Medicare, and its means-tested sibling Medicaid, are 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 older adults, 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.
In an unprecedented move, both programs received major additional funding in the wake of the coronavirus outbreak and following the enactment of the CARES Act in March 2020. So just how much are Americans paying for Medicare and Medicaid, and how big a bite from your paycheck should you expect?
- Both Medicare and Medicaid are government-sponsored health insurance plans.
- Medicare is federally administered and covers older or disabled Americans, while Medicaid operates at the state level and covers low-income families and some single adults.
- Funding for Medicare is done through payroll taxes and premiums paid by recipients.
- Medicaid is funded by the federal government and each state.
- Both programs received additional funding as part of the fiscal relief package in response to the 2020 economic crisis.
Medicare and Medicaid Costs
Medicare is administered by the Centers for Medicare & Medicaid Services (CMS), a component of the Department of Health and Human Services. CMS works alongside the Department of Labor (DOL) and the U.S. Treasury to enact insurance reform. The Social Security Administration (SSA) determines eligibility and coverage levels.
Medicaid, on the other hand, is administered at the state level. Although all states participate in the program, they aren't required to do so. The Affordable Care Act (ACA) increased the cost to taxpayers—particularly those in the top tax brackets—by extending medical coverage to more Americans.
According to the most recent data available from the CMS, national healthcare expenditure (NHE) grew 9.7% to $4.1 trillion in 2020. That's $12,530 per person. This figure accounted for 19.7% of gross domestic product (GDP) that year. If we look at each program individually, Medicare spending grew 3.5% to $829.5 billion in 2020, which is 20% of total NHE, while Medicaid spending grew 9.2% to $671.2 billion in 2020, which is 16% of total NHE.
The CMS projects that healthcare spending is estimated to grow by 5.4% each year between 2019 and 2028. This means healthcare will cost an estimated $6.2 trillion by 2028. Projections indicate that health spending will grow 1.1% faster than the country's GPD each year from 2019 to 2028. This projection in growth is primarily due to higher Medicare enrollments. The projected healthcare spending estimates by the CMS do not take into account costs related to the coronavirus pandemic.
Medicaid Expansion in 2021
President Joseph Biden’s American Rescue Plan provided incentives for states to expand their Medicaid programs to cover adults up to age 65 who have incomes at or below 138% of the federal poverty level ($30,305 for a family of three in 2021). Fourteen states—Alabama, Florida, Georgia, Kansas, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Wisconsin, and Wyoming—had income limits well below that as of May 2021.
Under the plan, the states were offered additional federal funding if they expanded Medicaid for adults with eligible low-income adults. They could also earn an additional five-percentage-point federal match on their regular Medicaid expenditures for two years—not including costs for those newly eligible, disproportionate share hospital (DSH) payments, and some other expenses—to help defray state matching costs. More valuable, they would also gain the ACA’s 90% federal matching funds to pay for the costs of covering newly eligible adults.
Additional CARES Act Funding
On March 27, 2020, former President Donald Trump signed the CARES Act—a $2 trillion coronavirus emergency relief package—into law. A sizable chunk of those funds—$100 billion—was earmarked for healthcare providers and suppliers, including those that are Medicare and Medicaid enrolled for expenses related to COVID-19.
Below are some examples of what the additional funding covers:
- A 20% increase in Medicare payments to hospitals for COVID-19 patients.
- A scheduled payment reduction was eliminated for hospitals treating Medicare patients from May 1, 2020, through Dec. 31, 2020.
- An increase in Medicaid funds for states.
Taxpayers who receive wages, salaries, or self-employment income are required to pay Medicare tax on all of their wages. Once there was 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, 1.45%, and the employee pays 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. This amount is coded as a deduction for adjusted gross income (AGI), so it isn't necessary for the taxpayer 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 Medicare Contribution Tax
There is also an additional tax on unearned income, such as investment income, for those with AGIs higher than the thresholds mentioned above. It is known as the unearned income Medicare contribution tax or the net investment income tax (NIIT). 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 taxable business activity and to income earned by day traders.
This tax is applied to the lower of the taxpayer’s net investment income (NII) or modified AGIexceeding the listed thresholds. This tax is also 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.
When the NIIT legislation was enacted in 2010, the IRS noted 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." This means that the funds collected under this tax are left in the federal government's general fund.
Example of a Medicare Tax Bill for a High Earner
The total tax bill for Medicare that could be paid by a high-income taxpayer could 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.
The total number of people enrolled in Medicare in 2020.
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 ($6,525 + $225 + $2,660).
How Medicare Is Funded
Medicare is funded by two trust funds that can only be used for the program. The hospital insurance trust fund is funded by payroll taxes paid by employees, employers, and the self-employed. These funds are used to pay for Medicare Part A benefits.
Medicare's supplementary medical insurance trust fund is funded by Congress, premiums from people enrolled in Medicare, and other avenues, such as investment income from the trust fund. These funds pay for Medicare Part B benefits, Medicare Part D benefits, and program administration expenses. The standard monthly premium set by the CMS for 2022 for Medicare Part B is $170.10 ($148.50 for 2021), although that number increases for higher-income earners. Premiums for Medicare Part D, which covers prescription drugs, will average $33 per month in 2022, up from $31.47 in 2021.
Benefit payments made by Medicare cover the following services:
- Home healthcare
- Skilled nursing facilities
- Hospital outpatient services
- Outpatient prescription drugs
- Physician payments
- Hospital inpatient services
- Medicare Advantage Plans, also known as Part C Plans, which are offered by Medicare-approved private companies
- Other services
The CARES Act expands Medicare's ability to cover treatment and services for those affected by COVID-19 including:
- Providing more flexibility for Medicare to cover tele-health services
- Authorizing Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists
How Medicaid Is Funded
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.
As mentioned above, the CARES Act will provide additional funds to states for costs related to COVID-19.
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, the CARES Act aims to address costs related to the coronavirus outbreak.
What Percentage of Healthcare Spending Goes to Medcaid?
Medicaid represents $1 out of every $6 spent on healthcare, and the program is the major source of financing for states to provide coverage of health and long-term care for low-income residents.
What Percentage of Healthcare Spending Goes to Medicare?
Medicare spending often plays a major role in federal health policy and budget discussions, since it accounts for 21% of national health care spending and 12% of the federal budget.
How Does Medicaid Expansion Affect State Budgets?
Expansion has produced net savings for many states, according to the Center on Budget and Policy Priorities. That’s because the federal government pays the vast majority of the cost of expansion coverage, while expansion generates offsetting savings and, in many states, raises more revenue from the taxes that some states impose on health plans and providers.