The United States health care system is complicated. While most developed countries have some form of universal health coverage, Americans get health insurance through a patchwork of different sources — workplace health plans, private insurance, and a variety of government programs. One of the biggest patches in that quilt is Medicare. This public health insurance program provides coverage for retirees and people with disabilities.
People often talk about Medicare as if it were a single plan that covered millions of Americans. In reality, it’s a highly complicated system with many different types of coverage. Before you can sign up for Medicare benefits, you have to figure out what plan type you want and how to enroll. For many people, this process can be confusing.
It helps to have a big-picture view of how Medicare works — who’s covered, the various coverage types, and what Medicare costs. Once you understand your choices, it’s easier to find the one that’s right for you.
What Medicare Is
In most countries of the world, people either get their health insurance from the government or buy it from private companies, with some public funding available to help with payments. However, according to the U.S. Census Bureau, 56.4% of Americans got their health insurance through their employers in 2019.
That creates a problem for older Americans who are no longer working and people who are unable to work. The solution to that problem is Medicare.
Medicare Eligibility
This federal government program provides health coverage for U.S. citizens and permanent residents in three groups:
- People who are 65 or older
- People under age 65 who have disabilities that prevent them from working (that applies to anyone who has collected Social Security Disability Insurance for at least 24 months)
- People who have end-stage renal disease, or permanent kidney failure, that must be treated with either dialysis or a transplant
The federal agency that runs the Medicare program is called the Centers for Medicare & Medicaid Services (CMS). According to Medicare.gov, the program provided coverage for over 58 million Americans in 2017. The U.S. Census Bureau says about 18% of all Americans get their insurance from Medicare. This number is growing as the U.S. population ages.
Medicare Funding
Funding for the Medicare program comes from two trust fund accounts held by the U.S. Treasury. Money in these accounts can only be used for Medicare.
The first fund, called the Hospital Insurance Trust Fund, gets most of its money from payroll taxes. During your working years, you pay 1.45% of your total earnings into a pool to pay for your future Medicare benefits, and your employer matches that percentage. If you make more than $200,000 per year, you pay an additional payroll tax of 0.9% on all the earnings above that limit. This money goes to pay for your hospital insurance costs under Medicare.
The second fund is called the Supplementary Medical Insurance Trust Fund. Most of the money in this fund comes out of the regular federal budget. A portion of it also comes from premiums paid by Medicare recipients. Money in this fund covers the cost of medical insurance and prescription drug costs for beneficiaries.
How Medicare Works
Medicare isn’t just a single insurance plan. There are several separate parts of Medicare, each of which covers different types of medical care. These types are commonly identified by the letters A, B, and D.
To make matters more complicated, there are two ways to get Medicare coverage: Original Medicare or a Medicare Advantage plan. Original Medicare includes Medicare Parts A (hospital insurance) and B (medical insurance). You can also choose to add extra coverage, such as a prescription drug plan or supplemental insurance (Medigap) for the costs Parts A and B don’t cover.
Alternatively, you can choose a Medicare Advantage plan. Sometimes known as Medicare Part C, these plans provide the same coverage as Parts A and B in a single package. Most of them provide other benefits as well.
Before deciding on a plan type, take a closer look at the various parts of Medicare and what each one covers.
Medicare Part A
Medicare Part A covers hospital stays and other types of care in a medical facility. Part A coverage includes:
- 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
Medicare does not cover long-term care or custodial care, meaning round-the-clock care or help with daily activities.
Most people don’t have to pay a monthly premium for Medicare Part A because they pay for it through payroll taxes during their working years. However, people who have not paid Medicare taxes for at least 10 years can buy into Part A. For 2021, the standard premium is $259 if you’ve paid Medicare taxes for at least 30 quarters and $458 if you haven’t. If you choose not to sign up for Part A when you first become eligible, you pay a late enrollment penalty that raises your monthly premium once you sign up.
Part A coverage comes with a deductible — an amount you must pay out of pocket before your hospital insurance coverage kicks in. In 2021, this deductible is $1,484. Even after meeting your deductible, you must pay a portion of your costs, called coinsurance, for each hospital stay. The amount varies based on how long you’re in the hospital.
Medicare Part B
Medicare Part B, or medical insurance, covers most types of outpatient care. That includes both treatment for specific conditions and preventive care to maintain wellness. Part B benefits include:
- Doctor visits
- Lab tests
- Diagnostic screenings
- Ambulance services in an emergency (and at other times if your doctor says it is medically necessary)
- Durable medical equipment, which includes all devices you need to maintain your health, such as blood sugar monitors and test strips for diabetes, canes, walkers, wheelchairs, oxygen, and continuous positive airway pressure (CPAP) devices
- Mental health care, even if it requires a hospital stay
- Outpatient prescription drugs (that is, drugs administered by a doctor or other health care provider, not drugs you take yourself)
All Medicare recipients pay a Part B premium equal to $148.50 per month in 2021. This premium automatically comes out of your Social Security or Railroad Retirement Board benefits if you receive them. If not, you receive a bill for your coverage. In some states, people with low incomes can apply to a Medicare Savings Program to help them cover Part A and Part B premiums.
Like Part A, Part B has a deductible for health care costs. For 2021, it’s equal to $203 per year. After covering this amount, you must pay coinsurance equal to 20% of the Medicare-approved amount — the approved fee Medicare will pay for any given service or treatment — for any care you receive. If your doctor charges more than the approved amount, you must pay the difference.
According to AARP, if you’re buying into Medicare, you can choose to enroll in Part B without signing up for Part A. However, you cannot get Part A coverage without Part B.
Medicare Part D
Medicare Parts A and B only cover prescription drug costs if you receive the medication in a hospital or medical facility. However, you can add drug coverage to Original Medicare by signing up for a Medicare prescription drug plan, also known as Medicare Part D. Part D coverage is available to everyone who signs up for Medicare Part A or B, but it’s not required.
Private health insurers sell Part D plans. Thus, their premiums vary from plan to plan. However, CMS says the average premium for Part D coverage is $30.50 per month for 2021. People with low incomes can apply for an assistance program called Extra Help to reduce their costs for prescription drug coverage.
Part D plans also vary in deductibles, coinsurance, and drug coverage. Each Medicare Part D plan has its own list of which specific drugs it covers, called a formulary. However, all Part D plans must cover a wide range of drugs people on Medicare use. For instance, all plans must provide a choice of at least two drugs in the most commonly prescribed drug categories and classes, such as cancer or HIV or AIDS treatments.
When you buy a covered drug, you must typically pay a portion of the cost out of your own pocket, called a copayment. Many Medicare prescription drug plans sort covered drugs into different tiers. The higher the tier, the higher your copayment. For example, a plan could offer a generic drug on a lower tier and the brand-name version of the same drug on a higher tier.
Medicare Advantage Plans
Medicare Advantage plans, or MA plans, are sometimes called Medicare Part C. However, they’re not actually part of the federal Medicare program at all. Instead, they’re policies offered by private insurance companies that follow rules set by Medicare.
MA plans must provide the same coverage as Original Medicare (Parts A and B). Most of them — about 90%, according to AARP — also offer prescription drug coverage, like Medicare Part D. Many of them also provide other benefits that Original Medicare doesn’t include, such as dental or vision care. Coverage varies widely between plans, so you must carefully read the plan descriptions to find out exactly what you’re getting.
When you join a Medicare Advantage plan, you must still pay your Part B premium. Some plans charge an additional monthly premium on top of the Part B premium. According to CMS, the average expected premium for 2021 is $21 per month.
Other out-of-pocket costs, such as deductibles and coinsurance, also vary from plan to plan. Like other private health care plans, insurers can set up Medicare Advantage plans in several different ways. Types of MA plans include:
- HMOs. Health maintenance organizations, or HMOs, require you to get care from a network of doctors and other providers who participate in the plan. If you get care from anyone else, your insurance doesn’t cover it. The only exceptions are for emergency care or urgent care and dialysis received when you’re outside the plan’s service area. These plans require you to choose a primary care doctor and get a referral if you need to see a specialist. On the plus side, HMOs tend to have lower monthly premiums than other types of coverage. Also, most HMOs include prescription drug coverage.
- PPOs. Preferred provider organizations, or PPOs, also have a network of health providers. However, you can get care from providers outside the network. You just pay a higher fee when you do. PPOs generally don’t require you to choose a primary care doctor or get referrals. Like HMOs, most of them cover prescription drug costs.
- PFFS Plans. With a private fee-for-service (PFFS) plan, you can typically get your care from any provider you choose. You don’t need to choose a primary care doctor or get specialist referrals. However, your premiums and other costs are usually higher with this plan type. Also, PFFS plans don’t all cover prescription drugs. If you choose a Medicare Advantage plan that doesn’t include prescription drug coverage, you can buy Medicare Part D separately.
- Medicare SNPs. Special Needs plans, or SNPs, are designed specifically for patients with specific types of health problems or needs. For instance, there are Medicare SNPs for people with diabetes, HIV or AIDS, and end-stage renal disease. There are also SNPs for people who live in nursing homes or require nursing care at home and those who use both Medicare and Medicaid. These plans carefully tailor their benefits, doctor choice, and drug plans to meet the needs of the specific groups they serve. Medicare SNPs aren’t available everywhere or open to everyone. You can search the Medicare site to see if there are any in your area.
- Medicare MSA Plans. Medicare Medical Savings Account (MSA) plans have two parts. The first is a high-deductible MA plan, which only begins to cover your care once you’ve paid a fairly large amount out of pocket. The second is a Medical Savings Account (MSA), a type of health savings account that works with Medicare. You store money in this account and use it to cover all your health costs — including costs not covered by Medicare. Any money spent from your MSA toward covered Part A or B services counts toward your deductible. Once you’ve reached your full deductible, the MSA plan covers the rest of your Medicare-covered cost. MSA plans can cover costs Original Medicare doesn’t, such as dental or vision care. However, they don’t cover prescription drugs. You must buy Part D coverage separately.
Other Medicare Health Plans
Depending on where you live, you may have other choices for Medicare coverage besides Original Medicare and a Medicare Advantage plan. There are other health plans within the Medicare program that provide Part B coverage, and sometimes Parts A and D. They follow some of the same rules as MA plans, but each one has its rules and exceptions.
These choices include:
- Medicare Cost Plans. Available only in certain areas of the country, these plans combine the features of Original Medicare and Medicare Advantage. Like most Medicare Advantage plans, they provide Part A and B services through a care provider network. However, if you go to an out-of-network provider, Original Medicare covers the cost. Some Medicare Cost plans include drug coverage. If yours doesn’t, you can sign up for a separate Part D plan. You can join a Medicare Cost plan at any time it’s accepting new members as long as you already have Part B. You can also leave at any time and return to Original Medicare.
- Part B Medicare Cost Plans. This type of Medicare Cost plan provides only Part B coverage. All Part A services are covered through Original Medicare. These plans never include Part D. Part B Medicare Cost plans are generally offered through workplace or labor union health plans.
- PACE. Programs of All-Inclusive Care for the Elderly, or PACE, are for people over 55 who need full-time nursing care but prefer not to go into a nursing home. They assign you to a team of health care professionals who work with you and your family to coordinate your care so you can meet your health care needs within the community. PACE includes all health care services covered by Medicare or Medicaid within a single plan. It also covers other services your health care team thinks are necessary for you, such as drugs, home care, adult day care, and transportation. Most PACE teams work with a limited number of patients, so they can provide very personalized care. However, PACE is only available in certain areas. You can look for PACE programs near you on Medicare.gov or by calling your Medicaid office.
- Demonstrations and Pilot Plans. Medicare often experiments with new ways to provide better care at a lower cost. These experiments involve small numbers of people in specific areas of the country, and most last for only a limited time. To learn about available Medicare demonstrations and pilot programs, call 800-633-4227 (800-MEDICARE).
Medigap
Original Medicare pays for most of your health care costs, but not all of them. For example, according to AARP, Medicare Part B covers only 80% of the cost of most doctor visits and lab tests. You have to pay the other 20% out of pocket. You also have to meet deductibles for Parts A and B. All told, they can add up to thousands of dollars per year.
Medicare Supplement Insurance, or Medigap, is a way to make these costs more manageable. These policies, sold by private insurance companies or through a marketplace like eHealthInsurance, fill the “gaps” in your Medicare coverage. Whenever you receive a service, Original Medicare pays for the portion of the cost it covers. After that, your Medigap policy covers the rest.
Medigap plans aren’t the same as Medicare Advantage plans. Those plans provide all your Medicare benefits, including Parts A and B, plus whatever extras the particular plan includes. Medigap plans are merely a supplement to Original Medicare.
To buy a Medigap plan, you must already be enrolled in Original Medicare with Part A and Part B coverage. You cannot sign up for Medigap if you have a Medicare Advantage plan.
You can buy a Medigap policy from any health insurer in your state authorized to sell them. You pay a monthly premium for the plan that’s separate from your Medicare premiums. Your policy is guaranteed renewable as long as you keep paying the premiums, regardless of your health. Each Medigap policy covers only one person, so if you and your spouse both want Medigap coverage, you must buy separate policies.
There are many different levels of Medigap coverage. Medicare groups plans into categories, lettered from A through N, based on what they do and don’t cover. According to Business Insider, the most popular type is Plan F, which covers your deductibles and coinsurance for Parts A and B as well as doctor bills over the Medicare-approved amount. The average cost for Plan F coverage in 2018 was about $143 per month.
Medigap policies don’t cover everything. There are some health care costs, including dental care, vision, hearing, and long-term care, that neither Original Medicare nor Medigap cover. You can get coverage for some of these costs by choosing a Medicare Advantage plan instead of Original Medicare. For others, you can purchase separate policies, such as dental insurance, vision care plans, or long-term care insurance.
How to Choose Medicare Coverage
Both Original Medicare and Medicare Advantage plans provide all the benefits of Medicare Parts A and B. However, there are some major differences between the two choices. When choosing between the two, consider these factors:
- Logistics. If you choose Original Medicare, you must sign up for as many as four separate plans: Part A, Part B, Part D prescription coverage, and a Medigap policy. With Medicare Advantage plans, you generally need only one plan to provide Parts A, B, and D. However, you must still enroll in Parts A and B before signing up for your MA plan. Also, you don’t have the option of adding Medigap to cover additional costs.
- Coverage. Original Medicare covers care received in hospitals, doctors’ offices, and other health care settings. You can add Part D to get prescription drug coverage. MA Plans generally provide all three coverage types, and many provide other coverage, such as hearing, vision, or dental care. If you choose Original Medicare, you must either pay for these types of care out of pocket or buy separate insurance plans to cover them.
- Cost. According to AARP, MA plans typically have lower out-of-pocket costs than Original Medicare. These plans generally charge fixed copays for doctor visits and other Part B services, which are typically lower than the 20% coinsurance required under Original Medicare. Also, MA plans provide an annual cap on your out-of-pocket expenses. To limit your out-of-pocket costs with Original Medicare, you must pay extra to add Medigap Plan K or L.
- Prescription Drugs. To get Medicare prescription drug coverage, you must either choose Medicare Advantage or add Part D to your Original Medicare. Either way, you have to compare different plans to find one that includes all the drugs you currently take in its formulary. To see plans in your area and compare their costs, check out Medicare’s plan comparison site.
- Provider Choices. If you choose Original Medicare, you can get care from almost any provider in the country who takes Medicare. According to the Kaiser Family Foundation (KFF), 99% of all non-pediatric doctors in the U.S. accept Medicare, although 21% are not accepting any new Medicare patients. By contrast, many MA plans have a provider network. They either require you to choose providers in the network or charge you much more if you don’t. If you currently have a doctor you like, check to see whether you can keep that doctor under any MA plan you are considering. If you don’t, check to see which doctors and pharmacies in your area accept various MA plans.
- Your Location. Original Medicare can be a better choice for people who live in rural rather than urban areas. These areas often have fewer Medicare Advantage plans to choose from than cities. That can limit your choice of available providers. The prices of available MA plans and Part D plans also vary by location.
- Travel. Original Medicare gives you access to physicians and providers all over the country. By contrast, MA plans often limit you to providers within a local network. That can be a problem if you travel a lot or spend a lot of time at a vacation home outside your network area. Neither Original Medicare nor Medicare Advantage provides any health care coverage when you’re traveling outside the U.S. However, some Medigap plans offer this coverage for emergencies — a possible reason to choose Original Medicare plus Medigap if you travel abroad often.
Keeping all these different variables in mind at once is complicated. To make it a little easier, Medicare offers several different websites for comparing your choices.
You can use the out-of-pocket cost estimator at Medicare.gov to compare the average costs of Original Medicare and MA plans in your area. The Medicare plan finder allows you to compare specific plans available in your area and their costs. And if you want to know more about the providers available on a particular plan, the care compare page helps you find health care providers in your area and compare their quality ratings.
Choosing between Original Medicare and Medicare Advantage is only one of several choices you need to make when enrolling in Medicare. For instance, if you choose Original Medicare, you may have to decide whether to sign up for both Parts A and B right away or delay Part B until you need it. You also have to determine whether you want to add Part D coverage or Medigap. And if you opt for any form of private insurance — Medicare Advantage, Part D, or Medigap — you have to compare and choose from the available plans.
To help you through this process, see our article on how to enroll in Medicare. It provides more details about eligibility, enrollment periods, and how to compare different plans. And it walks you through the process of signing up for each type of plan once you’ve made your choice.
Final Word
The Medicare program is one of the biggest items in the federal budget. According to the KFF, Medicare benefits cost a total of $731 billion in 2018 — 15% of all federal spending. By 2029, this number is expected to rise to 18%. An aging population, rising health care costs, and longer life spans are all driving up the program’s expenses. By 2026, the Hospital Insurance Trust Fund, which pays for Medicare Part A, will run out of money, and the money still coming in from payroll taxes won’t be enough to cover all the Part A program’s costs.
According to the KFF, the growth of Medicare spending has slowed since 2010, partly because of changes made by the 2010 Affordable Care Act. However, costs are still rising. Policymakers have offered various suggestions to keep the program solvent. Ideas include raising the eligibility age for Medicare, raising premiums and coinsurance, cutting payments to providers, and raising payroll taxes.
Republicans and Democrats in Congress may disagree on how to save Medicare, but they can agree it’s an important issue. According to a 2019 eHealth survey, 3 out of 4 Medicare recipients are happy with their coverage, yet nearly 1 in 4 worry funding for the Medicare program will disappear within their lifetime. The issue is important to older Americans — and older Americans vote. It’s in the interest of elected officials to find a way to fix it.
