3.3 Public Health Insurance & Systems
Sections:
3.3.1 Medicare Federal Insurance Program
Medicare was established in 1965 as Title XVIII of the Social Security Act, initially providing health insurance to Americans aged 65 and older. In 1972, Medicare eligibility was expanded to include certain people under age 65 with disabilities and people with end-stage renal disease (ESRD) (Centers for Medicare & Medicaid Services [CMS], 2026b). People under age 65 who qualify for Medicare based on disability generally become eligible after receiving Social Security Disability Insurance (SSDI) benefits for 24 months. People with amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease, are eligible for Medicare when they become entitled to disability benefits, without the 24-month waiting period. Medicare eligibility for people with ESRD is based on specific requirements related to dialysis or kidney transplantation, and the date coverage begins depends on the individual’s circumstances (CMS, 2026j).
Medicare was further expanded through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which established the Medicare Part D prescription drug benefit beginning in 2006 (CMS, 2026b). Medicare enrollment has grown substantially since the program began, from approximately 19 million beneficiaries in 1966 to more than 70 million today. As of May 2026, approximately 70.5 million people were enrolled in Medicare (CMS, 2026g). Today, Medicare primarily provides health insurance to people aged 65 and older, certain younger people with disabilities, and people with ESRD or ALS who meet Medicare eligibility requirements (CMS, 2026j).
Review CMS history webpage (CMS, 2026b): History
I. Breadth of Coverage
Medicare is a combination of the following four programs:
- Hospital Insurance (Part A)
- Medical Insurance (Part B)
- Medicare Advantage (Part C)
- Medicare Prescription Drug Benefit (Part D).
Part A – Hospital Insurance
Medicare Part A is hospital insurance. It helps cover inpatient hospital care, skilled nursing facility care, hospice care, and some home health services. Most beneficiaries do not pay a monthly premium for Part A because they or their spouse paid Medicare taxes for a sufficient period while working. Individuals who do not qualify for premium-free Part A may be able to purchase Part A if they meet Medicare eligibility requirements (CMS, 2026j).
Medicare hospital payment has evolved from reimbursement based largely on hospitals’ reported costs to prospective payment systems in which payment is determined in advance using established classifications and payment rates. For acute inpatient hospital care, Medicare uses the Inpatient Prospective Payment System (IPPS), which assigns cases to Medicare Severity Diagnosis-Related Groups (MS-DRGs). Hospital outpatient departments are generally paid through the Outpatient Prospective Payment System (OPPS), which groups many services into Ambulatory Payment Classifications (APCs). Different coding systems provide information used in these payment processes. ICD-10-CM codes identify diagnoses, ICD-10-PCS codes identify inpatient hospital procedures, and Current Procedural Terminology (CPT) codes identify many medical services and procedures provided by physicians and other healthcare professionals (CMS, 2026h).
CMS (2026h) explains that these coding and payment systems serve different purposes. ICD-10-CM and ICD-10-PCS provide diagnostic and inpatient procedure information used in assigning an inpatient case to an MS-DRG. CPT codes describe many physician and other professional services. Once an inpatient case is assigned to an MS-DRG, Medicare uses the payment weight associated with that group, along with applicable payment adjustments, to determine the hospital’s Inpatient Prospective Payment System (IPPS) payment.
Medicare hospital reimbursement has changed significantly over time, moving from payment based largely on hospital costs to prospective payment based on diagnoses and, more recently, incorporating quality and patient outcomes into payment. Under Medicare’s Inpatient Prospective Payment System, hospitals generally receive a predetermined payment for an inpatient stay based on the Medicare Severity Diagnosis-Related Group (MS-DRG) assigned to the case, with adjustments for factors such as severity of illness and local labor costs (CMS, 2026h).
The Affordable Care Act (ACA) expanded Medicare’s use of value-based purchasing, which links a portion of hospital reimbursement to the quality of care provided rather than paying solely based on the quantity of services. Medicare’s Hospital Value-Based Purchasing Program evaluates hospitals using measures related to clinical outcomes, patient safety, patient experience, and efficiency. Medicare withholds 2% of participating hospitals’ base operating DRG payments and redistributes those funds as incentive payments based on hospital performance (CMS, 2026d).
Part B – Medical Insurance
Medicare Part B, also known as Medical Insurance, is voluntary coverage available to eligible Medicare beneficiaries. Most beneficiaries pay a monthly premium for Part B, and higher-income beneficiaries may pay a higher premium (Medicare.gov, n.d.-b). Part B helps cover physician and other healthcare provider services, outpatient care, certain home health services, laboratory tests, durable medical equipment, therapy services, many preventive services, and some drugs administered in outpatient settings. Coverage generally depends on whether the service or supply meets Medicare requirements, including applicable medical-necessity requirements (Medicare.gov, n.d.-d).
Part C – Medicare Advantage
The Balanced Budget Act of 1997 established the Medicare+Choice program, now known as Part C or the Medicare Advantage Program, to provide more healthcare coverage choices for individuals with Medicare (CMS, 2026b). Part C, or Medicare Advantage, is an alternative way for beneficiaries with Parts A and B to receive their Medicare benefits through a Medicare-approved private health plan rather than through Original Medicare. Enrollment is voluntary. Medicare Advantage plans must cover the medically necessary services covered by Original Medicare and may offer additional benefits such as vision, hearing, and dental services. Most Medicare Advantage plans also include Part D prescription drug coverage (Medicare.gov, n.d.-a). One of the main differences between Medicare Advantage and Original Medicare is that Medicare Advantage coverage is offered through Medicare-approved private insurance companies rather than directly through Original Medicare (Medicare.gov, n.d.-a).
When a beneficiary receives a service under Original Medicare, the Medicare program pays the provider directly for services, though payments are processed through private organizations called Medicare Administrative Contractors (MACs). In contrast, under Part C, Medicare pays the Medicare Advantage plan a fixed amount per month for each enrollee, with payments adjusted based on characteristics such as demographics and medical diagnoses (CMS, 2024). Individuals who are entitled to Part A and enrolled in Part B may choose to join a Medicare Advantage plan available in their area. Medicare Advantage plans may have different out-of-pocket costs than Original Medicare, and plans may require enrollees to use network providers or obtain prior authorization for certain services (Medicare.gov, n.d.-a). Medicare Advantage plans assume financial risk for providing covered services to their Medicare enrollees.
Part D – Prescription drug benefit
Part D prescription drug coverage began in 2006 and is voluntary. Before that, Medicare did not provide broad coverage for outpatient prescription drugs. Part D coverage is provided through Medicare-approved private insurance companies. Beneficiaries may obtain Part D coverage through a stand-alone Medicare drug plan or through a Medicare Advantage plan that includes prescription drug coverage (Medicare.gov, n.d.-b). Each plan can vary in cost and the specific drugs it covers. A plan’s list of covered prescription drugs is called a formulary, and plans may place drugs into different tiers with different cost-sharing requirements (Medicare.gov, n.d.-b).
Review issue brief (Cubanski & Damico, 2026): Medicare Part D Enrollment, Premiums, and Cost Sharing in 2026
II. Scope of Coverage
In general, Medicare covers healthcare services and supplies that meet applicable Medicare coverage requirements, including requirements related to medical necessity. Unlike many private health insurance plans, Original Medicare generally does not require prior authorization for services or supplies, although prior authorization applies to certain services in limited circumstances (Medicare.gov, n.d.-a). Original Medicare does not cover several categories of care, including most long-term custodial care and most routine dental care. Other common exclusions include routine hearing aids, routine eye examinations for prescription glasses, and most cosmetic surgery, although coverage may apply in specific circumstances. Medicare Advantage plans may offer additional benefits beyond those provided by Original Medicare (Medicare.gov, n.d.-e).
One of the most significant services not covered by Original Medicare is long-term custodial care. Precisely which services are covered by Medicare is rather complex because the program does include some coverage for nursing home and home healthcare. This coverage, however, is aimed at acute-care illnesses needing skilled care (e.g., rehabilitation). Skilled care must be medically necessary; custodial care alone is not covered. Moreover, skilled nursing facility care generally requires a qualifying inpatient hospital stay of at least three days, and Medicare Part A may cover up to 100 days of skilled nursing facility care during a benefit period if coverage requirements continue to be met (Medicare.gov, 2025).
Definition: Custodial care is long-term care that primarily helps individuals with activities of daily living, such as bathing, dressing, eating, and using the bathroom. Original Medicare does not cover custodial care when it is the only care a person needs. Medicaid may cover long-term services and supports for eligible individuals, including services provided in nursing facilities and home- and community-based settings (Medicare.gov, n.d.-c).
Medicare coverage decisions are made at both the national and local levels. CMS may establish national Medicare coverage policy through National Coverage Determinations (NCDs). When no applicable national policy determines coverage, Medicare Administrative Contractors (MACs) may develop Local Coverage Determinations (LCDs) for items or services within their jurisdictions. Under Medicare Advantage and Part D, private plans also make coverage decisions within Medicare requirements and their approved benefit structures. Beneficiaries and providers have access to established appeals processes when coverage or payment is denied (CMS, 2026e).
Review infographic (CMS, 2026f): Medicare & You 2026
Review (Medicare.gov, 2025): Medicare Coverage of Skilled Nursing Facility Care
3.3.2 Medicaid & CHIP Joint Insurance Programs
I. Medicaid
Medicaid was enacted in 1965 as Title XIX of the Social Security Act and is jointly administered by the federal government and the states. Although the federal government establishes broad requirements, each state operates its own Medicaid program within those guidelines. As a result, eligibility, covered services, payment methods, and program administration vary across states. States are required to cover certain mandatory benefits but may also choose to cover additional services and populations. Medicaid is jointly financed by the federal government and the states, with the federal government providing matching funds for state Medicaid expenditures. The program provides health coverage to eligible low-income adults, children, pregnant women, older adults, and people with disabilities (Medicaid.gov, 2026a). As of April 2026, approximately 66.7 million people were enrolled in Medicaid, with another 7.1 million enrolled in the Children’s Health Insurance Program (CHIP) (Medicaid.gov, 2026a).
The main population groups covered by Medicaid include:
- low-income children;
- pregnant women;
- low-income parents and other adults who meet state eligibility requirements;
- people with disabilities; and
- low-income older adults.
Some Medicaid beneficiaries are dually eligible for both Medicare and Medicaid. Medicare is generally the primary payer for Medicare-covered services, while Medicaid may help eligible beneficiaries with Medicare premiums and cost sharing and may cover services that Medicare does not fully cover, including certain long-term services and supports. Eligibility and the amount of Medicaid assistance available vary by dual-eligibility category and state (CMS, 2026a).
Review: Dual Eligibility Categories (CMS, 2026a)
Medicaid is a federal-state partnership, but states have considerable flexibility in establishing eligibility and benefits within federal requirements. The Affordable Care Act (ACA) created an adult eligibility group for states that choose to expand Medicaid, generally covering adults with incomes up to 138% of the federal poverty level. As of August 2026, 41 states, including the District of Columbia, had adopted Medicaid expansion, while 10 states had not (KFF, 2026b). Eligibility for adults in non-expansion states varies considerably and may remain much more restrictive, particularly for adults without dependent children.
The federal government pays a share of each state’s Medicaid costs through the Federal Medical Assistance Percentage (FMAP), with states that have lower per capita incomes generally receiving a higher federal matching rate. For fiscal year 2026, the traditional FMAP ranges from 50% to 77% depending on the state. The federal government pays 90% of the cost of the ACA Medicaid expansion population, while states pay the remaining 10% (KFF, 2026b). Most Medicaid beneficiaries now receive services through managed care rather than solely through traditional fee-for-service arrangements. In 2024, 78% of Medicaid beneficiaries were enrolled in comprehensive managed care organizations, although states vary considerably in how they use managed care (Hinton et al., 2026).
The ACA significantly broadened Medicaid eligibility for low-income adults in states that adopted expansion. Before the ACA, adult eligibility was generally tied to categories such as pregnancy, parenthood, disability, or older age. Expansion created an eligibility pathway based primarily on income for many adults who previously did not qualify. Although most states have adopted expansion, approximately 1.2 million adults in the 10 non-expansion states remain in a coverage gap because their incomes are too high to qualify for Medicaid under their state’s rules but too low to qualify for Marketplace premium subsidies (KFF, 2026a).
Medicaid pays for a broad range of healthcare services, including hospital care, physician and clinical services, prescription drugs, managed care, and long-term services and supports. Medicaid is especially important in financing long-term care. Unlike Medicare, which generally covers only limited post-acute skilled nursing and home health services, Medicaid can provide ongoing long-term services and supports for eligible individuals who meet financial and functional requirements. These services may be provided in nursing facilities or through home- and community-based programs. Medicaid paid 61% of U.S. long-term services and supports spending in 2022, with most Medicaid long-term care spending going toward home- and community-based services rather than institutional care (Chidambaram & Burns, 2024).
II. Children’s Health Insurance Program
The Children’s Health Insurance Program (CHIP) was created through the Balanced Budget Act of 1997 and provides low-cost health coverage to children in families that earn too much money to qualify for Medicaid but may not be able to afford private coverage. States may also provide CHIP coverage to certain pregnant women (Medicaid.gov, n.d.-a). CHIP income eligibility varies by state, with eligibility levels ranging from approximately 170% to 400% of the federal poverty level (Medicaid.gov, n.d.-a). To qualify for CHIP, children generally must:
- be under 19 years of age;
- be uninsured and ineligible for Medicaid;
- be a U.S. citizen or meet applicable immigration requirements;
- live in the state where they are applying; and
- meet the state’s CHIP income and other eligibility requirements (Medicaid.gov, n.d.-a).
Like Medicaid, CHIP is administered by the states but is jointly funded by the federal government and states. The federal matching rate for state CHIP programs is generally about 15 percentage points higher than the Medicaid matching rate for that state (i.e., a state with a 50% Medicaid FMAP may have an enhanced CHIP matching rate of 65%) (Medicaid.gov, n.d.-c). Every state administers its own CHIP program within federal guidelines, so program structure and benefits vary by state. States may operate CHIP as a Medicaid expansion program, a separate CHIP program, or a combination of both (Medicaid.gov, n.d.-b).
3.3.3 Public Health Systems
In addition to the Medicare, Medicaid, and CHIP public insurance programs, there are four public health systems that provide health services to unique populations. These systems include the Indian Health Service, Military Health System, Veterans Health Administration, and correctional healthcare systems.
The Indian Health Service (IHS), Military Health System (MHS), and Veterans Health Administration (VHA) provide healthcare to different populations through federally supported healthcare systems. IHS provides services to approximately 2.8 million American Indians and Alaska Natives; the MHS serves approximately 9.5 million service members, military retirees, and family members; and the VHA provides care to more than 9.1 million enrolled Veterans (Indian Health Service [IHS], 2026; Military Health System [MHS], 2026; Veterans Health Administration [VHA], 2026). Depending on the system and the needs of the patient, healthcare may be provided in government-operated facilities or through other authorized healthcare organizations and providers.
The final area of government provision of healthcare services is the correctional healthcare system. Correctional health encompasses the health and well-being of adults and juveniles involved with the justice system, beginning with arrest and continuing through detention or incarceration and return to the community, known as reentry. Correctional health also includes the health of correctional staff and the families and communities affected by incarceration (Centers for Disease Control and Prevention [CDC], 2024).
I. Indian Health Service
The Indian Health Service (IHS) provides health services to eligible American Indians and Alaska Natives. The federal responsibility for providing healthcare to American Indians and Alaska Natives developed from the government-to-government relationship between the federal government and federally recognized tribes, based on the U.S. Constitution and subsequently established through treaties, laws, court decisions, and executive orders (IHS, 2024). IHS is an agency within the U.S. Department of Health and Human Services, but healthcare is delivered through a system that includes federally operated IHS facilities, tribal health programs, and urban Indian organizations.
II. Military Health System
The military provides healthcare services wherever military personnel are deployed. These services can vary from care provided in operational settings to complex medical or surgical care in military hospitals. The Military Health System provides healthcare through both military hospitals and clinics and civilian healthcare providers participating in the TRICARE system. TRICARE provides healthcare coverage worldwide for eligible service members, military retirees, and family members. The Defense Health Agency manages TRICARE and many other components of the Military Health System (MHS, 2026).
III. Veterans Health Administration
The Veterans Health Administration (VHA) is a national system of hospitals, clinics, and other healthcare facilities that provides healthcare services for eligible military Veterans. The VHA is administered by the U.S. Department of Veterans Affairs and provides comprehensive primary, specialty, mental health, and other healthcare services. Care is provided through VA facilities as well as authorized community healthcare providers when appropriate (VHA, 2026). The VHA serves more than 9.1 million enrolled Veterans through 1,380 healthcare facilities nationwide, including 170 VA medical centers and more than 1,190 outpatient sites of care (VHA, 2026).
IV. Correctional Healthcare
Federal, state, and local governments have an obligation to provide healthcare to incarcerated individuals. Healthcare may be provided within correctional facilities or through outside healthcare providers when services cannot be appropriately provided within the facility. Correctional healthcare includes medical, mental health, preventive, and other healthcare services provided during incarceration and may also involve coordination of care as individuals transition back into their communities (CDC, 2024).
