How Does Medicare Work — Plus Other Common Q&As
The annual Medicare open enrollment period is going on now through Dec. 7. It’s your yearly chance to switch, drop or add coverage.
But how does Medicare work, anyway?
Whether you’re about to turn 65 or you’ve been enrolled in the program for years, now is a great time to brush up on this federal health insurance program, what it offers, what it costs and how to make changes to your Medicare coverage.
7 FAQs About Medicare and Open Enrollment
Medicare is the largest health insurance program in the United States, covering more than 60 million Americans.
It’s also one of the most confusing and complex programs.
Contrary to popular belief, Medicare isn’t free and it doesn’t cover all your health care costs either.
Here’s what you need to know to get the most out of your Medicare coverage.
1. What Is Medicare?
Medicare is the federal government’s health program for people age 65 and older, as well as some younger people with disabilities or kidney failure.
If you’re at least 65 years old and entitled to Social Security benefits or Railroad Retirement benefits, you’re eligible for Medicare. You don’t need to be retired or taking benefits to qualify.
Younger people who have been on Social Security Disability for at least 24 months, or have been diagnosed with end-stage renal disease or ALS are also eligible.
2. How Is Medicare Funded?
Medicare is funded via payroll taxes, also known as FICA taxes, which are automatically withheld by your employer.
FICA includes a 6.2% Social Security tax and a 1.45% Medicare tax on your earnings — or 7.65% total.
Self-employed people face a double whammy from the federal government because they pay both the employer’s and the employee’s share of FICA taxes — a total of 15.3%.
No matter how much you make, 1.45% of your paycheck will be withheld for Medicare.
An additional 0.9% Medicare tax may apply to earnings over $200,000 for single filers, or $250,000 for married couples filing jointly.
3. How Does Medicare Work and What Are the Different Parts?
Original Medicare, also known as traditional Medicare, includes Part A and Part B. Original Medicare covers hospital stays, doctor visits, durable medical equipment, home health care and other medical services. However, it doesn’t cover vision, dental or hearing.
Medicare Part D is optional prescription drug coverage, and serves as a supplement to Original Medicare.
Medicare Part C, better known as Medicare Advantage, is an alternative to Original Medicare. It’s provided by federally approved private insurance companies and bundles features of Part A, Part B and usually Part D drug coverage into a single plan.
You can have other insurance, such as employer coverage, and Medicare at the same time. In this situation, Medicare pays first and your other insurance is the secondary payer.
Part A: Hospital Coverage
Medicare Part A is basically hospital insurance. It’s premium-free for most Medicare beneficiaries because you paid into it during your working years via those Medicare taxes.
However, Part A isn’t completely free. You’ll still have Part A deductibles and coinsurance costs.
Medicare Part A covers:
- In-patient hospital care
- Skilled nursing facility care
- Home health care
2021 Medicare Part A costs include:
- $0 monthly premiums for most people.
- A deductible of $1,484 per benefit period. (This is how much you pay out-of-pocket before Medicare picks up the rest of the bill).
- $0 for the first 60 days in a hospital. Then $371 per day for days 61 through 90. After day 90, you can dip into a reserve of 60 days that you get over your lifetime, but you’ll pay $742 a day. Once you run out of lifetime reserve days, you’re responsible for the full cost.
- $0 for the first 20 days in a skilled nursing facility following a hospitalization. Then $185.50 per day for days 21 through 100. Beyond day 100, you pay all the costs.
- $0 for hospice care and related services.
All the costs above are per benefit period. The clock for a benefit period begins when you’re admitted to the hospital or a skilled nursing facility as an in-patient. It ends once you haven’t had any in-patient care for 60 days.
So if you had a 75-day hospitalization, you’d pay a $1,484 deductible, plus coinsurance of $5,565 (for days 61 through 75 at $371 per day).
If you were hospitalized again six months later, you’d start a new benefit period. You’d owe another $1,484 deductible. So it’s possible to owe the Part A deductible multiple times in one calendar year if you’re hospitalized multiple times.
However, so long as you didn’t remain hospitalized for more than 60 days during your second visit, you wouldn’t have any coinsurance costs.
Over 95% of people don't pay a monthly premium for Part A. But if you worked less than 10 years prior to your 65th birthday, you may owe up to $471 in Part A premiums per month in 2021.
Because of the potential for high out-of-pocket costs, many recipients purchase Medicare supplement insurance policies, better known as Medigap, that helps shoulder some expenses.
Part B: Medical Coverage
Medicare Part B covers you for doctor’s services and outpatient care, including:
Medicare Part B covers:
- Doctor visits (including telehealth)
- Lab work
- Diagnostic tests and preventative care
- Mental health coverage
- Physical therapy
- Durable medical equipment
- Outpatient surgeries
- Ambulance services
If you have Medicare Part B, you can see any health care provider or primary care doctor who accepts assignment and who is accepting new Medicare patients.
Unlike Medicare Part A premiums, your Part B premiums aren’t free.
Some people who are still working and covered by employer medical insurance or are covered under their spouse’s health insurance plan opt to postpone Medicare Part B coverage until their other coverage ends.
2021 Medicare Part B costs include:
- Monthly premium of $148.50. This amount is higher for single filers with an income above $88,000, and married couples with an income above $176,000. People with limited incomes may qualify for Medicaid services or other programs that help cover this cost.
- A $203 annual deductible.
- 20% coinsurance for Medicare Part B services after your deductible is paid.
- $0 for most preventive services.
If you receive Social Security, your Medicare Part B premiums are automatically deducted from your benefit each month.
Medicare determines your premiums using your tax returns from two years earlier, so your 2020 return will be used to determine your 2022 premiums.
Part D: Drug Coverage
Medicare Part D is an optional prescription drug coverage program for people enrolled in Original Medicare. This coverage is provided by a private insurance company that Medicare later reimburses.
All Medicare prescription drug plans are required to cover certain categories of prescription drugs, but plans can vary widely in terms of what specific drugs they cover. Thus, your prescription drug costs can vary, depending on the Medicare Part D you choose.
You can shop for a Part D plan on Medicare’s website.
Medicare Part D costs include:
- Your costs will depend on your income, your prescription drugs, the plan you select and the pharmacies you use.
- A monthly premium, which varies. If you’re a single filer with an income above $88,000 or you’re married filing jointly with a combined income above $176,000, you’ll also pay a surcharge for Part D.
- Your Medicare prescription drug plan may have a deductible, but it’s capped at $435.
The average Part D premium for 2022 is projected to be $33 a month.
Medicare Advantage Plans (Part C)
Medicare Part C, better known as Medicare Advantage, is an all-in-one alternative to Original Medicare.
You can buy a Medicare Advantage plan offered by a Medicare-approved private insurance company.
Most Medicare Advantage plans bundle in Part D prescription drug coverage, allowing you to get all your Medicare benefits in a single plan. Many include additional benefits Original Medicare doesn’t cover, like hearing, dental and vision coverage.
These plans may also lower your out-of-pocket costs.
Think of Medicare Advantage like this:
Part C = Part A + Part B + Part D (usually) + some extra services
Medicare Part C covers:
- All the services covered by Original Medicare, including emergency and urgent medical care.
- Vision, hearing and dental (usually).
- Most plans offer some coverage for prescription drugs.
2021 Medicare Part C costs include:
- Deductibles and coinsurance, which vary from plan to plan.
- You may pay a premium for your Medicare Advantage plan in addition to your monthly Part B premium.
- Some plans have a $0 premium or may help pay some of your Part B premiums.
In 2022, the average monthly premium for a Medicare Advantage plan is projected to be $19 a month.
Unlike Original Medicare, Medicare Advantage plans restrict you to health care providers and services within the plan’s local network. You may also need to get prior authorization and approval from your plan for certain services and supplies.
Medigap (Medicare Supplement Insurance)
Medigap policies help cover some out-of-pocket costs, such as deductibles and coinsurance, for Original Medicare beneficiaries.
You can only purchase a Medigap policy if you’re enrolled in Original Medicare. Medicare Advantage enrollees can’t buy these supplement insurance policies.
Medicare supplement insurance plans are sold by private insurance companies. You’ll pay an insurer a monthly premium for your Medigap coverage in addition to all your other Medicare costs.
4. What Doesn’t Medicare Cover?
There are several major medical expenses that aren’t covered by Medicare Part A or Part B.
But remember: You can get some of these services covered if you add a Part D plan or switch to a Medicare Advantage plan.
- Long-term care: No part of Medicare — including Medicare Advantage plans — covers extended nursing home or assisted living facility stays. Medicare coverage for nursing care is mostly limited to short-term rehabilitative stays. If you can afford long-term care insurance, it’s worth considering, given the high costs of nursing care. Medicaid — which assists people with low income, regardless of age — can pick up the tab for long-term care, but only after you’ve depleted your financial resources.
- Prescription drugs: Part D coverage is necessary.
- Dental: Original Medicare doesn’t cover routine dental care, including cleanings, fillings, tooth extractions and dentures, but Part A may cover emergency dental work you incur during a hospital stay.
- Vision: Original Medicare won’t pay for eye exams, glasses or contact lenses.
- Hearing aids: Original Medicare doesn’t pay for hearing aids or exams for fitting hearing aids.
Other services not covered by Medicare:
- Most cosmetic surgery
- Sterilization, including a hysterectomy (unless it’s considered medically necessary)
- Medical marijuana
- Massage therapy
- Health care outside the United States
Funding a health savings account (HSA) before you’re eligible for Medicare is a good way to save for the costs that Medicare won’t cover.
5. How Do I Sign Up for Medicare?
If you’re already receiving Social Security benefits, you’ll be automatically enrolled in Medicare. You don’t have to do anything.
Otherwise, your Medicare eligibility begins around your 65th birthday, and you have a seven-month window to sign up.
This initial enrollment period begins three months before your birthday month, includes your birthday month and extends three months after that. So if you were born on Jan. 5, you could sign up between Oct. 1 and April 30.
You can also sign up during Medicare’s general enrollment period between Jan. 1 and March 31 if you missed the seven-month window around your 65th birthday. But your benefits won’t start until July of that year.
The Medicare enrollment process is handled by the Social Security Administration. If you’re not automatically enrolled, you can sign up by visiting Social Security’s website, calling 800-772-1213 or visiting your local Social Security office.
You can enroll in Medicare even if you don’t plan to retire right when you turn 65.
6. What Is Open Enrollment?
Medicare open enrollment, also known as the annual election period, runs from Oct. 15 through Dec. 7 each year.
It’s the time when people who are already enrolled in Medicare can make changes to their plans.
If you’re happy with your coverage, you don’t need to do anything.
During open enrollment, you can:
- Switch from Original Medicare to Medicare Advantage, or vice versa.
- Switch to a different Medicare Advantage plan.
- Sign up for Part D if you didn’t enroll when you first became eligible.
- Change to a different Part D plan.
Whatever changes you make won’t go into effect until Jan. 1. So if you make changes during the 2021 open enrollment period, your new benefits will kick in January 2022.
7. Is Signing Up for Medicare Mandatory?
In some cases, yes.
If you have coverage under the Affordable Care Act, COBRA through a past employer or TRICARE for retired military members, you’re required to enroll in Medicare when you turn 65.
You may not have to sign up for Medicare right away if you’re still working and enrolled in your employer’s group health plan coverage or if your spouse is still working and you’re covered under their plan. But be sure to check with your employer. Some companies will require you to enroll in Part A and Part B and use your employer insurance as secondary coverage.
Be sure you’re very clear on the rules. The penalties for late enrollment are steep and, in some cases, can increase your Medicare costs for the rest of your life.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Rachel Christian is a senior writer and Certified Educator in Personal Finance.