"So, do I have this right, Medicare is state funded - they pay the doctor less than the cost of manufacturing the medicine and the doctor over-charges other people's insurance companies so as to pay for fixed costs and add profit, to the drug company and themselves?"

For certain things, yes that is the way it works. I believe most medical practices are losing money when they administer a vaccine.[0]

[0]: http://pediatrics.aappublications.org/content/124/Supplement...