Medicare and Medicaid Overview

Medicare and Medicaid are the two largest public health insurance programs in the United States, together covering more than 150 million Americans. Medicare, established by Title XVIII of the Social Security Act in 1965, provides health insurance primarily to individuals aged 65 and older, as well as to certain younger individuals with disabilities and those with end-stage renal disease. Medicaid, established by Title XIX of the same Act, provides health coverage to low-income individuals and families, with eligibility and benefits determined jointly by the federal and state governments. Though created at the same time and often discussed together, the two programs differ fundamentally in their structure, financing, populations served, and administrative mechanisms. This page examines both programs in detail, along with the policy challenges they face.

Medicare: Program Structure

Medicare is a federal program administered by the Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services. The program consists of four distinct parts, each covering different services and financed through different mechanisms.

Part A: Hospital Insurance

Medicare Part A covers inpatient hospital care, skilled nursing facility care (up to 100 days following a qualifying hospital stay), home health care, and hospice care. Most individuals who are eligible for Social Security retirement benefits are automatically enrolled in Part A at age 65 without paying a premium, because they or their spouse paid Medicare payroll taxes during their working years. Individuals who do not qualify for premium-free Part A may purchase it by paying a monthly premium.

Part A is financed primarily through the Hospital Insurance (HI) payroll tax — 1.45 percent of all wages paid by both employers and employees (2.9 percent total), with no taxable maximum. The Affordable Care Act added an additional 0.9 percent tax on wages exceeding $200,000 for individuals ($250,000 for married couples filing jointly). Part A has a deductible ($1,632 per benefit period in 2024) and coinsurance requirements for extended hospital stays and skilled nursing facility care. The HI Trust Fund, which finances Part A, is projected to be depleted in 2036 under current projections, at which point incoming payroll taxes would cover approximately 89 percent of Part A expenditures.

Part B: Medical Insurance

Medicare Part B covers physician services, outpatient hospital care, durable medical equipment, laboratory tests, preventive services, and certain other medical services not covered by Part A. Part B is voluntary; eligible individuals must enroll and pay a monthly premium. The standard Part B premium ($174.70 per month in 2024) covers approximately 25 percent of Part B costs, with the remaining 75 percent financed through general federal revenues. Higher-income beneficiaries pay income-related monthly adjustment amounts (IRMAA) that increase their premiums.

Part B has an annual deductible ($240 in 2024) after which beneficiaries typically pay 20 percent of the Medicare-approved amount for most covered services (coinsurance). There is no annual out-of-pocket maximum under traditional Medicare Part B, which is one reason many beneficiaries purchase supplemental insurance (Medigap policies) or enroll in Medicare Advantage plans.

Part C: Medicare Advantage

Medicare Part C, known as Medicare Advantage (MA), allows beneficiaries to receive their Medicare benefits through private health insurance plans approved by CMS. Medicare Advantage plans must cover all services covered by Parts A and B (except hospice, which remains under traditional Medicare) and typically offer additional benefits such as dental, vision, hearing, and prescription drug coverage. Most MA plans operate as health maintenance organizations (HMOs) or preferred provider organizations (PPOs) with provider networks and utilization management requirements.

CMS pays Medicare Advantage plans a per-beneficiary amount based on a bidding process and risk adjustment. If a plan's bid is below the benchmark payment rate for its service area, the plan receives a rebate that must be used to provide additional benefits to enrollees or to reduce premiums. Medicare Advantage enrollment has grown substantially, from approximately 13 percent of Medicare beneficiaries in 2005 to approximately 51 percent in 2024. This growth has raised concerns about the adequacy of risk adjustment (whether payments to MA plans accurately reflect the health status of their enrollees), the effects of prior authorization and network restrictions on access to care, and whether MA plans generate savings or additional costs for the Medicare program overall.

Part D: Prescription Drug Coverage

Medicare Part D, established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and effective January 1, 2006, provides outpatient prescription drug coverage through private plans approved by CMS. Beneficiaries may enroll in stand-alone Prescription Drug Plans (PDPs) if they remain in traditional Medicare or receive drug coverage through their Medicare Advantage plan. Part D plans must meet minimum coverage standards set by CMS but have significant flexibility in designing their formularies and cost-sharing structures.

The Inflation Reduction Act of 2022 (IRA) made several significant changes to Part D. Beginning in 2025, the IRA caps total out-of-pocket prescription drug spending for Part D beneficiaries at $2,000 per year, eliminating the catastrophic coverage gap (known as the "donut hole") that previously exposed beneficiaries to significant cost-sharing on high-cost drugs. The IRA also authorized Medicare to negotiate prices directly with manufacturers for certain high-cost drugs — a provision that represents a fundamental shift in Medicare drug pricing policy, as prior law had prohibited such negotiations.

Medicaid: Program Structure

Medicaid is a joint federal-state program that provides health coverage to low-income individuals and families. Unlike Medicare, which is entirely federal, Medicaid is administered by each state according to broad federal guidelines established by CMS. States have significant flexibility in designing their Medicaid programs, resulting in substantial variation in eligibility criteria, covered benefits, provider payment rates, and delivery systems across the 50 states, the District of Columbia, and the U.S. territories.

Eligibility

Federal law requires states to cover certain "mandatory" populations to receive federal Medicaid funding, including low-income children, pregnant women with incomes up to 138 percent of the federal poverty level (FPL), parents meeting state-specific income thresholds, individuals receiving Supplemental Security Income, and certain other groups. States may also cover "optional" populations, including adults without dependent children (even without ACA expansion), medically needy individuals whose income exceeds Medicaid limits but who have high medical expenses, and individuals in other categories defined by state law.

The Affordable Care Act of 2010 expanded Medicaid eligibility to all adults with incomes up to 138 percent of FPL (effectively 133 percent with a 5 percent income disregard). The ACA originally required all states to expand Medicaid as a condition of continued federal Medicaid funding, but the Supreme Court held in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), that this requirement was unconstitutionally coercive and that Medicaid expansion must be optional for states. As of 2024, 40 states and the District of Columbia have adopted the Medicaid expansion. The federal government pays 90 percent of the cost of covering the expansion population, compared to the traditional federal matching rate (FMAP) that ranges from 50 to 77 percent depending on the state's per capita income.

Benefits and Services

Medicaid covers a broad range of services. Federal law requires coverage of certain mandatory benefits, including inpatient and outpatient hospital services, physician services, laboratory and X-ray services, nursing facility services for individuals aged 21 and older, home health services, family planning services, and early and periodic screening, diagnostic, and treatment (EPSDT) services for children under 21. EPSDT is particularly significant because it requires states to provide any medically necessary service to eligible children, even if the state does not otherwise cover that service in its Medicaid plan.

States may also cover optional services, and most cover some combination of prescription drugs, dental services, vision services, physical therapy, and home and community-based services (HCBS). Long-term services and supports (LTSS) — including nursing facility care and home and community-based services for individuals with chronic conditions or disabilities — represent the largest category of Medicaid spending, accounting for approximately one-third of total Medicaid expenditures.

Dual Eligibles

Approximately 12.8 million individuals are "dual eligibles" — enrolled in both Medicare and Medicaid simultaneously. These individuals are generally low-income seniors or individuals under 65 with disabilities who qualify for Medicare based on age or disability and for Medicaid based on income. Dual eligibles account for a disproportionate share of spending in both programs: approximately 15 percent of Medicaid enrollees but approximately 33 percent of Medicaid spending, and approximately 20 percent of Medicare beneficiaries but approximately 34 percent of Medicare spending.

For dual eligibles, Medicare is the primary payer for acute care services (hospital, physician, and drug costs), while Medicaid covers Medicare premiums and cost-sharing, long-term services and supports, and benefits not covered by Medicare such as dental and vision care. The fragmentation between two separate programs with different administrative structures, payment systems, and care coordination mechanisms has been widely recognized as a barrier to effective care for dual eligibles. CMS has pursued various demonstration projects and policy initiatives to improve care coordination for this population, including the Financial Alignment Initiative, which allows states to enter into agreements with CMS to integrate Medicare and Medicaid benefits through managed care arrangements.

CMS Oversight and Administration

The Centers for Medicare & Medicaid Services, established in 2001 as the successor to the Health Care Financing Administration, administers both Medicare and Medicaid along with the Children's Health Insurance Program (CHIP) and the Health Insurance Marketplaces established by the ACA. CMS is one of the largest purchasers of health care in the world, with combined Medicare and Medicaid spending exceeding $1.7 trillion annually.

CMS exercises oversight through several mechanisms: promulgation of regulations implementing the Medicare and Medicaid statutes; issuance of coverage determinations that define the scope of covered services; establishment of payment rates for providers and plans; approval and monitoring of state Medicaid plans and waiver requests; and enforcement of quality standards through conditions of participation for providers and quality rating systems for plans. The agency also administers the Medicare Quality Payment Program, which ties a portion of physician reimbursement to quality metrics and cost efficiency, and oversees the Medicare Shared Savings Program and other alternative payment models designed to shift the health care system from fee-for-service to value-based payment.

The Children's Health Insurance Program

The Children's Health Insurance Program (CHIP), enacted as Title XXI of the Social Security Act in 1997, provides health coverage to uninsured children in families with incomes too high to qualify for Medicaid but too low to afford private insurance. CHIP is jointly funded by the federal and state governments, with the federal matching rate for CHIP typically 15 percentage points higher than the state's regular Medicaid FMAP. States administer CHIP either as an expansion of their Medicaid program, as a separate CHIP program with different eligibility rules and benefits, or as a combination of both approaches. CHIP covers approximately 7 million children and has been credited with contributing to the significant reduction in the uninsured rate among children, which fell from approximately 14 percent in 1997 to approximately 5 percent by 2023. CHIP must be periodically reauthorized by Congress; the Bipartisan Budget Act of 2018 extended funding through fiscal year 2027.

Medicaid Waivers and State Innovation

Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain Medicaid requirements to allow states to conduct experimental, pilot, or demonstration projects that are "likely to assist in promoting the objectives" of the Medicaid program. Section 1115 waivers have been used to implement a wide range of state innovations, including managed care delivery systems, premium and cost-sharing requirements for beneficiaries above certain income levels, incentive programs for healthy behaviors, substance use disorder treatment reforms, and, in some cases, work and community engagement requirements as a condition of Medicaid eligibility. Waiver approval involves a public comment period, federal review, and negotiation of terms and conditions between the state and CMS. Approved waivers are time-limited and subject to evaluation requirements.

Section 1915 waivers provide additional flexibility. Section 1915(b) waivers allow states to require Medicaid beneficiaries to enroll in managed care plans. Section 1915(c) waivers allow states to provide home and community-based services (HCBS) to individuals who would otherwise require institutional care, enabling states to serve individuals in less restrictive and often less costly community settings. HCBS waivers have been instrumental in shifting long-term care from institutional to community-based settings — a shift known as "rebalancing" that reflects both consumer preferences and cost-effectiveness considerations.

Spending Trends and Fiscal Challenges

Medicare and Medicaid together account for approximately 25 percent of total federal spending and represent the largest drivers of projected growth in federal expenditures over the coming decades. Medicare spending totaled approximately $944 billion in fiscal year 2023, while combined federal and state Medicaid spending totaled approximately $805 billion. The Congressional Budget Office projects that Medicare spending will grow from 3.2 percent of GDP in 2023 to 4.8 percent by 2053, driven primarily by the aging of the population and the growth of health care costs per beneficiary.

Several factors drive spending growth in these programs. Demographic changes — the aging of the baby boom generation and increasing life expectancy — are expanding the eligible population for Medicare. Health care price growth, technological advancement that introduces new (and often expensive) treatments, and the increasing prevalence of chronic conditions all contribute to rising per-beneficiary costs. For Medicaid, spending growth is influenced by these health care cost factors as well as by enrollment fluctuations driven by economic conditions, state policy decisions regarding eligibility and benefits, and the growth of long-term services and supports spending as the population ages.

Prescription Drug Pricing

Prescription drug costs have been among the most politically salient health care cost issues. The United States spends more per capita on prescription drugs than any other developed country, driven in part by the absence of the price controls that other nations employ and by the patent and regulatory exclusivity protections that allow brand-name drug manufacturers to charge premium prices for extended periods.

The Inflation Reduction Act of 2022 represented the most significant federal action on drug pricing in decades. In addition to the Part D out-of-pocket cap discussed above, the IRA authorized CMS to negotiate maximum fair prices for a specified number of Medicare Part D and Part B drugs, beginning with ten Part D drugs in 2026. The IRA also requires drug manufacturers to pay rebates to Medicare if they raise prices faster than the rate of inflation — a provision designed to discourage the practice of annual price increases that had contributed significantly to drug cost growth. The pharmaceutical industry has challenged the IRA's negotiation provisions in multiple federal lawsuits, arguing that the program constitutes an unconstitutional taking of property and violates due process, though no court has issued a ruling blocking implementation of the program as of this writing.

Medicare and Medicaid represent the nation's core commitment to providing health coverage to the elderly, disabled, and economically vulnerable. The programs have substantially reduced uninsurance among these populations and have provided a floor of health care access that did not exist before 1965. The fiscal sustainability of these programs — and the broader question of how to control health care costs while maintaining access and quality — remains among the most consequential policy challenges facing the federal government.