Understanding Medicare Advantage: How It's Funded

Medicare Advantage, Medicare Part C, provides Medicare beneficiaries with optional ways to receive health care. These options generally provide more coverage than original Medicare, sometimes premium-free. Beneficiaries enroll in Health Maintenance Organizations, Preferred Provider Organizations, Private Fee for Service Plans and occasionally, special needs plans

Funds Source

• Advantage plans provide at least the same coverage as Medicare Parts A and B and receive funding from the Medicare Parts A and B Trust Funds. These funds received income of $431.4 billion in 2008. Payroll taxes supplied $195.7 billion, federal General Revenues $147.5 billion and $58.2 billion came from Medicare premiums beneficiaries paid. The rest came from sources such as interest on Trust Fund investments and taxation of Social Security benefits.

Prospective Financing

• During 2008, Medicare paid $98.2 billion dollars to finance Medicare Advantage. Payments are prospective. Medicare determines a benchmark per beneficiary cost according to previous year costs and factors such as the demographics of a plan's service area. The Advantage company submits a bid of their expected costs per patient. If Medicare pays less than the bid per patient, plan members may have to pay a premium.

Advantage Plan Costliness

• Medicare costs for the Advantage plans for 2009 are estimated at $110 billion. Because most plans provide more coverage than original Medicare Part A and B they cost Medicare more per beneficiary--about 114 percent in 2009 compared to Medicare spending on non-Advantage plan Medicare recipients.