The Medicare program was established in 1965 through the Social Security Act. Medicare is a federal entitlement health insurance program for seniors 65 years of age and older, people under age 65 with permanent disabilities and certain diseases, and people of all ages with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a kidney transplant).

Medicare is administered by the Centers for Medicare and Medicaid Services (CMS). The main sources of funding are a payroll tax, paid by current workers and their employers (38 percent), general federal revenues (40 percent), and beneficiary premiums (13 percent). 

Individuals become eligible for Medicare when they reach 65, if they or their spouse made payroll tax contributions for 10 or more years.

Medicare services fall into four parts (See Medicare General Information for more details):

  • Part A, also known as the Hospital Insurance (HI) program, is hospitalization insurance. Most people do not pay a premium for Part A.
  • Part B, the Supplementary Medical Insurance (SMI) program, is medical insurance that covers services not covered by Part A. Most people pay a monthly premium for Part B ($104.90 per month in 2014, higher for singles earning over $85,000 a year or couples earning over $170,000 a year).
  • Part C is the Medicare Advantage program. It allows beneficiaries to enroll in a private plan, such as a Health Maintenance Organization (HMO), preferred provider organization (PPO), or private fee-for-services (PFFS) plan.
  • Part D is outpatient prescription drug insurance, issued by private insurance companies.

Medicare does not cover most long-term health services, vision or dental care, or hearing aids.

Medicare covers more than 50 million Americans, 8 million of which are non-elderly people with disabilities. While the program has helped reduce poverty among older adults since 1965, nearly half of Medicare beneficiaries still have incomes below 200 percent of poverty.

Medicare and the Affordable Care Act

The Patient Protection and Affordable Care Act (ACA) of 2010 made several changes to Medicare.  It made most preventable health services free, whereas previously beneficiaries of Original Medicare had to pay 20 percent of the cost out-of-pocket, and there were no limitations on what Medicare Advantage Plans could charge.  It will phase out the prescription drug coverage gap (sometimes known as the "doughnut hole" over time.  Additionally, it will gradually reduce payments to Medicare Advantage private insurance companies in order to phase out the 9 percent differential between costs for Medicare Advantage beneficiaries and Original Medicare beneficiaries.  It also takes steps towards slowing the growth of Medicare costs and ensuring that Medicare remains solvent through 2024.  Finally, it incentivizes increased quality of care by providing bonus payments to high-quality Medicare Advantage providers.

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