Medicare: How the Program Actually Works

The federal health insurance program for Americans age 65 and older — plus a smaller group of younger people with disabilities. Its four parts, who qualifies, how it's paid for, and the two fundamentally different paths a beneficiary can take through it.

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69.7M Total beneficiaries
~20% of all Americans
~$1.1T Annual program spending
~21% of national health spending · ~13% of federal spending · ~4% of GDP

The Four Parts

Medicare comprises four different pieces, each with its own financing, payments, and structure

Hospital Insurance
Part A
Inpatient care, skilled nursing, hospice. Funded by payroll tax.
Medical Insurance
Part B
Outpatient, physician services. Funded by premiums + general revenue.
Medicare Advantage
Part C
Private plans bundling A+B (+D). Capitated, risk-adjusted payment.
Prescription Drugs
Part D
Private drug plans, standalone or bundled into MA.

Who's Eligible

Three separate paths to Medicare eligibility.

Age 65+
The default path — automatic for most Social Security recipients.
Disability
Under 65, after 24 months on SSDI.
ESRD / ALS
Any age, with end-stage renal disease or ALS.

Two Paths Through Medicare

Once eligible, every beneficiary makes one structural choice that shapes everything downstream.

Traditional Medicare
  • Parts A + B directly from the government
  • Any provider that accepts Medicare, no network
  • No out-of-pocket max — pair with Medigap to cap exposure
  • Add a standalone Part D plan for drug coverage
Traditional Medicare & Medigap →
Medicare Advantage
  • A private plan (Part C) replaces A + B
  • Usually bundles Part D and extra benefits
  • Network-based, often needs prior authorization
  • Built-in annual out-of-pocket maximum
Medicare Advantage →

Enrollment Has Flipped

Medicare Advantage overtook Traditional Medicare in enrollment share around 2023 and has kept growing.

2010
Traditional 76%
2018
66%
34%
2024
49%
MA 51%
Traditional MedicareMedicare Advantage

Illustrative figures for mockup purposes — pull exact CMS enrollment splits before publishing.

How It's Financed

Each part draws on a different funding stream — this is why "Medicare's finances" is really three separate conversations.

Part A
HI Trust Fund
2.9% payroll tax (split employer/employee), can face projected insolvency.
Parts B & D
SMI Trust Fund
~75% general revenue, ~25% beneficiary premiums. Structurally can't "go insolvent" the same way.
Part C
Capitated from A/B funds
CMS pays MA plans a risk-adjusted monthly rate drawn from both trust funds.

Where the Debates Stand

Is Medicare Advantage overpaid?
MedPAC's level accounting puts MA payments ~20% above traditional FFS cost for comparable beneficiaries; penetration literature finds higher MA enrollment correlates with lower total regional Medicare spending. Both can be true depending on the accounting frame.
Is the Part A Trust Fund actually at risk?
Trustees' reports periodically project depletion dates within a decade or so; historically Congress has always acted before depletion, but the underlying demographic pressure (fewer workers per beneficiary) is real and structural.

Go Deeper

Medicare Advantage
Payment mechanics, risk adjustment, star ratings, and the reform debate.
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Medigap
Private plans that reduce Medicare cost sharing.
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