Medicare and its means-tested sibling Medicaid represent the only forms of health coverage available to millions of Americans today. They represent some of the most successful social insurance programs ever, serving tens of millions of people, including the elderly, younger beneficiaries with disabilities, and those with low incomes or limited resources.
Medicare is administered by The Centers for Medicare and Medicaid Services (CMS), which is a component of the Department of Health and Human Services. CMS works alongside the Department of Labor and the Treasury to enact insurance reform. The Social Security Administration determines eligibility and coverage levels. Medicaid is administered at the state level; states aren't required to participate in the program, but all currently do. Those last few sentences won't give you an idea of how much money will come out of your paycheck to fund those programs; they were included to give an idea how far-reaching the programs are. (For more, see: What's the Difference Between Medicare and Medicaid? )
The fact is that everyone in the workforce is required to pony up their share to fund these programs — either through payroll deductions (Medicare wages ) or when they file taxes each year. The Affordable Care Act (ACA), or "Obamacare," has increased the costs to taxpayers, particularly for those in the top tax brackets — the cost of extending medical coverage to more Americans. (For more, see: New Taxes Under The Affordable Care Act .)
So just how much are Americans paying for Medicare and Medicaid? And how much will you pay?
Individual Taxpayer Burden
Taxpayers who receive wages, salaries or income from self-employment are required to pay Medicare tax on all of their wages. There used to be a limit on the amount of income on which Medicare tax was assessed, but this was eliminated in 1993. Now all earned income of any kind is assessed a 2.9% tax with no limit. Employers who pay their employees W-2 income will cover half of this amount, or 1.45%; the employee must pay the other half. In most cases, the employer will withhold the amount the employee owes so that no balance is owed at tax time. Self-employed taxpayers must pay the entire amount themselves, but they are allowed to deduct half of this cost as a business expense (the amount is coded as a deduction for adjusted gross income (AGI), so it isn't necessary for the taxpayer to be able to itemize).
On Jan. 1, 2013, the ACA also imposed an Additional Medicare Tax of 0.9% on all income above a certain level for high-income taxpayers. Single filers will have to pay this additional amount on all earned income they receive above $200,000 and married taxpayers filing jointly will owe this on earned income in excess of $250,000. The threshold is $125,000 for married taxpayers who file separately .
There is also an additional new tax on unearned income. such as investment income for those with AGIs above these thresholds known as the Unearned Income Medicare Contribution Tax. Taxpayers in this category now will owe an additional 3.8% Medicare tax on all taxable interest, dividends. capital gains. annuities. royalties and rental properties that are paid outside of individual retirement accounts or employer-sponsored retirement plans. This Net Investment Income Tax, which was also enacted Jan. 1, 2013, also applies to passive income from a taxable business activity and to income earned by day traders. This tax will be applied to the lower of the taxpayer’s net investment income or modified AGI that exceeds the listed threshold amounts. This tax also will be levied on the income from estates and trusts that have incomes that exceed the AGI threshold limits that are prescribed for estates and trusts. Deductions that can reduce the amount of taxable net investment income include early withdrawal penalties. investment interest and expenses and the amount of state tax paid on this form of income.
The total bill for Medicare that could be paid by a high-income taxpayer could therefore look something like this:
- Jerry is single and has inherited several pieces of land that produce oil and gas income at the wellhead. He also works as a salesman for a local technology company and earned $225,000 of 1099 income this year. His oil and gas royalties for the year total $50,000, and he also realized capital gains of about $20,000 from the sale of stock.
- Jerry will owe 2.9% on his $225,000 of earned income, which equals $6,525. He also will owe another 0.9% on the
amount of his earnings in excess of $200,000, which in this case is $25,000. This comes to $225. Finally, he must pay 3.8% of his $70,000 of combined investment income, which is an additional $2,660. The grand total that he will pay to Medicare for the year equals $9,410 ($225 + $6,525 + $2,660).
Medicare is funded via two trust funds that can only be used for Medicare. The Hospital Insurance Trust Fund is funded via payroll taxes paid by employees, employers and the self-employed. These funds are used to pay for Medicare Part A (Hospital Insurance) benefits (see below for a list). Medicare's Supplementary Medical Insurance (SMI) Trust Fund is funded via Congress, premiums from people enrolled in Medicare and other avenues, such as investment income from the trust fund. Those funds pay for Medicare Part B benefits, Part D benefits and program administration, such as costs for paying benefits and for fighting abuse and fraud. (For more, see: Avoid the Most Common Medicare Fraud & Scams .)
The Medicaid program is funded by the federal government and each state. The federal government pays states for a share of program expenditures, called the Federal Medical Assistance Percentage (FMAP). Each state has its own FMAP based on per capita income and other criteria. The average state FMAP is 57%, but FMAPs can range from 50% in wealthier states up to 75% for states with lower per capita incomes (the maximum regular FMAP is 82%). FMAPs are adjusted for each state on a three-year cycle to account for fluctuations in the economy. The FMAP is published annually in the Federal Register.
The 2015 Annual Report on the Social Security shows that for fiscal year 2014, the hospital insurance segment of Medicare received $227 billion from payroll taxes and another $18 billion from taxes on Social Security benefits. It also received $80 billion from premiums paid by beneficiaries and another $8.7 billion from transfers paid by states. Some $5 billion came in from reimbursement and another $243.7 billion came from the U.S. Treasury. Almost $5 billion came in from other miscellaneous sources, and then the Medicare administration reaped another $11.2 billion in interest income on its holdings for the year. These numbers total nearly $600 billion in 2014 and they are expected to increase modestly each year for the foreseeable future. Medicare constituted 14% of the $3 trillion federal budget in 2014, and Medicaid accounted for 9%.
The benefit payments that Medicare made from this revenue can be broken down as follows:
- Home health care: 3%
- Skilled nursing facilities: 5%
- Hospital outpatient services: 7%
- Outpatient prescription drugs: 11%
- Physician payments: 12%
- Hospital inpatient services: 23%
- Medicare Advantage Plans (a.k.a. "Part C" or "MA Plans", which are offered by private companies approved by Medicare): 26%
- Other services: 14% (note: total may not equal 100% due to rounding )
An Apparent Contradiction
The numbers listed above do not include the additional revenue that is being generated by the Unearned Income Medicare Contribution Tax. At the time that this tax was legislated in 2010, it was projected to bring in another $210 billion of revenue by 2019. However, while the Internal Revenue Service stated in the preamble to its list of regulations that this tax was a “surtax ” on Medicare, the Joint Committee for Taxation specifically stated: "No provision is made for the transfer of the tax imposed by this provision from the General Fund of the United States Treasury to any Trust Fund." The designated purpose of the money that is collected from this tax has therefore been left somewhat unclear. (For more, see: Medicare Mythbusters: What You Don't Know .)
The Bottom Line
Medicare and Medicaid constitute a major segment of the health insurance market for tens of millions of Americans. Although Medicare and Medicaid funding is projected to fall short at some point (2026 by one measure), most taxpayers feel that other areas of the economy are in greater need of adjustment at this point (such as Social Security), and thus a shortfall has yet to be addressed (and when it is addressed, a likely remedy is a tax hike). For more information on Medicare and how much you will have to pay for it, visit the Medicare website at www.medicare.gov or consult your financial advisor. For a good payroll deduction calculator, click here. (For more, see: The Future of Medicare: Why You Should Be Worried .)