed to Medicare. The SMI is funded by premiums paid by people with Medicare Part B and Part D. Also, income earned by trust fund investments is added to the trust fund.

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