What is Medicare Cost Sharing?
Medicare’s cost-sharing is the out-of-pocket costsOut-of-Pocket Costs for Medicare are the remaining costs that are not covered by the beneficiary's health insurance plan. These costs can come from the beneficiary's monthly premiums, deductibles, coinsurance, and copayments. that beneficiaries pay to receive medical services or supplies, like a doctor’s visit, hospital inpatient visit, or prescription drug. Shared costs include copaymentsA copayment, also known as a copay, is a set dollar amount you are required to pay for a medical service., coinsuranceCoinsurance is a percentage of the total you are required to pay for a medical service. , and deductiblesA deductible is an amount a beneficiary must pay for their health care expenses before the health insurance policy begins to pay its share..
Although you or your spouse paid into Medicare through payroll taxes during the years that you worked, it’s not a zero-cost system when you turn 65 years old. Many people who retire and get their Medicare benefits for the first time are caught off guard by the out-of-pocket costs with Medicare. In this MedicareWireMedicareWire is a Medicare insurance consulting agency. We founded MedicareWire after seeing and hearing how confusing and frustrating it is to find, understand, and choose a plan. Our services are free to the consumer. article, we’ll walk you through your costs so you can plan ahead for your retirement years.
What are Medicare’s Cost Sharing Obligations?
Overview: Medicare is a health insurance program with several options. Traditional MedicareOriginal Medicare is private fee-for-service health insurance for people on Medicare. It has two parts. Part A is hospital coverage. Part B is medical coverage., known as Part A and Part B, offers basic coverage for major medical costs. Part C and D are private health plans.
Medicare beneficiaries share costs with the federal government and health plans for their healthcare coverage. Here’s a quick look at the shared costs baked into each part:
- Medicare Part AMedicare Part A is hospital coverage for Medicare beneficiaries. It covers inpatient care in hospitals and skilled nursing facilities. It also covers limited home healthcare services and hospice care. (hospital coverage): The government pays 80%, and the beneficiaryA person who has health care insurance through the Medicare or Medicaid programs. pays 20% co-insurance plus deductibles.
- Medicare Part BMedicare Part B is medical coverage for people with Original Medicare benefits. It covers doctor visits, preventative care, tests, durable medical equipment, and supplies. Medicare Part B pays 80 percent of most medically necessary healthcare services. (medical coverage): The government pays 80% and the beneficiary pays 20% co-insurance, plus deductibles, plus premiumsA premium is an amount that an insurance policyholder must pay for coverage. Premiums are typically paid on a monthly basis. In the federal Medicare program, there are four different types of premiums. .
- Medicare Part CMedicare Part C is Medicare's private health plan option. Also known as Medicare Advantage, Medicare Part C plans are a type of Medicare health plan offered by companies that contract with Medicare to provide all... (private health plan): The government pays a flat rate to health plans and the beneficiary pays co-pays, co-insurance, and a monthly premium.
- Medicare Part DMedicare Part D plans are an option Medicare beneficiaries can use to get prescription drug coverage. Part D plans provide cost-sharing on covered medications in four different phases: deductible, initial coverage, coverage gap, and catastrophic. Each... (prescription drug plan): The beneficiary pays a monthly premium and an annual deductible, then shares costs with the drug plan until the catastrophic spending level is reached, then the government pays most of the costs.
There are also 3 Medicare Cost Sharing programs that involve state Medicaid cost-sharing:
- Qualified Medicare Beneficiaries Program (QMB): The government pays the economically disadvantaged beneficiary’s Part B premiums and deductibles.
- Specified Low-Income Medicare Beneficiaries (SLMB): The government pays the Part B Medicare premium for qualified beneficiaries.
- Qualifying Individuals Program (QI): The government pays the Part B Medicare premium for qualified beneficiaries.
If you are a low-income individual, you are encouraged to contact Social Security to explore QMB, SLMB, or QI options.
Your Cost-Sharing Depends on Your Personal Situation
Medicare is a cafeteria-style system, not one size fits all. The “Parts” you choose, your income, and where you live all factor into the final equation. Where you live is a factor because private health plans are regional, which affects costs.
Medicare Part A Cost Sharing
Medicare Hospital Insurance (Part A) covers your hospital care when you are an inpatient. It’s free for anyone who has paid Social Security and Medicare payroll taxes for 10 years (40 quarters of work) and for the spouse of a person who has paid the taxes. Free is a bit of a misnomer. There are no additional costs because you already paid for the benefit through payroll taxes.
If you, or your spouse if you didn’t work, have 30-39 quarters of Medicare-covered employment, you’ll be required to pay a monthly premium that includes some cost-sharing with the government. For those people who are not eligible for Part A and have fewer than 30 quarters worked, you’ll pay the full Medicare Part A premiumMost beneficiaries get Medicare Part A benefits (inpatient coverage) premium-free based on the number of years they paid Medicare taxes. However, beneficiaries that did not pay Medicare taxes for the required 10 years pay a.... You can find the Part A premium rates here (they change annually).
There are various co-payments and deductibles that go along with Part A coverage. Each inpatient benefit periodA benefit period is a method used in Original Medicare to measure a beneficiaries use of hospital and skilled nursing facility (SNF) services. With each new benefit period, the beneficiary is charged a new benefit... (60 days) comes with a deductible ( ($1,408 in 2020). After the 60th day, there’s a daily co-payment ($352 in 2020 for days 61-90). With a co-payment in excess of $350 per day, these costs add up very fast. You can learn more about hospital costs here.
After a hospital stay of three days or more, some patients may be transferred to a skilled nursing facility for rehabilitation. The first 20 days are free. For days 21-100, the co-payment is $170.50 per day (2020 rates). You can find current rates here.
Medicare Part B Cost Sharing
Medicare Medical Insurance (Part B) covers your doctor bills, including lab tests, screenings, imaging, etc. There’s a monthly premium of $144.60 per month (2020 rate) for the majority of the 61 million beneficiaries. However, individuals with income up to $85,000 per year, and married couples with incomes up to $170,000 pay more.
You also have an annual deductible and co-payments to pay when you use services. The annual deductible is $198 (2020 rate). After your deductible is met, you typically pay 20% of the Medicare-approved amount for most doctor services, therapy, and durable medical equipmentDurable medical equipment (DME) is equipment that is designed to last and can be used repeatedly. It is suitable for home use and includes wheelchairs, oxygen equipment, and hospital beds.. This includes doctor services while you’re an inpatient.
Medicare Part C (Advantage Plan) Cost Sharing
Once you see the cost-sharing that’s baked into traditional Medicare, it’s easy to see why most Americans get additional insurance. One of the popular options is Medicare Advantage.
Medicare Advantage plansMedicare Advantage (MA), also known as Medicare Part C, are health plans from private insurance companies that are available to people eligible for Original Medicare (Medicare Part A and Medicare Part B). are private health plans, similar to Obamacare and the healthcare offered through your employer. Common options include HMO, PPO, and Medical Savings Account plans, however, all plan options are regional (by county).
The “advantage” of these plans is that the government allows them to offer additional benefits that are not part of Medicare Part A and Part B. The most common additional benefit is prescription drug coverage.
Unlike Medicare Part A and Part B, cost-sharing is not standardized. With most Medicare Advantage plans you pay a monthly premium (Medicare Part B plus any additional premium charged by the plan), co-pays or co-insurance when you use services, and an annual deductible if the plan includes prescription coverage. While this seems simple enough, beware that all plans charge different co-payments and coinsurance for different services. Also, the rates are normally higher if you don’t use in-networkDoctors, hospitals, pharmacies, and other healthcare providers that agree to health plan members' services and supplies at a set price are in-network providers. With some health plans, your care is only covered if you get... providers.
You can compare Medicare Advantage plans here.
Medicare Part D (Prescription Drug Plan) Cost Sharing
When Medicare was first enacted in 1965, prescription drug costs were quite modest, so coverage wasn’t an issue. By the 1990s drug prices skyrocketed. Part D of Medicare was added in 2003 to address this problem.
Medicare Part D cost-sharing is the most difficult part of Medicare for most people to get a handle on. The reason for this has to do with the four phases of coverage:
- Initial Deductible: In this phase, you pay 100% of all costs until spending reaches the annual standard deductible set by your plan.
- Initial Coverage LimitOnce you have met your yearly deductible, you will pay a copayment or coinsurance for each covered drug until you reach the initial coverage limit. You will then enter your plan’s coverage gap (aka, “donut... (ICL): In this phase, you and your plan share costs until spending reached the annual ICL, which adjusts each year.
- Coverage GapA period of time in which you pay higher cost-sharing for prescription drugs until you spend enough to qualify for catastrophic coverage. (Donut Hole): In this phase, you pay 25% of the retail costs of all generic and brand name medications.
- Catastrophic Coverage: In this phase, you pay up to $3.60 for all generic/preferred multi-source medications and up to $8.95 for all others.
What makes Part D difficult to understand is the difference between what you pay and how the Centers for Medicare and Medicaid ServicesThe Centers for Medicare & Medicaid Services (CMS) is the U.S. Federal agency that runs the Medicare, Medicaid, and Children’s Health Insurance Programs. (CMS) does its accounting on drug spending. Across all phases, CMS looks at the total retail costs of drugs to determine which phase of your Part D plan you are in.
You can compare Medicare Part D plans here.
Medicare Supplement Plans for Traditional Medicare Gap Coverage
No discussion on Medicare cost-sharing would be complete without talking about Medicare Supplement insuranceMedicare Supplements are additional insurance policies that Medicare beneficiaries can purchase to cover the gaps in their Original Medicare (Medicare Part A and Medicare Part B) health insurance coverage. (Medigap). These insurance products have been around since the inception of Medicare itself, and many retirees consider them the best option available to cover the co-payment and coinsurance portion of Medicare.
Medigap plans a super simple to understand once you know that:
- A Medigap plan will only cover Medicare-approved costs (no extras, like prescriptions, dental, or vision); and
- Medigap plans are standardized (there are 10 lettered plans).
With Medicare supplement insurance, you choose the level of coverage you need, and the plan pays its share. The big difference (financial) between Medigap coverage and a Medicare Advantage plan is predictable costs. With Medigap you pay for your coverage monthly, whether you use healthcare services or not. With Medicare Advantage, you pay smaller monthly premiums, but you have unpredictable co-pays and coinsurance bills when you use health services.
You can compare Medicare supplement plans here.
There are a lot of moving parts with Medicare, and they all have shared costs. It pays to understand and plan for these costs before you retire.