Medicare Advantage, or Part C, is a health insurance program. It is funded from two different sources.

The monthly premiums of beneficiaries provide part of the funding. However, the main source is a federal agency called the Centers for Medicare & Medicaid Services, which runs the Medicare program.

Private insurance companies manage Advantage plans. Medicare pays them a fixed monthly amount for each beneficiary’s expected healthcare costs.

Below, we give an overview of the funding and the factors that determine how much Medicare sends to Advantage plans. Then, we discuss the funding sources of all Medicare programs and the proportion of total Medicare spending that goes to Advantage plans.

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There are two main sources of funding for Medicare Advantage.

Advantage plans pay for the services otherwise covered by Medicare parts A and B. They also pay for some additional services, depending on the specific Advantage plan.

Medicare Part A covers care in institutions such as hospitals, with the exception of hospices. Medicare Part B covers outpatient services such as visits to a doctor.

Advantage plans may also cover prescription drugs and supplemental benefits, such as dental and vision care.

Some funding for Advantage plans comes from the monthly premiums of enrolled individuals. However, most of the funding comes from Medicare.

Every month, Medicare pays into Advantage plans an amount that covers the Part A and Part B costs of beneficiaries. If a plan also offers prescription drug coverage, Medicare provides a separate payment.

The amount of the monthly payments depends on two main factors:

  • the healthcare practices in the county where each beneficiary lives, which influences a procedure called the bidding process
  • the health of each beneficiary, which governs how Medicare raises or lowers the rates, in a system known as risk adjustment

The Advantage plan 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 amount of the bid against the benchmark. The benchmark is a percentage of costs of average Medicare spending per individual.

Each county in the United States has its own benchmark. It reflects the practice patterns of resident healthcare providers that bill Medicare. Practice patterns differ among counties, so their benchmarks also differ.

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

If the bid is lower than the benchmark, the plan gets a rebate from Medicare that is a percentage of the difference between the bid and the benchmark.

Plans that receive rebates should use a portion of the rebates to fund supplemental benefits or to reduce premiums.

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

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

After the establishment of the base rate, Medicare uses risk adjustment to change the rate to reflect the anticipated healthcare costs of a person enrolled in a plan.

For example, if someone has a risk score of 1.0, it means that their expected costs are equal to those of an individual with average health.

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

Two trust funds held by the United States Department of the Treasury supply the money for Medicare payments. The funds are the Hospital Insurance Trust Fund and the Supplemental Medical Insurance Trust fund.

The Hospital Insurance Trust Fund pays for inpatient hospital care, home health care, and skilled nursing facility care — types that Part A covers. 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
  • income taxes from social security benefits
  • interest gained from trust fund investments

The Supplemental Medical Insurance Trust Fund pays for Part B costs, such as visits to a doctor, along with prescription drug costs. The money comes from:

  • premiums of Medicare parts B and D
  • funds authorized by Congress
  • interest gained from trust fund investments

In 2019, Medicare payments to Advantage plans to fund Part A and Part B benefits were $250 billion, according to the Kaiser Family Foundation. This represents 33% of Medicare’s total spending.

On average, across the country, 34% of people with Medicare chose to enroll in Advantage plans during 2019. The percentage of residents who have these plans varies widely by state, from 1% in Alaska to 43% in Minnesota and Florida.

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

Medicare Advantage is funded from two main sources.

The plans receive some funding through monthly plan premiums, but most of the money comes from Medicare. The private insurance companies that offer the plans receive a payment each month from Medicare. This covers the costs of Medicare parts A and B for each beneficiary.

The amount of the payments from Medicare depends partly on the anticipated costs of healthcare in the county where each beneficiary lives.

Another factor that influences Medicare’s contribution is the expected healthcare costs of the beneficiaries, based on their medical records.

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