What is 'Medicare'

Medicare is a U.S. federal government program that subsidizes healthcare services for individuals over age 65, as well as younger people who meet specific eligibility criteria. Medicare encompasses a variety of plans covering different healthcare situations and offered at different premiums. While this allows the program to offer consumers more choice in terms of costs and coverage, it also introduces complexity for those seeking to sign up.

BREAKING DOWN 'Medicare'

Congress created the Medicare program as part of the Social Security Act in 1965 as a way of extending insurance coverage to individuals over the age of 65 who frequently lacked appropriate coverage prior to that time. Subsequent legislation has expanded Medicare’s eligibility pool to include individuals under 65 who receive Social Security Disability Insurance checks and those with end stage renal disease. Those who receive SSDI generally need to wait 24 months after they receive their first check before becoming eligible for Medicare, though the program waives this requirement for those with amyotrophic lateral Sclerosis.

Since U.S. taxpayers fund the Medicare program, rising healthcare costs have generated political arguments regarding the future solvency of the program. To date, however, the program’s popularity has shielded it from major changes to its eligibility, funding or coverage provisions.

Types of Medicare coverage

Basic Medicare coverage comes predominately via Parts A and B, also called Original Medicare, or through a Medicare Advantage plan. Medicare Part A covers costs billed by hospitals or similar inpatient or inpatient-like settings, such as skilled nursing facilities. Part B generally covers costs billed for outpatient care, such as physician’s office visits. Original Medicare plans do not limit out-of-pocket costs for services rendered during a given year.

Medicare Advantage plans, also known as Medicare Part C plans, must offer coverage at least equivalent to Original Medicare. Consumers purchase Medicare Advantage plans through private insurers rather than through the government itself. Many of these plans offer annual limits on out-of-pocket costs. Many also provide benefits that Original Medicare patients would otherwise need to purchase via supplemental insurance, such as a Medigap plan.

Medicare offers supplemental prescription drug coverage through Medicare Part D. Enrollees in Medicare Part A or Part B may enroll in Part D to receive subsidies for prescription drug costs that Original Medicare plans do not cover.

Shifting to value-based care

The Centers for Medicare and Medicaid Services, or CMS, administer the Medicare program. The agency sets fees that it will pay to healthcare providers who provide services to Medicare patients. In response to arguments that fee-for-service payment plans create incentives to provide services in higher volumes without enough regard for the value those services provide for healthcare, CMS has recently begun to shift toward value-based payment methodologies that attempt to reward physicians who provide high-quality care.

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