Medicare and Medicaid: Program Overview and Current Policy Issues

Medicare and Medicaid were established in 1965 through amendments to the Social Security Act, creating the two largest government health insurance programs. Medicare provides nearly universal health coverage for Americans aged 65 and older and for younger individuals with qualifying disabilities or end-stage renal disease. Medicaid provides means-tested health coverage for low-income populations, jointly financed by the federal and state governments. Together, these programs cover approximately 150 million Americans and account for over 40% of national health spending.

Medicare consists of four parts: Part A covers inpatient hospital services, skilled nursing facility care, hospice care, and home health services, financed primarily through the 2.9% payroll tax (split between employer and employee); Part B covers physician services, outpatient care, durable medical equipment, and other services, financed through beneficiary premiums (approximately 25%) and general revenues (approximately 75%); Part C (Medicare Advantage) allows beneficiaries to enroll in private plans that receive capitated payments from Medicare; and Part D provides outpatient prescription drug coverage through private plans.

Medicaid eligibility varies by state but generally covers children, pregnant women, parents, elderly individuals, and persons with disabilities meeting income and categorical requirements. Under the ACA's Medicaid expansion, adopted by 40 states and DC, coverage extends to adults under 65 with incomes up to 138% FPL with a 90% federal matching rate. The Federal Medical Assistance Percentage (FMAP) for traditional Medicaid populations ranges from 50% to approximately 77% based on state per capita income.

The Inflation Reduction Act made significant changes to Medicare drug benefits, including authorizing CMS to negotiate prices for certain high-expenditure drugs, capping out-of-pocket prescription drug costs at $2,000 per year for Part D enrollees, eliminating cost-sharing for adult vaccines, capping insulin copays at $35 per month, and imposing inflation rebates requiring manufacturers to pay rebates to Medicare if drug prices rise faster than inflation. These provisions are being phased in over several years.

Medicare reform proposals include premium support or competitive bidding models that would restructure Medicare financing, traditional approaches to reduce spending growth through provider payment modifications, expansion of value-based payment models, allowing Medicare to negotiate drug prices for additional categories of drugs, and proposals to lower the Medicare eligibility age from 65 to 60 or to create a Medicare public option.

Medicaid reform proposals include converting federal Medicaid financing to block grants or per capita caps, which would give states greater flexibility but potentially shift costs and reduce coverage; expanding mandatory eligibility categories; improving provider payment adequacy to ensure access; and addressing the administrative burden of eligibility determination and enrollment processes. Proposals to establish continuous eligibility for children and streamline enrollment have received bipartisan attention.

Medicare Advantage enrollment has grown to over 32 million beneficiaries, representing approximately 52% of all Medicare beneficiaries, raising questions about payment accuracy, plan quality, prior authorization practices, and the impact on traditional Medicare. Implementation of the IRA drug negotiation program is underway, with initial negotiations covering drugs treating blood cancers, diabetes, heart failure, and blood clots. Medicaid enrollment has declined following the end of the pandemic-era continuous enrollment requirement, with millions of enrollees disenrolled through redetermination processes. Congressional oversight has focused on Medicare Advantage oversight, Medicaid unwinding, and the financial sustainability of both programs.