Medicare Benefits and Financing

Medicare coverage has four parts, each offering specific benefits. Part A and Part B provide hospital and medical coverage. Part C offers a private plan alternative. And Part D assists with the costs of prescription drugs.  

• Part A covers inpatient hospital care (including inpatient drugs), some home health services, limited skilled-nursing facility care, and hospice care. For most people, Part A requires no premiums.  
• Part B covers physician services, some home health services, and outpatient services. It requires a monthly premium. Financial assistance is available for beneficiaries with low incomes and savings.  
• Part C, also known as the Medicare Advantage (MA) program, is Medicare’s private plan alternative to Traditional Medicare. Private MA health plans that contract with Medicare are required to cover Part A and Part B benefits and may include additional coverage. MA accounts for about half of Medicare enrollees, and that share is growing.  
• Part D covers outpatient prescription drugs. Individuals can obtain Part D coverage through a stand-alone private Part D plan or as part of an MA plan.

In 2024, about half of Medicare beneficiaries enrolled in MA plans (see also Medicare Part C—Medicare Advantage). Medicare beneficiaries may also enroll in Part D for outpatient prescription drug coverage. This coverage is available through a “stand-alone” private drug plan or an MA plan.

Benefits: Beneficiaries in Traditional Medicare may obtain covered services from any provider who accepts Medicare payment. The overwhelming majority of physicians across the country do. However, Traditional Medicare requires patients to pay cost-sharing amounts for many covered services. Medicare beneficiaries often purchase private Medicare Supplement insurance to help pay cost-sharing expenses. This supplement insurance is known as Medigap or MedSupp. Some people with Traditional Medicare coverage have employer-sponsored or union-sponsored health insurance, such as retiree coverage, that supplements Medicare and helps cover Medicare’s cost-sharing expenses. And some Medicare beneficiaries with low incomes receive assistance with Medicare premiums and cost-sharing through a Medicare Savings Program or a state Medicaid program.

Individuals enrolled in MA plans typically receive their health care through their plan, choosing physicians and facilities from the plan's network. MA plans usually have lower cost-sharing than Traditional Medicare for in-network providers and, unlike Traditional Medicare, MA plans have an annual out-of-pocket spending cap. Some MA plans charge an additional plan-specific premium to enrollees. Most MA enrollees also have outpatient prescription drug coverage (Part D) through their MA plan.

Funding: Medicare Part A is mainly financed by payroll taxes. Employers and employees each pay 1.45 percent of wages to the Part A trust fund. Since 2013, higher-wage workers have paid an additional Medicare tax of 0.9 percent on annual wages and self-employment income above specified thresholds. The thresholds are $200,000 for single tax filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Most Americans eligible for Social Security are entitled to Part A at no cost when they turn 65. Participation in Part B is voluntary and generally requires payment of a monthly premium. About 92 percent of people who participate in Part A also enroll in Part B. Beneficiary premiums cover about 25 percent of Part B costs. The other 75 percent is financed by federal general revenue. Medicare beneficiaries with low incomes and limited savings, who are enrolled in a Medicare Savings Program or Medicaid, do not pay Part B premiums. For these Medicare beneficiaries with low incomes, Medicaid pays their premiums and, for some, their cost-sharing expenses. Individuals with higher incomes have paid higher Part B premiums since 2007. The amount they pay is typically based on their annual income two years earlier. In 2024, individuals with more than $103,000 in annual income in 2022 and couples with more than $206,000 pay higher Part B premiums. And since 2011, people with higher incomes must pay higher Part D (prescription drugs) premiums.

Fiscal pressures: Medicare faces long-term financial challenges. The 2024 Medicare trustees’ report estimates that the Hospital Insurance Trust Fund, which funds Part A and is mainly financed by payroll taxes, will be solvent until 2036. This is five years longer than predicted in the trustees’ previous annual report. In 2036, current projections indicate that the trust fund will only be able to cover 89 percent of Part A spending.

Continued increases in medical costs, rapid changes in medical technology, and the aging of the boomer generation, along with the addition of ten million enrollees to the program between 2023 and 2030, require the consideration of Medicare policy changes in future years. These could include various approaches, including a combination of ways to control spending and increase revenues for the Part A trust fund. Medicare must remain a strong, broadly supported social insurance program so that it can continue to protect current and future generations.

Medicare's fiscal pressures reflect the general trend in the overall health care market as well as increasing enrollment in the program. Health care spending has generally been growing faster than the overall economy for decades. Annual cost increases raise premiums and expenditures for all payers, including Medicare, other federal health programs, private plans, state insurance plans, and people who self-finance their care.

The COVID-19 pandemic had a significant impact on revenues going into the Medicare trust fund, Medicare spending, and the health status of the population in Medicare now and going forward. In 2020, the pandemic reduced revenues coming into the program and reduced utilization of health care services. In addition, many beneficiaries with health conditions and advanced age needed COVID care, and mortality was high in this population. More recently,, revenue into the trust fund from payroll taxes has increased because of growth in wages and the number of workers, which have helped extend the projected solvency time for the Part A trust fund.

The 2024 trustees report estimated the Part A trust fund will become insolvent in 2036. This is five years later than projected in the 2023 trustees report. The estimated solvency period was increased both because of higher estimated income and lower estimated spending than previously projected. Income projections reflect both a larger number of workers and higher average wages than previously projected, thus increasing income from the Medicare payroll tax. Lower spending reflects, in part, lower than previously projected spending for inpatient hospital services and home health care.

Going forward, revenues and utilization are expected to follow historic trends in the general economy and health care sector. Health inflation trends due to higher input costs and workforce shortages are likely to affect Medicare spending as it will for other payers.

Despite slower spending growth during the past fifteen years, compared with previous decades, Medicare still faces long-term financial challenges that must be addressed. It must grapple with the enrollment growth associated with aging baby boomers and the related declining ratio of workers to Medicare beneficiaries. Enrollment is projected to increase from 67 million in 2023 to 77 million in 2030. Viable solutions to ensure adequate and affordable benefits while making the program sustainable for future generations must be found.

There have been several proposals to address Medicare’s long-term sustainability that AARP does not support. They include, among other changes, raising the eligibility age, converting Medicare from a defined-benefit to a defined-contribution (voucher) system, means-testing, and privatizing the program.

Shifting costs to current and future beneficiaries is not an adequate solution to Medicare's long-term financial outlook. Instead, one step should continue to look at ways to improve the program’s efficiency and integrity. Research literature documents that a significant portion of health care spending fails to yield better care and is therefore wasted. As part of the larger health care system, Medicare must encourage the transformation of service delivery so that care is person- and family-centered, efficient, and of high quality. Congress and the federal health agencies have taken steps to help ensure these outcomes, such as by encouraging innovative payment and delivery models, but much more can be done.

In addition, evaluating and updating Medicare Advantage payments could generate program savings to help strengthen Medicare's financing. For example, the Congressional Budget Office estimates that reforming one aspect of how Medicare pays private plans (a 10 percent reduction in the federal benchmarks that partially determine plan’s payments) would generate savings of $392 billion from 2025 to 2032.

Americans of all ages recognize Medicare’s important role in helping to ensure access to health care and financial security in retirement.