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“Medicare is a federal program that pays for covered health care services of qualified beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act to provide health insurance to individuals 65 and older, and has been expanded over the years to include permanently disabled individuals under 65. The program is administered by the Centers for Medicare & Medicaid Services (CMS), within the U.S. Department of Health and Human Services (HHS).¹

“Medicare consists of four distinct parts:

“• Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers. Since 2013, workers with income of more than $200,000 per year for single tax filers (or more than $250,000 for joint tax filers) pay an additional 0.9% on income over those amounts.

“• Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%).

“• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Parts A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through the HI and SMI trust funds.

“• Part D covers outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments.

“Medicare serves approximately one in six Americans and virtually all of the population aged 65 and older.² In 2020, the program will cover an estimated 63 million persons (54 million aged and 9 million disabled).³ The Congressional Budget Office (CBO)⁴ estimates that total Medicare spending in FY2020 will be about $836 billion; of this amount, approximately $814 billion will be spent on benefits.⁵ About 25% of Medicare benefit spending is for hospital inpatient and hospital outpatient services (see Figure 1). CBO also estimates that federal Medicare spending (after deduction of beneficiary premiums and other offsetting receipts) will be about $696 billion in 2020, accounting for about 15% of total federal spending and 3.1% of GDP.⁶ Medicare is required to pay for all covered services provided to eligible persons, so long as specific criteria are met. Spending under the program (except for a portion of administrative costs) is considered mandatory spending and is not subject to the appropriations process.”

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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“Medicare Parts A, B, and D each cover different services, with Part C providing a private plan alternative for all Medicare services covered under Parts A and B, except hospice.”

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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“Part A provides coverage for inpatient hospital services, posthospital skilled nursing facility (SNF) services, hospice care, and some home health services, subject to certain conditions and limitations. Approximately 20% of fee-for-service enrollees use Part A services during a year.³¹“

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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“Medicare Part B covers physicians’ services, outpatient hospital services, durable medical equipment, and other medical services. Initially, over 98% of the eligible population voluntarily enrolled in Part B, but in recent years the percentage has fallen to about 91%.⁴⁵ About 89% of enrollees in original (FFS) Medicare use Part B services during a year.⁴⁶ The program generally pays 80% of the approved amount (most commonly, a fee schedule or other predetermined amount) for covered services in excess of the annual deductible ($198 in 2020). The beneficiary is liable for the remaining 20%.

“Most providers and practitioners are subject to limits on amounts they can bill beneficiaries for covered services. For example, physicians and some other practitioners may choose whether or not to accept assignment on a claim. When a physician signs a binding agreement to accept assignment for all Medicare patients, the physician accepts the Medicare payment amount as payment in full and can bill the beneficiary only the 20% coinsurance plus any unmet deductible. The physician agrees to accept assignment on all Medicare claims in a given year and is referred to as a participating physician. There are several advantages to being a participating provider, including higher payment under the Medicare fee schedule, a lower beneficiary co-payment, and automatic forwarding of Medigap claims.”

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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“Medigap (or “Medicare Supplement Insurance”) is private insurance designed to provide secondary coverage to original Medicare (Parts A and B). Medigap is not equivalent to Medicare and is distinct from Part B (“Supplementary Medical Insurance”), Part C (“Medicare Advantage”), and Part D (which covers outpatient prescription drug benefits).

“Although original Medicare provides broad protection against the costs of many covered services, beneficiaries can still face significant out-of-pocket spending. Many Medicare beneficiaries therefore have some form of additional coverage (private or public) to pay for some or all of their out-of-pocket costs.

“Medigap is one type of private supplemental insurance and is designed to cover cost-sharing gaps under original Medicare, such as deductibles, coinsurance, and copayments.⁵ Other sources of coverage that Medicare beneficiaries may have include retiree coverage through a former employer, group health care coverage through a current employer, and/or coverage through other governmental sources, such as Medicaid, the Department of Veterans Affairs (VA), or the TRICARE health care program for military personnel and veterans.”

Source: Michele L. Malloy, Research Librarian. Medigap: Background and Statistics. CRS Report R47552. Congressional Research Service: Washington, DC. May 12, 2023.

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“Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered benefits. Under MA, private health plans are paid a per-person amount to provide all Medicare covered benefits (except hospice⁸²) to beneficiaries who enroll in their plan. Medicare beneficiaries who are eligible for Part A, enrolled in Part B, and do not have ESRD are eligible to enroll in an MA plan if one is available in their area.⁸³ Some MA plans may choose their service area (local MA plans), while others agree to serve one or more regions defined by the Secretary (regional MA plans). In 2020, nearly all Medicare beneficiaries have access to an MA plan and approximately a third of beneficiaries are enrolled in one.⁸⁴ Private plans may use different techniques to influence the medical care used by enrollees. Some plans, such as health maintenance organizations (HMOs), may require enrollees to receive care from a restricted network of medical providers; enrollees may be required to see a primary care physician who will coordinate their care and refer them to specialists as necessary. Other types of private plans, such as private fee-for-service (PFFS) plans, may look more like original Medicare, with fewer restrictions on the providers an enrollee can see and minimal coordination of care.

“In general, MA plans offer additional benefits or require smaller co-payments or deductibles than original Medicare. Sometimes beneficiaries pay for these additional benefits through a higher monthly premium, but sometimes they are financed through plan savings. The extent of extra benefits and reduced cost sharing varies by plan type and geography. However, MA plans are seen by some beneficiaries as an attractive alternative to more expensive supplemental insurance policies found in the private market.

“By contract with CMS, a plan agrees to provide all required services covered in return for a capitated monthly payment adjusted for the demographics and health history of their enrollees. The same monthly payment is made regardless of how many or few services a beneficiary actually uses. In general, the plan is at-risk if costs, in the aggregate, exceed program payments; conversely, the plan can retain savings if aggregate costs are less than payments. Payments to MA plans are based on a comparison of each plan’s estimated cost of providing Medicare covered services (a bid) relative to the maximum amount the federal government will pay for providing those services in the plan’s service area (a benchmark).”

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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“Medicare Part D provides coverage of outpatient prescription drugs to Medicare beneficiaries who choose to enroll in this optional benefit.⁸⁶ (As previously discussed, Part B provides limited coverage of some outpatient prescription drugs.) In 2020, about 49 million (about 77%) of eligible Medicare beneficiaries are estimated to be enrolled in a Part D plan.⁸⁷ Prescription drug coverage is provided through private prescription drug plans (PDPs), which offer only prescription drug coverage, or through Medicare Advantage prescription drug plans (MA-PDs), which offer prescription drug coverage that is integrated with the health care coverage they provide to Medicare beneficiaries under Part C. Plans must meet certain minimum requirements; however, there are significant variations among them in benefit design, including differences in premiums, drugs included on plan formularies (lists of drugs covered by the plan), and cost sharing for particular drugs.

“Part D prescription drug plans are required to offer either standard coverage or alternative coverage that provides at least actuarially equivalent benefits. In 2020, standard coverage has a $435 deductible and a 25% coinsurance for drug costs between $435 and $4,020. After this point, an enrollee enters the coverage gap (the doughnut hole), which continues until the enrollee incurs out-of-pocket costs of $6,350 (an estimated $9,719.38 in total spending) and reaches the catastrophic limit.⁸⁸ While in the coverage gap under the standard benefit, enrollees pay 25% coinsurance. Once a beneficiary’s costs exceed the catastrophic limit, the program pays all costs except for the greater of 5% coinsurance or $3.60 for a generic drug and $8.95 for a brand-name drug. Most plans offer actuarially equivalent or enhanced benefits rather than the standard package, including alternatives such as reducing or eliminating the deductible, or using tiered cost sharing with lower cost sharing for generic drugs.⁸⁹“

Source: Patricia A. Davis, et al. Medicare Primer. CRS Report R40425. Congressional Research Service: Washington, DC. Updated May 21, 2020.

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World Health Systems Facts is a project of the Real Reporting Foundation. We provide reliable statistics and other data from authoritative sources regarding health systems and policies in the US and sixteen other nations.

Page last updated March 17, 2025 by Doug McVay, Editor.