Medicare and Medicaid come from different funding sources

Medicare is funded entirely by the federal government through payroll taxes, general revenue, and premiums paid by beneficiaries. Medicaid is funded jointly by the federal and state governments, which means each state runs its own program with its own rules, within federal guidelines. Understanding who pays for each program matters because it affects what coverage you get, what it costs you, and whether your coverage changes if you move to a different state.

The federal government collects Medicare money through taxes on wages, and it pays out benefits the same way nationwide. With Medicaid, the federal government sends money to states, but each state decides how much of its own money to add, who can join, and what services are covered. This is why a person on Medicaid in one state may have different coverage than someone on Medicaid in another state.

Key Takeaways

  • Medicare is funded by federal payroll taxes (2.9% of wages split between employer and employee), general federal income tax revenue, and monthly premiums paid by people enrolled in Parts B and D.
  • Medicaid is funded by both federal and state money, with the federal government covering between 50% and 76% of costs depending on the state's income level.
  • Medicare covers the same services in all 50 states because it is a federal program, while Medicaid coverage varies by state.
  • The Centers for Medicare & Medicaid Services (CMS), a federal agency, oversees both programs but does not directly run Medicaid — states do.

How Medicare is funded through payroll taxes and premiums

Medicare is funded through the Hospital Insurance Tax, which is taken from paychecks during a person's working years. This tax is 2.9% of wages — 1.45% paid by the employee and 1.45% paid by the employer. Self-employed people pay the full 2.9%. This money goes into the Medicare Hospital Insurance Trust Fund, which pays for Part A (hospital, skilled nursing, hospice, and home health coverage).

Part B (doctor visits and outpatient services) and Part D (prescription drugs) are funded differently. The federal government pays for part of these costs using general income tax revenue. People enrolled in Part B also pay a monthly premium, which varies based on income — in 2024, the standard premium was $164.90 per month, but higher-income beneficiaries pay more. Part D premiums vary by plan and insurance company.

When you turn 65 and become may be able to access for Medicare, you do not pay a lump sum or a one-time fee. Instead, the program is funded continuously through ongoing taxes and premiums from current workers and current beneficiaries. This is called a pay-as-you-go system.

How Medicaid is funded by federal and state governments

Medicaid is a partnership between the federal government and each state. The federal government does not run Medicaid directly — instead, it sends money to states and sets broad rules about who must be covered and what services must be offered. Each state then uses that federal money plus its own state tax revenue to run its own Medicaid program.

The federal government pays a percentage of each state's Medicaid costs, called the Federal Medical information Percentage (FMAP). This percentage varies by state and is based on the state's average income compared to the national average. Wealthier states receive a lower federal match (a minimum of 50%), while lower-income states receive a higher match (up to 76%). This means a poorer state gets more federal dollars per person served, while a wealthier state covers a larger share of its own costs.

States fund their share of Medicaid through state income taxes, sales taxes, and other state revenue sources. Because of this split funding, a state can choose to expand its Medicaid program (covering more people) or keep it smaller, as long as it meets federal minimum requirements. This is why Medicaid may be able to access and benefits differ from state to state.

The difference between federal and state control

Medicare is a federal program, which means the same rules explore everywhere. If you move from California to Florida, your Medicare coverage does not change. The federal government sets the payment rates doctors receive, the services covered, and the rules for enrollment. The Centers for Medicare & Medicaid Services (CMS), which is part of the U.S. Department of Health and Human Services, runs Medicare.

Medicaid is state-run, which means each state has significant control over its program. One state may cover dental care for adults; another may not. One state may cover more mental health services; another may cover fewer. One state may have higher income limits for coverage; another may have lower limits. Because of this variation, it is important to know your own state's Medicaid rules if you are on that program.

The federal government does set minimum standards — every state Medicaid program must cover certain groups (like children, pregnant people, and people over 65 with low income) and certain services (like hospital care, doctor visits, and lab tests). But states can go beyond these minimums if they choose to spend more state money.

What happens to Medicare and Medicaid funding over time

Medicare's Hospital Insurance Trust Fund (Part A) is monitored closely because it is funded by a fixed payroll tax. As the population ages and more people become may be able to access for Medicare, the program pays out more money each year. The trustees of the Medicare Trust Fund publish an annual report on whether the fund will have enough money to pay all claims. In recent years, the report has warned that the Hospital Insurance Trust Fund will eventually pay out more than it takes in if no changes are made.

Medicaid funding changes based on state decisions and federal law. When the economy is strong, states collect more tax revenue and can spend more on Medicaid. When the economy weakens, states collect less and may reduce Medicaid spending or coverage. The federal government can also change the FMAP or add new requirements, which affects how much states must spend.

Both programs have been affected by major legislation. The Affordable Care Act (2010) expanded Medicaid in states that chose to participate. The COVID-19 pandemic led to temporary increases in federal Medicaid funding to help states cover more people. These changes show that Medicare and Medicaid funding is not fixed — it responds to policy decisions and economic conditions.

How to find out what your coverage costs you

If you are on Medicare, your costs depend on which parts you have enrolled in. Part A has no monthly premium for most people (because they paid the Hospital Insurance Tax during their working years), but it has a deductible when you use hospital services. Part B has a monthly premium and a deductible. Part D has a monthly premium that varies by plan. You can see your current premiums and deductibles on your Medicare card or by logging into Medicare.gov.

If you are on Medicaid, your costs depend on your state's program. Some states charge no premiums or copays for people with very low income. Other states charge small premiums or copays for certain services. Your state Medicaid office or your Medicaid card will tell you what you owe. You can also contact your state Medicaid program directly — the phone number is usually on your card.

Questions to ask your doctor or benefits counselor

If you are confused about what your Medicare or Medicaid covers, or what you will owe, ask your doctor's office or call your state Medicaid program. You can also contact a State Health Insurance information Program (SHIP), which offers free counseling about Medicare. To find your local SHIP, visit shiptalk.org or call 1-877-839-2675.

Specific questions to ask include: "What is my deductible for this service?" "Will I owe a copay?" "Is this service covered under my plan?" and "If I move to another state, will my coverage change?" These questions help you understand what you will pay and what to expect.

Frequently Asked Questions

Can I be on both Medicare and Medicaid at the same time?

Yes. People who are 65 or older and have low income can be on both programs. This is called being "dual may be able to access." Medicare is your primary insurance, and Medicaid covers some costs Medicare does not, like copays and deductibles. Your state Medicaid program determines whether you may have access to based on income and assets.

What happens to my Medicaid if I move to a different state?

Your Medicaid coverage ends when you move. You must explore for Medicaid in your new state, and your coverage may be different because each state has different rules. Contact your new state's Medicaid office as soon as you move to find out what you need to do. Medicare coverage does not change when you move.

Does the federal government run Medicaid?

No. The federal government funds part of Medicaid and sets minimum rules, but each state runs its own Medicaid program. This is why coverage and may be able to access vary by state. The Centers for Medicare & Medicaid Services oversees both programs but does not directly administer Medicaid.

Why do Medicare and Medicaid have different funding sources?

Medicare is funded by payroll taxes because it is designed as an insurance program — people pay in during their working years and receive benefits when they turn 65. Medicaid is funded by federal and state taxes because it is designed as a needs-based program for people with low income, regardless of age or work history.

What if Medicare's trust fund runs out of money?

If the Hospital Insurance Trust Fund is depleted, Medicare can still pay claims using incoming payroll tax revenue, but it would only be able to pay about 89% of costs. Congress would likely need to change the payroll tax rate, adjust benefits, or raise the may be able to access age to keep the program solvent long-term. This has not happened yet, but it is a concern discussed in policy debates.