Understanding Medicare and Medicaid Costs
Let me tell you directly: Medicare and its means-tested counterpart, Medicaid, are the sole health coverage options for millions of Americans right now. These programs stand as some of the most effective social insurance initiatives we've seen, supporting tens of millions including seniors, younger people with disabilities, and those with low incomes or limited resources. If you're in the workforce, you're contributing to these through payroll deductions or your annual tax filings—every taxpayer does.
You need to know that Medicare is a federal program covering older or disabled Americans, while Medicaid runs at the state level for low-income families and some single adults. Funding comes from your payroll taxes and recipient premiums for Medicare, and from federal and state governments for Medicaid. Both got extra funding via the 2020 fiscal relief package amid the economic crisis.
Breaking Down the Costs
Medicare falls under the Centers for Medicare & Medicaid Services (CMS), part of the Department of Health and Human Services, working with the Department of Labor and U.S. Treasury on insurance reforms. The Social Security Administration handles eligibility and coverage. Medicaid is state-managed, and while all states participate, it's not mandatory. The Affordable Care Act ramped up costs for taxpayers, especially high earners, by broadening coverage.
From CMS data, national healthcare spending hit $4.9 trillion in 2023, up 7.5%, equating to $14,570 per person and 17.6% of GDP. Medicare spending rose 8.1% to $1,029.8 billion (21% of total), and Medicaid grew 7.9% to $871.7 billion (18%). CMS projects 5.6% annual growth through 2032, outpacing GDP by 1.4%, driven by rising Medicare enrollments—these figures don't include pandemic costs.
Medicaid Expansion Details
Under President Biden’s American Rescue Plan, states got incentives to expand Medicaid to adults up to 65 with incomes at or below 138% of the federal poverty level—that's $36,777 for a family of three in 2025. Forty states plus D.C. adopted this; ten didn't, including Alabama, Florida, and others. States receive extra federal funding, including a five-percentage-point match boost for two years on regular expenses, plus 90% matching for newly eligible adults.
CARES Act Funding Impact
The CARES Act, signed in March 2020, allocated $2 trillion for emergency relief, with $100 billion for healthcare providers on COVID-19 expenses. This included a 20% Medicare payment increase for COVID patients, no payment cuts for hospitals through 2020, and more Medicaid funds for states.
Your Medicare Taxes Explained
If you earn wages, salaries, or self-employment income, you're paying Medicare tax on all of it—2.9% total, split 1.45% each between you and your employer if you're a W-2 employee. Self-employed? You pay the full amount but deduct half as a business expense on your AGI. Since 2013, high earners face an extra 0.9% on income over $200,000 (single) or $250,000 (joint).
There's also a 3.8% net investment income tax on unearned income like interest, dividends, and rentals for those over the thresholds. It applies to the lower of your net investment income or excess modified AGI. Deductions can reduce this, like investment expenses or state taxes on that income.
Example of Medicare Tax for a High Earner
- Consider Jerry, a single filer with $225,000 in earned income, $50,000 in royalties, and $20,000 in capital gains.
- He owes 2.9% on $225,000 ($6,525), plus 0.9% on $25,000 over the threshold ($225), and 3.8% on $70,000 investment income ($2,660).
- Total: $9,410 to Medicare.
How Medicare Gets Funded
Medicare draws from two trust funds dedicated solely to it. The hospital insurance fund uses payroll taxes from employees, employers, and self-employed to cover Part A. The supplementary fund comes from Congress, enrollee premiums, and investments, funding Parts B and D plus admin costs. Payments cover home health, skilled nursing, outpatient services, drugs, physician fees, inpatient care, and Advantage Plans. The CARES Act added telehealth flexibility and home health certifications by non-physicians.
How Medicaid Gets Funded
Medicaid funding splits between federal and state governments via the Federal Medical Assistance Percentage (FMAP), averaging 57% but ranging 50-75% based on state income. It's adjusted every three years. CARES Act added funds for COVID costs. Medicaid takes $1 of every $5 in healthcare spending, key for low-income coverage. Medicare is 21% of national spending and 12% of the federal budget. Expansions often save states money due to high federal shares.
The Bottom Line
Medicare and Medicaid are vital for millions, but funding projections show shortfalls ahead. The CARES Act helped with coronavirus costs, yet as a taxpayer, you're directly supporting these through your contributions—understand that this is how we keep these programs running.
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