When it comes to understanding the cost of Medicare, most people primarily worry about how much they'll have to pay out-of-pocket every month. However, there is also the question of how much Medicare costs the United States government.

As with most government spending, there is no clear, black and white answer to that question. In this article, we explain the Medicare basics, including how the government funds the Medicare program and how this money is stored.

How does Medicare work?

Although we often use the name "Medicare" as a blanket term, there are actually several distinct Medicare programs. While there are some similarities, such as all falling under the umbrella of the Centers for Medicare & Medicaid Services (CMS), there are a number of important differences, including funding.

Please note that, while CMS also manages Medicaid, this state-based program is funded differently than Medicare.

What does Original Medicare include?

Original Medicare refers to Medicare Part A, hospital insurance, and Medicare Part B, health insurance. These are the parts of Medicare that are administered and paid for directly by the federal government. The other two parts of Medicare, C and D, receive input, funding, and regulation by the U.S. government, but they are not administered by the government directly.

Medicare Part A benefits cover inpatient health services like hospital care as well as skilled nursing facilities (SNF), hospice care, and even home care in some situations.

Part A is notable in that it is the only part of Original Medicare that is available premium-free to those who qualify. This means you do not have to pay a monthly premium. To qualify for premium-free Part A, you or your spouse must have worked and paid Medicare taxes for around 10 years.

(There are also Part C plans that have no monthly premium, but Part C is not part of Original Medicare.)

Medicare Part B covers most medically necessary outpatient care. This includes services like doctor visits, diagnostic tests, wellness checks, outpatient surgery, and much more. Neither Part A nor Part B cover prescriptions or routine dental and vision care.

Medicare Part C

Medicare Part C is more commonly known as Medicare Advantage. These plans are provided by private insurance companies working within guidelines established by United States government.

Although Medicare Advantage plans are not directly funded by the U.S. government, these plans do receive funding in the form of your monthly Medicare Part B premium. This is why Medicare Advantage plans have an average monthly premium in the $25 to $40 range (depending on whether the plan includes prescription drug coverage). The Part B premium you pay every month goes to your Advantage plan provider.

Every Advantage plan must provide the same benefits and coverage that you get with Original Medicare. However, most Part C health plans offer more coverage, such as prescription drugs, dental, and vision care.

Medicare Supplement Plans

Medicare Supplement policies, more commonly known asMedigap, are private insurance plans that help pay your out-of-pocket fees under Original Medicare. These plans are only offered by private insurance companies, although they are regulated by the Centers for Medicare & Medicaid Services. Everything you pay for a Medigap plan goes to the insurer, not the government.

The Medicare Tax

The government's main funding source for Medicare is the Medicare Tax. This is a payroll tax that workers and employers split. It comes to a total of 2.9% of an individual's wages.

If you are employed by an organization of some kind, you split the tax with your employer, each paying 1.45%. Self-employed individuals, however, must pay the entire amount, since there is no other employer to match their contribution.

The Medicare Tax is paid by all employed individuals, even if they do not yet have Medicare. One provision of the Affordable Care Act (ACA) increased the tax rate for high-earning individuals.

The Social Security Administration

The Social Security Administration (SSA) processes and holds the funds collected by the Medicare Tax. As the name implies, SSA also processes payments related Social Security and the Social Security Tax.

Although these taxes go to different services, SSA's handling of these funds is the reason you usually have to contact the Social Security Administration to take care of issues related to your Medicare payments, such as having them automatically deducted from your Social Security check each month.

Where is the Medicare Tax money stored?

The money that funds Medicare is stored in two trust funds. These monies are held by the United States Treasury and can only be used for Medicare. We look at each fund individually below.

The Hospital Insurance Trust Fund

As the name implies, the Hospital Insurance Trust Fund pays Medicare's share of costs for hospital stays and other covered Part A services. This trust is funded and managed separately from the other Medicare trust, although both are used to pay for Medicare in general.

The primary source of funding for the Hospital Insurance Trust Fund is the Medicare Tax. Additional funding sources include taxes paid on Social Security benefits, investments, and the monthly Part A premium for those who don't qualify for premium-free.

The Supplementary Medical Insurance Trust Fund

Despite its name, the Supplementary Medical Insurance Trust Fund has no relation to Medicare Supplement or Medigap plans. Instead, this trust fund helps pay for Medicare Part B and Medicare Part D prescription drug plans. This includes all outpatient services covered by these parts of Medicare, including durable medical equipment (DME) under Part B.

Funding resources include monthly Part B premiums as well as resources allocated by Congress for these purposes. In addition, funds derived from interest and investments go into the fund, just as they do for the Hospital Insurance Trust Fund. Monies held by the Supplementary Medical Insurance Trust Fund are used for Medicare Parts B and D only.

Additional resources

• ClearMatch Medicare: Find a Medicare Plan
• Medicare.gov: Costs