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Planning for retirement includes obtaining appropriate and affordable healthcare coverage. In that respect, for Americans 65 and older, any conversation about healthcare must include Medicare. Eligibility at age 65 means that health insurance becomes more affordable.

When you retire, it’s important to understand how Medicare works and how you can get the best and most cost-effective coverage. Many retirees wonder how to determine whether they need all four parts of Medicare. Questions about Medicare costs, supplemental insurances, and enrollment periods often arise as well.

Key Takeaways

  • For Americans 65 and older, conversations about health insurance should include Medicare.
  • There are four parts to Medicare—A, B, C, and D—that cover different healthcare needs.
  • Medigap insurance is provided by private insurance companies and can help pay for expenses not covered under Medicare.
  • When you're first eligible for Medicare, the open enrollment period lasts roughly seven months and begins three months prior to the month of your 65th birthday.

Part A (Hospital)

Medicare Part A, hospital coverage, pays for your care in a hospital, skilled nursing facility, nursing home (as long as it’s not just for custodial care), hospice, and certain types of home health services. 

Part B (Medical)

Medicare Part B coverage includes medically necessary services or supplies needed to diagnose and treat a medical condition. It also covers preventive services for illnesses such as the flu. Finally, Part B includes inpatient and outpatient physician services and, in some cases, limited outpatient prescription drugs. 

In contrast to Part A, which is available to many people at no cost, those who sign up for Part B pay monthly premiums. Part B also requires a deductible and coinsurance.

Part C (Medicare Advantage)

Part C, Medicare Advantage, is sold by private insurance companies approved by Medicare. These plans come in four varieties—health maintenance organization (HMO), preferred provider organization (PPO), private fee for service (PFFS), and special needs (SNP) plans—and take the place of Medicare Part A, Part B, and, often, Part D coverage. HMOs and PPOs are the most common Medicare Advantage plans, and many of them offer extras such as vision, dental, hearing aids, and wellness services.

Part D (Prescription Drugs)

Prescription drug coverage is based on a medication list (called a formulary) that is included with Medicare Part D. Each Medicare prescription drug plan has its own list. Most plans place drugs into different “tiers,” with each tier having a different cost.

The Medigap Option

It’s hard to predict Medicare costs. Because of that, many retirees who don’t choose a Medicare Advantage (Part C) plan purchase a Medigap plan instead. Such plans come in 10 standardized policies that offer a great deal of variety and fill in for many of the out-of-pocket costs associated with traditional Medicare. Some even provide additional services not covered by traditional Medicare. Medigap plans, however, do not provide prescription drug coverage. So if you have a Medigap policy, you may also need Part D. 

A one-time Medigap open-enrollment period lasts six months and begins the month you turn 65 (and are enrolled in Part B). During this period, you can buy any Medigap policy sold in your state regardless of your health. After the enrollment period, if you want a Medigap policy, you could be denied or forced to pay a higher premium.

Also, starting Jan. 1, 2020 and going forward, Medigap plans C and F are no longer available to people new to Medicare.

Medicare Advantage can be an alternative to a Medigap policy plus Part D coverage. It's important to look at your own circumstances and determine which type of plan is better for you.

If you already have a Medicare Advantage plan, Medigap coverage is not an option—in fact, it is illegal for someone to try to sell you Medigap coverage.

If you qualify for Medicare and are ready to look at plans, eHealth Medicare, an independent insurance broker and partner of Investopedia, has licensed insurance agents at <833-603-0946 TTY 711> who can help connect you with Medicare Advantage, Medicare Supplement Insurance, and Prescription Drug Part D plans.

Initial Enrollment Period

Your initial enrollment period for Medicare (all four parts) begins three months prior to the month you turn 65 and lasts until the end of the third month after your birthday month—a total of seven months. If you don’t sign up during the initial window, you can sign up between January 1st and March 31st each year for coverage that begins July 1st. Failure to sign up during the initial enrollment period, however, could result in permanently higher premiums—unless you qualify for a special enrollment period. 

Special Enrollment Period (SEP)

If you are still covered by a group health plan provided by your or your spouse's employer when you turn 65, you may qualify for a special enrollment period. In general, the SEP requires that you enroll in Medicare no later than eight months after your group health plan or the employment on which it is based ends (whichever comes first). One important exception to SEP rules: If your group health plan or employment on which it is based ends during your initial enrollment period, you do not qualify for a SEP. 

Other Enrollment Periods

There is an open enrollment period for Medicare Advantage and prescription drug coverage each year, from October 15th to December 7th. There is also a new annual Medicare Advantage open enrollment period, from January 1st to March 31stduring which you can switch to traditional Medicare from an MA plan and join a Medicare prescription drug plan to add drug coverage.

Medicare Costs

Most people pay enough into the Medicare system during their working lives that they do not have to pay for their Medicare Part A coverage.

The 2021 standard monthly premium for Medicare Part B coverage is $148.50, up from $144.60 in 2020. Most people pay the standard monthly premium, but some individuals pay more if their annual income—which determines what someone pays—was greater than a certain amount. According to Medicare's Part B fact sheet, single filers with more than $500,000 in reported income on their 2019 tax returns (the tax year used to calculate 2021 premiums) are required to pay $504.90 per month in Part B premiums in 2021.

Some Part C (Medicare Advantage) plans do not charge a premium. Other costs can include copayments for doctor visits and other services.

Part D coverage includes a monthly premium that will vary depending on the plan you choose and the drugs you use. Although the dreaded “doughnut hole” closed Jan. 1, 2020, there is still a coverage gap beginning when you and your provider spend $4,130 on covered drugs. During the coverage gap you will pay 25% of the cost of covered drugs. Once you and your provider spend $6,550 in 2021 you will enter “catastrophic coverage” and pay a small copay for the rest of the year.

However, shared costs dropped in 2019, so the costs are a bit less onerous from that point forward. Also, starting on Jan. 1, 2021, people who take insulin may be able to get Medicare drug coverage that limits the cost of insulin to no more than $35 for a 30-day supply.

Sorting Out Your Options

All of this can lead to confusion about which sign-up options are best for you. Most people sign up for A, B, and D, with many adding Medigap coverage as well. Others choose Medicare Advantage instead of A, B, and D. If you choose a Medicare Advantage plan and want prescription drug coverage, make sure it is provided by your MA plan. If not, you may need to add Part D coverage to your plan. 

Because Medicare normally pays first (before other coverage), chances are that any available retiree policy will require you to have, at minimum, Medicare Part A and Part B. Check out costs and coverage before signing up for Medicare. 

If you decide to go back to work after retirement and are eligible for group health plan coverage, it will likely work differently with Medicare. Check with the human resources department of your new employer to avoid overlaps or lapses in coverage. If you have retiree health insurance from a former employer, find out what happens if you cancel that coverage but want it back at a later date. 

Costs for Medigap coverage depend on the type of policy you have and where you live; they can range from $50 per month to several hundred dollars. Learning about drug pricing tiers and Part D can help you decide on an optimal plan.

The Bottom Line

Visit the Medicare.gov website and use it to review topics discussed in this article before deciding on the best Medicare coverage for you. Shop around using Medicare’s Medicare Plan Finder. This helpful tool will let you specify your health situation, including up to 25 drugs you take. Then it will display plans, with costs, available to you in your area. 

When online, you may come across many non-Medicare information websites. Be aware that they could be biased in favor of a sponsoring healthcare provider. Finally, don’t forget to review your full complement of Medicare coverage every year to make sure the plan is still the most suitable for you.