How Is Medicare Advantage Financed?

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.