How is Medicare and Medicaid Funded?

Medicare and Medicaid are two government-sponsored health insurance programs that provide vital medical and health coverage for millions of Americans. Medicare primarily serves senior citizens ages 65 and older and people with certain long-term disabilities, while Medicaid provides health coverage for eligible low-income adults, children, pregnant women, elderly adults and people with disabilities.

Though the two public programs have similarities, there are important differences in how Medicare and Medicaid are structured and funded.

Medicare is primarily funded through payroll taxes, beneficiary premiums, deductibles and co-payments, and general tax revenues. Medicaid is financed through a combination of state and federal resources, including federal matching funds based on the Federal Medical Assistance Percentage (FMAP), direct state contributions, and beneficiary premiums and co-payments.

How Is Medicare Funded?

Medicare is funded through the below sources.

1. Payroll Taxes

The largest funding source is the payroll tax that workers and employers pay throughout their working years. Employees pay 1.45% of their earnings while employers match that percentage. The self-employed pay 2.9%. 

2. Beneficiary Premiums

Beneficiaries pay a monthly premium for Medicare Part B coverage. Higher income seniors pay more. Beneficiaries in Medicare Advantage plans and Part D prescription plans also pay premiums.

3. Beneficiary Deductibles and Co-payments

Beneficiaries are responsible for deductibles and coinsurance payments when receiving medical services. For example, Part A has a deductible when admitted to the hospital.

4. General Revenues

A portion of Medicare funding comes from general tax revenues like income taxes. This helps cover Medicare costs not covered by payroll taxes and premiums.

What Are the Different Parts of Medicaid?

Medicaid coverage varies by state but generally includes:

  • Inpatient and outpatient hospital services
  • Doctor visits 
  • Maternity care
  • Pediatric services 
  • Prescription drugs
  • Nursing home care
  • Home healthcare
  • Emergency services

Some states have also expanded coverage through Medicaid.

How Is Medicaid Funded?

Medicaid is funded through a mix of state and federal resources:

1. Federal Matching Funds

The federal government matches a percentage of what states invest, which is based on a Federal Medical Assistance Percentage (FMAP). The FMAP varies by state based on per capita income. 

2. State Funds

States directly contribute funds to Medicaid from their own budgets to draw down federal matching dollars. States set eligibility and coverage rules within federal guidelines.

3. Beneficiary Premiums

Some beneficiaries pay sliding scale premiums, deductibles and copays based on their income level. This makes up a small portion of Medicaid funding.

4. Beneficiary Deductibles and Co-payments

States can require small copayments for services and prescription drugs for Medicaid enrollees at certain income levels. This makes up a small part of Medicaid funding.

What Are the Differences between Medicare and Medicaid Funding?

Here is a table comparing Medicare and Medicaid funding:

Funding SourceMedicareMedicaid
Payroll taxesPrimary funding sourceNot a funding source
General tax revenuesPartial funding sourceMajor funding source (federal share)
State fundingNo state fundingStates provide a share of Medicaid funding
Beneficiary premiumsRequired for Parts B, C, DMinimal premiums based on income
Beneficiary cost-sharingDeductibles, copays requiredMinimal copays required
Federal oversightFully federally administeredFederal & state administration
EligibilitySenior citizens, disabilityLow-income adults, children, pregnant women, elderly, disabled

Some key differences in Medicare and Medicaid funding:

  • Medicare is mostly funded by payroll taxes and enrollee premiums. Medicaid relies more on state and federal funds.
  • Medicare is solely managed by the federal government. Medicaid involves both state and federal funding. 
  • Medicare beneficiaries are largely seniors. Medicaid covers low-income adults and children.
  • Medicare has uniform coverage nationwide. Medicaid policies, benefits and spending vary considerably by state.

What Are the Pros and Cons of Medicare and Medicaid Funding?

Advantages of the current Medicare and Medicaid funding structure:

  • Payroll taxes provide a stable funding base for Medicare.
  • Federal matching helps states provide Medicaid coverage for the poor. 
  • Premiums and cost-sharing lower costs and involvement for taxpayers.

Disadvantages include:

  • Reliance on payroll taxes may not cover rising Medicare costs.
  • Medicaid costs are squeezing state budgets in tough economic times.
  • Low-income beneficiaries struggle to pay premiums and deductibles. 
  • No limits on overall Medicare and Medicaid spending levels.

What Are the Alternatives to Medicare and Medicaid Funding?

Some alternative funding approaches that have been suggested:

  • Raise payroll taxes, require higher premiums or increase cost-sharing amounts.
  • Block grant Medicaid funds to states to control federal costs. 
  • Establish federal caps or spending targets for Medicare and/or Medicaid.
  • Gradually increase Medicare eligibility age to reduce costs.
  • Transition Medicare to a system of private vouchers or premium support.

Each approach involves tradeoffs in terms of cost, quality and access to care for beneficiaries. There is continued debate over the best funding solution.

What Are the Effects of Medicare and Medicaid Funding on Health Care Costs?

Medicare and Medicaid exert significant influence on overall US health expenditures:

  • In 2022, Medicare made up 20% and Medicaid accounted for 16% of total national health spending.
  • Medicare’s fee-for-service model contributes to fragmented, volume-driven care. 
  • Low Medicaid provider payments can reduce access for beneficiaries.
  • Combined Medicare and Medicaid spending puts pressure on budgets and may crowd out other priorities.

At the same time, Medicare’s size gives it leverage to pilot payment and care delivery reforms. Medicaid programs in some states have slowed spending growth through managed care and value-based models.


Medicare and Medicaid are foundational public programs that provide health coverage for many vulnerable Americans. While criticisms exist, understanding how these programs are funded can lead to more informed debates over potential changes and financing reforms. The future of Medicare and Medicaid funding will have far-reaching impacts on beneficiaries, health providers, governments budgets and the overall US healthcare system.