Administration and Funding of Medicare

Funding for Medicare comes partially from payroll taxes, known as FICA (Federal Insurance Contributions Act) taxes. FICA comprises Social Security tax and Medicare tax. The rate of the Medicare tax is 2.9 percent. Employers withhold 1.45 percent from their employees and match it with another 1.45 percent [Ref]. High-income Social Security beneficiaries also pay income tax on their Social Security income, some of which goes toward Medicare. This money goes into a trust fund used to pay doctors, hospitals and private insurance companies when Medicare patients use their services. This trust fund has been more difficult to manage than the Social Security trust fund, because health care expenditures are harder to track and can change quickly. Medicare Part B is partially (about 25 percent) paid for by premiums and co-pays. In all, Medicare costs about $277 billion per year, roughly 13 percent of the total federal budget [Ref].

­Initially, Medicare was as a single-payer system in which the government acted as the administrator and distributor of taxpayer-funded health insurance. However, since the 1990s, government officials have made changes that allow private insurers to take part in Medicare, opening the system to market forces. The Medicare Advantage Plan (or Medicare + Choice) programs are the primary example of this.

Projected distribution of Medicare funding for the 2006 fiscal year

Source: 2005 Annual Report of the Social Security and Medicare Boards of Trustees

The Centers for Medicare and Medicaid Services (CMMS) administers Medicare. It falls under the Department of Health and Human Services. During Medicare's early decades, there was little oversight on claims and payments from Medicare to providers. This resulted in inflated claims and a rise in the costs of health care, which put a severe strain on the Medicare trust fund. In 1983, Medicare went to a fixed rate payment plan, instead of just paying whatever doctors and hospitals billed them. Today, participating health care providers accept Medicare payments as "paid in full" for services. Non-participating providers can only charge patients up to 15 percent beyond the amount approved by Medicare.

Next, we'll learn about the history of Medicare.