Planning for retirement includes obtaining appropriate and affordable health care coverage. In that respect, for Americans 65 and older, any conversation about health care must include Medicare. Eligibility at age 65 means that health insurance becomes more affordable and coverage won't be denied due to any preexisting medical conditions.

It’s important to understand what happens with regard to Medicare when you retire and how you can obtain the best and most cost-effective coverage. Many retirees wonder how to figure out if 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 health care needs.
  • Medigap insurance is provided by private insurance companies and can help pay for expenses not covered under Medicare.
  • The open enrollment period for Medicare lasts roughly seven months and begins three months prior to the month of your 65th birthday.

Part A (Hospital)

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)

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. This includes inpatient and outpatient physician services and, in some cases, limited outpatient prescription drugs. 

Part C (Medicare Advantage)

Part C, Medicare Advantage, is sold by private insurance companies. These MA plans come in two varieties—Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) plans—and take the place of Medicare Part A, Part B, and, often, Part D coverage. Many offer extras such as vision, dental, hearing aids, and wellness services.

Part D (Prescription Drugs)

Prescription drug coverage is based on a 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.

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 plan is better for you. Lastly, 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.

Medigap policies sold after Jan. 1, 2006 are not allowed to include prescription drug benefits, which are instead available under the Medicare Prescription Drug Plan (Part D).

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 employer (or your spouse’s) 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 2020 standard monthly premium for Medicare Part B coverage is $144.60, up from $135.50 in 2019. Most people pay the standard monthly premium, but some individuals pay more if their 2018 income was greater than a certain amount. For example, according to Medicare's Part B fact sheet, those with more than $500,000 in reported income on their 2018 tax returns, pay $491.60 per month in Part B premiums.

Some Part C (MA) plans do not charge a premium. Other costs can include co-payments 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. Significant coverage gaps with Part D include the dreaded “doughnut hole,” which could force you to pay a larger portion of drug costs until you reach the “catastrophic coverage” amount of $5,100 for 2019 ($6,350 in 2020). However, shared costs dropped in 2019, so the costs are a bit less onerous from that point forward. 

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 an MA 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 a minimum of 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 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.