Medicare and Medicaid shape American healthcare by setting the coverage floor for roughly 135 million people and paying about 39 percent of the country’s health bill, which gives their rules gravitational pull over hospitals, physicians, private insurers, and the direction of care delivery itself. In 2024, Medicare spending reached $1,118 billion and Medicaid spending hit $931.7 billion, together outspending private health insurance.1Centers for Medicare & Medicaid Services. NHE Fact Sheet When two programs of that size make a decision about what to pay for, who qualifies, or what counts as acceptable quality, the rest of the system follows.
The Coverage Baseline They Created
Before 1965, roughly half of Americans over 65 had no health insurance and illness in old age routinely wiped out a family’s savings. The Medicare and Medicaid amendments to the Social Security Act, signed by President Lyndon Johnson that year, made healthcare something the government guaranteed for seniors, people with disabilities, and those who couldn’t afford it.2National Archives. Medicare and Medicaid Act (1965)
Medicare covers people 65 and older, people who have received disability benefits for 24 months, and people with end-stage renal disease or ALS.3Medicare.gov. Which Path Is Right for Me? Medicaid, a joint federal-state program, covers low-income children, pregnant women, seniors, and people with disabilities, and its enrollment reached about 68.8 million as of late 2025.4Medicaid.gov. November 2025 Medicaid and CHIP Enrollment Data Highlights States must cover certain mandatory Medicaid benefits and may add optional services, which is why coverage varies from one state to the next.5MACPAC. Medicaid 101
The Long-Term Care Gap
The most consequential misunderstanding about this baseline involves long-term care. Medicare does not cover it. It will help pay for up to 100 days of skilled nursing or rehabilitation after a hospitalization, but it will not pay for a permanent nursing home stay. Medicaid does cover long-term nursing home care, but only for people with very low income and minimal savings, and the thresholds vary by state. Families often discover this only when a parent needs full-time care and assumes Medicare will step in.
Home care follows the same split. Medicaid pays for home health aides who help with bathing and dressing, but only for people who meet the income requirements. Medicare covers skilled nursing visits and physical therapy for people recovering from illness, not the ongoing personal care someone with advancing dementia or severe disability needs day after day.
Dual Eligibles
About 12 million Americans qualify for both programs at once. Medicare typically covers their hospital and doctor visits while Medicaid picks up premiums, cost-sharing, and services Medicare doesn’t cover, including long-term care. Coordinating between two separate programs has historically been messy for beneficiaries juggling different rules, cards, and provider networks. Dual-Eligible Special Needs Plans now attempt to integrate both sets of benefits into a single plan, though the degree of integration varies.
How Their Rules Become the Industry’s Rules
Hospitals and doctors that accept Medicare patients have to meet conditions of participation covering staffing, infection control, and other minimum health and safety standards required by the Social Security Act and administered by CMS.6Social Security Administration. Compilation of the Social Security Laws – Title XVIII – Health Insurance for the Aged and Disabled Since most hospitals can’t afford to turn away Medicare patients, those standards become the floor for the whole industry.
Diagnosis-Related Groups
In 1983, Congress changed how Medicare pays hospitals by introducing Diagnosis-Related Groups. Instead of reimbursing hospitals for every individual service in a stay, Medicare began paying a fixed amount based on the patient’s diagnosis.7Centers for Medicare & Medicaid Services. Design and Development of the Diagnosis Related Group (DRG) Each DRG carries a weight reflecting the average resources needed for that condition, and the hospital’s payment is calculated by multiplying its per-case rate by that weight.8Centers for Medicare & Medicaid Services. MS-DRG Classifications and Software Hospitals had to start thinking about efficiency in a way fee-for-service never demanded, and private insurers soon adopted similar approaches.
Value-Based Purchasing
The Affordable Care Act pushed the industry further with the Hospital Value-Based Purchasing Program under Section 3001. CMS withholds 2 percent of participating hospitals’ base Medicare payments and redistributes it as incentive payments tied to clinical outcomes, patient experience, and safety.9Centers for Medicare & Medicaid Services. Hospital Value-Based Purchasing The program covers inpatient stays at more than 3,500 hospitals.10Centers for Medicare & Medicaid Services. CMS Issues Final Rule for First Year of Hospital Value-Based Purchasing Program When that many hospitals are being measured on the same metrics, those metrics become the industry standard regardless of what insurance a given patient carries.
How They Anchor Market Pricing
Medicare’s payment rates function as a gravitational center for the whole market. When Medicare sets what it will pay for a hip replacement or a primary care visit, that rate influences what Medicaid pays (usually less) and what private insurers negotiate (usually more). Medicare generally pays hospitals less than private insurers do, but the rates are public and updated annually, which is why other negotiations orbit them.
The programs also keep whole categories of providers financially viable. Rural hospitals, safety-net clinics, and nursing homes often depend on Medicare and Medicaid for the majority of their revenue, so when Congress adjusts reimbursement or coverage, it can determine whether a rural hospital stays open. Medicaid expansion has reduced uncompensated care in the states that adopted it, improving hospital finances alongside patient access.
How Medicaid Expansion Redrew the Coverage Map
The Affordable Care Act let states extend Medicaid eligibility to adults earning up to 138 percent of the federal poverty level, with the federal government covering 90 percent of the cost for the newly eligible population, well above the standard federal matching rate.11MACPAC. Matching Rates As of early 2026, 40 states and Washington, D.C. have expanded, while 10 states, concentrated in the South and including Texas, Florida, Mississippi, Alabama, and South Carolina, have not.
Expansion has been one of the most significant coverage events since the programs launched. Millions of low-income adults who had fallen into a coverage gap gained insurance, hospitals in expansion states saw sharp drops in uncompensated care, and research has linked expansion to earlier diagnoses and better financial stability for patients and providers alike. In non-expansion states, adults earning too much for traditional Medicaid but too little for marketplace subsidies often remain uninsured.
Estate Recovery
Federal law also requires every state to seek recovery from the estates of deceased Medicaid recipients who were 55 or older when they received benefits, at least for nursing facility services, home and community-based services, and related hospital and prescription drug services.12Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets In practice, a state can place a claim against a deceased person’s home to recoup what Medicaid spent on their care. Many families don’t learn about it until a lien appears after death. States have some flexibility in how aggressively they recover and what exemptions they allow, but the obligation exists everywhere.
How Medicare Advantage Changed Senior Care
More than half of Medicare beneficiaries now get their coverage through Medicare Advantage, the private-plan alternative to traditional fee-for-service Medicare, with enrollment surpassing 35 million in early 2026. These plans are run by private insurers and funded by Medicare. They often add benefits traditional Medicare lacks, like dental, vision, and hearing, and they use provider networks and prior authorization rules that look more like commercial insurance.
That structure means private insurers are competing for a government-funded patient population at massive scale. The competition drives consolidation among insurers and health systems, reshapes networks, and creates ongoing tension over how aggressively plans can deny or delay coverage to manage costs. CMS Star Ratings for these plans also influence billions in bonus payments, which gives insurers strong financial incentive to hit whatever benchmarks CMS chooses.
How They Drive Delivery Innovation
The Affordable Care Act created the Center for Medicare and Medicaid Innovation within CMS with an explicit mandate to test new payment and service delivery models that could reduce spending while maintaining or improving quality.13Office of the Law Revision Counsel. 42 USC 1315a – Center for Medicare and Medicaid Innovation That made Medicare the country’s largest laboratory for healthcare reform.
Accountable Care Organizations
The most prominent model to come out of that lab is the Accountable Care Organization: groups of doctors, hospitals, and other providers who voluntarily coordinate care for their Medicare patients and share in the savings if they keep spending below a benchmark while meeting quality targets. In 2024, 476 ACOs participated in the Medicare Shared Savings Program, 75 percent of them earned shared savings, and total performance payments reached $4.1 billion.14Centers for Medicare & Medicaid Services. Medicare Shared Savings Program Performance Data The model has pushed providers toward coordinated, team-based care instead of the fragmented approach fee-for-service rewards.
Telehealth Rules That Move the Whole Market
Medicare’s telehealth rules now shape how virtual care works across the healthcare system. Through December 31, 2027, Medicare beneficiaries can receive telehealth services from anywhere in the country, including their homes, and geographic restrictions for behavioral health telehealth were permanently removed.15Centers for Medicare & Medicaid Services. Telehealth FAQ
A cliff is coming. Starting January 1, 2028, most non-behavioral-health telehealth services will revert to stricter rules requiring patients to be in a medical facility in a rural area, and physical therapists, occupational therapists, speech-language pathologists, and audiologists will lose the ability to furnish Medicare telehealth services entirely.15Centers for Medicare & Medicaid Services. Telehealth FAQ Whether Congress extends the current flexibilities is one of the bigger open questions in health policy, and because private insurers often model their telehealth coverage on Medicare’s rules, the answer will ripple through the whole market.