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What Is Medicare: Understanding the Basics of Medicare
By Donna Frederick
May 26, 2020
Medicare is America's federal health insurance program. It was originally designed to provide health insurance to U.S. citizens aged 65 and older. During Medicare's first year (1966), 19 million people enrolled.
Coverage expanded in the 1970s to include individuals with certain medical conditions. Today, around one-sixth of Medicare beneficiaries are younger than 65. In 2018, nearly 60 million Americans had Medicare coverage.
The Basics of Medicare
Medicare is a government entitlement program administered by the Centers for Medicare & Medicaid Services (CMS). While most people qualify for Medicare benefits based on their age (65), you may also be able to enroll if you meet one or more of the following requirements:
- Collect disability benefits from the Social Security Administration (SSA) for 24 months
- Collect Railroad Retirement Board (RRB) benefits
- Have end-stage renal disease (ESRD)
- Have amyotrophic lateral sclerosis (ALS, commonly known as Lou Gehrig's disease)
In addition, you must be either a United States citizen or a permanent resident who has lived here for at least 5 consecutive years.
What Is Original Medicare?
Around two-thirds of Medicare recipients have Original Medicare (Parts A and B).
What Is Medicare Part A?
Medicare Part A is also known as hospital insurance. It covers healthcare services received as an inpatient in either a hospital or skilled nursing facility (SNF). Part A also covers hospice care and select home healthcare services, assuming they are related to a qualifying hospital stay.
If you or your spouse paid Medicare taxes for 40 quarters (10 years), you qualify for premium-free Part A. Those who did not work the required 40 quarters may still sign up for Medicare Part A, but they must pay a monthly premium, which is $471 in 2021.
Other out-of-pocket costs for Medicare Part A include a deductible of $1,484 per benefit period and coinsurance if you spend more than 60 days in the hospital in a single benefit period.
What Is Medicare Part B?
Also known as medical insurance, Medicare Part B covers the cost of outpatient services deemed medically necessary by a Medicare-approved provider. Typically, this means care you would receive in a doctor's office to diagnose or treat a medical condition.
Part B also covers preventive screenings and services, durable medical equipment (DME), lab work, and mental health services.
The standard monthly premium for Medicare Part B is $148.50 in 2021. You may pay a higher premium if your annual income exceeds certain thresholds. Other out-of-pocket costs for Part B include an annual deductible of $203 and coinsurance for covered services. Typically, this amounts to 20 percent of the Medicare-approved amount.
What Is Medicare Part C?
More commonly known as Medicare Advantage (MA), Medicare Part C plans are similar to the group health insurance plans many people have through their employer.
Private insurance companies sell Medicare Advantage plans, which must provide the same coverage as Original Medicare. Most, however, offer additional benefits. Popular coverage items include:
- Prescription drug coverage
- Routine vision care
- Routine dental care
- Hearing aids
- Fitness plans and/or gym memberships
Benefits and costs vary according to the plan and provider you choose. If you decide to buy an MA plan, compare your options carefully. For example, many plans have a $0 monthly premium. But you need to look beyond the premium to see the full cost of the plan, which may include deductibles, copayments, and coinsurance.
MA plans also have a yearly out-of-pocket maximum, which is something Original Medicare does not have. The maximum out-of-pocket limit is $7,550 for in-network services and $11,300 for out-of-network. However, some MA plans set a lower out-of-pocket max. Once you reach the plan's out-of-pocket limit, your plan pays 100 percent of costs for the rest of the year.
Most Advantage plans also include a provider network. Any entity that provides healthcare services – primary doctors, specialists, labs, clinics, hospitals, DME vendors – may be included in the provider network.
Our plan finder tool makes it easy to compare your Medicare plan options. Just enter your location and coverage start date to begin reviewing plans in your area.
What Is Medicare Part D?
Medicare Part D provides prescription drug coverage, something not included in Original Medicare. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) gave us Part D.
Like Part C, prescription drug plans (PDPs) are also sold by private insurance companies. And again, costs and coverage vary according to the plan and provider you choose.
You may add a Part D prescription drug plan to Original Medicare or an MA plan that does not include drug coverage. If you go more than 63 days without creditable prescription drug coverage (i.e. coverage that is comparable to Medicare), you face lifelong late penalties.
Part D plans include a drug formulary, which is simply a list of medications covered by the plan. When comparing your PDP options, make sure the formulary includes your medications. You should also look at the pharmacy network and whether the plan allows mail order prescription refills.
If you have limited income and resources, you may qualify for Extra Help. This is a Medicare program that helps beneficiaries pay some or all of their out-of-pocket Part D costs.
What Is the Donut Hole?
One of the topics we get the most questions about is the donut hole, also known as the coverage gap. The donut hole famously closed in 2020, but questions still abound. Namely, if the donut hole is closed, why are you still paying 25 percent of prescription drug costs?
The main issue here is that not enough people understand:
- How out-of-pocket costs are figured under Part D
- How Part D worked before the Affordable Care Act (ACA, commonly known as Obamacare) passed in 2010
You start in the deductible phase, where you pay 100 percent of costs until you meet your Part D plan's deductible. At this point, you enter the initial coverage phase. During this stage, you pay 25 percent of drug costs and your plan pays 75 percent.
If you and your plan spend a combined total of $4,130, you enter the coverage gap, i.e. the donut hole. Once you're here, you continue to pay 25 percent. The difference is in how the remaining 75 percent is divvied up.
- Generic drugs: Medicare pays 75 percent
- Brand name drugs: Your plan pays 5 percent, the manufacturer pays 70 percent
In other words, your costs once you reach Medicare Part D donut hole coverage don't really change. But, before Obamacare, you paid 100 percent of prescription drug costs once you entered the donut hole.
Over the 10 years since ACA passed, the donut hole slowly closed. These days, the coverage gap mainly defines how your spending counts to reach the final stage of Part D: catastrophic coverage.
The out-of-pocket spending threshold you have to reach to enter catastrophic coverage rose significantly in 2020, from $5,100 in 2019 to $6,350. This is due to Medicare spending cuts that started in 2018. In 2021, your total out-of-pocket spending must reach $6,550 to leave the coverage gap. Once you reach the catastrophic coverage phase, you have only a nominal cost for covered prescriptions.
What Is Medicare Supplement Insurance?
More commonly known as Medigap, Medicare Supplement Insurance plans help cover some of your out-of-pocket costs under Original Medicare. Although private insurance companies sell these policies, the plans are standardized. That means that Medigap Plan A provides the same benefits no matter which insurance company you use. The same is true for Plan B, C, G, etc. Costs, however, differ from provider to provider.
Your Medigap Open Enrollment Period (OEP) begins the month you are both aged 65 or older AND enrolled in Medicare Part B. During this time, you cannot be denied a Medicare Supplement policy or charged a higher rate, even if you have pre-existing medical conditions.
Outside your Medigap OEP, your application typically goes through a process known as medical underwriting, which is a series of health-related questions. Your answers may result in you being denied a policy or charged a higher premium.
The only other time you can avoid medical underwriting is if you qualify for guaranteed issue rights. Typically, this means you left Original Medicare for an Advantage plan and then switched back within 12 months (known as trial rights). You may also qualify for guaranteed issue rights if you lose your Medigap or Advantage plan through no fault of your own.
You cannot have both Medicare Supplement Insurance and an Advantage plan.
How Do I Enroll in Medicare?
You sign up for Medicare via the Social Security Administration here. The online application takes less than 10 minutes to complete. You can also call SSA at 1-800-772-1213.
While you don't enroll via Medicare, the Medicare.gov site provides a variety of resources. You may also call the Medicare phone number at 1-800-MEDICARE (633-4227) or TTY 1-877-486-2048.
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