Medicare is an essential health insurance program serving millions of Americans and is a major part of the federal budget. The program was signed into law by President Lyndon B. Johnson in 1965 to provide health insurance to people age 65 and older. Since then, the program has been expanded to serve the blind and disabled.

The number of people enrolled in Medicare has tripled since 1973, climbing from 23 million to 67 million in 2023, and it is projected to reach about 89 million in 30 years. A major driver of Medicare enrollment is the increase in the number of older Americans. There are currently 61 million people age 65 and older, and that number is projected to increase by 40 percent over the next three decades. In addition to that population, Medicare also covers certain younger people with disabilities or specific illnesses.

One of the biggest misconceptions about Medicare is that it is self-financed by current beneficiaries through premiums and by future beneficiaries through payroll taxes. In fact, payroll taxes and premiums together only cover about half of the program’s cost.

Key Facts

• Medicare is the second largest program in the federal budget: 2023 Medicare expenditures, net of offsetting receipts, totaled $839 billion — representing 14 percent of total federal spending.
• Medicare has a large impact on the overall healthcare market: it finances over one-fifth of all health spending and nearly 40 percent of all home health spending.
• In 2023, Medicare provided benefits to 20 percent of the population.
• Medicare spending is a major driver of long-term federal spending and is projected to rise from 3.1 percent of gross domestic product (GDP) in fiscal year 2023 to 5.4 percent in fiscal year 2053 due to the retirement of the baby-boom generation and the rapid growth of per capita healthcare costs.

What Are the Components of Medicare?

Medicare is a federal program that provides health insurance to people who are age 65 and older, blind, or disabled. Medicare consists of four "parts":

• Part A pays for hospital care;
• Part B provides medical insurance for doctor’s fees and other medical services;
• Part C is Medicare Advantage, which allows beneficiaries to enroll in private health plans to receive Part A and Part B Medicare benefits;
• Part D covers prescription drugs.

Almost all seniors are automatically enrolled in Part A at no additional cost once they turn 65. Parts B, C, and D are voluntary and require enrollees to pay premiums to receive coverage.

Where Does Medicare Funding Come From?

Medicare is financed by two trust funds: the Hospital Insurance (HI) trust fund and the Supplementary Medical Insurance (SMI) trust fund. The HI trust fund finances Medicare Part A and collects its income primarily through a payroll tax on U.S. workers and employers. The SMI trust fund, which supports both Part B and Part D, receives most of its income from the federal government’s general fund because premiums only cover about one-quarter of the fund’s total expenditures. Part C, on the other hand, is paid for through both the HI and SMI trust funds and collects its income from a combination of the general fund, payroll taxes, premiums paid by beneficiaries, and out-of-pocket charges.

As a whole, only 57 percent of Medicare’s costs were financed through payroll taxes, premiums, and other receipts in 2023. Payments from the federal government’s general fund made up the difference.

The composition of Medicare financing has changed significantly over the past 50 years, with an evolving mix of premiums, payroll taxes, and general fund support. In 1973, payroll taxes financed 73 percent of Medicare spending. In 2023, however, payroll taxes covered only 36 percent of the program’s costs. In 1986 the payroll tax rate for Medicare increased the contribution rates for both employers and employees from 0.6 percent to 1.45 percent of wages. Later, in 1994, the cap on earnings, which limited the amount of income subject to the Medicare payroll tax, was eliminated (the cap on earnings for the payroll tax that funds Social Security, however, was not eliminated). Most recently, the Affordable Care Act increased payroll tax rates for high earners by an additional 0.9 percentage points beginning in 2013. Unfortunately, the sum of those changes will not be sufficient to offset future cost growth.

Premiums play only a modest role in funding the Medicare program. They financed 15 percent of Medicare’s overall costs in 2023, about the same share as in 1973.

The federal government’s general fund has been playing a larger role in Medicare financing. In 2023, 43 percent of Medicare’s income came from the general fund, up from 16 percent in 1973. Looking forward, such revenues are projected to continue funding a major share of the Medicare program. By 2053, the Trustees project that general revenues will cover half of the program’s costs.