What Is Medicare and How Does It Work?

Medicare isn’t free health care

Medicare isn’t free — though some services are since you’ve already been paying into the program — and was never meant to be. Sharing costs with the government was intended to prevent an overuse of health care services.

Expect to pay deductibles for each part of Medicare, as you do with your employer’s health insurance. A deductible is what you have to shell out for care before your plan starts coverage after you’ve paid your monthly premium.

You’ll also find copayments, another feature of workplace plans, within Medicare. Original Medicare’s Part A uses these fixed fees for hospital stays in excess of 60 days, and Medicare Advantage plans rely on this cost sharing for visits to a doctor, emergency room or urgent care.

Coinsurance shows up for expenses in both original Medicare and Medicare Advantage. For this, you’ll pay a percentage of the cost of care, often 20 percent out of your pocket and 80 percent from your original Medicare or Medicare Advantage plan.

If you’re worried about paying your share, some financial assistance is available if you have a limited income and few additional resources.

You pay for Medicare now and later

Medicare started with two parts: Part A to help cover hospital bills and related care and Part B to help with doctor costs and other health care services. Together, those two parts are called original Medicare or traditional Medicare, and they’re the building blocks for all of Medicare’s additional coverage.

You pay for Part A through Medicare taxes automatically deducted from your paycheck, including any work in retirement. So you became invested in Medicare with your very first formal job.

Part A helps pay for inpatient stays in hospitals and skilled nursing facilities, inpatient rehabilitation, some home health care services and end-of-life hospice care.

If you’ve seen Fed Med/EE or FICA (Federal Insurance Contributions Act) Medicare on your pay stub, that’s 1.45 percent of your check going into the Medicare hospital insurance trust fund to help cover Part A costs. Your company pays a matching amount.

You send 6.2 percent of your pay before taxes to the Social Security trust funds, and your employer matches that too. The contributions stop after you reach $184,500 in annual earnings, but Medicare taxes don’t have that limit.

You’ll also pay an additional 0.9 percent on earnings of more than $200,000. It, too, goes into the Medicare trust fund to pay everyone’s Medicare bills.

The money you pay throughout your work life earns you credits toward premium-free Part A when you apply for Medicare coverage. After you hit 40 calendar quarters, the equivalent of 10 years of work that don’t have to be continuous, you’ll pay no premium when your Part A kicks in, or you may get covered through the work history of your spouse or former spouse.

You pay for Part B while you’re enrolled in Medicare.

Part B helps pay for most doctors’ services; diagnostic tests; outpatient care; preventive care; durable medical equipment, which is doctor-prescribed, medically necessary equipment such as hospital beds and wheelchairs; and some medications administered in a doctor’s office.

By design, Part B enrollees pay about a quarter of each year’s expected costs through their premiums. Congress has to allocate the rest through the federal government’s general fund.

That’s one reason Part B premiums tend to increase annually. More people are using more health care services as costs are rising.

In 2026, the standard Part B premium topped $200 a month and is $202.90. If you’re in a high-income bracket, you’ll be charged more.

From 1966 through 2024, more than 163 million people benefited from Medicare. These days, more than 300,000 people become eligible every month because they turn 65.

Medicare is more than hospital, doctor insurance

Since its inception, Medicare has expanded beyond its initial Part A and Part B.

Coverage for disabled people was the first addition, via the Social Security Amendments of 1972.

The law expanded Medicare to include some younger than 65 who had been receiving Social Security Disability Insurance (SSDI) coverage for 24 months. It also extended benefits to people with permanent kidney failure, also called end-stage renal disease.

Patients with amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease, gained accelerated access to Medicare in 2000, and in 2020 Congress eliminated that wait time entirely. ALS is often a fast-acting, always fatal disease that forces people to stop work and lose their income and health insurance. In the past, some didn’t survive the delay.

The 1972 amendments also allowed a test of whether private insurers could provide services equal to original Medicare through health maintenance organizations (HMOs).

Medicare supplemental insurance that helps pay out-of-pocket costs, such as deductibles, copayments and coinsurance in original Medicare, wasn’t an official part of the government’s Medicare program at first. But private insurers saw a coverage gap almost from Medicare’s start because of costs that enrollees have to pay themselves.

These companies’ policies, better known as Medigap, came under federal oversight in 1980. By 1990, federal Medigap reform legislation kept the policies with commercial insurers but standardized into 10 plans so consumers could easily compare benefits and premiums.

Part C, now known as Medicare Advantage, was named in 1982 to formalize the private Medicare option that HMOs were testing: If private companies were able to manage the care of Medicare beneficiaries in their plans, could those efficiencies curb Medicare’s rising costs?

The types of insurance plans that could participate were expanded in 1997 to include preferred provider organizations (PPOs), which use provider networks like HMOs do. PPOs offer some out-of-network coverage, while HMOs generally don’t.

These days, more people are enrolled in Medicare Advantage plans than in original Medicare. By 2034, 64 percent of Medicare enrollees are projected to be in Medicare Advantage plans, according to an analysis from the nonpartisan health policy nonprofit KFF, which has offices in Washington, D.C.

The Part D prescription drug benefit, signed into law in 2003 with coverage available to enrollees in 2006, was the most recent addition to Medicare, coming at a time when many companies were phasing out supplemental coverage for their retirees.

Insurers sell Part D plans that can be compared using Medicare’s Plan Finder. They’re available as an add-on to original Medicare or folded into most Medicare Advantage plans.

In part thanks to AARP’s advocacy, the biggest change to Part D happened in 2025, when a $2,000 limit on enrollees’ out-of-pocket costs for covered drugs went into effect, simplifying rules that had people paying nearly double. This year the limit rose to $2,100; in 2027 it will be $2,400.

Medicare won’t cover all your health care needs

Even with the benefits added through the years, Medicare still has gaps in its coverage.

Much of this is because lawmakers thought the cost to enrollees would be minimal. So the original Medicare legislation focused on what Congress considered essential services.

Among the services Medicare doesn’t cover:

• Dental care, including fillings, cleanings, extractions, implants and dentures
• Glasses, contact lenses and eye exams, except for limited coverage in circumstances including cataract surgery and diabetes
• Hearing aids or routine hearing tests and fittings
• Long-term care, such as at assisted living centers or nursing homes
• Routine foot care from a podiatrist

You’ll have to budget for these expenses — long-term care may be the biggest — or seek out separate insurance policies to cover your needs.

Medicare Advantage plans generally offer more dental, hearing and vision coverage than original Medicare, often focusing on preventive care. However, the plans set annual limits on costs they’ll cover and may pay only half for more expensive services such as root canals, according to an analysis from KFF. Some Medigap plans, the supplemental insurance for original Medicare, may also offer extras such as gym memberships or discounts on dental, hearing and vision services.

How Medicare works depends on choices you make

When you sign up for Medicare Part A and Part B, you’ll have to choose between original Medicare and Medicare Advantage. Many people start looking around age 65.

Your seven-month initial enrollment period starts three months before the month you turn 65, includes your birthday month and ends three months after. Your 65th-birthday month is the earliest you’re eligible for Medicare unless you qualify because of a disability.

Original Medicare is a federal program that works on a fee-for-service basis. Part A and Part B allow you to go to any hospital or doctor that accepts Medicare anywhere in the United States, and the program pays its share of the bill for any covered service.

Many people buy Medigap supplement and Part D drug policies — private plans with additional premiums — because original Medicare has no limit on out-of-pocket expenses. A Medigap plan can pay most, if not all, covered services beyond your Part B deductible, and Part D plans have no copayments after you reach their annual out-of-pocket cap.

The strengths of original Medicare lie in the control you have over your care: You can choose your doctor or specialist, you can use it anywhere in the United States and you don’t need permission from an insurance company to be covered.

Medicare Advantage is the alternative to original Medicare that consists of privately run health plans, typically HMOs and PPOs, whose benefits vary based on where you live. Nearly 9 in 10 of these plans include Part D prescription coverage, and almost all fold in some limited dental, hearing and vision benefits.

As with original Medicare, you must have Medicare Part A and Part B before you can enroll in a Medicare Advantage plan. But federal regulations don’t allow you to buy a Medigap plan to help pay for extra costs.

Instead, Medicare Advantage plans in 2026 have out-of-pocket limits of $9,250 for in-network covered services and $13,900 for combined in- and out-of-network services. In 2027, those costs will go up: $9,850 in network and $14,800 combined in- and out-of-network services. Some plans set lower limits.

Two ways that Medicare Advantage plans cut costs are through prior authorization, preapproval for certain services and prescriptions, and provider networks, which can change every year and might not include your physician.

The choice you make between original Medicare and Medicare Advantage may seem inconsequential when you’re 65 and fairly healthy. But it will affect you in ways you might not anticipate later in life.

Future you can switch from original Medicare to a Medicare Advantage plan easily during annual open enrollment. Dropping a Medicare Advantage plan for original Medicare can be harder.

The reason is Medigap, important because original Medicare doesn’t cap out-of-pocket costs. Insurers in most states can consider your health, give you higher premiums and even deny coverage when you apply for Medigap later, and worsening health may be the reason you want original Medicare.

When you look at your Medicare choices, think about your total costs and the big picture — not just for this year but for the long life you hope for.

The difference between Medicare and Medicaid

As you learn about Medicare, you may be wondering how Medicaid fits in. Both are government health insurance programs enacted in 1965.

The federal government manages Medicare mainly for adults 65 and older and some people with disabilities. Medicaid is a state and federally financed program that serves people in many age groups who have limited incomes and assets.

The two programs intersect when an adult 65 and older or someone disabled has little money coming in every month and few resources to help pay for necessities. An older adult can have dual eligibility in both Medicare and Medicaid.

Here’s how:

• If you qualified for Medicaid before age 65, you may continue to qualify after you sign up for Medicare.
• If your income dropped, you may become eligible for Medicaid at or after 65.
• People with slightly higher incomes and assets may be able to sign up for a Medicare Savings Program, financial assistance that the federal government helps pay for but state Medicaid agencies administer.

Receiving Supplemental Security Income (SSI), a federal safety net program for Americans with extremely limited financial resources who are 65 or older, and either blind or disabled, automatically qualifies you for Medicaid and a Medicare Savings Program but may require a separate application in some states.

Health care gets more expensive as you age, often because chronic conditions need more attention and new health problems pop up. About 10 percent of Medicaid enrollees in 2023 were 65 and older, but they accounted for more than 21 percent of Medicaid spending that year.

Medicaid also pays for more than 60 percent of the nursing home care across the country. More than 4 in 5 nursing home residents are 65 and older.

Contributing: Dena Bunis and Linda Dono

This article, originally published July 1, 2020, was updated with additional information about Medicare’s origins, costs and coverage gaps and how it’s different from Medicaid.