How Medicare Is Financed

Medicare’s two trust funds are financed in fundamentally different ways, and the difference explains why the program’s “insolvency” headlines apply to only one part of it.

Part A: a payroll tax and a finite fund

Part A is financed through the Hospital Insurance trust fund, fed by “a 2.9% tax on earnings paid by employers and employees (1.45% each),” with higher earners paying 2.35 percent. Payroll taxes made up 88 percent of Part A revenue in 2024.

Because the tax rate is fixed in statute while spending grows with health costs and enrollment, the fund can be drawn down. The 2026 Medicare Trustees Report projects the Part A trust fund will be depleted in the second quarter of 2033, roughly seven years out.

Depletion is not the same as the program ending. It means incoming payroll tax receipts would cover only part of Part A benefits, and Congress would have to raise revenue, reduce payments, or both. Every prior approach to a depletion date has been resolved by legislation, but the resolution has always involved someone being paid less or taxed more.

Parts B and D: general revenue and annual resetting

Part B and Part D flow through the Supplementary Medical Insurance trust fund, financed very differently. Part B ran on “72% government contributions…and 26% beneficiary premiums” in 2024. Part D ran on “75% government contributions and 13% beneficiary premiums,” with the remainder from state contributions.

The critical structural fact is that Part B and Part D premiums and general revenue contributions are reset every year to cover expected costs. They cannot become insolvent, because the financing is defined to match the spending rather than being capped in advance.

Worth remembering: this asymmetry shapes what Medicare reform proposals look like. Part A’s fixed revenue creates a recurring legislative deadline that forces action, which is why hospital payment has been cut so many times. Part B and Part D have no such deadline, so their growth shows up as pressure on the federal budget and on beneficiary premiums rather than as a countdown to a cliff. The absence of a forcing mechanism is not the same as the absence of a cost problem.

The scale

Medicare benefit payments totaled $1.2 trillion in 2025, up from $666 billion a decade earlier. Payments to Medicare Advantage plans accounted for $534 billion of that in 2025 and are projected to represent 59 percent of total Part A and Part B spending by 2035. Part D spending is projected to “nearly double from 2025 ($181 billion) to 2035 ($346 billion), representing an average annual growth rate of 6.7%.”

Those numbers are the reason value-based care exists as a federal priority. A program growing at this rate, financed partly by a capped payroll tax, has to find a way to buy care differently.

Key takeaways

• Part A is financed by a 2.9 percent payroll tax into the Hospital Insurance trust fund, projected for depletion in the second quarter of 2033.
• Parts B and D are financed mainly by general revenues reset annually, so they cannot become insolvent in the same sense.
• Medicare benefit payments reached $1.2 trillion in 2025, nearly double the level a decade earlier.
• Medicare Advantage accounted for $534 billion in 2025 and is projected to reach 59 percent of Part A and B spending by 2035.

Sources

• KFF, Medicare 101: Key Facts (opens in a new tab)
• KFF, Key Facts About Medicare Spending Trends and Projections from the 2026 Medicare Trustees Report (opens in a new tab)