Q & A
Why am I paying a Medicare premium? Didn’t my taxes cover that?
Complete Question: I’m signed up for Medicare for 2015 for the first time and I was told I’ll be paying a premium of $104.90 per month. I’m really confused. I knew I had to pay for prescription drug coverage, but I have to pay a premium for doctor visits? Why was I paying Medicare taxes all those years?
Answer: Unfortunately, the 2015 premium is $104.90 even after paying taxes. It can be frustrating, so here is how your taxes have been broken down. First of all, FICA tax as we call it, which is named for the “Federal Insurance Contributions Act”, is 7.65% and is paid for by both you and your employer (or twice as much is paid by someone who is self-employed). Most of this (6.2%) is for Social Security and the rest (1.45%) is to pay Medicare. So with this in mind, only 38% of Medicare costs are financed by payroll taxes. Monthly premiums pay for 13% and general revenues pay for 40%. The remaining amount is paid for through additional taxes and premiums from higher-income beneficiaries, interest, and other miscellaneous revenues.
Medicare Part A is the only aspect of Medicare that is financed (in part) by payroll taxes. As you probably figured out when you applied, Part A is free (because of your payroll taxes), but it only covers major medical (which is why it is called “hospital insurance”). The government uses the Hospital Insurance (HI) Trust Fund to pay for Part A coverage. This is why you have to pay for any additional coverage, such as Part B. This is also why Part B and drug coverage are voluntary. You may also want to know that the Part B premium is determined every year so that it covers 25% of Part B costs. The premiums are deposited into the Supplemental Medical Insurance (SMI) Trust Fund and the remaining costs (75%) are paid for by general revenues.
So even though it seems like your Medicare taxes did not pay for anything, they did cover your hospital insurance (Part A). Most of what you paid in FICA taxes were actually for your Social Security.