Like HowStuffWorks on Facebook!

How Medicare Works


Administration and Funding
U.S. President Barack Obama signing the Improving Medicare Post-acute Care Transformation Act of 2014
U.S. President Barack Obama signing the Improving Medicare Post-acute Care Transformation Act of 2014
©Chip Somodevilla/Getty Images

Medicare remains a vital means of paying for health care for many Americans. An estimated 15 percent of Americans were enrolled in Medicare programs in 2015. That's about 46 million seniors, of which roughly 13 percent are 85 or older, in addition to about 9 million receiving Social Security disability benefits [sources: Center for Medicare Advocacy, KFF]. Despite being a vital program for older Americans' health and financial security, funding for Medicare has always been a sensitive political issue in the U.S.

Medicare is funded through a few different revenue streams, primarily general revenues (most of which comes from federal income tax payments), payroll taxes and beneficiary sources.

Payroll taxes paid by American employees and employers finance Part A, for example. Under PPACA in 2013, the Additional Medicare Tax, generally withheld from high-wage earners, was introduced.

Part B is mostly financed by general revenues and beneficiary premiums.

Part D is also financed by general revenues and beneficiary premiums, in addition to state funding for individuals eligible for both Medicare and Medicaid (called dual eligibles).

Part C, the Medicare Advantage program, is its own creature but isn't much different. Advantage programs are composed of Medicare Part A, Part B and sometimes Part D, and they're financed in the same ways as Part A, Part B and Part D. The money comes from general revenues, payroll taxes and monthly premiums. The difference is that individuals enrolled in these plans are also responsible for additional costs for the supplementary benefits available in Advantage plans.

Medicare has and continues to undergo changes under the PPACA health care reform laws of 2010, including new policy options such as Medicare Advantage, and coverage such as free preventive care services — but beneficiaries have seen and will see changes in out-of-pocket expenses, such as deductibles and payroll taxes.

Under the Budget Control Act of 2011, $1.2 trillion in federal spending cuts were approved, including a 2 percent cut to Medicare provider payments, as well as to claims for durable medical equipment, prosthetics, orthotics and supplies beginning in April 2013. In 2013 the U.S. spent roughly $586 billion on Medicare, which is 20 percent of America's health care spending. That year nearly 4,000 health care providers were paid about $1 million — each. And a handful of doctors saw as much as $10 million in Medicare reimbursements. Medicare payments of $62 billion went to hospitals and outpatient facilities [source: Tracer]. The Congressional Budget Office (CBO) predicts that reductions between 2013 and 2021 will total $123 billion, adding up to roughly $31 billion in savings [source: Medicare NewsGroup].

In October 2014, President Barack Obama signed the Improving Medicare Post-acute Care Transformation Act of 2014 (known as the IMPACT Act). The goal of the act is to standardize patient-care assessment data for quality, payment and resource management (such as discharge planning) in Medicare's post-acute care settings, which include home health agencies, inpatient rehabilitation facilities, long-term care facilities, hospitals, and skilled nursing facilities [source: CMS].

Among these changes is also the Medicare Access and CHIP Reauthorization Act (MACRA), enacted in April 2015 as an update to the Balanced Budget Act of 1997. MACRA improves the way physicians are reimbursed under Medicare and reduces vulnerabilities in the payment model, making it more difficult to commit Medicare fraud.