Financing Medicare

An article by Richard L. Kaplan called Rethinking the Medicare Payroll Tax, posted at SSRN, starts off with a review of how the Medicare program is currently financed.

Part A - standard Medicare, pays hospital expenses and some home health - financed by a 1.45% tax on earned income (wages and salaries), plus another 1.45% on the employer - total 2.9% tax on earned income.

Part B - optional Medicare, pays doctors visits, ambulance, some durable medical equipment. Financed by a monthly premium charged to the beneficiary and deducted from social security benefits, subsidized by general Federal revenues. Premium $115 to $369 per month, depending on annual income levels. The graduation based on income was first introduced in 2006.

Part D - prescription drugs. Financed generally like Part B, but with various premiums based on a number of factors.

The new tax added under the Affordable Care Act is a combination of two items, to be effective in 2013.

1. An increase in the employee portion of the payroll tax from 1.45% to 2.35% for those earning over $200,000/$250,000. The employer contribution is unchanged.

2. A 2.9% tax on investment income (interest and dividends, rents, capital gains) over $200,000/$250,000.

Kaplan goes on to proposed that the payroll tax approach be abolished and that Congress change the Medicare program so that it is financed by general revenues. Don't hold your breath.