In 2026, the standard Medicare Part B premium is $202.90 a month. That is not what Part B actually costs. The true cost is about $811.60 per person per month. You pay roughly 25 percent, and general federal revenue covers the other 75 percent.
Even the highest earners are subsidized. Someone in the top IRMAA bracket pays $689.90 a month for Part B, more than triple the standard premium, yet that is still only about 85 percent of the real cost. No one on Medicare pays the full price of their coverage.
Understanding this matters, because Medicare costs are heading into several years of real increases.
Most of Us Never See the Real Price of Health Insurance
In 2025, the average employer family health plan cost $26,993 a year. The average worker paid $6,850 of that, about 26 percent. ACA marketplace buyers mostly see prices after subsidies. Medicare works the same way. For decades, most people have been shielded from what health care truly costs. When a subsidy shrinks, it can feel like a price hike, but often you are simply seeing more of a cost that was always there.
How Medicare Is Funded
Part A is funded by a payroll tax: 1.45 percent from you, 1.45 percent from your employer, plus an extra 0.9 percent for higher earners. The 2026 Medicare Trustees Report projects the Hospital Insurance Trust Fund will be depleted in 2033. That does not mean Part A stops. It means incoming taxes would cover about 89 percent of scheduled benefits.
Part B and Part D were never funded by that payroll tax. They rely almost entirely on general federal revenue and your premiums.
IRMAA is best understood not as a penalty, but as a smaller discount. Only about 7 to 8 percent of beneficiaries pay it.
Where the Money Goes
Medicare Advantage plans must spend at least 85 percent of Medicare revenue on medical care. A KFF analysis found that Medicare Advantage is the most lucrative line of business for insurers on a per member basis, with gross margins roughly double the employer market.
Hospitals, on the other hand, lose money on Medicare. MedPAC reports hospitals’ Medicare margin was negative 12.1 percent in 2024, while their overall operating margin was a positive 6.5 percent. In other words, commercial insurance helps subsidize Medicare patients.
Insurer profits and CEO pay are real, but they are small relative to total costs. The main driver of rising premiums is the underlying cost of care, which the U.S. spends about $15,474 per person per year on.
What Is Changing for 2027
Part D: A temporary federal program that held down drug plan premiums in 2025 and 2026 is ending. The underlying cost plans bid against has risen sharply since the Inflation Reduction Act. The maximum Part D deductible rises to $700 and the annual out of pocket cap rises to $2,400. That cap is a real benefit for people with high drug costs. Standalone drug plan choices have also dropped significantly.
Medicare Advantage: Many plans are leaving counties or closing entirely for 2027, even though CMS increased payments to plans. Insurers are deciding the cost of delivering care in some areas simply does not work.
Medicare Supplement: Plan G rate increases in early 2026 ranged from about 12 percent to more than 26 percent across major carriers, far above the historical range of 3 to 7 percent. An aging pool, rising medical costs, and people moving from Medicare Advantage back to supplements all play a role.
What You Can Do
Leaving your coverage alone year after year is no longer a safe strategy.
Read your Annual Notice of Change carefully, not just the summary page.
If your Medicare Advantage plan is leaving your county, you may have a guaranteed issue right to move to a Medicare Supplement without health questions, but that window is limited.
If your Plan G premium jumped, remember every Plan G has identical benefits by federal law. Shopping carriers may save you money.
If you are near an IRMAA threshold or considering a Roth conversion or property sale, plan ahead. Income decisions today set your Medicare premium two years from now.
We Can Help
Open enrollment runs October 15 through December 7. The Eriksen Insurance Group can review your coverage and help you compare your options. Call us at 847-426-2788 or visit erikseninsurance.com.