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Advising the Congress on Medicare issues
MedPAC > Medicare 101

Medicare 101

What is Medicare?

Medicare is a federal health insurance program for individuals age 65 years and older, individuals with end-stage renal disease (ESRD), or certain younger individuals with disabilities. Generally, Medicare beneficiaries pay a monthly premium for Medicare coverage and part of the costs each time they receive a covered service.

In Medicare, there are three parts that each cover selected services:

Part A is for hospital insurance and helps cover:

  • Inpatient hospital stays
  • Care in skilled nursing facilities
  • Hospice
  • Home health care

Part B is for medical insurance and helps cover:

  • Doctors’ services
  • Certain physician-administered drugs
  • Outpatient care
  • Medical supplies (such as wheelchairs and walkers)
  • Preventive services (such as yearly “wellness” visits)

Part D covers prescription drugs

What are the two main Medicare coverage options?

Traditional Medicare

  • Traditional Medicare (sometimes referred to as Original Medicare) covers Part A (hospital insurance) and Part B (medical insurance).
  • Individuals also have the option to add Part D coverage for prescription drugs alongside their Part A and B coverage if they choose.
  • Under Traditional Medicare, there is no annual limit on out-of-pocket costs. To help with the cost of coverage, individuals in traditional Medicare can buy Medicare Supplemental Insurance (Medigap), which is extra insurance available from a private company. Medicare beneficiaries with limited income and resources may qualify for supplemental coverage under Medicaid.

Medicare Advantage (MA), also referred to as Part C

  • As a coverage alternative to traditional Medicare, beneficiaries have the option to enroll in Medicare Advantage.
  • MA plans are run by private health insurers that follow the rules set by the Medicare program and are then paid by Medicare to provide services.
  • Unlike traditional Medicare, MA plans usually include Part D as part of a “bundle” with Part A and Part B.
  • Under MA, annual out-of-pocket costs are limited. Once an enrollee reaches the MA plan’s limit, the plan pays 100 percent of the cost of covered services for the remainder of the year.

How is Medicare funded?

The federal government funds the cost of services covered in Medicare by Part:

  • Part A is financed through payroll taxes that are deposited into the Hospital Insurance (HI) Trust Fund.
  • Part B and Part D are financed mostly through income taxes that are overseen in a general fund of the Treasury, and partly through premiums paid by beneficiaries and state Medicaid agencies.

Part C is funded through the same taxes and premiums as Parts A, B, and D in proportion to the overall spending of each part. In some cases, beneficiaries pay a separate premium to enroll in a Medicare Advantage health care plan.

For more information

Payment Basics
For more detailed information on how Medicare’s individual payment systems function, please see MedPAC’s Payment Basics series.
MedPAC advises the U.S. Congress on Medicare policy issues, but we don’t operate the Medicare program. People with Medicare, family members, and caregivers should visit, the Official U.S. Government Site for People with Medicare, for the latest information on Medicare enrollment, benefits, and other helpful tools.