Medicare and Medicaid are health insurance programs sponsored by the federal government that cover medical expenses for elderly, disabled, and low-in-come Americans. Both programs took effect in 1965 and are administered by the Health Care Finance Administration (HCFA) of the Department of Health and Human Services. The U.S. government provides health care coverage to a variety of groups—including federal employees, military personnel, veterans, and Native Americans—but the Medicare and Medicaid programs account for the largest proportion of health care expenditures.

The cost of administering the programs has increased dramatically over the years with the rapid escalation in health care costs. In fact, the portion of overall government spending that went toward Medicare and Medicaid increased from 5 percent in 1970 to 12 percent in 1990 and was projected to reach 23 percent by 2000. As a result, many experts predict that Americans will not be able to depend upon the programs for their long-term health care needs in the future. For self-employed persons and small business owners, who are less likely to be covered by an employer's health insurance program, these statistics make obtaining private health insurance policies that much more important.


Medicare is the nation's largest health insurance program, providing coverage for 39 million Americans who are age 65 or older or who have a disability. Medicare coverage consists of two parts. Part A, which is financed largely through Social Security taxes, provides hospitalization insurance. Intended to assist people who need long-term medical treatment, Medicare Part A covers inpatient hospital services, skilled nursing facilities, home health services, and hospice care. Part B, which is financed through premiums paid by those who choose to enroll in the program, provides supplemental insurance to help cover the cost of physician services, outpatient hospital services, and medical equipment and supplies.

Qualified people can enroll in the Medicare program by completing an application at their local Social Security Administration office. It is important to note that, once an employee becomes eligible for Medicare, a small business owner is no longer required to offer him or her health insurance continuation coverage under the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Since Medicare does not cover all of an elderly or disabled person's health care costs, many insurance companies offer Medicare Supplemental Insurance (also known as Medigap coverage) to fill in the gaps. Medigap policies commonly take care of co-payments and over-limit expenses, for example, in exchange for a small premium. Due to past problems with disreputable Medigap providers, experts recommend that individuals shop carefully for this type of coverage.


As the nation's second-largest health insurance program, Medicaid provides medical assistance to 36 million low-income Americans. It was established through Title XIX of the Social Security Act of 1965 to pay the health care costs for members of society who otherwise could not afford treatment. The program is jointly funded by the federal government and the state governments, but is administered separately by each state within broad federal guidelines. Medicaid recipients include adults, children, and families, as well as elderly, blind, and disabled persons, who have low or no income and receive other forms of public assistance. Medicaid also covers the "medically needy," or those whose income is significantly reduced by large medical expenses.

Medicaid covers the full cost of a wide range of medical services, including inpatient and outpatient hospital care, doctor visits, lab tests, X-rays, nursing home and home health care, family planning services, and preventative medicine. A large proportion of the Medicaid population is elderly or disabled, and thus also qualifies for Medicare. In these cases, Medicaid usually pays for Medicare premiums, deductibles, and co-payments, in addition to some non-covered services.


Although many Americans plan to rely on Medicare to meet their health insurance needs later in life, the program as it stood in the mid-1990s actually covered less than half of an average elderly person's medical costs, according to Lenore Janecek in her book Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed. It does not provide funds for dental, vision, or hearing care, for example, and 97 percent of the time it does not cover nursing home care. Most significantly for many seniors, Medicare does not cover outpatient prescription drugs. A 2000 article in U.S. News and World Report noted that health care costs account for 21 percent of senior citizens' income, with prescription drugs the second-largest expense after insurance premiums.

Even if the Medicare program remained basically the same beyond the year 2000, it would not provide adequate coverage for many Americans. But the program seemed likely to face significant changes to address the rising cost of health care and the increased need for coverage as the baby-boom generation neared retirement age. Both Medicare and Medicaid were featured prominently in discussions about the federal budget deficit, welfare reform, and health care reform. Various proposals to reduce the programs' budgets, introduce spending caps, and create new plans to cover children and prescription drugs may be adopted in the near future. As a result, Janecek noted, entrepreneurs may face even greater challenges in ensuring their financial and physical well-being upon retirement.


Anastasio, Susan. Small Business Insurance and Risk Management Guide. U.S. Small Business Administration, n.d.

Cady, Donald F. "Medicare and Medicaid Defined." National Underwriter Life and Health. May 3, 1999.

Health Insurance. Council of Better Business Bureaus, 1995.

Janecek, Lenore. Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed. Allworth Press, 1993.

"Making Sense of Medicare." Business Week. November 1,1999.

"Medicare Requires Serious Help." Business Insurance. September 11, 2000.

Retsinas, Joan. "Medicare, and the Statistical Good (and Maybe Not So Good) News." Providence Business News. December 6,1999.

Shapiro, Joseph P. "Medicare's Drug Woes." U.S. News and World Report. February 21, 2000.

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