Key takeaways

  • Medicare is primarily funded through trust funds supported by income taxes on Social Security benefits, Medicare premiums, congressional appropriations, and interest earned on these funds.
  • The Hospital Insurance (HI) Trust Fund covers Medicare Part A, while the Supplementary Medical Insurance (SMI) Trust Fund supports Parts B and D. Unlike the HI Trust Fund, the SMI Trust Fund is adequately funded indefinitely because its premiums are adjusted annually to cover costs.
  • Medicare Advantage (Part C) plans are partially funded by Medicare trust funds, with the government paying private insurers a set monthly fee. Enrollees may also pay additional premiums to these companies.

Medicare is healthcare insurance funded by the federal government. It is supported by two dedicated Medicare trust funds held by the U.S. Treasury:

  • Hospital Insurance (HI) Trust Fund: pays for Medicare Part A (hospital insurance)
  • Supplementary Medical Insurance (SMI) Trust Fund: pays for:
    • Part B (medical insurance)
    • Part D (prescription drug coverage)
    • administration of Medicare

Both funds have multiple income streams. Keep reading to learn more about the income streams that sustain the Medicare trust funds and how the price you pay for Medicare affects them.

The government maintains the HI Trust Fund by collecting:

  • income taxes on Social Security benefits, such as those paid by employers and employees
  • Part A premiums from people who do not get premium-free Part A
  • interest earned on the trust fund

According to a 2025 annual report on the financial health of Social Security and Medicare, the HI Trust Fund can currently pay 100% of the scheduled benefits until 2036.

The government maintains the SMI Trust Fund by collecting:

Unlike the HI Trust Fund, the SMI Trust Fund is adequately funded indefinitely. This is because its main funding sources, Part B and Part D premiums, are adjusted annually to cover the costs of the upcoming year. That’s why enrolling late in Part B can result in a lifetime penalty (an increased cost for coverage).

Medicare-approved private insurance companies offer Medicare Advantage (Part C) plans that provide coverage similar to that of Original Medicare (parts A and B).

The trust funds also partially fund these plans, as Medicare pays the insurance companies a set monthly fee to cover the care of enrollees.

Insurance companies charge additional premiums for some Medicare Advantage plans to help fund the plans and provide the included benefits.

Whether a Medicare plan is fully or partially funded by the U.S. government depends on the type of plan.

In general, Original Medicare is fully funded by the government. However, some of the government funding for these plans comes from individuals paying into them through income tax or plan premiums.

For Advantage plans, the government funds a portion of the cost by paying the private insurance companies that provide them. But many insurance companies also charge a premium when they sell these plans, so anyone who buys the plan shares the cost.

Trust funds held by the U.S. Treasury fund Medicare.

One fund supports Medicare Part A, and the other supports Medicare parts B and D. You pay into these funds while working by paying income tax for Social Security and by paying Medicare premiums.

You also pay additional premiums for Medicare Part D that help fund these plans.

If you have a Medicare Advantage plan, your plan is partially funded by these trust funds, but you may also pay a premium to the private insurance company that provides your plan.