Health Insurance

Medicare How It Works

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 17 minute read

The healthcare system in the United States is intricate. While most industrialized nations provide healthcare to all citizens, the United States healthcare system is a hodgepodge of employer-based and individual policies. 

Medicare is one of the most significant sections of that blanket. Coverage is offered through this government-run health care insurance program for the elderly and the disabled.

Medicare is often discussed as if it were a monolithic program covering all 50 states. In truth, there are a plethora of coverage options, making the system quite intricate. First, you’ll need to research your options for Medicare plans and enroll in one that suits your needs and budget. 

This is a procedure that many individuals find difficult to understand. Having a broad understanding of Medicare is beneficial.

This includes the types of Medicare coverage, the people who are eligible for Medicare, and the associated expenses. When you know what you have to work with, choosing which option to pursue is less of a guessing game.

Medicare’s Purpose

Health insurance is often provided by the government or sold privately, with some kind of public financing available to aid with costs in most nations. However, 56.4% of Americans in 2019 have health insurance via their workplace, per the U.S. Census Bureau.

To put it another way, that’s an issue for retired Americans and the disabled. Medicare is our answer to that issue.

Availability of Medicare

U.S. citizens and permanent residents fall into one of three categories to qualify for health coverage under this federal government program:

  • Members of the population who are 65 and up
  • Disabled individuals under the age of 65 who are unable to work apply to anyone who has collected Social Security Disability Insurance for at least 24 months.
  • People with permanent kidney failure also known as end-stage renal disease need dialysis or a transplant.

The Centers for Medicare & Medicaid Services is the government department in charge of the Medicare program (CMS). Over 58 million Americans received coverage in 2017 thanks to Medicare, as reported on Medicare.gov. 

According to the Census Bureau, Medicare is the primary health insurance for roughly 18% of the U.S. population. As the population of the United States continues to age, this figure is expected to rise.

Funding for Medicare

The U.S. Treasury manages two trust funds that provide the money for the Medicare program. These accounts are for Medicare expenses alone.

Hospital Insurance Trust Fund is the first and is primarily supported by contributions from workers’ paychecks. Medicare benefits are funded in part by employee and employer contributions to a pool equal to 1.45 percent of annual wages. 

There is a 0.9% surcharge added to your annual paycheck if your income is beyond $200,000. You’ll be able to cover the cost of your Medicare hospital insurance with this payment.

The Supplemental Health Insurance Trust Fund is the second account. The bulk of this account comes straight from the normal government budget. Premiums paid by Medicare recipients also contribute. Beneficiaries’ medical insurance premiums and pharmacy charges are paid for with the money in this account.

Understanding Medicare

The Medicare program encompasses multiple insurance options. Medicare consists of numerous different programs that provide coverage for various medical services. Letters A, B, and D are typically used to denote these categories.

The situation is further complicated by the fact that there are two ways to enroll in Medicare: There are two types of Medicare coverage available. Medicare Parts A and B make up what is commonly referred to as “Original Medicare” medical insurance. 

You also have the option of purchasing supplemental insurance (Medigap) to cover any expenses that Medicare Parts A and B do not pay for, as well as a prescription drug plan. In contrast, Medicare Advantage plans are also an option. 

These plans, also referred to as Medicare Part C, combine the benefits of both Parts A and B into a single payment. In addition to these primary advantages, most of them also have supplementary ones.

It’s important to familiarize yourself with the many Medicare components and the services they provide before settling on a plan.

Part A of Medicare

Hospitalization and other inpatient medical services are covered by Medicare Part A. 

Included in the Part A coverage is:

  • Inpatient care in a hospital
  • Short-term care in a skilled nursing facility following a hospital stay (for example, if you have a stroke or break your hip, you may need to stay in a skilled nursing facility for a while after you leave the hospital)
  • Short-term medical care in a nursing home
  • Hospice care for terminally ill people
  • Certain types of home health care, such as physical therapy or a part-time home health aide

Custodial care, which refers to around-the-clock assistance with activities of daily living, is not covered by Medicare. The majority of people do not have to pay a premium for Medicare Part A because it is funded by payroll taxes collected while they are working. 

Medicare Part A can be purchased by those who have not paid Medicare taxes for the required 10 years. If you have paid Medicare taxes for at least 30 quarters, your normal premium for 2021 will be $259; if you haven’t, it will be $458.

Your monthly cost for Medicare Part A will be higher if you wait to enroll until after you become eligible. There is an out-of-pocket expense required by Part A before the insurance will pay for hospital care.

Your 2021 deductible is $1,484. After you’ve paid your deductible, you’ll still have to pay a portion of your healthcare bills each time you go to the hospital. This is known as coinsurance. Depending on how long you’re hospitalized, the cost may change.

Part B of Medicare

Outpatient medical services are covered by Medicare Part B. It includes care for acute illnesses as well as general wellness maintenance. 

The benefits of Part B include:

  • Exams and tests at the lab
  • Examinations for Diagnosis
  • Providers of rapid ambulance response and at other times if your doctor says it is medically necessary
  • All things from glucose monitors and test strips for diabetics to walkers, wheelchairs, oxygen tanks, and CPAP machines are examples of things that fall under the umbrella term of durable medical equipment.
  • Inpatient treatment for mental health issues
  • Medication for general release that is, drugs administered by a doctor or other health care provider, not drugs you take yourself.

In 2021, the monthly Part B premium for Medicare will be the same for everyone: $148.50. If you receive Social Security or Railroad Retirement benefits, this premium will be deducted from your payments automatically each month. 

In any other case, you will be sent a bill for your insurance. Medicare Savings Programs are available to low-income individuals in several states to assist with the payment of Medicare Parts A and B premiums.

A health care deductible applies to both Part A and Part B. The yearly equivalent in 2021 is $203. After this deductible is met, you’ll be responsible for paying 20% of Medicare’s approved cost for the service or treatment you receive the maximum amount Medicare will pay. If your doctor’s bill is higher than the predetermined maximum, you’ll have to foot the bill yourself.

The American Association for Retired Persons (AARP) states that Medicare Part B enrollment is optional and can be pursued independently of Medicare Part A enrollment. It’s important to note that you won’t be able to enroll in Part A without also enrolling in Part B.

Part D of Medicare

Parts A and B of Medicare will only pay for your prescription drugs if you obtain them in a clinic or hospital setting. Medicare Part D, generally known as a Medicare prescription drug plan, is a supplement to Original Medicare that covers medication costs. 

Anyone who enrolls in Medicare Parts A or B has the option to also enroll in Part D, although doing so is not mandatory. Medicare Prescription Drug Plans are offered by private health insurance companies. 

Accordingly, the costs associated with each policy are different. In contrast, the typical monthly cost for Medicare Part D in 2021 is expected to be $30.50, according to CMS. Extra Help is a program designed to help people with low incomes pay for their prescription drugs.

Part D plans can differ in terms of their deductibles, co-insurance, and prescription coverage. The formulary is a list of medications that are covered by a given Medicare Part D plan. Part D plans vary in the pharmaceuticals they cover, but all must cover a substantial portion of the medications typically used by Medicare recipients. 

For instance, in the most often prescribed medicine categories and classes, including cancer or HIV/AIDS therapies, all plans must include a minimum of two drugs to choose from.

A co-payment is the out-of-pocket expense that patients are responsible for when they purchase a covered medication. Covered medications may be categorized into levels by some Medicare prescription drug programs. 

There is a direct correlation between the tier you are in and the amount you are responsible for paying each month. A plan may, for instance, provide coverage for generic versions of medications at lower costs while covering brand-name equivalents at higher premiums.

Plans for Medicare Advantage

The Medicare Advantage program is also known as Medicare Part C. However, they are not included in the federal Medicare program. Rather, these are plans provided by private insurers that conform to Medicare’s standards.

All MA plans must offer the same benefits as traditional Medicare (Parts A and B). The majority of them, over 90%, provide prescription medication coverage similar to Medicare Part D, as reported by AARP. 

Most of them also cover things like dental and eye care that Original Medicare doesn’t. Due to significant differences in coverage, it is essential that you read each plan’s description in detail before making a decision.

In spite of signing up for a Medicare Advantage plan, you will still be responsible for paying your Part B cost each month. In addition to Medicare’s Part B cost, some plans have their own monthly payment. The projected average premium for 2021 from CMS is $21 per month.

Different plans also have different out-of-pocket expenses including deductibles and coinsurance. Insurers provide Medicare Advantage plans in a variety of configurations, just like other private health insurance. 

Some examples of different MA plans are:

  • HMOs. Patients enrolled in health maintenance organizations (HMOs) are obligated to see only those medical professionals in the HMO’s provider network for treatment. Care from a non-network provider will not be covered by your insurer. The only exceptions are dialysis received outside the plan’s coverage area and emergency treatment received outside the plan’s service area. Selecting a primary care physician and obtaining a referral for specialty care are both necessities under these plans. HMOs, in contrast to other forms of insurance coverage, typically have cheaper monthly premiums. The cost of medications is typically covered by HMOs as well.
  • PPOs. In the same way, PPOs have their own network of doctors and hospitals to serve their members. Aside from in-network providers, you are free to seek treatment elsewhere. Simply expect to pay a greater cost each time you do so. In most cases, PPOs will not necessitate that you select a primary care physician or ask for a referral. Most of them offer similar prescription drug coverage to health maintenance organizations.
  • Provision for Future Healthcare Expenses Plans. Individuals covered by a private fee-for-service (PFFS) plan have greater flexibility in selecting their healthcare providers. No need to choose a primary care physician or get referred to a specialist. The downside is that this sort of plan typically has higher premiums and other fees. Furthermore, not all PFFS plans include coverage for medications. Medicare Part D can be purchased independently of a Medicare Advantage plan if you like.
  • Special Needs Plans for Medicare. Healthcare providers often offer Special Needs Plans, or SNPs, to their clients who have patients with unique conditions or requirements. Medicare Special Needs Plans (SNPs) exist, for instance, for those with preexisting conditions like diabetes, HIV/AIDS, or kidney failure. In addition, dual-eligible Medicare/Medicaid beneficiaries, those who live in nursing facilities, and those who need nursing care at home, all have access to Special Needs Plans (SNPs). Each group’s needs are unique, therefore these plans customize their benefits, provider network, and medication coverage to meet those demands. The Medicare SNP option is not accessible to all Medicare recipients. You can check if any are available in your area by doing a search on the Medicare website.
  • A Medical Savings Account Plan for People with Medicare. Medicare MSA plans are split into two halves. The first is a medical savings account (MSA) with a high deductible, which means that you will have to pay a significant portion of your medical costs out of pocket before the MSA would start paying anything. The other is a Medicare-compatible health savings account known as a Medical Savings Account (MSA). Money is put away in this account and used to pay for medical expenses, including those that Medicare doesn’t cover. If you use funds from your MSA to pay for Medicare Part A or B services, such payments will be applied toward your deductible. The MSA plan will pay for any remaining Medicare-eligible expenses after your deductible has been met. Medicare Supplement Insurance (MSI) plans can pay for services that aren’t included in Original Medicare, such as dental and vision care. They do not, however, include coverage for medications. Separate coverage for Part D is required.

A Different Medicare Health Plan

Medicare coverage options extend beyond Original Medicare and Medicare Advantage and may include some or all of the following, depending on your location. 

Aside from Original Medicare, which includes Parts A and D, there are a variety of Medicare health plans that just cover Part B. Some of the same principles apply to these as to MA plans, but each has its own specifics.

One can select from the following options:

  • Plans to Decrease the Expenses of Medicare. This hybrid of Original Medicare and Medicare Advantage is currently only offered in a small number of states. They, like most Medicare Advantage plans, offer coverage for Medicare Parts A and B via a consolidated network of medical professionals. On the other hand, Original Medicare will pay for your care even if you visit an out-of-network provider. Medications are covered by several Medicare Advantage plans. Not all health insurance plans provide Medicare Part D coverage, so if yours doesn’t, you can always enroll in a stand-alone policy. As long as you have Part B, you can enroll in a Medicare Cost plan whenever it is taking new members. Leave at any time and go back to Original Medicare.
  • Medicare Advantage Plans for Part B Expenses. This Medicare Cost Plan offers solely Part B coverage. When you have Original Medicare, you get access to all of Part A. Coverage for Medicare Supplement Insurance Plan D is never included in these plans. Medicare Cost Plan Part B is typically made available through group medical insurance through a company or a union.
  • PACE. Persons over the age of 55 who require round-the-clock nursing care but who do not want to live in a nursing home might enroll in a PACE program instead. To help you fulfill your health care needs in the community, they will pair you up with a team of professionals in the medical field who will work with you and your loved ones to organize treatment. Care provided by PACE is comprehensive, encompassing even non-Medicare medical procedures. Drugs, home care, adult day care, and transportation are all included, as are any other services your health care team deems essential for you. Since most PACE teams only take care of a small number of patients at a time, they are able to give each one of them individualized attention.
  • PACE is limited in its availability. PACE programs in your area can be located by searching Medicare.gov or contacting your state’s Medicaid office.
  • Presentations and Test Runs. Medicare regularly tries out novel approaches in an effort to deliver higher quality care while reducing spending. Most of these trials only involve a select few participants in defined geographic areas and persist for a brief period of time. Contact Medicare at 800-633-4227 for more information on current pilot and demonstration projects (800-MEDICARE).

Medigap

When it comes to medical expenses, Original Medicare will cover most but not all of them. Part B of Medicare, which covers doctor’s visits and lab work, only pays for 80 percent of the total cost, according to AARP.

The remaining 20% must come directly from your pocket. The Parts A and B deductibles must also be paid. They can total several thousand dollars annually if left unchecked.

Medigap insurance, or Medicare Supplement Insurance, can help with these out-of-pocket expenses. The gaps in Medicare coverage can be filled by these supplementary policies, which are available through private insurers or marketplaces like health insurance.

Part of the cost of medical care is covered by Original Medicare. Your Medigap policy will then pay for whatever costs remain after the initial Medicare coverage.

Advantage plans for Original Medicare recipients are not the same as Medigap policies. Those plans include everything that Medicare does, from Parts A and B to any perks that are included with that particular plan. All Medigap policies do is fill in the gaps left by Original Medicare.

If you don’t have Original Medicare (Parts A and B) coverage, you can’t obtain a Medigap policy. Medicare Advantage enrollees are ineligible for Medigap coverage.

Any private medical insurance provider licensed to do business in your state is eligible to sell you Medigap coverage. It has its own monthly payment that you pay in addition to your Medicare costs. 

As long as you maintain paying your premiums, your coverage will be automatically renewed each year, regardless of your health. Both you and your spouse would need to get individual Medigap plans if you both wished to be covered.

A wide variety of Medigap plans are available, each with its own set of benefits and limitations. Medicare divides plans into a set of categories, labeled A through N, based on what services they provide and do not. 

Plan F is the most common, as it pays for all Medicare-related expenses above the standard coverage provided by Medicare, including Parts A and B deductibles and coinsurance. In 2018, the typical monthly premium for Plan F coverage was roughly $143.

Incomplete coverage is typical in Medigap policies. None of Original Medicare’s or Medigap’s plans pay for dental, vision, or hearing services, or long-term care.

If you choose a Medicare Advantage plan rather than Original Medicare, you may be able to cover some of these expenses. Dental and vision plans, as well as long-term care insurance, are examples of specialized policies that can be purchased separately.

How to Pick a Medicare Plan

Medicare Parts A and B are fully covered by both Original Medicare and Medicare Advantage plans. There are, however, important distinctions between the two options. 

It’s important to weigh the following while deciding between the two options:

  • Logistics. Part A, Part B, Part D (prescription drug coverage), and a Medigap policy are the minimum required coverage if you pick Original Medicare. Parts A, B, and D coverage are typically bundled into a single Medicare Advantage plan. Enrollment in Medicare Parts A and B is a prerequisite to signing up for an MA plan. Furthermore, you cannot purchase Medigap separately to pay for supplementary medical expenses.
  • Coverage. Hospitalization, doctor visits, and other medical services are all covered under Original Medicare. Prescription drug coverage can be obtained by enrolling in Part D. All three types of coverage are standard in MA plans, and many plans also include things like vision and hearing aids and dental work. If you go with Original Medicare, you’ll have to shell out cash or look into additional insurance to cover these services.
  • Cost. The AARP reports that, on average, MA plans have lower out-of-pocket expenditures than Original Medicare. Unlike Original Medicare’s 20% coinsurance requirement, most of these plans include fixed copays for doctor visits and other Part B services. In addition, the amount you have to pay each year is limited by the maximum allowed by your MA plan. If you have Original Medicare, you can lower your out-of-pocket expenses by purchasing the supplemental Medigap Plan K or L for a fee.
  • Drugs that need a doctor’s prescription. One must enroll in Medicare Advantage or purchase Medicare Part D in addition to Original Medicare in order to have coverage for prescription drugs. Either way, you’ll need to shop around to find a plan whose formulary covers your prescription medications. Medicare’s plan comparison site is where you can research your options and see how they stack up financially.
  • The Availability of Multiple Healthcare Providers. If you go with Original Medicare, you can see any doctor in the country who accepts Medicare patients. KFF reports that 99% of non-pediatric doctors in the US accept Medicare, however, 21% do not take new Medicare patients. Alternatively, many MA plans feature a provider network. You must use in-network service providers or pay substantially higher out-of-network rates. Verify that your current, preferred medical provider will accept patients under the MA plan you’re thinking about signing up for. If you don’t already know, research whether local pharmacies and medical facilities accept your preferred MA plan.
  • Its current location. For some, the benefits of Original Medicare outweigh the costs of Medicare Advantage, especially those who do not live in major metropolitan areas. It’s common for rural communities to have a smaller selection of Medicare Advantage plans than urban ones. Because of this, your pool of potential service providers may become smaller. Pricing for Medicare Advantage and Medicare Prescription Drug Plans likewise varies by region.
  • Travel. If you have Original Medicare, you can see any doctor or visit any hospital in the United States. In contrast, MA plans typically restrict you to seeing doctors only within the plan’s designated geographic area. That can be an issue if you frequently visit locations beyond your network’s coverage area, such as a vacation house. If you are a Medicare recipient and want to travel outside the United States, neither Original Medicare nor Medicare Advantage will reimburse any medical expenses incurred. This is not covered by Original Medicare, but it is covered by some Medigap plans in the event of an emergency, so you may want to consider combining the two if you frequently go outside the country.

It’s difficult to maintain a comprehensive mental picture of so many moving parts. Medicare provides a number of online resources for evaluating your options. Compare the monthly premiums of Medicare Advantage plans against those of Original Medicare by using Medicare.gov’s out-of-pocket cost estimator. 

Medicare plan search lets you examine and contrast the prices of various plans in your location. Further, the care compares website assists in locating local medical professionals and comparing their quality ratings, which is useful if you are curious about the doctors who accept a specific insurance plan.

When signing up for Medicare, you’ll have to decide between Original Medicare and Medicare Advantage, among other options. When enrolling in Original Medicare, for instance, you may have to decide whether to enroll in Part B immediately or wait until you actually need it. 

You should also think about whether or not you need Medicare Supplement Insurance or Part D. If you decide to go the private insurance route, be it Medicare Advantage, Part D, or Medigap, you’ll need to do some research and select a plan that best suits your needs.

Here’s an article that explains how to sign up for Medicare to help you out. More information about who is eligible, when to enroll, and how to evaluate various plans are included. Once you’ve decided on a plan, it guides you through the steps of signing up for that specific plan.

Bottom Line

There are few parts of the federal budget that come close to matching Medicare’s size. The KFF estimates that the total cost of Medicare benefits in 2018 will be $731 billion, or 15% of total government spending. 

This percentage is predicted to increase to 18% by the year 2029. The costs of the program are on the rise because of factors such as an aging population, increasing health care costs, and higher life expectancies. 

The Hospital Insurance Trust Fund, which finances Medicare Part A, will deplete its funds by 2026, and the payroll tax revenue that remains won’t be enough to cover the whole cost of the Part A program after that year.

The KFF claims that the Affordable Care Act of 2010 is responsible for a portion of the slowdown in Medicare spending increase seen since that year. Nonetheless, expenditures continue to rise. 

Government officials have proposed a variety of fixes to the program’s financial problems. Ideas include increasing the Medicare eligibility age, premiums and coinsurance, payments to providers, and payroll taxes.

Both Republicans and Democrats in Congress agree that Medicare needs to be saved, but they disagree on the best way to do so. A 2019 eHealth study found that 74% of Medicare beneficiaries were satisfied with their coverage, while roughly 26% were worried that the program’s funding would be eliminated during their lifetime. 

Older Americans care deeply about this subject, and they are also more likely to cast a ballot. Elected officials should work to find a solution to the problem.

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