What Medicare Is and How It Works

Medicare is a federal health insurance program run by the Centers for Medicare & Medicaid Services (CMS), a division of the U.S. Department of Health and Human Services. Established in 1965, Medicare currently provides health coverage to approximately 68 million Americans. The program was created to help seniors, certain younger people with disabilities, and people with end-stage renal disease access affordable healthcare services.

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Medicare operates differently than private health insurance. Rather than a single insurance plan, Medicare consists of several distinct parts, each covering different types of medical services. The program is funded through payroll taxes, premiums paid by enrollees, and general federal revenue. Understanding how these different parts work together helps you know what services might be covered and what your costs could be.

The program divides healthcare coverage into four main categories: Hospital Insurance (Part A), Medical Insurance (Part B), Prescription Drug Coverage (Part D), and Medicare Advantage plans (Part C). Some people use Original Medicare, which includes Parts A and B, while others choose Medicare Advantage as an alternative way to receive their Medicare coverage. Many people also add prescription drug coverage through Part D plans.

Medicare is not the same as Medicaid. While both are government health programs, Medicaid is jointly funded by federal and state governments and primarily serves low-income individuals and families, while Medicare is federally funded and serves specific groups regardless of income level. Additionally, the Veterans Health Administration serves military veterans through a separate system, and people under 65 who are not disabled may have other coverage options through their employer or the health insurance marketplace.

The program covers a wide range of medical services, from hospital stays and doctor visits to lab tests and preventive care. However, Medicare does not cover all healthcare expenses. Understanding what is and is not covered, along with how much you might pay out-of-pocket, is essential for planning your healthcare and finances.

Practical Takeaway: Medicare is a large, multi-part program with specific coverage rules for different services. Learning which part covers what type of care helps you understand what services might be available to you and what costs to expect.

Understanding Medicare Part A: Hospital Insurance

Medicare Part A, known as Hospital Insurance, covers inpatient hospital care, skilled nursing facility care, hospice care, and some home health services. Part A is the hospital-focused portion of Original Medicare. Most people do not pay a monthly premium for Part A if they or their spouse paid Medicare taxes for at least 10 years while working. In 2024, those who do pay a premium can pay between $278 and $556 per month, depending on how many years of Medicare tax payments they have on record.

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When you are admitted to a hospital as an inpatient under Part A, you are responsible for paying a deductible for each benefit period. For 2024, the Part A deductible is $1,632 per benefit period. A benefit period begins when you are admitted to a hospital and ends after you have been out of the hospital and other covered facilities for 60 consecutive days. After you pay the deductible, Medicare covers your hospital costs for the first 60 days. Days 61 through 90 require a daily coinsurance payment, and days 91 and beyond have higher daily costs.

Skilled nursing facility (SNF) care is covered under Part A when specific conditions are met. You must have been admitted to a hospital as an inpatient for at least three consecutive days (not counting the day of discharge), and you must be admitted to a Medicare-participating SNF within 30 days of leaving the hospital. The facility must provide skilled nursing or skilled rehabilitation services. Medicare covers all approved charges for the first 20 days. From day 21 through day 100, you pay a daily coinsurance amount, which is $408 per day in 2024.

Part A also covers home health services when ordered by a doctor and provided by a Medicare-certified home health agency. These services may include part-time or intermittent skilled nursing care, physical therapy, occupational therapy, and speech-language pathology services. There is no deductible or coinsurance for covered home health services, though you may pay 20% of the Medicare-approved amount for durable medical equipment.

Hospice care is another Part A benefit for people with a terminal illness. Your doctor must certify that you are expected to live six months or less. Medicare covers hospice services without a deductible or coinsurance, though you may pay small copayments for medications and inpatient respite care.

Practical Takeaway: Part A primarily covers hospital and facility-based care, with significant out-of-pocket costs after the initial deductible. Understanding the cost structure of inpatient stays helps you prepare financially for potential hospitalizations.

Understanding Medicare Part B: Medical Insurance

Medicare Part B, called Medical Insurance, covers doctor visits, outpatient hospital services, physical therapy, occupational therapy, speech pathology, diagnostic tests, and other medically necessary services and supplies. Unlike Part A, Part B is optional, though most people choose to enroll. Almost everyone who enrolls in Part B pays a monthly premium, which varies based on income. For 2024, the standard premium is $174.70 per month, though higher-income individuals pay more through Income-Related Monthly Adjustment Amounts (IRMAA).

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Part B also has an annual deductible of $240 in 2024. After you meet this deductible, you typically pay 20% of the Medicare-approved amount for most services, while Medicare pays 80%. For outpatient hospital services, you may pay a copayment instead. This cost-sharing structure means your out-of-pocket expenses depend on the types of services you use and their frequency.

Preventive services covered under Part B include annual wellness visits, cancer screenings (such as mammograms and colonoscopies), cardiovascular disease screenings, diabetes screenings, bone density testing, and vaccinations including flu, pneumonia, and shingles vaccines. Medicare covers these preventive services with no coinsurance or copayment after the deductible is met, supporting early detection and disease prevention.

Part B covers doctor office visits whether your doctor is in-network or out-of-network, though out-of-network providers can charge up to 15% more than the Medicare-approved amount in some cases. Mental health services, including therapy and psychiatry, are also covered under Part B. Durable medical equipment such as wheelchairs, walkers, and oxygen equipment is covered, with you paying 20% of the approved cost after the deductible.

Part B covers some services in limited amounts. For example, Medicare covers physical therapy and occupational therapy up to certain dollar limits, though these limits may be waived in some cases. Chiropractic care is limited to manual spine manipulation only. Dental care, routine eye exams, eyeglasses, and hearing aids are generally not covered by Part B, though there are exceptions for certain services related to other medical conditions.

Practical Takeaway: Part B is the medical services portion of Original Medicare with monthly premiums and ongoing cost-sharing. Understanding what services Part B covers and which services it does not helps you plan for your healthcare needs and budget for out-of-pocket costs.

Understanding Medicare Part D: Prescription Drug Coverage

Medicare Part D covers prescription medications through private insurance plans approved by Medicare. It is separate from Original Medicare (Parts A and B) and Medicare Advantage. Part D is optional, but if you do not have other creditable prescription drug coverage (such as coverage through an employer or retiree plan) and you delay enrolling in Part D after your coverage begins, you may face a permanent penalty added to your premiums for as long as you are on Medicare.

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Part D plans vary by insurance company and region, meaning the premiums, deductibles, and which drugs are covered differ from plan to plan. Monthly premiums in 2024 typically range from approximately $8 to $100 or more, depending on the plan. Each plan maintains a formulary, which is a list of covered medications organized into categories based on cost. Generic drugs are usually in lower cost categories, while brand-name drugs are typically in higher categories requiring greater out-of-pocket costs.

Part D cost structure includes an annual deductible (up to $545 in 2024, though some plans have no deductible), copayments or coinsurance during the coverage gap, and catastrophic coverage after you reach a certain out-of