Medicare is a veritable alphabet soup of choices. There’s Part A, Part B, Part C, Part D, and when you get into Medicare Supplements, there are 10 options—A, B, C, D, F, G, K, L, M, and N. Make the wrong choices and you could be hit with lifetime penalties that drive up your Medicare premiums and a Medicare plan that doesn’t give you all the benefits you could have. Constructing a Medicare plan that’s right for you requires research, planning, and asking the right questions.
When Medicare was signed into law on July 30, 1965, there were just two parts, Part A and Part B. They are referred to as Original Medicare and still exist today. Parts A & B cover approximately 80% of your healthcare costs. Anything above that comes out of your pocket.
Medicare Part A
Medicare Part A is hospital insurance. In broad categories Part A covers:
- Hospital Care
- Skilled nursing facility care
- Nursing home care (as long as custodial care is not the only care you need)
- Home health services.
Part A covers services like lab tests, surgeries, and doctor visits as well as supplies such as wheelchairs and walkers if they’re considered medically necessary.
Generally, there is no cost for Medicare Part A, sometimes called premium-free Part A. It’s paid for by the Medicare tax that’s been taken out of your paycheck during your working career. However, it doesn’t mean you incur no costs. If you have a hospital stay in 2021, there is an inpatient deductible of $1,484 for each benefit.
- According to Medicare, 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 gotten any inpatient hospital care for 60 days in a row. If you go into a hospital or skilled nursing facility after one benefit period has ended, a new benefit period begins. You must pay the inpatient hospital deductible for each benefit period. There is no limit to the number of benefit periods.
Besides the deductible, coinsurance can be involved. For example, in 2021
- You pay $0 coinsurance days 1-60 for each benefit period
- You pay $371/day coinsurance days 61-90 for each benefit period
- You pay $742/day coinsurance days 91 and beyond for each “lifetime reserve day” after day 90 for each benefit period.
- Medicare defines lifetime reserve days as additional days Medicare will pay for when you’re in a hospital for more than 90 days. You have 60 reserve days that can be used during your lifetime. For those days, Medicare pays all covered costs except for daily coinsurance.
- You pay all costs when you exhaust your lifetime reserve days.
Medicare Part B
Medicare Part B provides medical insurance, things like outpatient services, and doctors’ fees. Part B covers 2 types of services
- Medically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.
- Preventive services: Healthcare to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.
- Supplies necessary to diagnose or treat a medical condition that meets accepted standards of medical practice as well as preventive services.
There’s no cost to you for most preventive services if you receive them from a health care provider who accepts assignment, meaning the provider agrees to be paid directly by Medicare, accepts the amount Medicare pays, and agrees not to bill you for more than the Medicare deductible and coinsurance. Part B covers things like:
- Clinical research
- Ambulance services
- Durable medical equipment (DME)
- Mental health
- Partial hospitalization
- Getting a second opinion before surgery
- Limited outpatient prescription drugs
There is a monthly premium for Part B. If you receive Social Security, the premium is automatically deducted from your benefit payment. If you are not receiving Social Security, you will be billed. In 2021, the monthly Part B premium is $148.50. There is also an annual Part B deductible. In 2021 it is $203. The monthly premium and annual deductible generally increase every year.
An important part of any health insurance plan for mature Americans is prescription drug coverage. That’s where Medicare Part D comes in—the drug plan. Prescription drug coverage is not part of Original Medicare, so it has to be purchased separately. The average basic premium for Part D in 2021 is $30.50. That price generally increases every year. There is also an annual Part D deductible you have to pay before your Medicare drug plan pays its share. The deductible varies between plans but in 2021 the deductible can be no more than $445.
Each Medicare drug plan has its own list of covered drugs, called a formulary. Many plans place drugs into different tiers on their formularies and drugs in each tier have a different cost. For example, a drug in a lower tier will generally cost less than a drug in a higher tier. Or a generic drug usually costs less than a brand name.
Except for vaccines covered under Medicare Part B, Medicare drug plans must cover all commercially available vaccines, like the shingles vaccine, when it’s medically necessary to prevent illness.
Part D has two categories—initial and catastrophic. In both cases, there is a certain amount that comes out of your pocket before Part D pays for your prescriptions. In between initial and catastrophic is the infamous “Donut Hole. Not everyone will enter the coverage gap. According to Medicare, once you and your plan have spent $4,130 on covered drugs in 2021, you’re in the gap. Once you reach the coverage gap, you’ll pay approximately 25% of the cost for your plan’s covered drugs. Medicare lists specifics on its website.
When you’ve spent $6,550 out-of-pocket in 2021, you’re out of the coverage gap. After that, you automatically move into “catastrophic coverage” which assures you only pay a small coinsurance amount or copayment for covered drugs for the rest of the year. Under catastrophic coverage, you’ll pay the greater of 5% of the retail price of your prescriptions or $9.20 for brand names and $3.70 for generics.
Items that count toward the donut hole coverage gap include:
- Your yearly deductible, coinsurance, and copayments
- The discount you get on brand-name drugs in the coverage gap
- What you pay in the coverage gap.
Items that don’t count toward the coverage gap include:
- The drug plan premium
- Pharmacy dispensing fees
- What you pay for drugs not covered by your plan
Medigap (Supplement) Plans and Medicare Advantage Plans (Part C)
So, are you stuck paying all the deductibles, coinsurance, and copayments that come with Original Medicare? That’s where Medigap, officially known as Medicare Supplements, and Medicare Advantage, or Part C, plans come in.
Medigap is an addition to Parts A & B. Medigap is provided by private insurers that have been approved by Medicare. The plan you choose determines how much your Medigap plan will pay toward your out-of-pocket costs. There are 10 different Medigap plans, all beginning with a letter, but insurance companies are not required to offer all 10.
No matter which plan you choose, the coverage is standardized. For example, every plan F, no matter which company you buy it from, has identical coverage. But all Medigap premiums are not created equal. Insurance companies may charge different premiums for the same policy. So, as you shop, be sure you’re comparing apples to apples, for example, comparing Plan F from one company with Plan F from another company.
People with chronic conditions often choose Medigap plans because of the amount they pay toward deductibles, coinsurance and copayments that come from Original Medicare (Parts A & B), and because Medigap allows you to visit any doctor or hospital that accepts Medicare.
Here are things to keep in mind when considering Medicare Supplement Policies:
- You must have Medicare Part A and Part B.
- If you have a Medicare Advantage Plan, you can apply for a supplement policy, but make sure you can leave the Medicare Advantage Plan before your supplement policy begins.
- You pay the private insurance company a monthly premium for your supplement policy in addition to the monthly Part B premium you pay Medicare.
- A Supplement policy covers only one person. If both you and your spouse want supplemental coverage, you have to buy separate policies.
- You can buy a supplement policy from any insurance company licensed in your state.
- Any standardized supplement policy is guaranteed renewable even if you have health problems. The insurance company cannot cancel your policy as long as you pay the premium.
- Supplement policies are not allowed to include prescription drug coverage.
- It’s illegal for anyone to sell you a Supplement policy if you have a Medicare Medical Savings Account (MSA) Plan.
- Medicare Supplement policies generally do not cover long-term care, vision, dental, hearing aids, eyeglasses, or private-duty nursing.
The best time to buy a Supplement policy is during your six-month Medicare open enrollment period. During that time, you can buy any supplement policy sold in your state, even if you have health problems. The enrollment period automatically starts the month you turn 65 and are enrolled in Medicare Part B. If you don’t sign up for a Medicare Supplement policy during the enrollment period and later change your mind, you could be denied coverage or charged a higher premium based on your health history.
Medicare Advantage Plans
If you join a Medicare Advantage Plan, you still have Medicare, but your Part A hospital insurance and Part B medical insurance coverage come from the Plan, not from Original Medicare. MA plans use their own network of doctors and medical facilities, so you usually have lower premiums and higher out-of-pocket costs than Medigap plans. Using out-of-network doctors and medical facilities costs you more.
While the plans cover all services offered by Original Medicare, they always cover you for emergency and urgently needed care, and may cover you for vision, hearing, dental, and health and wellness programs. Most plans also include Medicare prescription drug coverage (Part D).
Medicare pays a fixed amount for your care each month to the companies offering Medicare Advantage plans, and the plans have to follow rules set by Medicare. However, the cost of Medicare Advantage Plans varies and they can charge different out-of-pocket costs as well as have different rules for obtaining various services. Your out-of-pocket costs depend on:
- Whether the plan charges a monthly premium
- Pays any of your monthly Medicare Part B premium
- Has a yearly deductible or additional deductibles
- The copayment or coinsurance amount you pay for each visit or service
- The type of health care services you need and how often you get them
- If your doctor accepts assignment
- Whether you use network providers or out-of-network
- If you need extra benefits
- The plan’s yearly limit on your out-of-pocket costs for all medical services
Once a year Medicare Advantage Plans set the amounts they charge for premiums, deductibles, and services. It is the plan, not Medicare that decides how much you pay for a MA plan. Changes can only occur once a year and they take effect each January 1st. So, it’s advisable to shop around each year to make sure you’re getting the best deal for your situation.
If you have existing health coverage through your employer, union, or other benefits administrator, talk to them about their rules before you join a Medicare Advantage Plan. In some cases, joining an MA Plan might cause you to lose employer or union coverage for yourself, your spouse, or dependents. In other cases, if you join a MA Plan, you may still be able to use your employer or union coverage along with the plan you join. If you drop employer or union coverage, you may not be able to get it back.
One of the deadliest Medicare mistakes, whether you’re enrolling in Original Medicare, a Medigap plan or Medicare Advantage, is not enrolling at the right time. Missing enrollment deadlines can increase your cost and permanently penalize you. The age to enroll in Medicare is age 65, not at your Social Security Full Retirement Age.
The first time you can enroll in Medicare is during your Initial Enrollment Period (IEP), a 7-month window that runs 3 months before you turn 65, the month you turn 65, and three months after the month you turn 65. If you enroll in the first three months of your IEP the effective date of your coverage will not be delayed, so enroll as early as possible.
There is an exception to the Initial Enrollment Period. if you’re still working at 65 and get health insurance through your employer, or through your spouse’s employer, you can delay enrolling in Medicare, without penalty, until you leave that employer. But the employer health plan has to be qualified, which means it covers 20 people or more. Once you leave the employer you have eight months to enroll in Medicare before penalties begin. Even if you have qualified employer health coverage, it’s a good idea to enroll in Part A when you turn 65. It’s free and you’ll have it in place for later.
Late Enrollment Penalties
If you don’t have eligible employer coverage and don’t enroll in Medicare during that initial seven-month window, but later do enroll, you’ll be hit with late enrollment penalties.
Part B will raise your monthly premium by 10% for each 12-month period you were eligible to enroll in but didn’t. According to Medicare, the penalty lasts “for as long as you have Part B”— in other words, for the rest of your life.
Although Part D is optional, if you don’t enroll when you’re eligible and later do enroll, your premium increases 1% for each month you could have had Part D coverage but did not. The part D late enrollment penalty lasts for the rest of your life, too.
Medicare Advantage Enrollment
Your Initial Enrollment Period (IEP) is also the time you enroll in a Medicare Advantage plan if that’s the option you choose. You must sign up for Medicare Parts A & B and receive a Medicare number before you can enroll in a Medicare Advantage plan.
You have a 6-month window to sign up for a Medigap plan. It begins the month you turn 65 and are enrolled in Medicare Part B. During that time, you can buy any Supplement policy sold in your state at the best price, even if you have preexisting conditions.
However, if you later decide to switch to a different Medigap policy or move from Medicare Advantage to Medigap, insurance companies are allowed to use medical underwriting to decide whether to accept your application and how much to charge you. If they accept your application, it may cost more than you were paying and the company may impose a waiting period before covering your healthcare costs. There is no underwriting for Medicare Advantage plans.
- If you miss your Initial Enrollment Period, you can sign up for Part A anytime, but for Part B you have to wait until the annual General Enrollment Period, January 1-March 31. Your coverage then begins July 1.
- There is an annual Open Enrollment Period, October 15-December 7. During this period, you can move from Original Medicare to Medicare Advantage, Medicare Advantage to Original Medicare, switch Medicare Advantage plans, change or add prescription drug coverage standalone plans or drop drug coverage and move into an Advantage plan. You can switch Medigap plans anytime if the new insurer accepts you.
- Once you enroll in Medicare you can no longer contribute to a flexible spending account or a health savings account, but you can withdraw funds from an HSA to pay for medical expenses.