Do I pay into Medicare while I work?

Yes. Every worker pays 1.45% of their wages toward Medicare through payroll taxes, matched by their employer. Self-employed individuals pay 2.9%. These contributions fund the Part A Hospital Insurance Trust Fund.

Is Medicare funded by Social Security?

Medicare and Social Security are separate programs with separate trust funds. However, some of the taxes paid on Social Security benefits flow into the Medicare HI Trust Fund, and the Social Security Administration handles Medicare enrollment for many beneficiaries.

Why do Medicare premiums increase each year?

Part B premiums are set annually by CMS to cover approximately 25% of projected Part B program costs. As healthcare costs rise and the number of beneficiaries grows, premiums tend to increase to keep pace. IRMAA adjustments also increase for higher-income beneficiaries based on their prior-year income.

Will Medicare run out of money?

The HI Trust Fund is projected to cover full Part A benefits through approximately 2036. After that, incoming revenue would cover about 89% of costs without legislative action. Congress has historically acted to prevent benefit cuts, but the long-term funding gap remains a significant policy challenge.

Does Medicare Advantage cost the government more than Original Medicare?

Studies have shown that federal payments to Medicare Advantage plans have historically exceeded what the same beneficiaries would have cost under Original Medicare, though the gap has narrowed with payment reforms. The higher payments are partly offset by the extra benefits MA plans provide.

Do I pay into Medicare while I work?

Yes. Every worker pays 1.45% of their wages toward Medicare through payroll taxes, matched by their employer. Self-employed individuals pay 2.9%. These contributions fund the Part A Hospital Insurance Trust Fund.

Is Medicare funded by Social Security?

Medicare and Social Security are separate programs with separate trust funds. However, some of the taxes paid on Social Security benefits flow into the Medicare HI Trust Fund, and the Social Security Administration handles Medicare enrollment for many beneficiaries.

Why do Medicare premiums increase each year?

Part B premiums are set annually by CMS to cover approximately 25% of projected Part B program costs. As healthcare costs rise and the number of beneficiaries grows, premiums tend to increase to keep pace. IRMAA adjustments also increase for higher-income beneficiaries based on their prior-year income.

Will Medicare run out of money?

The HI Trust Fund is projected to cover full Part A benefits through approximately 2036. After that, incoming revenue would cover about 89% of costs without legislative action. Congress has historically acted to prevent benefit cuts, but the long-term funding gap remains a significant policy challenge.

Does Medicare Advantage cost the government more than Original Medicare?

Studies have shown that federal payments to Medicare Advantage plans have historically exceeded what the same beneficiaries would have cost under Original Medicare, though the gap has narrowed with payment reforms. The higher payments are partly offset by the extra benefits MA plans provide.

How Is Medicare Funded? A Plain-Language Guide (2026)

Medicare is the federal health insurance program covering more than 67 million Americans, primarily those age 65 and older, as well as certain people with disabilities and end-stage renal disease. The program costs more than $1 trillion per year and is funded through several distinct revenue streams. The funding structure is not uniform across all parts of Medicare: Part A, Part B, Part C (Medicare Advantage), and Part D each draw from different sources.

Quick Summary

Part A is funded mainly by the 2.9% Medicare payroll tax. Part B is funded roughly 75% by general federal revenue and 25% by beneficiary premiums. Part D is funded by federal subsidies, state contributions, and beneficiary premiums. Medicare Advantage (Part C) is funded by federal payments to private insurers based on Original Medicare costs.

The Two Medicare Trust Funds

Medicare is managed through two separate trust funds administered by the U.S. Treasury. The Hospital Insurance (HI) Trust Fund covers Part A (hospital insurance). The Supplementary Medical Insurance (SMI) Trust Fund covers Part B (medical insurance) and Part D (prescription drug coverage). These trust funds receive income from their respective revenue sources and pay out benefits and administrative costs.

Medicare Trust Funds

Trust Fund	What It Covers	Primary Revenue Sources	Financial Status (2026)
Hospital Insurance (HI) Trust Fund	Part A: inpatient hospital, skilled nursing, hospice, home health	Payroll taxes (2.9%), income taxes on Social Security benefits, interest earnings	Projected to remain solvent through approximately 2036 per 2025 trustees report
Supplementary Medical Insurance (SMI) Trust Fund	Part B: outpatient, physician services; Part D: prescription drugs	General federal revenue (~75%), beneficiary premiums (~25%), state contributions (Part D)	Automatically funded each year; not subject to insolvency risk

The SMI Trust Fund is considered "adequately financed" because Congress is required by law to set premiums and appropriate general revenue sufficient to cover projected costs each year.

How Part A Is Funded: Payroll Taxes

Part A is primarily funded by the Medicare payroll tax. Every worker in the United States pays 1.45% of their wages toward Medicare, and their employer matches that amount for a combined rate of 2.9%. Self-employed individuals pay the full 2.9% themselves. Higher earners pay an additional 0.9% on wages above $200,000 (single filers) or $250,000 (married filing jointly) under the Additional Medicare Tax introduced by the Affordable Care Act.

Standard Medicare payroll tax: 1.45% employee + 1.45% employer = 2.9% combined
Self-employed rate: 2.9% on all net self-employment income
Additional Medicare Tax: 0.9% on wages above $200,000 (single) or $250,000 (married filing jointly)
No wage cap: Unlike Social Security taxes, Medicare payroll taxes apply to all wages with no upper limit
Other Part A revenue: Income taxes on Social Security benefits, interest on trust fund investments, and a small amount of premium income from those who do not qualify for premium-free Part A

Most people who have worked and paid Medicare taxes for at least 40 quarters (10 years) receive Part A with no monthly premium. Those with fewer than 40 quarters pay a premium: $285/month for 30 to 39 quarters, or $518/month for fewer than 30 quarters in 2026.

How Part B Is Funded: Premiums and General Revenue

Part B is funded through two main sources: beneficiary premiums and general federal revenue. By law, beneficiary premiums are set to cover approximately 25% of Part B program costs, with the remaining 75% coming from general federal tax revenue. This means that for every dollar spent on Part B benefits, about 75 cents comes from the federal government and about 25 cents comes from beneficiary premiums.

The standard Part B premium in 2026 is $185.00 per month. Higher-income beneficiaries pay more through the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA surcharges range from $74.00 to $443.90 per month in addition to the standard premium, depending on income. For more on IRMAA, see our article on IRMAA and higher Medicare premiums.

How Part D Is Funded: Federal Subsidies and Premiums

Part D prescription drug coverage is funded through a combination of federal subsidies, state contributions, and beneficiary premiums. The federal government subsidizes approximately 74.5% of the cost of standard Part D coverage through the SMI Trust Fund. States contribute a "clawback" payment to help fund the cost of covering dual-eligible beneficiaries (those who qualify for both Medicare and Medicaid) who were shifted from Medicaid drug coverage to Part D when the program launched in 2006.

The average Part D premium in 2026 is approximately $34.50 per month, though premiums vary widely by plan and region. Higher-income beneficiaries also pay an IRMAA surcharge on Part D, ranging from $14.50 to $91.00 per month in addition to their plan premium. The Inflation Reduction Act of 2022 introduced a $2,000 annual out-of-pocket cap on Part D drug costs, fully effective in 2026.

How Medicare Advantage (Part C) Is Funded

Medicare Advantage plans are private insurance plans approved by Medicare. They are funded through federal payments called capitation payments made by CMS to the private insurers. CMS pays each plan a set amount per enrolled beneficiary per month, based on a benchmark rate tied to the cost of providing Original Medicare coverage in that county. Plans that bid below the benchmark receive a rebate they can use to offer extra benefits or lower premiums. Plans that bid above the benchmark charge beneficiaries a premium to cover the difference.

Medicare Advantage and the Trust Funds

Medicare Advantage payments come from both the HI Trust Fund (for Part A benefits) and the SMI Trust Fund (for Part B benefits), in the same proportions as Original Medicare. Beneficiaries enrolled in Medicare Advantage still pay the standard Part B premium, which flows into the SMI Trust Fund.

Medicare Funding Sources at a Glance

Part	Primary Funding Source	Secondary Funding Source	2026 Beneficiary Cost
Part A	Payroll taxes (2.9%)	Income taxes on SS benefits, interest	$0 premium (if 40+ quarters); $518/month if fewer than 30 quarters
Part B	General federal revenue (~75%)	Beneficiary premiums (~25%)	$185/month standard; higher with IRMAA
Part C (Medicare Advantage)	Federal capitation payments from HI + SMI funds	Plan premiums (if above benchmark)	$0 to $100+/month depending on plan; still pay Part B premium
Part D	Federal subsidies (~74.5%), state clawback payments	Beneficiary premiums	Avg $34.50/month; higher with IRMAA

Costs shown are 2026 figures. IRMAA surcharges apply to beneficiaries with income above $106,000 (single) or $212,000 (married filing jointly) based on 2024 tax returns.

The Financial Outlook of Medicare

The HI Trust Fund faces a long-term funding challenge. The 2025 Medicare Trustees Report projected that the HI Trust Fund will be able to pay full benefits through approximately 2036, after which incoming revenue would cover only about 89% of projected costs without legislative action. The SMI Trust Fund does not face the same insolvency risk because it is funded on a pay-as-you-go basis with general revenue and premiums set annually to cover projected costs.

The long-term fiscal pressure on Medicare comes from several factors: the aging of the large baby boom generation, rising healthcare costs, and the fact that Medicare spending is growing faster than the payroll tax base. Congress has addressed Medicare funding challenges multiple times through legislation, including the Balanced Budget Act of 1997, the Medicare Modernization Act of 2003, the Affordable Care Act of 2010, and the Inflation Reduction Act of 2022.

What Does This Mean for Beneficiaries?

The trust fund projections do not mean Medicare will disappear. Even if the HI Trust Fund were depleted, incoming payroll taxes would still cover the majority of Part A costs. Congress has consistently acted to prevent benefit cuts. However, the long-term funding gap is a major driver of ongoing policy debates about Medicare premiums, benefits, and eligibility age.

How Is Medicare Funded?