Medicare and Medicaid are often confused with each other, as both are government sponsored health programs. But there are major differences.
So who do they help? Do they cover all medical costs? How did they come about? CNBC explains.
What is Medicare?
Medicare is health insurance managed by the U.S. government for people age 65 or older and for some people under the age of 65 with certain disabilities.
The Medicare program also funds residency training programs for the vast majority of physicians in the United States.
Medicare is managed by the Centers for Medicare and Medicaid Services, a division of the U.S. Department of Health and Human Services.
Medicare provides assistance for some 45 million people, according to the latest statistics.
What is Medicaid?
Medicaid is health insurance available to certain people and families who have limited income and resources. It covers an estimated 58 million people.
Medicaid is overseen by the federal government, but each state establishes its own eligibility standards, and determines the scope of services. States also set the rate of payment for services, and administer their own Medicaid programs.
Like Medicare, Medicaid is overseen by the Centers for Medicare and Medicaid Services of the Department of HHS.
When did Medicaid and Medicare start?
Both were created when President Lyndon B. Johnson signed amendments to the Social Security Act on July 30, 1965.
This was part of Johnson's social reform movement known as the "Great Society,"which set goals to eliminate poverty and racial injustice.
The idea of a national health system began in the early days of the republic. John Adams and Thomas Jefferson supported legislation that required private citizens to pay into a public healthcare system. But little was done over the years.
National health plans picked up some steam in the early 1900s and were championed by President Harry Truman in the late 1940s. But during Truman's term, Congress failed to pass any kind of measure on a national health care plan.
At the 1965 signing ceremony, Johnson enrolled Truman as the first Medicare beneficiary and gave him with the first Medicare card—Truman's wife Bess got the second.How does Medicare work?
Medicare has two main parts. There's Part A and Part B. Part A is for hospital coverage, and Part B is for medical coverage, such as seeing a doctor.
Part A helps pay for in-patient care you get in a hospital, skilled nursing facility, or hospice, and for certain conditions of home health care.
Medicare Part B helps pay for medically-necessary doctors’ services and other outpatient care. It also pays for some preventive services, like flu shots.
It's important to note that neither plan pays full coverage for a patient's care. Medicare has premiums, deductibles and co-insurance, which must be paid out-of-pocket.
What are the two choices for Medicare Coverage?
There's Original Medicare and Medicare Advantage Plans, also called Part C.
Original Medicare is in two sub sections—Medicare Part A and Part B. People can choose to have either one, or both parts. Paying a deductible is required for either one, and usually a patient must pay a fee each time they get services.
Medicare prescription drug coverage (Part D) can be added by joining a Medicare Prescription Drug Plan. Costs and benefits vary by plan. (see below for more on Part D)
A Medicare Supplement Insurance policy can be purchased to help pay some of the health care costs, like co-payments and deductibles.
For Medicare Advantage Plans, or Part C, someone must have both Part A and Part B to join one of these plans. The plans provide all Part A and Part B services and provides additional services.
For Part C, subscribers usually pay a monthly premium, and co-payments but they will likely be less than the coinsurance and deductibles under Original Medicare.
What is Medicare Part D?
This is a drug prescription plan. It went into effect on January 1, 2006 with the passage of the Medicare Prescription Drug, Improvement, and Modernization Act. But it has been amended, as we'll see in a bit.
In essence, Part D moves some costs of prescription drugs to patients through what is called the "donut hole" or coverage gap.
In order to receive Part D, a person with Medicare must enroll in a stand-alone Prescription Drug Plan or the Medicare Advantage plan with prescription drug coverage.
These plans are regulated by Medicare, but are designed and run by private health insurance companies. Plans choose which drugs they wish to cover, and are free to choose not to cover some drugs at all.
During the initial coverage phase, subscribers pay a co-payment and the Part D drug plan pays its share for each covered drug until the combined amount — including deductible — reaches $2,840.
Once a subscriber and Part D drug plan have spent $2,840 for covered drugs, a person would be in the "donut hole," where patients have to pick up the full costs of the drugs. This went on from 2006 to 2011.
However, starting in 2011, patients in the donut hole get a 50% discount on covered brand-name prescription medications.
The donut hole continues until total out-of-pocket costs reach $4,550. When someone spends more than $4,550 out-of-pocket, the coverage gap ends and the drug plan pays most of the costs of covered drugs for the remainder of the year.
As the last part of the previous sentence points out, co-payments and drug costs start from scratch every year.
Who qualifies for Medicaid?
The rules for counting someone's income and resources — and so, qualifying for Medicaid — usually depend on which state a person lives in.
The program is geared toward people with low incomes, but eligibility also depends on meeting other requirements based on age, pregnancy status, disability status, other assets, and citizenship.
Beginning in 2014, Medicaid rules will be simpler and more people will be eligible. Nearly all adults under age 65 with individual incomes up to about $15,000 per year will be eligible for coverage.
In some cases, Medicare beneficiaries are eligible for Medicaid services, depending on their income. In 2001, about 6.5 million Americans were enrolled in both Medicare and Medicaid.
What services does Medicaid provide?
Although the states make the final decision on what's provided, there are some mandatory federal requirements that must be met in order to receive federal matching funds. Those include:
How are Medicare and Medicaid paid for?
Medicare is financed by payroll taxes known as the Federal Insurance Contributions Act or FICA. The tax is equal to 2.9% of income, with 1.45% withheld from the worker and a matching 1.45% paid by the employer.
The self-employed must pay the entire 2.9% tax on self employed net earnings.
Beginning in 2013, the 2.9% tax will continue to apply to the first $200,000 of income for individuals or $250,000 for couples but it will rise to 3.8% on income in excess of those amounts.
Medicaid is jointly financed by federal and state governments. No taxes are directly collected for Medicaid.
The federal government pays a matching rate of funds to what states spend for the plan, but that amount varies from state to state and is related to state per capita income. It's usually 57% of the costs.
State participation in Medicaid is optional, but every state does participate. Some states require local communities to contribute toward the financing. In many states, Medicaid beneficiaries are required to pay fees or co-payments for medical services.
How do Medicaid and Medicare pay health care providers?
Medicare contracts with regional insurance companies to pay doctors and hospitals for medical services.
Like Medicare, Medicaid does not pay benefits directly to individuals. Instead, it sends benefit payments to health care providers.How much do both programs cost?
Spending on Medicare and Medicaid is expected to grow in the coming years,primarily due to the rising costs of health care.
In 2010, Medicare accounted for 12.5% or $452 billion of the total expenditures of the federal budget. For the years 2010-2019, Medicare is projected to cost $6.4 trillion dollars or 14.8% of the federal budget.
As for Medicaid, the Congressional Budget Office reported that thefederal government spent $129.8 billion on Medicaid in 2001 and will spend $295.4 billion in FY 2011, an average annual rate of growth of 8.6 percent.