What is Medicare, how does it work and how much will it cost in 2022?

Medicare is the federal health insurance system that covers enrolled people who are 65 or older, individuals under 65 with certain disabilities and people of any age with end-stage renal disease requiring dialysis or a kidney transplant.

Established in 1965, Medicare services have mushroomed over the years and now cover more than 62.6 million people.

Medicaid, set up at the same time as Medicare, is a separate program providing health coverage to low-income families, pregnant women, people with disabilities (regardless of age) and people needing long-term care.

The Centers for Medicare & Medicaid Services (CMS) -- a branch of the Department of Health and Human Services (HSS) -- is the federal agency that manages Medicare and monitors Medicaid programs, which are run by individual states.

Understanding Medicare's different parts

Original Medicare consisted of Parts A and B. Subsequently, Parts C and D were added. Here's what they cover:

Part A or hospital insurance (HI) covers inpatient hospital stays, care in a skilled nursing facility, skilled home health, hospice care and medications. There are limitations to coverage and patients are responsible for deductibles, co-payments and non-covered services.

Part B is medical insurance and covers services provided by doctors, outpatient medical care, medical supplies and preventive services, like diabetes screenings, mammograms and COVID-19 and flu vaccines.

Part C or Medicare Advantage Plans: These are voluntary health insurance plans offered by private insurance companies approved by Medicare. If you join a Medicare Advantage (MA) plan, coverage includes the benefits of Medicare Parts A, B and sometimes D, but provide additional coverage for services not included in original Medicare, like vision, dental, hearing and other categories. MA plans may be an HMO (Health Maintenance Organization), a PPO (Preferred Provider Organization) or others. There are different rules, costs and coverage limitations depending on the private insurer, including restrictions about which doctors, hospitals, nursing homes and rehab centers you can go to.

Part D is a prescription drug plan that helps cover the cost of some prescription medications.

Parts B, C and D are called Supplementary Medical Insurance (SMI).

There are also Medigap plans sold by private health insurance companies that pay for items like co-payments and deductibles not covered by Medicare.

For more information, see Medicare.gov

How is Medicare financed?

Funding for Medicare comes from a variety of sources, including federal government payments, payroll taxes, income taxes on Social Security benefits, premiums paid for health coverage, among others.

Two multibillion-dollar trust funds administered by the U.S.Treasury separately fund the Medicare plans: The Hospital Insurance Trust Fund (HI) finances Part A and a share of Part C and the Supplementary Medical Insurance Trust Fund (SMI) finances Parts B, C and D.

Where do these funds get their money?

Each fund has different revenue sources.

The trust fund supporting Part A is financed mainly by a 2.9 percent payroll tax. Employees and employers each pay 1.45 percent under the FICA tax (Federal Insurance Contributions Act). Self-employed also pay this tax.

People earning more than $200,000 have paid an additional 0.9 percent Medicare tax since 2013. Employers are not obliged to match the additional tax.

Other sources of money are income taxes paid on Social Security benefits, interest on trust fund investments and Medicare Part A premiums for people not eligible for premium-free Part A. (You have to have worked and paid Medicare taxes for at least 10 years to be eligible for the premium-free Part A coverage.)

Monthly premiums for Medicare

The monthly Part B premium was $148.50 per month in 2021. The 2022 Part B monthly premiums had not been announced by the end of September.

The average premium for Medicare Advantage plans is expected to be $19 per month, a drop from $21.22 in 2021, the Centers for Medicare and Medicaid Services (CMS) recently announced.

For Part D prescription drug plans, the average premium will be $33 per month in 2022, compared with $31.47 in 2021, CMS announced.

Medicare's hospital trust fund is dwindling

Last year, Medicare's total expenditures were $925.8 billion while its income was $899.9 billion. To cover the gap, $60.4 billion was paid from Medicare's Hospital Insurance Trust Fund, lowering these assets -- or reserves -- to $134.1 billion at year-end 2020, down from $194.6 billion at year-end 2019.

Th Hospital Insurance Trust Fund is now heading to depletion in 2026, when its dwindling reserves and income will not be enough to cover all spending.

The SMI fund supporting Parts B, C and D receives money from Congress, premiums paid by people enrolled in Parts B and D, plus other sources, including interest on the trust fund's investments. This fund's assets at the end of 2020 were $143.3 billion, up from $108.8 billion at the end of 2019.

While revenue for this fund varies from year to year, it is projected to be solvent in the future.

Sources: Medicare.gov, Centers for Medicare & Medicaid Services (CMS), the Congressional Budget Office (CBO), the Kaiser Family Foundation (KFF)

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