Understanding Medicare vs. Medicaid vs. CHIP

Original Medicare

Before original, or fee-for-service, Medicare was launched, seniors struggled to cover their healthcare costs and health insurance companies were able to terminate their coverage for the elderly by placing them in a high-risk category. Noticing these challenges and that the cost of healthcare increases as people age, the Johnson administration founded the Medicare program in 1966.

Who is eligible?

Eligibility for Medicare is largely age-based with some disease-based exceptions. Once an American turns 65 years old, they are eligible for Medicare coverage. Additionally, individuals who suffer from end-stage renal disease or amyotrophic lateral sclerosis (ALS) may enroll in Medicare coverage, regardless of their age.

As of June 2024, 33.4 million individuals were enrolled in original Medicare. Enrollment in this type of Medicare coverage has diminished over the last few years. In contrast, privatized public payer coverage (Medicare Part C or Medicare Advantage) has absorbed an increasing share of the beneficiary population.

Costs and funding

Medicare depends on the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. The first fund is built on employee and employer taxes, Social Security benefits income taxes, trust fund interest, and Medicare Part A premiums. The second fund relies on allocations from Congress and Medicare Part B and Part D premiums.

Medicare spending amounted to $1 trillion in 2023 or $16,698 on average per beneficiary, according to the CATO Institute. Expenditures for the program are expected to increase to $2 trillion over the next decade.

A dangerous trend has emerged in Medicare spending, specifically in Medicare Part A and the HI Trust Fund, the part of Medicare that contributes the most to Part A funds. Spending has surpassed revenues and the gap between expenditures and income is expected to only widen over the coming decade. By 2031, experts project that the HI fund will be depleted entirely, according to a brief from the Brookings Institution (Brookings).

This situation is not unprecedented, Brookings experts pointed out. In the late 1990s, the HI fund was only four years away from emptying its coffers. Congressional actions that lowered provider payments and redistributed certain benefits, among other measures, ultimately extended the fund's life just in time.

What it covers

Medicare has three main Parts: Part A, Part B and Part D. Each Part handles a different type of coverage. Medicare Part A primarily covers hospital costs. This includes semi-private hospital rooms, nurse services and meals for inpatient care as well as skilled nursing facility services, inpatient mental health days, some at-home care and more. Meanwhile, Medicare Part B contributes toward most outpatient care, durable medical equipment and preventive care. This segment of Medicare has some overlap with Medicare Part A coverage, particularly when it comes to hospital-related benefits. Additionally, certain services are price-capped in Medicare Part B. Medicare Part D encompasses prescription drug coverage. Medicare Part C, also known as Medicare Advantage, will not be covered in this article because Medicare Advantage is considered privatized Medicare.

The role it plays in the industry

Fee-for-service Medicare has a lot of influence over the health insurance industry and U.S. healthcare at large, if only for its massive amount of spending and enrollment. The federal program represents the largest payer in the country, accounting for 21% of the total national health expenditure in 2022.

"Because Medicare is the largest, most transparent and most critical payer for most hospitals and many other healthcare entities, the approaches Medicare leaders take to quality and cost dominate and shape the healthcare insurance industry," explained researchers from Northwestern University in a PubMed article.

Throughout its history, original Medicare has employed value-based care strategies to manage its high costs, the Northwestern researchers pointed out. Examples include the Quality Payment Program, Resource-Based Relative Value Scale and the Physician Quality Reporting System. Medicare legislation heavily affects hospital revenues and, as a result, influences a key player in the healthcare industry. It holds these providers to a higher quality of care standard, raising the bar for physicians across hospital systems and practices.

Moreover, Medicare influences pricing in the industry. Unofficially, the program establishes a pricing floor for hospitals. RAND Corporation found that in 2022, payers and employers paid 254% above Medicare prices at inpatient and outpatient hospitals. Hospitals argue that Medicare prices represent gross underpayment of physicians. In response to lower payment rates, hospitals often boost the number of private payer health plan member services, which can have access to care repercussions, according to a policy brief from the George Mason University Mercatus Center. However, lowering Medicare payments could also lead to lower private payer and employer costs, as trends in these sectors often follow Medicare trends. Sometimes, self-funded employers use Medicare rates in price negotiations with hospitals as a bargaining chip.

Additionally, private payers might borrow tools from Medicare. For example, many payers' payment mechanisms are similar to those in Medicare, the Mercatus brief mentioned. The brief noted that some payers even adopt Medicare's billing codes.

In more recent history, Medicare also affected the payer-pharmaceutical manufacturer relationship. As part of the public payer's Medicare Drug Price Negotiation Program, CMS announced the second cycle of drugs that Medicare negotiated to a lower price. This program does not involve private payers or employers and the downstream effects on these stakeholders are unclear. But millions of employer-sponsored health plan members take at least one of the ten drugs that CMS negotiated down to a lower price, meaning the dramatic price decreases will have some effect on employer costs, according to a KFF analysis. Experts are split on how employers and private payers will be impacted, whether the new prices will serve as a benchmark for payer and employer negotiations or it will force them to make up the difference. Some research also indicates that non-chain pharmacies might suffer financially from this new process. Drug price negotiation is just one Medicare strategy that lowers prescription drug costs for beneficiaries, who often rely on medications.

Medicaid

Although CMS oversees Medicaid just as it oversees Medicare, Medicaid programs are more state-based. In fact, states do not have to offer Medicaid at all. They can opt into it. As of the 1980s, every state has chosen to do so, the above-mentioned KFF brief states. More recently, the program expanded significantly under the Affordable Care Act, but not all states have opted into Medicaid expansion. This flexibility creates opportunities for states to tailor their programs to fit their populations, but it also means that enrollees in some regions might face gaps that other enrollees do not experience.

Who is eligible?

As of May 2024, 41 states, including Washington, D.C., adopted the expanded eligibility factors. As a result, eligibility requirements vary by state. Generally, Medicaid enrollees have to be able to meet the program's requirements which include the following:

• State residency.
• Citizenship.
• Income.
• Household size.
• Mandatory eligibility groups.

Medicaid-eligible individuals might fall into one of the mandatory eligibility groups, such as low-income families, those receiving supplemental security income (SSI) or pregnant individuals.

However, there are other eligibility group categories for coverage that are optional. For example, in some states, individuals might be eligible for Medicaid based on the following:

• Age.
• Medical need.
• Specific disease states or disabilities.
• Eligibility for other programs like home and community-based services.

Given these broad eligibility standards, the enrolled population boasts a wide variety of socioeconomic backgrounds and medical needs.

As of June 2024, over 79.8 million individuals were enrolled in Medicaid. Children and adults in poverty are more likely to be enrolled in Medicaid and American Indian American Native, Black and Hispanic are more likely to be covered under Medicaid than white people, according to a KFF brief. Additionally, as of 2021, 43% of adults with disabilities who were not elderly or institutionalized were enrolled in Medicaid. Children with special needs, residents in nursing homes, adults with mental health conditions and HIV were also more likely to have Medicaid.

Costs and funding

Unlike in Medicare where the federal government is entirely responsible for funding, Medicaid programs split that responsibility between the national government and states through the federal medical assistance percentage (FMAP). The formula designates federal reimbursement for states based on the per capita income when compared to the national average, as a Congressional Budget Office report explained. States with lower per capita incomes receive a higher matching percentage. Additionally, certain services, populations, or provider types receive higher FMAPs.

States are required to use state funds to cover at least 40% of their program's spending, as a Peter G. Peterson Foundation (Peterson Foundation) explainer shared. These funding sources include local government taxes, healthcare provider taxes, and personal and corporate income and sales taxes. On average, state spending on Medicaid amounted to 18% of general fund costs and this has increased over time.

In 2022, Medicaid spending reached $805.7 billion and accounted for the second-highest share of national health expenditures after Medicare, according to CMS data. That level of spending represented a 9.6% growth spurt. States contributed $250 billion toward Medicaid that year and the federal government spent around $578 billion, Pew Charitable Trusts data indicated.

On the federal level, FMAP spending amounted to around three-quarters of all federal Medicaid spending in 2021, according to the Congressional Budget Office. The Office projected that, from 2024 to 2032, the federal government would cover on average 60% of Medicaid enrollees' services.

What it covers

There are certain benefits that Medicaid programs are required to offer, regardless of the state. These include, but are not limited to, the following:

• Inpatient and outpatient hospital services.
• Physician services.
• Home healthcare services.
• Medication Assisted Treatment.
• Transportation to medical care.
• Rural health clinic services.
• Laboratory and X-ray services.
• Certain services for pregnant women and families.

There are also various benefits that states can choose to cover. These optional benefits allow states to tailor their offerings to their residents and control healthcare spending. The list of optional benefits is long and includes benefits such as the following:

• Additional types of therapy (physical, occupational).
• Prescription drugs.
• Dental services.
• Eyeglasses.
• Additional diagnostic, screening, preventive and rehabilitative services.
• Hospice.
• Other licensed practitioner services.

The role it plays in the industry

Medicaid's strength lies in its customizable format and diverse benefits.

For example, the public payer offers Early Periodic Screening Diagnosis and Treatment (EPSDT) services for children. According to the above-mentioned KFF brief, these services for complex healthcare needs are often not covered by private health insurance. Medicaid is required to cover services like rural health clinic services, family planning services and transportation to medical centers and states have the option to also cover care such as podiatry services, prosthetics and case management, as the KFF brief noted.

Additionally, Medicaid is the primary payer for long-term services and supports (LTSS), according to a primer from the Blue Cross Blue Shield of Massachusetts Foundation in collaboration with Manatt Health and Massachusetts Medicaid Policy Institute. Medicare and private payers cover certain facets of LTSS, but lack overarching coverage. In contrast, Medicaid covers more services and it covers them for a longer period of time, which is why most Americans with LTSS needs use Medicaid, the primer explained.

States have the power to introduce pilot programs and test out coverage for various new benefits through Section 1115 demonstration waivers. Medicaid programs have used these 1115 Medicaid demonstration waivers to address health equity, improve access to care for Medicaid beneficiaries, extend access to behavioral healthcare benefits for incarcerated beneficiaries and more. As a result, Medicaid programs can pioneer strategies and tools to address some of the healthcare industry's toughest problems.

Children's Health Insurance Program

Established in 1997, CHIP aims to provide uninsured children with more options for healthcare coverage. According to a report from Georgetown University McCourt School of Public Policy Center for Children and Families, the program builds on Medicaid's model financially, structurally and in terms of target population. CHIP not only provides health insurance for underserved children but also spearheads efforts to enable more children to enroll in Medicaid.

Who is eligible?

CHIP enrollees must meet certain eligibility factors, according to a Medicaid.gov explainer. These factors might vary by state because, like Medicaid, CHIP is state-run with partial funding from the federal government. For example, one key state decision in CHIP is: What population should the program cover? States can decide whether to cover pregnant women and children or just children.

For low-income children, CHIP requires that enrollees be younger than 19, citizens or immigrants who meet certain criteria, residents of the state in whose CHIP program they are enrolling, uninsured, and that they fall within the required income bracket. Income-related eligibility factors are determined using Modified Adjusted Gross Income (MAGI), just like Medicaid. States can add other requirements on top of these fundamental eligibility criteria, the explainer noted.

States can also offer coverage for prenatal through postpartum care, as long as the states meet certain criteria. If the state offers this type of coverage, newborns are automatically covered by Medicaid or CHIP until they turn one year old, the Medicaid.gov explainer added.

Including both pregnant women and children covered under CHIP as well as children covered under Medicaid, more than 37.6 million people received coverage through this program as of July 2024, according to CMS data. Medicaid and CHIP enrollment grew during the coronavirus pandemic, reaching a high of over 94.5 million in April 2023. But enrollment has steadily declined since then. In 2024, CMS took steps to ensure continuous coverage for children in Medicaid and CHIP with the aim of improving health equity and access to care for this population. The results of this effort remain to be seen.

Costs and funding

Three-quarters of all CHIP funding comes from the federal government, with the remaining quarter funded by the state, according to a post from the Peter G. Peterson Foundation. Though CHIP and Medicaid were created similarly, not all public programs are created equal: CHIP's federal matching rate is 15 percentage points higher than Medicaid's. After two years, unused federal funds go to states that have depleted their funds.

The federal government consistently enacts laws to extend CHIP funding. Since the program was founded in 1997, Congress has voted to issue funds to CHIP at least five times, according to the CDC website. As of this publication date, it has been appropriated sufficient funds to last through fiscal year 2027.

Overall, the U.S. spent over $23.3 billion on CHIP in 2023, according to MACPAC data. California had the highest amount of spending at more than $4.8 billion, with the federal government contributing over $3.3 billion. Most of the money went toward the Medicaid expansion CHIP population ($3.9 billion) while almost $900 million went toward separate CHIP programs and covering pregnant women. The state spent $81.6 million on administrative costs for the program. California's spending was followed by New York ($1.6 billion), Massachusetts ($1.08 billion) and Texas ($1.00 billion).

What it covers

Since CHIP is a state-run program, like Medicaid, covered benefits can vary from state to state. However, certain benefits are mandatory. For example, according to a HealthCare.gov explainer, states must cover CHIP enrollees' preventive services such as immunizations and check-ups. They also must cover dental care, vision care, inpatient and outpatient hospital care, emergency services, prescriptions, lab work and more.

The role it plays in the industry

CHIP played a particularly important role during the coronavirus pandemic in maintaining access to coverage and care for low-income children. During that time, CHIP and Medicaid enrollment grew as many families lost sources of income or experienced significant instability.

Since the advent of the vaccines and with the coronavirus pandemic more or less under control, CMS continued to uphold CHIP as a key healthcare resource for uninsured and low-income children, along with Medicaid. As of Jan. 1, 2024, 12 months of continuous CHIP and Medicaid coverage for children younger than 19 years old -- once an optional benefit for states -- became mandatory. States now have the option of extending continuous coverage beyond 12 months as part of a Section 1115 demonstration waiver. Studies indicate that this continuous coverage provision could result in better coverage rates among state residents and total spending for families and employers would drop by $1 billion per year. Providing Americans with more stable access to care early on in their lives could result in better health and fewer healthcare gaps.

What about Affordable Care Act (ACA) marketplace plans?

ACA plans are sometimes confused with public payer programs. However, while these plans exist on state-based and federal-based health exchanges, these health plans are considered private.

Health insurance exchanges or marketplaces are spaces -- typically online platforms -- where individuals can purchase private health plans, as healthinsurance.org's glossary explains. The ACA set up state- and federally-run health insurance exchanges where consumers can find regulated plans offered by private payers. Plans on these marketplaces must comply with certain standards regarding benefits, but these plans are still considered private because they are not funded by the government.

That being said, ACA exchanges can offer access to public payer coverage, as Verywell Health shares. They can notify enrollees that they are eligible for Medicaid and, in some states, those who are eligible can enroll through these exchanges. But not all plans on the ACA exchange are considered public plans and the ACA exchange is distinct from Medicare, Medicaid, or CHIP.

Given the enrollment numbers, benefits and opportunities that public payer programs present, understanding the impact of Medicare, Medicaid and CHIP is crucial for comprehending the state and trajectory of the U.S. healthcare industry as a whole.

Kelsey Waddill is a managing editor of Healthcare Payers and multimedia manager at Xtelligent Healthcare. She has covered health insurance news since 2019.