Understanding Medicare in 4 Easy Steps

If you are getting your Medicare benefits for the first time, the jargon may sound foreign, but you don’t need Medicare for Dummies to figure it out. You’ll be well on your way once you learn the ABCs and D of Medicare.

In this MedicareWire blog post, we’ll break down the four main parts of Medicare and answer these top questions (and many more):

Step 1: Understand What Medicare is in Simple Terms

Medicare is federal health insurance for people age 65 and older, and people with qualifying disabilities. It is not health care. In other words, the federal government does not provide healthcare services. And, it is not free or end-to-end healthcare. It is private fee-for-service (PFFS) health insurance for Medicare-approved medical services.

When the Medicare program was founded there were two parts to Medicare insurance, Part A and Part B. Combined, they are commonly called Original Medicare.

Medicare Part A is hospital insurance. It covers inpatient care at hospitals, skilled nursing facilities, and mental health facilities.

Medicare Part B is medical insurance. It covers doctor visits, lab tests, diagnostics, specialists, and other medical care.

Step 2: Understand Medicare’s Private Parts.

Original Medicare worked great for the first two or three decades but as the cost of healthcare and medications skyrocketed, both the Medicare program and its beneficiaries needed more options. So, in 2003, the George W. Bush Administration signed the Medicare Modernization Act (MMA) into law, giving us Medicare Parts C and D.

Medicare Part C allows private health insurance companies to sell approved health plans (e.g., HMO, HMO-POS, PPO, PFFS, MSA, SNP, and Cost plans) to Medicare beneficiaries. More commonly known as Medicare Advantage, these plans completely replace a beneficiary’s Part A and Part B coverage and may add more benefits. The most common extra benefit plans add is Medicare prescription drug coverage.

Medicare Part D allows private companies to sell local or national prescription drug plans for Medicare beneficiaries. Part D plans help millions of Americans get the medications they need at an affordable price.

Both Part C and Part D plans are optional. You are not required to participate in these private insurance products. However, with Part D there is a penalty if you don’t enroll when first eligible and then later choose to enroll because the program needs the revenue to maintain the low cost.

Step 3: Understand Which Medicare Plan is Best for You

If you are about to get your Medicare benefits for the first time, this is perhaps the most important question you can answer: which Medicare plan is best for me?

Your Medicare choices can make you or break you. Here’s why.

Original Medicare has no limits on out-of-pocket costs. None. I know people who have Original Medicare only and pay upwards of $12,000 per year out-of-pocket in hospital and medical costs. It put one of my friends into collections and has nearly sent her into bankruptcy.

This is exactly why Medicare puts a maximum out-of-pocket (MOOP) limit on Medicare Advantage plans, up to $8,550. But, can you afford that much? By the way, the MOOP does not include what you pay in premiums, deductibles, or your prescriptions. It is just your healthcare copayments.

This is what creates a big dilemma for most people. How do you choose?

Fortunately, there is a way to significantly limit your out-of-pocket costs with Original Medicare. It’s called Medigap.

Medigap is what Medicare calls supplemental insurance for Parts A and B. Medicare supplement plans cover some of the gaps in Original Medicare, including some deductibles, coinsurance, and copayments.

Which is better, Medicare Advantage or Medigap?

It all depends.

Here’s the fundamental difference. Once you understand the difference, you can make the right choice.

With Original Medicare and a Medigap policy, you pay most of your major medical costs in advance. As a result, you can budget your healthcare costs. It gives people peace of mind knowing that their major health care costs are all covered, no matter what.

With a Medicare Advantage plan, you pay most of your major medical costs when you use health care services. As a result, it’s very difficult to budget healthcare costs.

Do you remember the Fram oil filter commercials back in the ’70s? The crusty old mechanic would say, “You can pay me now or pay me later!” The difference between Original Medicare, with a Medicare supplement, and Medicare Advantage is a lot like that.

Pay me later generally costs more.

Who exactly does Medicare Advantage benefit? Here are the situations where it works great:

1. Super healthy seniors — This is a fantastic option if you are exceptionally healthy, work at maintaining your health, and want additional options that Original Medicare does not offer. For healthy seniors, Medicare Advantage offers long-term savings.
2. Dual-eligible people — If you qualify for both Medicare and Medicaid, there’s a good chance that you can get a Medicare Advantage Special Needs Plan (SNP) or premium assistance through the Medicare QMB (Medicare Qualified Beneficiary) Program.  In some cases, Medicare Savings Programs may also pay Medicare Part A and Medicare Part B deductibles, coinsurance, and copayments if you meet certain conditions.
3. Retirees with health plan benefits — Many people earn benefits when they retire from their federal, state, county, city, railroad, or corporate jobs. In many cases, these benefits include group Medicare Advantage plans that assist with monthly premiums and, in some cases, copayment, too.

Who Shouldn’t Join a Medicare Advantage Plan?

If you are entering the Medicare system with one or more chronic health conditions, in most cases, you have no business in Medicare Advantage.

Why?

The simple answer is that Medicare Advantage will most likely end up costing you more money out-of-pocket due to the ongoing care needs of your chronic condition(s). You need to think about your situation both today and down the road. And, there’s a very important reason for that.

Let’s say that you are currently pre-diabetic and will most likely progress to type 2 diabetes. Your doctor may be controlling your A1C with a medication like Metformin to slow the onset of diabetes. And, for now, that’s working.

But, what happens when you start having complications, like heart and blood vessel disease, nerve damage, kidney disease, eye damage, skin conditions, hearing impairment, sleep apnea, or even dementia. These are all secondary conditions brought on by type 2 diabetes.

In a Medicare Advantage plan, all of the treatments you will need to care for your progressing health conditions will come with a copayment. Simple doctor visits may only cost you $20 to $45 out-of-pocket, but they add up. As do the tests and specialists.

The real hit to your budget will be visits to the emergency room, ambulance transportation, and hospital inpatient care. In fact, a Kaiser Family Foundation study found that most people in a Medicare Advantage plan will pay more for their inpatient care than people with Original Medicare alone.

Medicare Supplement vs. Medicare Advantage

Hopefully, you were able to qualify or disqualify yourself for Medicare Advantage from the discussion above. And, it’s very important to do so.

People that make the mistake of choosing their Medicare coverage based on monthly premiums alone can easily put themselves in a world of hurt. This is a sad fact that is not helped by the Centers for Medicare & Medicaid Services (CMS) bias for Medicare Advantage.

If you are not an ideal candidate for Medicare Advantage, the best option is Original Medicare and a Medigap policy. But here’s something important that you must know: your time to get a Medigap policy may be very short.

Unlike Medicare Advantage plans, which have protections by law, Medicare supplement insurance companies have no obligation to sell you insurance, except one. When you first qualify for your Medicare benefits, you have a narrow window to buy a Medicare supplement plan with guaranteed-issue rights.

This one fact is why I can’t stress strongly enough why choosing the right Medicare insurance from the get-go is so important. If you have chronic health issues and you don’t get a Medicare supplement while your guaranteed-issue rights are still in effect, you will seal your fate for the rest of your life.

I provide people with free Medicare supplement quotes every day. For the past year, I have collected the average cost of Medicare supplements across all states and age ranges. For 2020, plans averaged a little over $152. In some states, Florida and New York, in particular, the costs are much higher. And in some southern and western states, the averages are lower.

Let’s examine what that $152 per month ($1,824 per year) buys you.

The most common plans sold today are Medigap Plan G and Medigap Plan N. Plan G covers all of the gaps in Original Medicare except one, the annual Part B deductible. Plan N is similar, but you pay a small copay to see your doctor (up to $20) or use the emergency room (up to $50), and it does not cover Part B Excess Charges (an additional 15% fee some doctors charge if they don’t accept Medicare’s standard rates). You can compare all plans side-by-side using our Medicare Supplement Plans Comparison Chart:

RELATED: Medicare Part B Excess Charges: How to Avoid Them

With Plan G coverage, your copayments and inpatient deductibles go away. Imagine a single inpatient event with a Medicare Advantage plan:

• Ambulance: $295 copay
• First five days in the hospital: $395 copay per day
• Medications: 20% or more of the approved amount
• Physician: $20 – $40 copay per bedside visit
• Specialists: $20 – $40 copay per bedside visit
• Lab tests: $20 – $40 copay per test
• Diagnostics: $20 – $40 copay per diagnostic

These are the average costs collected from thousands of Medicare Advantage plan benefit and cost records. It should be easy to see that a single hospital inpatient admission with a Medicare Advantage plan may cost you way more than the annual cost of a Medicare supplement plan.

This is why most seniors and insurance professionals alike believe that Original Medicare and a Medicare Supplement Plan G is the gold standard in Medicare insurance plans. It protects you from high inpatient and outpatient costs. If you need this coverage and peace of mind, don’t miss out on your eligibility opportunity.

Step 4: Understand How Much Medicare Costs

Since its inception, Medicare has covered about 80 percent of all major medical costs. The remainder is paid by the Medicare beneficiary through deductibles, copayments, and coinsurance costs. This is true across all Medicare Parts.

Many people believe that they can switch from Original Medicare to Medicare Advantage and avoid the 20 percent gap in coverage that causes out-of-pocket expenses. This isn’t true.

Let’s go over what Medicare really costs so there are no surprises because each part of Medicare has its own premiums, deductibles, and copays.

Medicare Part A Costs (inpatient coverage)

2024 Medicare Part A Monthly Premium:

• No monthly premium (free) for most beneficiaries.
• $278/month for beneficiaries who paid into Medicare for 7.5 to 10 years.
• $506/month for beneficiaries who paid into Medicare for less than 7.5 years.

2024 Medicare Part A Deductible:

• $1,632 per benefit period
• Covers up to 60 days in the hospital
• A benefit period begins the day you’re admitted as an inpatient in a hospital or skilled nursing facility (SNF). The benefit period ends when you haven’t received any inpatient hospital care (or skilled nursing care in an SNF) for 60 days.
• Supplemental Medicare coverage will pay some or all of the Part A deductible, depending on your Medigap policy.

2024 Medicare Part A Coinsurance:

• $408 per inpatient day, days 61-90 of the benefit period.
• $816 per inpatient day for day 91 and beyond of the benefit period (lifetime reserve days).
• $204 per day for skilled nursing facility care (day 21+). Medicare Part A covers 100 percent of the cost of skilled nursing facility care for the first 20 days so long as you had at least a three-night inpatient hospital stay prior to the skilled nursing facility stay.
• Supplemental Medicare coverage helps pay some or all of your Part A coinsurance. All of the standardized Medicare Supplement Plans cover an additional 365 days in the hospital after Medicare benefits are exhausted.

Medicare Part B Costs (medical coverage)

2024 Medicare Part B Monthly Premiums:

• $174.70 per month is what most beneficiaries will pay in 2024. Your actual rate will depend on Social Security cost of living adjustment (COLA) for 2021.
• Part B premiums for high-income individuals and couples range from $244.60/month to $594.00/month. The high-income threshold is $103,000 for an individual and $206,000 for a married couple.
• Your Part B premiums may be higher if you delayed your enrollment (due to a late enrollment penalty).

2024 Medicare Part B Deductible:

• The Part B deductible is $240 per year. If you receive a Part B-covered service during the year you will pay all costs out-of-pocket until the Part B deductible is met.
• Medicare Plan C and Plan F will pay your Part B deductible for you, but these plans are no longer available for newly eligible Medicare enrollees. (Plan G is the same as Plan F, except you pay the Part B deductible yourself.)

2024 Medicare Part B Coinsurance:

• After your Part B deductible is paid you pay 20 percent of all Medicare-approved costs for the Part B services. And, unlike Medicare Advantage coverage, there is no maximum out-of-pocket limit. Fortunately, you can get a Medigap plan to cover some or all of the Part B coinsurance.
• Your doctor may charge you up to 15% more for Part B services if they don’t accept Medicare-assignment (some states impose a lower limit), however, Medigap Plan F and Plan G cover excess charges for you.

Medicare Part C Costs (Medicare Advantage Plans)

Above you learned that Medicare Part A is funded through payroll taxes, but Medicare Part B is funded through monthly premiums. This does not change if you enroll in a Medicare Advantage plan. Those monies are paid to the plan you enroll in by Medicare. This is why it may seem like some Medicare Advantage plans are free. They are not free.

Medicare Advantage Monthly Premiums:

• If you enroll in a private health plan, you must continue to pay your Part B premium.
• If the plan offers extra benefits that add more cost, the plan will have an additional monthly premium.

Medicare Advantage Copayments:

• All plans charge copayments or coinsurance when you use healthcare services.
• The schedule of out-of-pocket costs is outlined in a plan’s summary of benefits document. MedicareWire details most cost information on its plan finder pages.

Medicare Advantage Deductible:

• If a plan includes a Part D plan, it may have an annual deductible that must be paid at the pharmacy before the plan begins paying its share for your medications.

Medicare Part D Costs (Prescription Drug Plans)

Every Medicare Part D Plan (PDP) is different. Each PDP has different drug formularies, premiums, deductibles, co-payments, and coinsurance. Let’s start with the formulary.

A formulary is simply a list of covered medications and pricing tiers. Plans create their formulary using the guidelines set by the United States Pharmacopoeia.

The formulary system makes choosing a plan challenging because it forces you to compare the medications you use across all plan formularies. If your medication is covered by a plan, it may be in a different tier than other plans and have a different copayment or coinsurance amounts.

Part D Monthly Premium:

• All Medicare Part D plans have a monthly premium.
• The average monthly premium for 2024 is around $33.
• In most states, plans start around $20. So, if you don’t have regular prescriptions or your prescriptions are few and common, your cost will be minimal.

Medicare Part D Deductible:

• The Part D deductible is an amount you’ll pay at the pharmacy before cost-sharing begins.
• Some plans have a $0 deductible, but most have a deductible, up to $545 .
• If you have minimal or no regular prescriptions, it’s conceivable that you will never take advantage of your plan’s cost-sharing benefit. But, when you need it most, you’ll be happy to have it.

Most people are surprised to learn that Medicare drug plans are not required to cover all Medicare-approved medications. This is one of the reasons that shopping for a plan can be challenging.

Medicare Part D Initial Coverage Period (ICL):

• After you’ve met your plan’s deductible, you’ll start your initial coverage period. This is where you make a co-payment or coinsurance payment for your prescriptions at the pharmacy.
• How long you’re in the initial coverage period depends on the retail price of your medications and your plan’s benefits structure. With most 2024 plans, your initial coverage period ends when your drug costs reach $5,030.
• $5,030 in retail drug costs is the initial coverage limit (ICL).

Medicare Part D Coverage Gap (Donut Hole):

• If you exceed the initial coverage limit, you enter the coverage gap phase of your plan, also known as the doughnut hole. While you’re in the coverage gap there is no cost-sharing. You pay all costs for your prescriptions. However, you do get discounts that help lower the cost of your medications.
• You get a 75 percent discount on most brand-name drugs, paid for by the manufacturer and the federal government. The remaining 25 percent is what you pay.
• You get a 25% discount on all generic drugs.

Medicare Part D Catastrophic Coverage:

• Catastrophic coverage begins after you have paid $8,000 in out-of-pocket costs. This is the amount you have paid, not the total drug costs.
• In this phase, you pay significantly less for your covered medications for the remainder of the year. The costs that help you reach the catastrophic coverage phase include:
  • Your deductible;
  • What you paid during the initial coverage period;
  • Almost the full cost of brand-name drugs (including the manufacturer’s discount) purchased during the coverage gap;
  • Amounts paid by others, including family members, most charities, and other persons on your behalf; and
  • Amounts paid by State Pharmaceutical Assistance Programs (SPAPs), AIDS Drug Assistance Programs, and the Indian Health Service.
• Costs that do not help you reach catastrophic coverage include monthly premiums, the cost of non-covered drugs, the cost of covered drugs from pharmacies outside your plan’s network, and the 75% generic discount.
• During catastrophic coverage, you will pay 5% of the cost for each of your drugs, or $0.00 for generics and $0.00 for brand-name drugs (whichever is greater).

Other Differences

Now you know the basics of your plan options and costs with Medicare, and how Medicare works. But, there are a few other things to know, as well.

With Medicare Advantage and Medicare Part D plans you can only enroll at certain times. When you first qualify for your Medicare benefits you have an individual enrollment period (IEP). It’s a seven-month period that begins three months before the month you turn age 65, includes your birth month, and ends three calendar months later.

After your IEP, you can enroll, make plan changes, or go back to Original Medicare during the annual open enrollment period in the Fall. There are also some special enrollment periods.

Unlike Original Medicare, Medicare Advantage does not offer hospice as a coverage option. Hospice care is covered directly by the Medicare health insurance program and costs are minimal. Dialysis is also covered by Medicare. In most cases, if you have end-stage renal disease (ESRD), and need dialysis, you will not be able to join an Advantage plan.

Summary

There are four parts to Medicare. Parts A and B are the Original Medicare PFFS insurance coverage for hospital and medical care, respectively. You can supplement this coverage with a Medigap plan that covers most of your copayment, coinsurance, and deductible costs.

Medicare Part C and Part D are health plans available from private insurers. Medicare Advantage plans (Part C) replace your Original Medicare benefits and may include extra benefits, like routine dental, vision, and hearing, and prescription drug coverage. Part D plans offer stand-alone prescription drug coverage.

If you qualify for both Medicare and Medicaid, be sure to call the Social Security Administration to see what additional benefit may be available to you. Medicare Advantage Special Needs Plans are particularly advantageous, as is the Extra Help program for Part D assistance.

If you have one or more chronic health conditions, and you need help understanding which plan is best, it’s time to speak with a licensed health insurance agent.

Call 1-855-728-0510 (TTY 711) and speak with a licensed HealthCompare insurance agent. There’s no obligation, and they offer more plan options than any other national agency.

Citations & References:

medicare.gov

• Medicare.gov: the official U.S. government site for Medicare | Medicare
  https://www.medicare.gov/
• Medicare costs at a glance | Medicare
  https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance
• Medicare.gov: the official U.S. government site for Medicare | Medicare
  http://medicare.gov