Medicare Introduction and Overview


Medicare is a nationwide health insurance program for the aged and certain disabled persons. Medicare consists of four distinct parts: Part A (Hospital Insurance, or HI); Part B (Supplementary Medical Insurance, or SMI); Part C (Medicare Advantage, or MA); and Part D (the prescription drug benefit added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, MMA). The program is administered by the Centers for Medicare & Medicaid Services (CMS). Total program outlays are estimated to reach $576 billion in fiscal year 2012. Net federal outlays, after deduction of beneficiary premiums and other offsetting receipts, are expected to be $492 billion in 2012.

Medicare is administered by CMS within the U.S. Department of Health and Human Services (DHHS). (Prior to June 14, 2001, this agency was known as the Health Care Financing Administration (HCFA).) Day-to-day program operations, including processing benefits and paying claims, are conducted by private Medicare contractors.


Almost all persons age 65 and over are automatically entitled to premium free Medicare Part A, as they, or their spouse, have at least 40 quarters of Medicare covered employment. Part A also provides coverage, after a 24-month waiting period, for persons under age 65 who are receiving Social Security cash benefits on the basis of disability. Most persons who need a kidney transplant or renal dialysis also may be covered, regardless of age. In 2011, Part A covered 48 million aged and disabled persons (including those with chronic kidney disease). Medicare Part B is voluntary. All persons age 65 and over and all persons enrolled in Part A may enroll in Part B by paying a monthly premium; those with higher incomes pay higher premiums. In 2011, 45 million aged and disabled persons were enrolled in Medicare Part B.

Approximately 75% of beneficiaries receive covered services through Parts A and B. Together these programs are known as “Original Medicare.” (“Original Medicare” is sometimes referred to as “traditional fee-for-service Medicare” since a separate payment is made for each unit of service.) Medicare beneficiaries who are eligible for Part A and enrolled in Part B have the option of obtaining covered services through private health plans under Part C rather than through Original Medicare. (In this case, monthly per capita payments are made to the health plan.) Approximately 25% of Medicare beneficiaries have elected this option. All beneficiaries can elect to obtain coverage for prescription drugs through private health plans under Medicare Part D. About 36 million Medicare beneficiaries were enrolled in a Medicare Part D plan (30 million) or received drug benefits from a Medicare subsidized employer retiree plan (6 million) in 2011.


Part A provides coverage for inpatient hospital services, up to 100 days of post-hospital skilled nursing facility (SNF) care, some home health services, and hospice care. CMS reimburses acute inpatient hospitals, home health agencies, hospice, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities under separate prospective payment systems. A prospective payment system (PPS) is a method of reimbursement in which Medicare payment is made based on a predetermined, fixed amount. Patients must pay a deductible ($1,156 in 2012) each time their hospital admission begins a benefit period. (A benefit period begins when a patient enters a hospital and ends when he or she has not been in a hospital or SNF for 60 days.) The limited numbers of beneficiaries requiring care beyond 60 days are subject to additional charges. Patients requiring SNF care are subject to a daily coinsurance charge for days 21-100 ($144.50 in 2012). There are no cost-sharing charges for home health care and limited charges for hospice care.

Part B provides coverage for physicians' services, laboratory services, durable medical equipment (DME), hospital outpatient department (OPD) services, and other medical services. The program generally pays 80 percent of Medicare's fee schedule or other approved amount after the beneficiary has met the annual deductible ($140 in 2012). The beneficiary is liable for the remaining 20 percent.

Under Part C, beneficiaries have the option of obtaining covered services through private health plans. Under an agreement with CMS, a plan agrees to provide all services covered under Medicare Parts A and B (except for hospice care) in return for a capitated monthly payment. 

Part D provides coverage for outpatient prescription drugs through private prescription drug plans (PDPs) or Medicare Advantage prescription drug (MA-PD) plans. Similar to Part C, Medicare makes monthly payments to Part D plans for each Part D enrollee. All plans are required to meet certain minimum benefit requirements, however there are significant differences among plans in terms of benefit design, drugs included on plan formularies (i.e., list of covered drugs), cost-sharing applicable for particular drugs, and monthly premiums.


Medicare Part A is financed primarily through the HI payroll tax levied on current workers and their employers. Employers and employees each pay a tax of 1.45 percent on all earnings. The self-employed pay a single tax of 2.9 percent on earnings. Beginning in 2013, high-income workers with wages over $200,00 for single filers, and $250,000 for joint filers, pay an additional 0.9 percent in payroll taxes on the income over these thresholds. Revenues are credited to the HI trust fund.

Part B is financed through a combination of monthly premiums levied on program beneficiaries and Federal general revenues. Beneficiary premiums have generally represented about 25 percent of Part B costs; Federal general revenues (i.e., tax dollars) account for the remaining 75 percent. Beginning in 2007, higher income individuals pay higher premiums. Revenues are credited to the SMI trust fund.

Part C has no separate financing mechanism. Payments to MA plans are made in appropriate parts from the HI and SMI trust funds. Part D is financed by a combination of beneficiary premiums and general revenues. Revenues are credited to a separate account in the SMI trust fund. Beginning in 2011, high-income enrollees pay higher Part D premiums.

Chapter Overview

This chapter of the Green Book includes links to recent Congressional Research Service (CRS) Reports on Medicare. A Tables and Figures section lists select tables and figures found in these reports. This chapter of the Green Book also includes a Legislative History of Medicare beginning in 1997. (Previous editions of the Green Book review legislation enacted prior to that date.) The Legislative History highlights major provisions and includes provisions which had a significant budget impact, changed program benefits, modified beneficiary cost sharing, or involved major program reforms. This chapter concludes with a list of Links to Additional Resources, including links to Medicare administrative and expenditure data and information on specific programs and payment systems published by the Centers for Medicare & Medicaid Services (CMS), the Medicare Payment Advisory Commission (MedPAC), and the Congressional Budget Office (CBO).


This page was prepared on September 24, 2012 for the 2012 version of the House Ways and Means Committee Green Book.