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. Everyone in the workforce is required to pony up their share to fund these programs either through payroll deductions or when they file taxes each year. So just how much are Americans paying for Medicare and Medicaid?
Medicare, Medicaid and the ACA
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. The Affordable Care Act (ACA), or "Obamacare," has increased the cost to taxpayers, particularly those in the top tax brackets, by extending medical coverage to more Americans.
All Income Earners Must Pay Medicare Tax
Taxpayers who receive wages, salaries or self-employment income 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. Employers who pay their employees W-2 income cover half of this amount or 1.45%, and the employee must pay the other half.
In most cases, the employer withholds the amount the employee owes so no balance is owed at tax time. Self-employed taxpayers must pay the entire amount themselves but 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 have to pay this additional amount on all earned income they receive above $200,000 and married taxpayers filing jointly owe it on earned income in excess of $250,000. The threshold is $125,000 for married taxpayers who file separately.
Unearned Income Tax
There is also an additional 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 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. It 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 exceeding the listed thresholds. This tax also will be levied on income from estates and trusts with income exceeding the AGI threshold limits 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 income.
At the time that this tax was legislated in 2010, it was projected to bring in another $210 billion of revenue by 2019. While the IRS stated in the preamble to its list of regulations that this was a surtax on Medicare, the Joint Committee on 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." Therefore, the funds collected under this tax are left in the federal government's general fund.
Sample Medicare Bill for High Earner
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 he will pay to Medicare for the year is $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 benefits (see below for a list). Medicare's supplementary medical insurance 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 expenses.
Benefit payments made by Medicare cover the following services:
- Home health care
- Skilled nursing facilities
- Hospital outpatient services
- Outpatient prescription drugs
- Physician payments
- Hospital inpatient services
- Medicare Advantage Plans (a.k.a., "Part C" or "MA Plans," which are offered by private companies approved by Medicare)
- Other services
Medicaid 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. 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 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, most taxpayers feel other areas of the economy are in greater need of adjustment (such as Social Security), and thus a shortfall has yet to be addressed. For more information on Medicare and how much you have to pay for it, visit the Medicare website at www.medicare.gov.