Medicare and Medicaid are the largest public health coverage programs in the U.S.
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Earlier this month, the House of Representatives approved a Republican-led bill that would fund the government at the current levels for an additional seven weeks. The bill requires 60 votes to move forward in the Senate, which means that at least seven Democrats must join all 53 Republicans to vote yes. In exchange for their votes, Democrats are insisting that Republicans extend health care subsidies for the Affordable Care Act (a.k.a. Obamacare) and reverse earlier cuts to Medicaid.
As debates rage about the specifics, it’s become clear that many Americans don’t understand the differences between Medicare and Medicaid. It’s understandable since they do have some similarities: Medicare and Medicaid are the two largest public health coverage programs in the U.S. However, there are several key differences, including the fact that eligibility for Medicare is based on age or disability, while Medicaid is largely based on income.
Here’s what you need to know.
About Medicare
Medicare is a federal health insurance program that mainly covers people based on age and specific health conditions. It is available to those aged 65 or older, regardless of income, as well as to some younger individuals with disabilities. Because it is a federal program, Medicare operates the same way no matter where you live in the country.
You’ll sign up for Medicare through Social Security. If you’re under age 65, you may be eligible for Medicare if you have permanent kidney failure or if you receive disability benefits. You’ll still need to do some paperwork—just because you receive Supplemental Security Income (SSI) doesn’t mean that you will qualify automatically.
If you apply for retirement benefits from Social Security or the Railroad Retirement Board at least four months before you turn 65, you’ll automatically qualify for Part A (Hospital Insurance) and Part B (Medical Insurance) of Medicare coverage. Because you pay for Part B—more on that in a bit—you can choose whether to keep it or not.
If you’re planning to delay your retirement benefits, you’ll need to contact Social Security when you’re ready to sign up for Medicare. Depending on your work situation and if you have health coverage through your employer, you may want to wait to sign up for Medicare.
Funding For Medicare
Medicare is primarily funded by payroll taxes. During your working life, wages and self-employment income are subject to Social Security and Medicare taxes. For wage earners, Social Security and Medicare taxes are called FICA (Federal Insurance Contributions Act) taxes and are taken out of your paycheck. Taxes on self-employment income are sometimes called SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.
If you’re employed, you pay Social Security tax at a rate of 6.2% as the employee, and your employer pays the same tax rate on your behalf. If you’re self-employed, you are responsible for both parts.
Social Security taxes are subject to a wage cap. That means you pay Social Security taxes on your earnings until you hit the magic number. After that, your wages are no longer subject to Social Security taxes. For 2025, that magic number is $176,100 (commonly called the taxable maximum or the wage base). That means that whether you make $1,000 or $100,000, you will pay Social Security taxes on your income. But if you earn $176,101? You’ll pay Social Security taxes on the first $176,100 but not on the extra dollar. And if you earn $1,176,100? Same result: you’ll pay Social Security taxes on $176,100, but not on the extra million.
In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax at a rate of 1.45% as the employee, and your employer kicks in tax at the same rate (1.45%). As before, if you’re self-employed, you’ll pay both portions. And, thanks to a change in the law that took effect in 2014, high-income taxpayers are also subject to a Medicare surtax (0.9%) added to wages that exceed $200,000, or $250,000 for married taxpayers.
Your employer collects those Social Security and Medicare payments and remits them to the government on your behalf (or you pay them directly if you’re self-employed). These taxes are sometimes referred to as “trust fund” taxes and are credited toward your retirement benefits.
Medicare Premiums
Medicare isn’t a one-size-fits-all all program. Remember Part A and Part B that I mentioned earlier? Those are just two of four parts. Here’s a quick look at each:
- Medicare Part A helps cover inpatient care in hospitals, skilled nursing facilities, hospice, and home health care. For most taxpayers, Medicare Part A is considered “premium-free” since you or your spouse paid into the system while working. That’s the 1.45% discussed earlier, which you see reported on your Form W-2 as withheld from your pay—it does pay off eventually! If you aren’t one of those “premium-free” folks, you can opt to buy Part A coverage. If you pay for coverage, the premiums are considered medical expenses for the medical deduction and are deductible on your federal income tax return. However, if you receive Part A due to your age or disability without paying out of pocket, you may not claim the premiums as medical expenses.
- Medicare Part B is medical insurance that covers services such as lab tests, surgeries, and doctor visits, as well as supplies like wheelchairs and walkers, which are considered medically necessary to treat a disease or condition. It’s optional coverage, and you have to pay for it if you want it. It’s normally deducted from your Social Security check—if you don’t receive benefits, you’ll be billed for coverage every 3 months. If you pay for Part B, the premiums would be considered medical expenses for purposes of the medical deduction. It doesn’t matter whether the premiums are paid out of your checks or if you pay every three months.
- Medicare Part C is typically referred to as a Medicare Advantage Plan. It’s not a separate benefit but is the part of the policy that allows private health insurance companies to provide Medicare benefits. If you want, you can choose to get your Medicare coverage through a Medicare Advantage plan—most plans cover Parts A and B, and often Part D, which is for prescription drugs. The plan might also offer extra benefits such as vision and dental. In a Medicare Advantage plan, you generally pay the Medicare Part B premium, and you may also pay an additional premium. Medicare pays the insurer directly for some of the costs, and you are responsible for paying the additional costs (the costs and benefits under the plans are heavily regulated). If you pay for Part C, your costs would be considered medical expenses for purposes of the medical deduction. Costs paid by Medicare for your plan are not deductible.
- Medicare Part D is prescription drug coverage. The costs and benefits of the plan vary according to several factors, including the amount of your modified adjusted gross income (MAGI). If you pay for Part D, your costs would be considered medical expenses for purposes of the medical deduction. Costs paid by your employer or other third party for your plan are not deductible.
About Medicaid
Medicaid is a joint federal and state program that offers health coverage to low-income families. Eligibility varies by state but typically includes children, pregnant women, seniors (especially those needing long-term care), and individuals with disabilities. Unlike Medicare, Medicaid is run by states relying on federal guidelines—that means there can be significant differences in eligibility rules and benefits depending on where you live.
You can qualify for Medicaid based on income, household size, disability, family status, and other factors in all states (though again, that can vary from state to state). But in states that have expanded Medicaid coverage, you can qualify based on your income alone.
In states that have expanded Medicaid coverage, you can qualify based on your income alone.
Kelly Phillips Erb
Federal law requires states to cover certain mandatory services under Medicaid—those include hospital care, physician visits, laboratory and X-ray services, and nursing facility care. States can offer additional benefits like prescription drugs, dental and vision care, physical therapy, case management, and long-term services including nursing homes or home health aides.
Medicaid is considered the single largest source of health coverage in the U.S., with nearly one in five individuals relying on the program for care. That number jumps dramatically when you factor in the cost of long-term care for seniors.
Funding For Medicaid
Medicaid currently covers more than 78 million people with low income (70,506,786 people were enrolled in Medicaid only while 7,241,375 people were enrolled in Children’s Health Insurance Programs, or CHIP).
State and federal governments pay for that care. Overall, Medicaid spending reached approximately $890 billion during the 2023 federal fiscal year. The federal government covered most of those costs (69%)—the exact funding amounts vary from state to state.
Federal funding for Medicaid is wrapped up in general revenues. Unlike Medicare, the program is not paid for with payroll taxes.
States also primarily pay their share of the Medicaid program through general revenue, which includes taxes and other funds collected by the state. (Depending on the state, counties and local governments may also contribute.)
Since there’s a federal fund matching component, states report the amount they have spent on covered Medicaid services and administrative costs to the Centers for Medicare and Medicaid Services (CMS).
Changes To Medicaid Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduced several changes to Medicaid—that’s part of what Congress is fighting about now. Key to those fights? Funding. Under OBBBA, states now face limits on provider taxes and supplemental payments, which they currently use to raise revenue for Medicaid. Overall, federal dollars previously provided to states will be dramatically reduced.
OBBBA also imposes additional work requirements for Medicaid recipients. For example, starting no later than December 31, 2026, able-bodied adults under age 65 will be required to report at least 80 hours per month of work, volunteering, education, or training—some groups, such as people with disabilities and caretakers of young children are exempt. States are tasked with verifying employment.
The Congressional Budget Office (CBO) estimated that the OBBBA will reduce federal spending on Medicaid and the Children’s Health Insurance Program (CHIP) benefits by $1.02 trillion. This is primarily due to eliminating at least 10.5 million people from the programs by 2034. Young adults (ages 18–24) and low-income individuals near the eligibility thresholds are expected to be disproportionately affected, particularly in Medicaid expansion states. College students in particular could be affected.
Medicaid and Immigrant Eligibility
One of the sticking points in the Medicaid funding battle in Congress is the treatment of immigrants.
Undocumented immigrants have never been eligible for full Medicaid benefits—they may not enroll in regular Medicaid. Undocumented immigrants can qualify for Emergency Medicaid, which covers only emergency medical conditions. Unlike regular Medicaid, Emergency Medicaid does not cover routine doctor visits, preventive care, or long-term treatment. (Some states, like New York, may use their own state funds to cover some undocumented residents, like children or pregnant women, but this is not federally funded.)
Lawfully present immigrants—including those here on a green card—may qualify for Medicaid but typically face some restrictions. For example, unless otherwise exempt, even immigrants with legal status must wait five years after obtaining lawful permanent residency before qualifying for Medicaid. (Under a 2009 law, states can choose to cover lawfully present immigrant children and pregnant women during this period using federal funds.)
Some immigrants considered to be lawfully present, including Deferred Action for Childhood Arrivals (DACA) program beneficiaries, refugees, and those seeking asylum through the courts, may qualify for certain Medicaid benefits. However, Republicans in Congress are currently trying to block Medicaid eligibility for those immigrants.
Medicare and Immigrant Eligibility
Undocumented immigrants also do not qualify for Medicare. Typically, to enroll in Medicare Part A or Part B, you must be a U.S. citizen or a qualified lawfully present immigrant age 65 and older who has paid into the system for a period of time (10 years for most people). You might also be able to qualify in some circumstances based on your spouse’s work history.
Some exceptions apply, including legal permanent residents (green card holders), certain Cuban and Haitian immigrants, and individuals residing under the Compact of Free Association (COFA). Immigrants who do not meet the criteria are not eligible to enroll in Medicare under any circumstances, regardless of their work history or marital status.
Medicaid And Medicare During The Shutdown
While Congress is fighting over the specifics of Medicaid, Medicare and Medicaid programs and services will continue during the shutdown (the same is true for Social Security). Staffing shortages may mean that there is a slowdown, however.
A message on the website for the Centers for Medicare and Medicaid Services (part of the Department of Health and Human Services), noted, “CMS will have sufficient funding for Medicaid to fund the first quarter of FY 2026, based on the advance appropriation provided for in the Full-Year Continuing Appropriations and Extensions Act, 2025. CMS will maintain the staff necessary to make payments to eligible states for the Children’s Health Insurance Program (CHIP). CMS will continue Federal Marketplace activities, such as eligibility verification, using Federal Marketplace user fee carryover.”
What’s Next
After the initial failure to pick up the needed votes to move a funding bill forward, Sen. Majority Leader John Thune (R-S.D.) said that the Senate would not vote again until Wednesday morning. Those votes also failed to pass.
The Senate adjourned without voting on Thursday in observance of the Yom Kippur holiday. They’re expected to take up the matter again on Friday afternoon.
Check back with the Forbes tax team for updates as they become available.