How Medicaid and Medicare Work: Coverage, Eligibility, and Who Pays
Medicaid and Medicare are the two largest public health insurance programs in the United States, together enrolling more than 150 million people. They were created by the same 1965 legislation but are structured in fundamentally different ways — a distinction that shapes nearly every major debate about the cost and reach of American health care.
Published June 30, 2026| Feature | Medicare | Medicaid |
|---|---|---|
| Governing authority | Entirely federal | Joint federal–state partnership |
| Primary population served | Adults 65 and older; people with certain disabilities | Low-income individuals and families; children; pregnant women |
| Eligibility basis | Age or disability status, regardless of income | Income (and in some cases assets) relative to the federal poverty level |
| How it is financed | Payroll taxes (Hospital Insurance Trust Fund), general revenues, and enrollee premiums | Shared federal and state general revenues; federal match rate (FMAP) varies by state |
| Administration | Federal government through CMS (Centers for Medicare & Medicaid Services) | Each state administers its own program within federal rules set by CMS |
Medicare Parts A, B, C, and D Explained
Medicare is divided into four distinct parts, each covering a different category of health care. Part A covers inpatient hospital care, skilled nursing facility stays, hospice, and some home health services. Most people who have worked and paid Medicare payroll taxes for at least ten years are entitled to Part A without paying a monthly premium, though significant cost-sharing applies to hospital stays beyond the first 60 days.
Part B covers outpatient services: doctor visits, preventive care, lab tests, durable medical equipment, and outpatient surgery. Unlike Part A, Part B requires a monthly premium, which is deducted from Social Security payments for most enrollees. The standard premium changes each year and is higher for beneficiaries with incomes above certain thresholds — a provision known as the income-related monthly adjustment amount, or IRMAA.
Part C, known as Medicare Advantage, is not a separate benefit category but rather an alternative delivery mechanism. Private insurance companies, approved and paid by the federal government, offer plans that bundle Parts A and B (and usually Part D) into a single managed-care product. Medicare Advantage plans now cover more than half of all Medicare enrollees. They often include extra benefits such as dental, vision, and hearing coverage, but they also require enrollees to use provider networks.
Part D covers prescription drugs. It is offered exclusively through private plans that contract with the federal government under a formula that subsidizes premiums. Before the Inflation Reduction Act of 2022, Part D had a coverage gap — popularly called the “donut hole” — in which beneficiaries faced higher out-of-pocket costs above an initial coverage limit. That gap has been restructured, and a new annual cap on out-of-pocket drug costs for Part D enrollees took effect in 2025.
Medicaid’s Federal–State Structure
Unlike Medicare, Medicaid is a partnership between the federal government and the 50 states, plus the District of Columbia and the territories. The federal government establishes minimum eligibility and benefit requirements that states must meet to receive federal matching funds. States then design their own programs within those rules, which is why Medicaid looks quite different from one state to the next — in who qualifies, what services are covered, and how care is delivered.
The federal government’s share of Medicaid costs is determined by the Federal Medical Assistance Percentage, or FMAP, which is calculated annually based on each state’s per capita income relative to the national average. Poorer states receive a higher federal match. The FMAP floor is 50 percent, meaning the federal government pays at least half of every Medicaid dollar spent in the wealthiest states. In the lowest-income states, the federal match can reach 83 percent or higher. This formula is designed to equalize the burden of providing health coverage across states with very different fiscal capacities.
Medicaid Expansion Under the ACA
The Affordable Care Act of 2010 included a provision that would have required all states to expand Medicaid eligibility to adults with incomes up to 138 percent of the federal poverty level, regardless of whether they had children or disabilities. The Supreme Court, in its 2012 decision in National Federation of Independent Business v. Sebelius, held that making this expansion mandatory was an unconstitutional coercion of the states. The court effectively made expansion optional.
As of mid-2026, 41 states and the District of Columbia have adopted the expansion. The nine holdout states continue to operate Medicaid under pre-ACA eligibility rules, which in some cases means that low-income adults without dependent children qualify for virtually no coverage. The gap between expansion and non-expansion states remains one of the most significant sources of variation in health insurance coverage rates across the country.
Cost-Sharing Differences Between the Two Programs
Medicare enrollees are responsible for meaningful cost-sharing: deductibles, coinsurance, and copayments that can add up quickly, particularly for hospitalizations or specialist care. There is no annual cap on out-of-pocket costs in traditional Medicare (Parts A and B combined), though Medicare Advantage plans are required to impose such a cap. Many beneficiaries purchase supplemental “Medigap” policies from private insurers to cover these gaps, adding another layer of complexity and cost.
Medicaid, by contrast, is designed for people with low incomes and imposes very limited cost-sharing. Federal rules restrict the premiums and copayments that states may charge Medicaid enrollees, and certain categories of enrollees — children, pregnant women, and people in nursing facilities — are entirely exempt from cost-sharing requirements. This makes Medicaid substantially more comprehensive in practice for enrollees with ongoing health needs, even though the program’s provider reimbursement rates are lower than Medicare’s, which can affect access to physicians willing to accept Medicaid patients.