Medicare Part D: How Is It Funded?

Last Updated : 15/09/20184min read

The Medicare Part D prescription drug program is available to all 58 million Americans currently on Medicare, including seniors 65 and over as well as those under age 65 with disabilities or certain conditions that qualify them for Medicare coverage. According to the Kaiser Family Foundation in 2016, roughly 41 million Medicare beneficiaries were enrolled in this voluntary program. Here’s a brief summary of Medicare Prescription Drug Plans and Medicare funding for the program.

When were Medicare Prescription Drug Plans created?

Congress authorized creation of Medicare Part D Prescription Drug Plans under the Medicare Modernization Act of 2003, although the benefits weren’t available until 2006. The program subsidizes the cost of prescription drug insurance for all Medicare beneficiaries. In 2017, the Congressional Budget Office (CBO) estimates that spending on Medicare Part D will total $94 billion, or about 16% of all Medicare expenditures for the year. According to the CBO, Medicare Part D is the most significant expansion of the Medicare program since it was created by Congress in 1965.

What is the source of Medicare funding for Medicare Prescription Drug Plans?

All Medicare benefits are paid for by two trust funds held by the United States Treasury that are specifically designated for use only by Medicare:

  • The Hospital Insurance (HI) trust fund
  • The Supplemental Medical Insurance (SMI) trust fund

Each of the two trust funds have different funding sources. The HI Trust Fund gets its Medicare funding primarily from payroll taxes paid by businesses, employees, and the self-employed. Smaller amounts come from income tax on Social Security benefits, interest earned on the monies in the trust, and Part A premiums from those who do not qualify for premium-free Part A.

The HI Trust Fund covers Medicare Part A benefits, such as inpatient hospital stays, home health, and hospice care. It also pays the administrative costs associated with Medicare Part A. According to the Tax Policy Center, the Medicare HI Trust Fund had a balance of $205 billion in 2015 and incoming Medicare funding of $275 billion for the year.

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The SMI Trust Fund gets its Medicare funding through congressional appropriations and premiums for Medicare Part B and Medicare Part D Prescription Drug Plans. The SMI Trust Fund pays specifically for outpatient health care expenses under Part B and Medicare Part D prescription drug benefits.

According to the Tax Policy Center, in 2015, the SMI Trust Fund had assets on hand of $69.5 billion and incoming revenue of $369 billion.

How much does the Medicare program spend a year?

According to the Centers for Medicare & Medicaid Services (CMS), national health care expenditures totaled $3.2 trillion in 2015, the most recent year complete data is available, or just under $10,000 per person living in the United States. Of that total, Medicare expenditures totaled $646.2 billion, or about 20% of all health care spending in the U.S.

The Department of Health and Human Services (HHS) breaks down Medicare spending in 2015 like this:

  • Medicare Part A direct fee-for-service payments – $203.1 billion.
  • Medicare Part B direct fee-for-service payments – $167.8 billion.
  • Medicare Part C (Medicare Advantage) payments – $149.8 billion.
  • Medicare Part D prescription drug payments – $85.2 billion.

According to the Centers for Medicare and Medicaid Services (CMS), Medicare spending in general is expected to grow at a rate of 7.1% a year, but spending on the Medicare Part D prescription drug program in particular is expected to slow from 9% in 2015 to 5% in 2016, primarily due to the number of high cost, specialty brand name medications that will lose patent protection and become available as generic formulations at much lower prices.

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