How US Healthcare Works, Part 2: Public and Private Coverage
Part 1 showed that about 89% of US health spending reaches providers through a payer. This part looks at where people's coverage actually comes from. There are two broad sources, public programs run or funded by government and private coverage bought by employers or individuals, and the line between them is blurrier than it looks, because private insurers run much of the public coverage.
1. The overview
| Coverage | Who it's for | Who pays | Who runs it | People |
|---|---|---|---|---|
| Employer plans | Workers and their families | Employer and employee | Insurer, or employer through a TPA | about 166 million under 65 |
| ACA marketplace | People buying their own plan | Member, with federal tax credits for some | Private insurers | 19.2 million (2026) |
| Medicare | 65 and over, some disabled people | Federal government, payroll taxes, member premiums | CMS, or private insurers (Medicare Advantage) | 64.2 million in Parts A and B |
| Medicaid | People with low incomes | Federal and state governments | Each state, mostly through private managed care plans | 66.0 million (June 2026) |
| CHIP | Children in families above Medicaid's income limit | Federal and state governments | Each state | 7.2 million (June 2026) |
| TRICARE | Military members, families and retirees | Department of Defense | Contracted regional insurers | |
| VA | Eligible veterans | Department of Veterans Affairs | The VA's own hospitals and clinics, plus community care |
The Census Bureau found that 53.5% of people had employment-based coverage at some point in 2025, and 7.9% had none all year.
2. Medicare
Medicare is federal health insurance for people 65 and over, people under 65 who have received Social Security disability payments for 24 months, and people with end-stage kidney disease or ALS. It is run by the Centers for Medicare & Medicaid Services (CMS). It has four parts, and the letters come up constantly.
Part A: hospital insurance. Inpatient hospital stays, skilled nursing after a hospital stay, hospice and some home health. It is funded mainly by a 2.9% payroll tax, split between worker and employer, so most people pay no premium once they've worked about ten years. In 2026 the deductible is $1,736 per benefit period, which starts at admission and ends after 60 days out of hospital, so one person can pay it more than once a year.
Part B: medical insurance. Doctor visits, outpatient care, lab tests, imaging, durable medical equipment such as wheelchairs, and some drugs given in a clinic. Members pay a monthly premium, $202.90 in 2026 (more at higher incomes), and general federal revenue pays about three quarters of the cost. The 2026 deductible is $283, after which the member usually pays 20% coinsurance with no upper limit.
Parts A and B together are called traditional or original Medicare. The government pays providers directly, through regional contractors called MACs, and the member can see any provider that accepts Medicare.
Part C: Medicare Advantage. Instead of traditional Medicare, a member can join a plan run by a private insurer. CMS pays the insurer a fixed monthly amount per member, adjusted for the member's health, and the insurer then covers everything Parts A and B cover, usually with a network, prior authorization, an annual out-of-pocket limit, and often extras such as dental or vision. Just over 35 million people, about 55% of Medicare members, are now in Medicare Advantage.
Part D: prescription drugs. Drug coverage sold by private plans, either alone (alongside traditional Medicare) or built into a Medicare Advantage plan. In 2026 the deductible is at most $615 and out-of-pocket drug costs are capped at $2,100 a year, a cap introduced by the Inflation Reduction Act.
Because traditional Medicare's 20% Part B coinsurance has no limit, many members in traditional Medicare buy a Medigap (Medicare Supplement) policy from a private insurer to cover it. Medigap plans are standardized and named by letters, so a Plan G from one insurer covers the same things as a Plan G from another.
So a person on Medicare chooses between two paths:
Members choose each year during open enrollment, which runs from 15 October to 7 December, so the window for 2027 coverage is open as this is written.
Special Needs Plans (SNPs) are Medicare Advantage plans limited to particular groups: people with both Medicare and Medicaid (D-SNPs), people with specific chronic conditions (C-SNPs), and people in nursing homes (I-SNPs). More than 8 million people are in one.
3. Medicaid
Medicaid covers people with low incomes. It's a federal-state partnership: the federal government sets minimum rules and pays a share of costs, and each state designs and runs its own program within those rules. That's why Medicaid in New York and Medicaid in Texas can look very different.
Who pays. The federal share, the FMAP, depends on the state's income per person: at least 50%, and above 75% in the poorest states. For adults covered through the ACA expansion, the federal government pays 90%.
Who is covered. States must cover certain groups, including children and pregnant women below set income levels, many people with disabilities, and many low-income older people. The ACA let states extend coverage to all adults under 65 with incomes up to 138% of the federal poverty level. 41 states, counting DC, have done so.
How it reaches providers. Most states don't pay most claims themselves. They contract with private managed care organizations (MCOs) and pay each a fixed monthly amount per member, much as CMS pays Medicare Advantage plans. About three quarters of Medicaid members are in managed care. The rest are in fee-for-service Medicaid, where the state pays providers claim by claim.
What it covers that Medicare doesn't. Long-term care. Medicare covers only short stays in skilled nursing after a hospital stay. Medicaid is the largest payer for long-term nursing home care and home- and community-based care, for people who qualify financially.
Dual eligibles. About 12 million people have both Medicare and Medicaid. Medicare pays first, and Medicaid covers Medicare's premiums and cost sharing, plus long-term care. They are a small share of Medicare's members but a large share of its spending, because many have several chronic conditions or disabilities.
What's changing. Enrollment grew during the pandemic, when states couldn't remove people, and has fallen since: 73.2 million people in Medicaid and CHIP in June 2026, with Medicaid down 4.5 million in a year. The 2025 budget law requires states to apply work requirements to expansion adults aged 19 to 64, starting by 1 January 2027 (states may seek extensions to the end of 2028): 80 hours a month of work, study, volunteering or a combination, with exemptions such as for caregivers and people with disabilities. CMS issued its rule in July 2026. Expect enrollment to keep falling, and payers and states to need much more data exchange to verify who qualifies.
CHIP covers children in families that earn too much for Medicaid but too little to afford private coverage. States run it as part of Medicaid, as a separate program, or as a mix.
4. Employer coverage
Employer plans are the largest single source of coverage. In 2026 the average family premium was $28,303, of which the worker paid $7,471 and the employer the rest. For single coverage it was $9,804, with $1,672 from the worker.
The key distinction from part 1 is how the plan is funded:
| Fully insured | Self-funded | |
|---|---|---|
| Who bears the risk | The insurer | The employer |
| What the employer pays | A fixed premium per employee | The actual claims, plus an admin fee |
| Who regulates it | The state insurance department | The federal government, under ERISA |
| Must it follow state benefit mandates? | Yes | No |
| Typical employer | Small and mid-sized | Large (71% of covered workers are self-funded) |
The regulation row matters in practice. A self-funded plan falls under ERISA, a 1974 federal law that largely overrides state insurance law. When a state passes a law requiring plans to cover a treatment, or setting rules for prior authorization, it usually doesn't apply to self-funded employer plans. Many self-funded employers buy stop-loss insurance to protect against a few very large claims.
Two related ideas:
- COBRA lets a person who leaves a job keep the employer plan for a while, usually 18 months, by paying the full premium plus 2%.
- HSA-eligible plans: a high-deductible health plan can be paired with a health savings account, a tax-free account the member uses for medical costs.
5. The ACA marketplace
People without employer coverage, Medicare or Medicaid can buy a plan on the marketplace, through HealthCare.gov or their state's own exchange. Insurers there must accept everyone regardless of health and cover ten categories of essential health benefits.
Plans come in four metal tiers, by the share of average costs the plan pays:
| Tier | Plan pays on average | Typical shape |
|---|---|---|
| Bronze | 60% | Low premium, high deductible |
| Silver | 70% | Middle; required for the extra cost-sharing help for lower incomes |
| Gold | 80% | Higher premium, lower deductible |
| Platinum | 90% | Highest premium, lowest cost sharing |
Premium tax credits lower the monthly cost for people with qualifying incomes. The extra credits added in 2021 expired at the end of 2025, and enrollment fell from 22.1 million to 19.2 million in 2026. The average deductible is $3,786.
6. Plan types: how networks work
Each source of coverage above can come in several network designs. Part 3 covers the money side (premiums, deductibles, copays, coinsurance) in detail, but the types are worth knowing now because they decide whether a claim gets paid at all.
| Type | Network | Referral to see a specialist? | Out-of-network care |
|---|---|---|---|
| HMO (health maintenance organization) | Strict | Usually yes, from your primary care doctor | Not covered, except emergencies |
| EPO (exclusive provider organization) | Strict | Usually no | Not covered, except emergencies |
| PPO (preferred provider organization) | Flexible | No | Covered, at a higher member share |
| POS (point of service) | Mix of HMO and PPO | Yes | Covered, at a higher share |
| HDHP (high-deductible health plan) | Any of the above | Depends | Depends; defined by its high deductible, often paired with an HSA |
Medicare Advantage and Medicaid managed care plans are mostly HMOs or PPOs too. Traditional Medicare has no network in this sense: any provider that accepts Medicare can bill it.
7. Where the lines blur
"Public" and "private" describe who funds the coverage, not who runs it:
- A Medicare Advantage member has public coverage, administered by a private insurer that is paid by the government.
- A Medicaid member in most states carries an insurer's card, not the state's.
- A worker at a large self-funded employer has private coverage that no insurer is at risk for.
That's why one large insurer can have commercial, Medicare Advantage and Medicaid lines of business, each with different rules, regulators and claim requirements. When people in the industry say "line of business", this is what they mean, and many of the systems later in this series (benefit setup, prior authorization, claims) are configured differently for each.
8. Limits of this picture
- People move between sources. Losing a job, a change in income or turning 65 moves a person from one row of the table to another, and coverage gaps often happen at those changes.
- The numbers lag. Enrollment changes month to month; the figures here are the latest published as of October 2026.
- State variation is large. Medicaid eligibility, benefits and managed care rules differ by state, and so do the rules for fully insured commercial plans.
Remember
| Term | Meaning |
|---|---|
| Part A / Part B | Medicare hospital / medical insurance; together, traditional Medicare |
| Part C (Medicare Advantage) | A private plan that replaces A and B; CMS pays the insurer per member |
| Part D | Medicare drug coverage, sold by private plans |
| Medigap | Private insurance that fills traditional Medicare's cost-sharing gaps |
| FMAP | The federal government's share of a state's Medicaid costs |
| MCO | A private plan a state pays to run Medicaid for its members |
| Dual eligible | Someone with both Medicare and Medicaid |
| Fully insured vs self-funded | Insurer's risk and state rules vs employer's risk and ERISA |
| Metal tiers | Bronze, silver, gold, platinum: the plan's average share of costs |
| Line of business | Commercial, Medicare Advantage or Medicaid: one insurer, different rules |
Next, in part 3: how a health plan works day to day, including premiums, deductibles, copays, coinsurance and the out-of-pocket maximum, worked through with real numbers.
Sources
- Medicare.gov, Parts of Medicare and 2026 costs
- Medicaid.gov, Medicaid and CHIP enrollment data
- KFF, Employer Health Benefits Survey
- US Census Bureau, Health Insurance Coverage in the United States
- HealthCare.gov, Health plan categories