Medicare is a federal public health insurance program for the elderly and qualified disabled.  It is a financing program not a health delivery system. It relies on private health providers to deliver health care to program beneficiaries. Private providers are paid by Medicare, either directly via Traditional Fee-for-Service Medicare (FFS Medicare) or through an intermediary system of private insurers: Medicare Advantage (MA) or stand-alone prescription drug plans (PDPs).
Brief overview and history
Medicare was established in 1965 under Title XVIII of the Social Security Act to provide health insurance for elderly Americans. Prior to Medicare, nearly half the elderly lacked health insurance. Today, health insurance for the elderly is nearly universal. Medicare was expanded in 1972 to provide health insurance to non-elderly disabled individuals. In total, Medicare provides coverage to 45 million Americans: 38 million age 65 and older and another 7 million non-elderly with permanent disabilities. Medicare payments account for 13 percent of the federal budget and 19 percent of total national health expenditures (2009).  The most recent prominent change to Medicare was the addition of an outpatient prescription drug benefit in 2006).  Medicare is organized in four parts: Part A is hospital insurance, funded by a 2.9% payroll tax (shared equally between employer and employee). Part B is outpatient coverage, funded by premiums and general revenue. Part C is the Medicare Advantage program, under which private insurers bundle Parts A, B, and in some cases D, and receive a fixed payment from Medicare to provide coverage for each enrollee. Part D is the new (as of 2006) prescription drug benefit, funded by general revenue and beneficiary premiums. 
Parts A and B can be obtained from FFS Medicare. Providers bill Medicare directly for services. Part C, Medicare Advantage, and Part D, the prescription drug benefit, are only available through private insurers. Providers bill insurers. In turn, insurers received fixed, per enrollee payments from Medicare.
Health maintenance organizations (HMOs) offered by private insurers have existed under Medicare since the 1970s. Medicare now contracts with a variety of types of private plans: preferred provider organizations (PPOs), provider-sponsored organizations (PSOs), private fee-for-service (PFFS) plans. Some plans operate on a regional (multi-state) basis (regional PPOs), while other plans operate locally, contracting with Medicare on a county-by-county basis.
The number beneficiaries enrolled in MA plans has grown recently to 10.2 million in 2008. The fastest growing plan type is PFFS which now has 2.3 million enrollees. MA enrolled beneficiaries receive all the standard FFS Medicare benefits plus additional benefits only available through private plans (e.g., reduced Part B cost-sharing). MA plans may also provide a Part D drug benefit.
MA benefits are highly subsidized by Medicare. In recent years Medicare capitated payments to private plans have exceeded per beneficiary FFS cost. That is, it costs Medicare more for a beneficiary to enroll in an MA plan then it would for Medicare to cover that beneficiary directly. [ Not all MA plan types are available everywhere. Historically, MA plans have been concentrated in urban regions. In the past some rural counties had no MA offerings. Today (2009), every Medicare beneficiary has access to one or several MA plans. Yet, there are still more offerings in or near urban regions than in rural areas.) 
Prescription drug plans
In addition to MA plans that offer Part D drug benefits, an other private plan type under Medicare is the stand-alone prescription drug plan (PDP). PDPs operate in multi-state regions. Most operate nationally. PDPs may offer a basic benefit that includes a donut hole or coverage gap (wherein a beneficiary pays 100% of drug costs between the initial coverage and the catastrophic coverage range). Other PDPs offer enhanced coverage which may include generic or brand coverage in the donut hole and/or a reduced deductible. PDPs are avaialble everwhere and in large numbers. All Medicare beneficiaries have access to between 40 and 60 PDPs). 
Like MA benefits, PDP benefits are also highly subsidized by Medicare. Medicare pays approximately 75% of the value of coverage, the beneficiary pays the remaining 25%. Some individuals qualify for additional low-income subsidies, with reduced or zero premium, full donut hole coverage, and reduced copayments. 
Wrap around coverage
Either through an employer or the non-group market, some beneficiaries obtain additional wrap around coverage, known as Medigap. Medigap plans are standardized in most states (MA, WI, MN are exceptions) and cover cost sharing and other benefits not covered by Medicare. Medigap plans are not subsidized by Medicare so non-group plans can be costly relative to MA coverage. 
- HHS.gov Medicare Program General Information
- Kaiser Family Foundation, Medicare: A Primer, 2009 p.1
- Many Insurers Set to Offer New Medicare Drug Plans, ROBERT PEAR, New York Times, Saturday, September 24, 2005,
- Kaiser Family Foundation, Medicare: A Primer, 2009 p.1]
- http://www.medpac.gov/documents/Mar07_EntireReport.pdf Medicare Payment Advisory Commission: Report to the Congress: Medicare Payment Policy], Chapter 4, March 2007
- Marsha Gold Medicare's Private Plans: A Report Card On Medicare Advantage Health Affairs Web Exclusive, November 24, 2008,
- A First Look At The New Medicare Prescription Drug Plans Health Affairs, July/August 2006; 25(4): w252-w26, Austin B. Frakt and Steven D. Pizer
- Kaiser Family Foundation, Medicare: A Primer, 2009 p.7
- "Medigap Coverage And Medicare Spending: A Second Look," Health Affairs, Volume 27, Number 2, March/April 2008, Jeff Lemieux, Teresa Chovan, and Karen Heath,