Medicare coverage plays a vital role in the retirement plans of millions of Americans. For all its benefits, Medicare can be confusing, so we’ll review the benefits and options of Medicare coverage in this article.
Paid for with a combination of payroll taxes, premium payments, and payment for services, Medicare is a government health insurance program run by the Centers for Medicare and Medicare Services (CMS).
What Does Original Medicare Cover?
Original Medicare is provided in two separate “parts” known as Part A and Part B.
Original Medicare Part A
Part A of Original Medicare provides coverage for inpatient services. Part A will kick in when you use any of these services:
- Hospital stays
- Skilled nursing care
- Hospice care
- Home health care
Most people pay for Part A during their working careers. When you receive W2 wages, or file taxes as a business owner, you have Medicare taxes withheld. As an employee, you pay half, and your employer pays the other half. If you’re self-employed, you pay both halves of the Part A payroll tax.
If you work enough years to qualify for Social Security (generally ten years), then you’ll receive Part A without having to pay a premium. This is known as premium-free Part A. Even if you didn’t work for ten years, you may still qualify for premium-free Part A if your spouse or ex-spouse did.
Original Medicare Part B
Original Medicare Part B covers outpatient services and procedures. When you think of going to the doctor, or having tests done, these are the types of things covered by Part B. Each of these services is covered by Part B:
- Doctors and specialist visits
- Therapy visits (physical, occupational, etc.)
- Outpatient surgeries
- Medical devices like bottled oxygen
- Cancer treatments like chemotherapy
Unlike Part A, you don’t pay payroll taxes to get Part B coverage. Instead, you pay a monthly premium only when you enter Part B. You continue to pay the Part B premium for as long as you’re covered.
What Are The Costs Of Original Medicare?
When you have Original Medicare, it’s important to understand that you will still need to pay for some medical services and procedures. Both Part A and B have out-of-pocket costs when you use services.
Part A Costs
For Part A, your major expense is the deductible. The Part A deductible for 2020 is $1,408.
This amount must be paid before Medicare will start paying benefits. Note that the deductible is not calculated on a yearly basis but is based on “benefit periods.”
A benefit period begins when you first receive covered services and ends when 60 days have passed without having related services. As an example, if you went to the hospital twice within one month, that would be considered a single benefit period.
By contrast, if you go to the hospital, or require skilled nursing, in events separated by more than 60 days, those are two separate benefit periods. Maybe you go to the hospital in June and to skilled nursing in December. You would pay the Part A deductible twice, once for each benefit period.
Part B Costs
Out-of-pocket costs for Part B come in a few varieties:
- Annual Part B deductible ($198 for 2020)
- Part B coinsurance (20% of the Medicare-approved cost)
- Part B excess charges
In practice, you must pay the first $198 in Part B costs in 2020 in order to satisfy the annual deductible. Once that is met, you will pay 20% of the Medicare-approved cost for each Part B service or procedure you receive.
You might also have to pay excess charges of up to 15% of the Medicare-approved cost if your physician doesn’t accept Medicare assignment. This should never be a surprise; you can find out in advance if your doctor accepts assignment.
Eligibility For Original Medicare
In order to enter Medicare, you must either be a United States citizen or permanent legal resident. If you are a legal resident, you must have resided in the United States for at least five consecutive years.
Assuming you meet the citizenship or resident requirement, you become eligible for Original Medicare when you satisfy any of the following conditions:
- You turn age 65 (aging into Medicare)
- You’ve received Social Security Disability or Railroad Retirement Board disability payments for 24 consecutive months
- You’ve been diagnosed with ALS (Lou Gehrig’s disease)
- You’ve been diagnosed with end-stage renal disease
Prescription Drugs Under Original Medicare
Prescription drugs are not covered by either part of Original Medicare. Instead, you will pay the full cost of your medications, or use a prescription drug plan, also known as Medicare Part D, to save money.
No Out-Of-Pocket Maximum For Original Medicare
There are no caps on the amount you could pay for services under Part A and B, unlike with private insurance. In a poor health year, or in a year in which you had a major accident, your costs could be very high.
Using Original Medicare Coverage In The Real World
When you have Original Medicare Part A and B, you’re not restricted to a network of doctors and hospitals. Instead, you can see any doctor, or visit any hospital anywhere in the country, as long as they accept Medicare patients.
You also generally don’t need referrals from one doctor to another (some doctors may want a referral, but it’s not a requirement of Medicare). You choose the doctor you want to see, receive services, and then pay your share of cost under Part A or B. This is known as fee-for-service (FFS) Medicare.
What Doesn’t Original Medicare Cover?
There are several types of services and procedures that Original Medicare does not cover. Generally speaking, Medicare will not cover:
- Dental services or procedures
- Cosmetic procedures
- Vision care (with the exception of cataracts or glaucoma)
- Chiropractic services
- Prescription drugs
If you need these services, you’ll need to pay for them out of pocket or find alternative forms of coverage from private insurers.
Options Beyond Original Medicare
Because there is no cap on out-of-pocket costs with Original Medicare, many people choose to work with private insurance companies to protect themselves.
Medicare Supplement Insurance
The first service that became available to people is Medicare Supplement insurance. Medicare Supplement insurance is also known as Medigap because it closes some of the gaps (the amounts you would normally have to pay) in Original Medicare.
Medigap policies are issued by private insurance companies. Because Medigap works with Original Medicare, so you must always keep paying your Part B premium.
Medigap policies come in 10 different standardized plans – A, B, C, D, F, G, K, L, M, and N. Each one of these options helps cover the gaps in Original Medicare differently.
As benefits become richer, the cost of coverage rises. So, for example, plan F is more expensive than plan N. Even with the less comprehensive plans, you have a hard out-of-pocket maximum to protect you from catastrophic medical bills.
Medicare Supplement insurance does not cover prescription drugs; you will have to enroll in a standalone prescription drug plan (PDP) if you want help with your drug costs.
Eligibility For Medicare Supplement Insurance
Eligibility for Medigap is very similar to Original Medicare. However, some states require you to be age 65 or older to enroll in Medigap even if you enter Medicare at an earlier age.
Prescription Drug Plans
Prescription drug plans are a part of what is called Medicare Part D. Part D became effective in 2006. Part D plans are issued by private insurance companies and they help make prescription drugs more affordable.
Medicare requires that every Part D plan provide a minimum level of benefits. Also, each drug plan must cover at least two medications in every therapeutic category. As an example, cholesterol medications are in one therapeutic category, and thyroid medications are in another.
Prescription drug plans have a monthly premium that you pay directly to the insurance company. You can expect to pay the following additional costs when you have a Part D plan:
- Annual deductible (if any) – not more than $435 for 2020
- Copayment or coinsurance for each prescription
Your copayment or coinsurance is set by the insurance company. These amounts can change during the year depending on how much your plan pays for your drugs. As you pass through certain bands called coverage stages, your share of the cost rises. Each year, you start over at the deductible phase.
Eligibility For Part D
You are eligible for prescription Drug plans if you are either enrolled in Part B or entitled to Part A. You do not need to be enrolled in both parts in order to get Part D.
Medicare Advantage Plans
Medicare Advantage plans, also known as Part C, are an alternative to Original Medicare. Enrolling in Medicare Advantage removes you from Original Medicare. A Medicare Advantage plan is a contract between a private insurer and CMS.
Medicare Advantage plans must cover everything that Original Medicare Part A and B covers. They are regulated by CMS, so you can be sure that you’ll receive the same level of coverage as you would get under Original Medicare. Many Part C plans provide more coverage than Original Medicare.
Part C plans work like traditional health insurance. Most plans are either HMO or PPO based. You generally need to use an approved network of providers in order for the plan to pay benefits. You may be required to have a primary care physician (PCP) who provides referrals to specialists.
Also, like traditional health insurance, Part C plans usually have small copayments or coinsurance for every service or procedure you use. These payments are generally smaller than what you would pay under Original Medicare. All payments you make count toward your yearly out-of-pocket maximum.
Medicare Advantage And Prescription Drugs
Many Medicare Advantage plans provide drug coverage. These plans are known as MAPD plans. You do not have to pay a separate or higher premium for drug coverage. Any deductibles, copayments, and coinsurance amounts are different for the drug portion of your plan. There is no out-of-pocket maximum for the drug portion of MAPD plans.
Extra Benefits Under Medicare Advantage
In addition to the out-of-pocket maximum, people often choose Medicare Advantage because these plans may offer benefits beyond Original Medicare. Extra benefits always vary by state, and by insurance company, but can include:
- Vision coverage
- Hearing coverage
- Dental coverage (either included, or available for a small additional premium)
- Gym memberships and fitness programs
- Transportation to medical appointments and facilities
- Emergency coverage while traveling outside the USA
Eligibility For Medicare Advantage
The rules for entering Medicare Advantage are similar to Original Medicare. The one exception is if you have end-stage renal disease (ESRD). Many Medicare Advantage plans will not enroll you if you already have ESRD. If you develop ESRD while you have Part C coverage, you can stay in the plan.
Some companies offer Medicare Advantage plans that are designed for people with ESRD. These plans are called C-SNPs (chronic special needs plans), and if one is available in your area you can enroll in it even if you already have ESRD.
Choosing Your Medicare Plan
As you get close to starting Medicare coverage, be sure to review the options in your area. Not all plans are offered in every state or county, so working with a licensed professional can be a good way to find a plan that meets your needs.