Skip to Main Content


Medicare is a very important health coverage term. Bankrate explains it.

What is Medicare?

Medicare is a federal health insurance program for older Americans. The program is funded through taxes on workers’ personal income. Understanding what Medicare provides, and what contributions you make, helps you to plan your personal finances and health coverage.

Deeper definition

Medicare is administered by the Centers for Medicare & Medicaid Services. Most U.S. citizens age 65 and older are eligible for coverage under the program. Some younger people with disabilities or certain medical conditions also are eligible.

Payroll taxes help pay for Medicare. Every employee who earns wages and tips is responsible for paying 1.45 percent of the tax, and the employer matches that amount for a total tax amount of 2.9 percent. High earners must pay an additional 0.9 percent when their wages exceed defined income thresholds. Anyone drawing an income from investments pays another 3.8 percent tax on their net investment income, or the amount their modified adjusted gross income exceeds their threshold amount, whichever is less.

When you first become eligible for Medicare, there is a seven-month enrollment period for signing up for Part A and Part B. This period normally includes the month you turn 65 years old, and the three months before and after that month. If you want only the free Part A coverage, it’s possible to sign up at any point after the enrollment period starts. But if you want Part B and do not sign up during the enrollment period, a late enrollment fee applies. Additionally, there is a general enrollment period from Jan. 1 through March 31 each year.

Example of Medicare

Medicare comprises four parts, covering specific services. Most people have Part A and Part B, covering hospital and medical insurance.

  • Hospital insurance (Part A): Hospital insurance covers the costs associated with a hospital stay. This includes care in a nursing home or hospice, and some home health care. The coverage is free if you have paid Social Security taxes for at least 10 years. If you have not paid sufficient taxes, you have the option to take out coverage for a monthly premium.
  • Medical insurance (Part B): Medical insurance covers the cost of doctors’ services and medical supplies. It also covers outpatient care and preventive services. This coverage requires an additional monthly premium.
  • Medicare Advantage (Part C): Medicare Advantage plans are a separate coverage available to some people through a private company. These plans must provide the same coverage as Medicare parts A and B, and may offer different costs and coverage options that are more suitable for your personal situation.
  • Prescription drug coverage (Part D): Medicare offers prescription drug coverage through Part D. To get this additional coverage, it’s necessary to join a plan through a Medicare-approved company. Such plans incur additional premiums, which vary based on the types of drugs covered.

More From Bankrate