Maybe you’re getting close to 65 yourself or simply want to understand how Medicare works so that you can help a family member or friend. Some people who sign up for Medicare are retired; others are still working.
Wherever you fit, you become eligible for Medicare when you reach 65 and, in most cases, have to enroll. Currently, more than 56 million people are enrolled.
Medicare is the United States’ national health insurance program for citizens and some permanent legal residents. Generally, you qualify for Medicare when you turn 65, based on your employment record or that of your spouse. People under 65 with qualifying disabilities are also covered by Medicare. “Anyone who has been approved and has received Social Security disability income benefits for two years qualifies for Medicare Parts A and B,” says Chris Cooper, CFP®, ChFC, EA, MSFS, president, Chris Cooper & Company, San Diego, Calif.
If you have a child with serious health issues who is about to turn 18, it is important to check whether he or she should register for Medicare (under the Affordable Care Act, you can also cover your child under your own policy until age 26).
Medicare has evolved over the years and now has four parts. Some are mandatory for all enrollees; others are optional.
Part A: Hospital Insurance
Part A covers the costs of being in a medical facility. When you enroll in Medicare, you receive Part A automatically. For most people, there is no cost to receive Part A.
Services covered under part A include tests, surgeries, doctor visits, home healthcare inpatient care in hospitals and skilled nursing facilities, hospice care, home healthcare services and inpatient care in a religious nonmedical healthcare institution – a facility that provides medical services that align with certain religious beliefs.
This sounds straightforward, but it's not. For example, in-home hospice care is covered, but Part A doesn’t cover a patient’s stay in a hospice facility. Additionally, if you’re hospitalized, your Part A deductible is $1,316, as of 2017.
If you stay for more than 60 days, you have to pay a portion of each day’s expenses. If you’re admitted to the hospital multiple times during the year, you may have to pay that $1,316 deductible each time.
After spending 60 days in the hospital, you must pay $329 per day in out-of-pocket costs; this increases to $658 per day after 90 days. Once coverage runs out, you will have to pay the full cost of the remainder of your hospital stay.
Part B: Doctors and Tests
Part B covers anything done to you: doctor’s services, medical equipment, outpatient care, and home healthcare are covered. Other examples of covered care include ambulance services, outpatient procedures, the purchase of blood, mammograms, cardiac rehab, and cancer treatments.
You’re required to enroll in Part B if you don’t have “creditable coverage” from another source – an employer or spouse, for example.
With Part B, you pay a monthly premium. If you don’t enroll and you don’t have credible coverage, you may have to pay a penalty. According to Medicare.gov, the standard premium in 2017 is $134 per month for Part B coverage, with a $183 deductible. Once you receive Social Security, the premium is deducted from your Social Security check.
Once you meet your deductible, you pay 20% of the Medicare-approved cost of the service, provided your healthcare provider accepts Medicare assignment.
But beware – there is no cap on your 20% out-of-pocket expense. If your medical bills for a certain year were $100,000, you would be responsible for $20,000 of those charges, plus charges incurred under the Part A and D umbrellas. There is no lifetime maximum. “Chilling, and potentially devastating for chronic illnesses like cancer – the American Medical Association estimates that Medicare users without Medigap (see below) can spend 25% to 64% of their income on medical expenses,” says Kathryn B. Hauer, MBA, CFP®, EA, a financial advisor with Wilson David Investment Advisors in Aiken, S.C., and author of “Financial Advice for Blue Collar America.”
On the other hand, you pay nothing for most preventive services, such as diabetes screenings and flu shots, if you receive those services from a healthcare provider who accepts Medicare payments.
What Parts A and B Don't Cover
The largest and most important item that traditional Medicare doesn’t cover is long-term care. If you are diagnosed with a chronic condition that requires ongoing personal-care assistance, the kind that requires an assisted-living facility, Medicare will cover none of the cost. This includes help with everyday activities, such as bathing and dressing.
According to medicare.gov, at least 70% of people over 65 will need long-term care at some point. “Medicare was never meant to pay for long-term care,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla. “To take care of these expenses, look into long-term care insurance, a life insurance policy with a long-term care rider (add-on), a specifically designed long-term care annuity (versus an annuity with a chronic care rider) or even a life settlement, which will convert an old life insurance policy into a set amount of funds.”
Other uncovered items include routine dental or eye care, dentures, cosmetic surgery, acupuncture and hearing aids.
Part C: Medicare Advantage
Also known as Medicare Advantage, Part C is an alternative to traditional Medicare coverage. Coverage normally includes all of Parts A and B, a prescription drug plan (Part D) and possibly other benefits. Part C is administered by private insurance companies that collect your Medicare payment from the federal government.
Depending on the plan, you may or may not need to pay an additional premium for Part C. You don’t have to enroll in an advantage plan – and they have limitations, such as possibly not covering healthcare if you're away from your home region – but for many people these plans can be a better deal than paying separately for Parts A, B and D. If you've been pleased by the coverage of an HMO, you might find these similar.
Part D: Prescription Drugs
Prescription drug coverage, known as Part D, is also administered by private insurance companies. Part D is required unless you have a prescription drug plan from another source, including a Medicare Advantage plan. Depending on your income, you may pay up to $76.20 in addition to your plan premium per month, as of 2017. (That extra figure is for people with incomes above $214,000 [filing taxes individually] or married/filing jointly incomes above $428,000.)
Depending on your plan, you may have to meet a yearly deductible before your plan begins covering your eligible drug costs.
Medicare plans have a coverage gap – a temporary limit on what the drug plan will cover. Often called the doughnut hole, this gap kicks in after you and your plan have spent $3,700 in combined costs in 2017, and it doesn’t close until you’ve spent $4,950 out-of-pocket. Once you have paid more than $4,950, you enter catastrophic coverage, under which you will pay a small co-payment for your prescription drugs.
While in the doughnut hole, however, you will be charged 40% of the cost of covered brand-name drugs in 2017 and 51% of generics. (By 2020, you'll be charged only 25% of the cost of generics.)
Each state has insurance options that will close the coverage gap, but these require paying an additional premium.
Medigap and Medicare Advantage
People who only have traditional Medicare – Parts A, B, and D – may incur sizable bills not covered by Medicare. To close these gaps, most recipients enroll in some form of Medigap insurance or in a Medicare Advantage plan (see Part C, above). One important thing to know about Medigap: It only supplements Medicare; it's not a stand-alone policy. If your doctor doesn't take Medicare, Medigap insurance will not pay for the procedure.
Medigap coverage is standardized by Medicare but offered by private insurance companies.
“I recommend that my clients purchase Medigap policies to cover their needs. Even though the premiums are higher, it is much easier to plan for them than what could be a large out-of-pocket outlay they might have to face if they had lesser coverage,” says Patrick Traverse, founder of MoneyCoach, Mt. Pleasant, S.C.
The Bottom Line
Traditional Medicare coverage, defined as parts A, B, and D, kicks in at age 65 – sooner, in the case of certain disabilities. Once you reach 65, you’re required to have health insurance coverage through Medicare or another insurance plan.
To learn more about how each of the four parts works, read “Medicare & You,” the official Medicare publication that explains the plan in further detail. Download or request a copy of the publication at medicare.gov.