Home / Government / Articles / What is Medicare? How is it different from Medicaid?

Medicare is a federal health insurance program. It serves people 65 and older, younger disabled patients, and dialysis patients. Patients pay part of costs through deductibles. Small monthly premiums are required for non-hospital coverage. Medicare is also a federal program run by a federal agency (the Centers for Medicare & Medicaid Services), so it is essentially the same everywhere in the country.

Medicaid is an assistance program. It serves low-income people regardless of age, and patients usually pay nothing, or a small co-payment, for covered medical expenses. It is a federal-state program, which means it is run by state and local governments within federal guidelines. Consequently, who Medicaid covers and how it works varies from state to state. There were about 82.9 million Medicaid beneficiaries as of 2018.

What is the history of Medicare, and how has the program changed over time?

Medicare and Medicaid were established on July 30, 1965, when President Lyndon B. Johnson signed a bill into law establishing both programs. Originally, Medicare had two parts: Part A for hospital insurance and Part B for medical insurance.

At first, Medicare was only available to those 65 and older. The Social Security Amendments of 1972 expanded Medicare to cover the disabled, and people with end-stage renal disease requiring dialysis or kidney transplant.

The Medicare Prescription Drug Improvement and Modernization Act expanded Medicare again in 2003 to include prescription drug coverage. The new optional drug benefit, known as Medicare Part D, went into effect in 2006.

The 2003 law also made the biggest changes to Medicare in 38 years. Under it, private health plans approved by Medicare were added as Medicare Advantage Plans, which are also known as “Part C” or “MA Plans.”

About 61 million people were enrolled in Medicare in 2019.

What’s covered under Medicare?

The different parts of Medicare help cover specific services.

  • Medicare Part A (hospital insurance) covers hospital stays, care in a skilled nursing facility, hospice care, and some home health care. Part A is half of base Medicare. In 2019, Part A spending was $322.8 billion.
  • Medicare Part B (medical insurance) covers some doctors’ services, outpatient care, medical supplies, and preventive services. Part B is the other half of base Medicare. In 2019, Part B spending totaled $365.7 billion.
  • Medicare, Part C (private health plans) are Medicare-approved private medical insurance that goes over and above Part A and B. Part C plans do not involve federal expenditures. About 22.9 million people have Part C plans as of 2019.
  • Medicare Part D (prescription drug coverage) helps cover the cost of prescription drugs, including many recommended shots or vaccines. In 2019, Part D spending totaled $97.1 billion. About 47.2 million people have Part D plans as of 2019.

Medicare enrollment continues to rise for each program type.

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How is Medicare funded?

The US Treasury holds two trust fund accounts to pay for Medicare: the Hospital Insurance Trust Fund and the Supplemental Medical Insurance Trust Fund.

The Hospital Insurance Trust Fund is funded by payroll taxes, income taxes paid on Social Security benefits, interest earned on the trust fund’s investments, and Medicare Part A premiums from people who aren’t eligible for premium-free Part A. It pays for Medicare Part A benefits and Medicare Program administration.

The Supplemental Medical Insurance Trust Fund is paid for by funds authorized by Congress, premiums from people enrolled in Medicare Part B and Medicare Part D, and interest earned on its investments. It pays for Part B benefits, Part D, and Medicare Program administration.

How much does Medicare cost for enrollees?

Each part of Medicare pays out benefits in different ways and requires different financial obligations from enrollees. Part A benefits do not require payments unless the enrollee is under the age of 65. Part B benefits require premiums based on an enrollee’s annual income. Part C benefits may cover part or all of Part B premiums. Some Part C plans require premiums in addition to the base Part B costs. Part D benefit costs differ depending on the plan of the enrollee.

States handle Medicaid benefits and eligibility differently.

Since Medicaid is an assistance program run by state governments, it varies widely between states. The Affordable Care Act provided financial incentives to states that expanded Medicaid eligibility. The law provided federal funds for the entire expansion and eventually phased down federal funding to 90% after three years. Thirty-nine states have since expanded Medicaid eligibility as part of the program.

States can apply to the federal government if they wish to change who is eligible for Medicaid or what benefits are covered under the program. Examples of those changes include requiring people to work to be Medicaid eligible, viewing single adults without children as not eligible for the program, or requiring co-payments to use Medicaid benefits.

The Biden administration instructed states with Medicaid work requirements to withdraw those adjustments since February 2021. The administration also denied work requirement requests from six other states.

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