How Is Medicare Advantage Funded?

Medicare Advantage is an alternative to traditional Medicare in which health care coverage is provided by private insurance companies, which are reimbursed by the federal government. Medicare Advantage is funded by Medicare and by people who sign up for the plans. With the exception of hospice care, Medicare Advantage must offer at least the same hospital and medical coverage as original Medicare. In return, Medicare pays a fixed amount to the insurance companies every month to help finance this coverage. If you choose an Advantage plan, you'll also help pay for its costs through premiums and other charges.

Medicare pays for Medicare Advantage out of two funds held in trust by the U.S. Treasury. The Hospital Insurance Trust fund pays for Medicare Part A hospital coverage and administrative costs. This trust receives its major funding from the Medicare portion of federal payroll and self-employment taxes.

The Supplementary Medical Insurance Trust Fund pays for Part B hospital benefits, Part D prescription drug coverage and some administrative costs. This second trust receives its major funding by vote of Congress and through the premiums people pay for Medicare Part B, hospital insurance, and Part D, prescription coverage.

The Affordable Care Act guarantees continuous funding of Medicare and Medicare Advantage at least until 2029, according to the Medicare.gov website. The ACA also mandates cutting costs to the government by reducing fraud and waste.

Before the ACA, Medicare paid approximately 14 percent more per patient in Medicare Advantage plans than for original Medicare, according to the Centers for Medicare & Medicaid Services. The government projected that the ACA would save Medicare $68 billion through 2016 by reducing these excess payments to insurance companies, but putting these cuts into practice has been politically difficult.

Premium payments also help fund the Medicare Advantage plans. Most MA subscribers pay the same Part B premium as original Medicare subscribers -- $104.90 per month as of 2015. In addition, most insurance companies also charge MA subscribers an additional monthly premium, but the amount varies with the plan and insurance company.

Medicare Advantage subscribers also pay part of the expenses through cost sharing. Each MA plan is different, but many of them charge one or more yearly deductibles. A deductible is the amount you must pay before your insurance covers a particular type of expense, such as a hospital bill. After the deductible, you'll generally have to pay a certain percentage of the remaining amount, called coinsurance. Most MA plans also charge a fixed amount for goods and services that aren't subject to a deductible. This amount, a copayment, commonly applies to physician visits and prescriptions.