Medicare (United States) - Financing

Financing

Medicare has several sources of financing. Part A largely is funded by revenue from a 2.9 percent payroll tax levied on employers and workers (each pay 1.45 percent) established by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act of 1954. Until December 31, 1993, the law provided a maximum amount of compensation on which the Medicare tax could be imposed each year. Beginning January 1, 1994, the compensation limit was removed. A self-employed individual must pay the entire 2.9% tax on self-employed net earnings (because they are both employee and employer), but may deduct half of the tax from the income in calculating income tax. Beginning in 2013, the 2.9% hospital insurance tax will continue to apply to the first US$200,000 of income for individuals or $250,000 for couples filing jointly and will rise to 3.8% on income in excess of those amounts. Parts B and D are funded by premiums paid by Medicare enrollees and general fund revenue. In 2011, Medicare spending accounted for about 15 percent of the federal budget, and this share is projected to increase to over 17 percent by 2020.

The retirement of the Baby Boom generation — which by 2030 is projected to increase enrollment from 48 million to more than 80 million as the number of workers per enrollee declines from 3.7 to 2.4—and rising overall health care costs pose substantial financial challenges to the program. Medicare spending is projected to increase from $560 billion in 2010 to just over $1 trillion by 2022. In response, policymakers recently have offered a number of competing proposals to reduce Medicare costs.