How is Medicare Advantage funded?

Medicare Advantage plans must cover the same services as Original Medicare parts A and B.

Original Medicare Part A covers inpatient hospital care, and Part B covers outpatient services such as doctors’ visits. Medicare Advantage plans cover Part A and Part B services but may include coverage for prescription medications and extra benefits, such as dental, vision, and fitness.

Some Medicare Advantage funding comes from the enrolled people’s monthly premiums. However, most of the funding comes from Medicare.

Every month, Medicare pays Medicare Advantage plan providers an amount covering the Part A and Part B costs. Medicare provides a separate payment if a plan also offers prescription drug coverage.

Two main factors determine the amount of money Medicare pays. One is the highest amount the federal government can pay the private insurers for a person in each U.S. county, known as the benchmark. The other is each beneficiary’s health, which governs how Medicare raises or lowers the rates, known as risk adjustment.

The Medicare Advantage bidding process involves two steps.

First, each plan submits a bid to Medicare, based on the estimated cost of Part A and Part B benefits per person.

Next, Medicare compares the bid amount against the benchmark, which is a percentage of average Medicare spending costs per person.

Each U.S. county has its own benchmark, which reflects the patterns in which local healthcare professionals and facilities bill Medicare. Because these patterns differ among counties, their benchmarks also differ.

When a plan’s bid is greater than the benchmark, the person enrolled in a Medicare Advantage plan pays the difference between the two amounts. This payment is a monthly premium that a person pays in addition to the Medicare Part B premium.

If the bid is lower than the benchmark, the plan gets a percentage rebate from Medicare for the difference between the two.

Insurers that receive rebates should use a portion of the funds for additional plan benefits or to reduce monthly premiums.

Medicare Advantage uses the bid and the benchmark to determine the base rate.

When a bid is lower than the benchmark, the bid becomes the base rate. In contrast, when a bid is higher than or equal to the benchmark, the benchmark becomes the base rate.

After Medicare Advantage establishes the base rate, Medicare uses risk adjustment to anticipate the healthcare costs of plan participants.

For example, if someone has a risk score of 1.0, their expected costs are equal to those of a person with typical health.

A risk score of 0.5 indicates that the expected costs are half of those of the person, while a risk score of 2.0 indicates the expected costs are double those of the person.

Two trust funds held by the Department of the Treasury supply the money for Medicare payments. These include the Hospital Insurance (HI) trust fund and the Supplemental Medical Insurance (SMI) trust fund.

The HI trust fund pays for Part A care, including inpatient hospital care, home healthcare, and skilled nursing facility care. Sources of this trust include:

• payroll taxes from employees and employers
• Part A premiums from people who do not qualify for premium-free Part A
• interest gained from trust fund investments

The SMI trust fund pays for Part B costs, such as doctors’ visits and prescription drugs. The money comes from:

• premiums of Medicare Part B and Part D prescription drug plans
• funds authorized by Congress
• interest gained from trust fund investments

In 2024, government payments to fund Medicare Advantage plan benefits were around $462 billion, projected at $540 billion in 2025.

On average, across the country, around 51% of people with Medicare chose to enroll in a Medicare Advantage or other health plan in 2025.

If there is a nationwide rise in people choosing Medicare Advantage over Original Medicare parts A and B, the percentage of total Medicare plan spending may also rise.

Two main sources fund Medicare Advantage. The plans receive some funding through monthly plan premiums, but most of the money comes from Medicare.

Private insurance companies offering Medicare Advantage plans receive monthly payments covering each beneficiary’s parts A and B costs.

The amount Medicare pays depends on the anticipated and average healthcare costs of Medicare beneficiaries in each U.S. county.

Medicare’s funding comes from various sources, such as taxes and funding authorized by Congress. Medicare’s payments to Medicare Advantage plan providers account for one-third of Medicare’s total spending.