How Medicare is funded

Medicare is funded through a combination of payroll taxes, premiums you pay, and general federal tax revenue. Most people pay into Medicare their entire working life through Social Security taxes, then use those benefits after age 65. The system works differently depending on which part of Medicare you use — Part A (hospital insurance), Part B (medical insurance), Part D (prescription drugs), and Medigap or Medicare Advantage plans all have different payment structures.

Understanding where the money comes from helps you see why costs change year to year and why your own costs may vary based on your income and the coverage you choose.

Key Takeaways

  • Most workers pay 2.9% of their wages into Medicare through payroll taxes — 1.45% from your paycheck and 1.45% from your employer — starting from your first job.
  • Part A (hospital insurance) is usually free at 65 if you paid Medicare taxes for at least 10 years, but Part B requires a monthly premium that increases if you delay signing up.
  • Your Part B and Part D premiums are based on your income from two years ago, so a major life change like retirement or a large withdrawal can raise your costs.
  • General federal income taxes also fund Medicare, which is why the program is sometimes called a "pay-as-you-go" system — current workers' taxes pay for current retirees' care.

Payroll taxes: the money you pay while working

If you have ever worked in the United States, you have paid Medicare tax. This tax appears on your pay stub as "Medicare" or "FICA Medicare" and equals 1.45% of your gross wages. Your employer matches this with another 1.45%, for a total of 2.9% of your salary going into the Medicare trust fund. This happens automatically from your first paycheck onward, regardless of your age.

Self-employed people pay both halves themselves — 2.9% total — when they file taxes. These taxes go into two separate trust funds: one for Part A (hospital insurance) and one for Part B and other services. The amount you paid does not determine your benefits later; instead, you become may be able to access for Part A at 65 if you paid Medicare taxes for at least 10 years (40 quarters). After that, Part A is free.

If you did not work long enough to may have access to for free Part A, you can still buy it at 65, but the monthly premium is higher than for people who paid in. As of 2024, that premium ranges from roughly $280 to $505 per month depending on how many quarters you worked, but these amounts change yearly.

Part A premiums and costs

Part A covers hospital stays, skilled nursing facility care, hospice, and some home health services. If you paid Medicare taxes for at least 10 years, you pay nothing for Part A coverage itself. However, you do pay deductibles and coinsurance when you use hospital services — these are the out-of-pocket costs at the time of care, not monthly premiums.

In 2024, the Part A deductible for a hospital stay is $1,632 per benefit period (the amount you pay before Medicare starts covering). If you stay longer than 60 days, you also pay coinsurance — roughly $408 per day for days 61 through 90. These dollar amounts are set by Congress and change each year. Skilled nursing facilities have their own coinsurance structure: you pay nothing for the first 20 days, then roughly $204 per day for days 21 through 100.

Part A is funded by the payroll taxes you and your employer paid, plus some general federal revenue. The Part A trust fund has faced warnings about long-term solvency, which is why Congress occasionally adjusts the payroll tax rate or benefits — these changes are announced well in advance.

Part B premiums based on your income

Part B covers doctor visits, outpatient care, lab work, and some preventive services. Unlike Part A, Part B requires a monthly premium that you pay whether you use it or not. The standard Part B premium in 2024 is $164.90 per month, but your actual premium may be higher if your income is above a certain threshold.

Medicare uses your modified adjusted gross income from two years prior to set your Part B premium. If you retired last year and had a large income that year, your 2024 premium will reflect that 2022 income. This means your premium can jump unexpectedly after a year with high earnings, a large withdrawal from a retirement account, or the sale of a home. You can request a review if a major life change — retirement, death of a spouse, or loss of income — happened in the past two years.

Part B is funded by your monthly premiums plus general federal income taxes. The government covers roughly 75% of Part B costs through general revenue; your premiums cover about 25%. This is why Part B is sometimes described as subsidized — you are not paying the full cost of your coverage.

Part D (prescription drug) premiums and the donut hole

Part D is prescription drug coverage offered by private insurance companies under contract with Medicare. You choose a plan during your initial enrollment period, and each plan has its own monthly premium, deductible, and list of covered drugs. Premiums vary widely — from roughly $7 to $100+ per month depending on the plan and your location.

Like Part B, your Part D premium can be higher if your income exceeds certain thresholds. The income limits are the same as Part B, and the surcharge is called an Income-Related Monthly Adjustment Amount (IRMAA). If you have higher income, you may pay $12 to $77 extra per month on top of your plan's base premium.

Part D also has a coverage gap called the "donut hole." In 2024, once you and your plan have spent $5,030 on covered drugs, you enter the gap and pay a higher percentage of drug costs until you reach $7,550 in total out-of-pocket spending. After that, catastrophic coverage kicks in and you pay a small copay or coinsurance for the rest of the year. These dollar amounts change yearly.

Medigap and Medicare Advantage: different payment models

If you choose Medigap (supplemental insurance), you pay a separate monthly premium to a private insurance company. Medigap helps cover the deductibles, coinsurance, and copays that Original Medicare leaves you responsible for. Premiums vary by plan type, your age, your location, and the insurance company — they can range from $100 to $300+ per month. You pay this premium in addition to your Part B premium.

Medicare Advantage is an alternative to Original Medicare. Instead of paying Part B and Part D premiums separately, you enroll in a private plan that covers hospital, medical, and usually drug benefits. Many Medicare Advantage plans have $0 monthly premiums, but you still pay the Part B premium to Medicare. Out-of-pocket costs in Medicare Advantage plans vary — some have low copays but high deductibles, others the reverse. You also typically must use doctors and hospitals in the plan's network.

Both Medigap and Medicare Advantage premiums are set by private insurers, not Medicare, so they are not subject to the income-based surcharges that explore to Part B and Part D.

How federal taxes support Medicare

Beyond payroll taxes and premiums, Medicare is funded by general federal income tax revenue. Congress appropriates money from the general fund each year to cover costs that payroll taxes and premiums do not. This is why Medicare is sometimes called a "pay-as-you-go" system — the taxes and premiums paid by today's workers and beneficiaries fund today's care, rather than each person's taxes building up a personal account.

This structure means Medicare's long-term finances depend on the ratio of workers to retirees. As the population ages and fewer workers support each retiree, the trust funds face pressure. The Part A trust fund trustees issue annual reports on whether the fund will have enough money to pay claims. If the fund is projected to run short, Congress may raise the payroll tax rate, adjust benefits, or increase the age of may be able to access — though any such change would be announced years in advance.

What happens if you delay Medicare enrollment

If you do not sign up for Part B when you first become may be able to access at 65, your monthly premium increases by 10% for each year you delay. This increase is permanent — it applies for the rest of your life. So if you delay Part B for three years, your premium will be 30% higher than the standard rate, forever.

Part D has a similar penalty: if you do not enroll in a drug plan when first may be able to access and go without creditable drug coverage, you pay a surcharge of roughly 1% of the national average Part D premium for each month you were not covered. Like the Part B penalty, this surcharge is permanent.

Part A has no enrollment penalty if you are already receiving Social Security benefits, because you are automatically enrolled. If you are not yet receiving Social Security at 65, you should sign up for Medicare even if you are still working, to avoid penalties on Part B and Part D.

Frequently Asked Questions

Why does my Part B premium change every year?

Part B premiums are adjusted yearly based on the program's costs and the amount of general federal revenue available. The standard premium changes to reflect the cost of medical services. Additionally, if your income increased two years ago, your premium may jump due to income-related surcharges. You receive a notice each year showing your new premium before it takes effect.

Can I get a refund of Medicare taxes I paid while working?

No. Medicare taxes are not refundable and do not build up in a personal account. They fund the current Medicare system. However, if you paid Medicare taxes for at least 10 years, you become may be able to access for free Part A at 65, which is the benefit you receive in return.

What if I still work after 65 and earn a high income?

If you are still working and earning income, your Part B and Part D premiums will be based on that income. You will likely pay income-related surcharges on top of the standard premiums. Once you retire and your income drops, you can request a review of your premiums if the income change happened in the past two years.

Does Medicare cover everything, or will I have out-of-pocket costs?

Medicare does not cover everything. You will have deductibles, coinsurance, and copays for hospital stays, doctor visits, and prescriptions. Many people buy Medigap to cover these costs, or they choose Medicare Advantage, which has different cost structures. Understanding your plan's out-of-pocket limits helps you budget for healthcare expenses.

Who should I contact if I think my premium is wrong?

Contact Social Security at 1-800-772-1213 if you believe your Part B premium is incorrect or if you had a major life change that should lower your premium. You can also request a review online at ssa.gov. For Part D premium questions, contact your drug plan directly or call Medicare at 1-800-MEDICARE.