Maybe you’re getting close to the age of 65 or simply want to understand how Medicare works so that you can help a family member or friend. While some people who sign up for Medicare are retired, others are still working. Whatever your situation, you become eligible for Medicare when you reach 65 and, in most cases, must enroll. Currently, more than 56 million people are enrolled.
Medicare is the national health insurance program for U.S. 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.
- Medicare is the national health insurance program for citizens of the United States.
- Individuals qualify for Medicare at the age of 65, but U.S. citizens with qualifying disabilities can also apply.
- There are four parts to Medicare: A, B, C, and D.
- Part A is automatic and includes payments for treatment in a medical facility, while Part B is required if you do not have other healthcare coverage, such as through an employer or spouse.
- While Part C, called Medicare Advantage, is an alternative to traditional Medicare, Part D covers prescription drug benefits.
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). Meanwhile, Medicare has evolved over the years and now has four parts. While some are mandatory for all participants, 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, inpatient care in hospitals, skilled nursing facilities, hospice care, home healthcare services, and inpatient care in a religious non-medical 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, a deductible applies and, 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 need to pay a deductible each time.
Part B: Doctors and Tests
Medicare 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. 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.
For example, 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 Part A and D umbrellas. There is no lifetime maximum. 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, explains,
“Chilling, and potentially devastating for chronic illnesses like cancer—the American Medical Association estimates that Medicare users without Medigap can spend 25% to 64% of their income on medical expenses."
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 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.
The percentage of people over the age of 65 that will need longer-term care at some point.
According to Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.,
“Medicare was never meant to pay for long-term care. 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 a Health Maintenance Organization (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 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 have spent a certain amount in combined costs. Once you have reached the level of "catastrophic coverage," you pay a small co-payment for your prescription drugs. Each state has insurance options that will close the coverage gap, but these require paying an additional premium.
Medigap vs. 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, recipients can 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 and it is not a stand-alone policy. If your doctor doesn't take Medicare, Medigap insurance will not pay for the procedure.
Insurance agents are not allowed to sell Medigap to participants of Part C, Medicare Advantage.
“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."
The Bottom Line
Traditional Medicare coverage, defined as parts A, B, and D, begins at age 65 or 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. Plan A kicks in automatically after enrollment. The other three parts might also be necessary depending on the individual's other insurance coverage and personal needs.