Chances are, if you’re not on Medicare, you don’t know very much about the federal health program. You’ve likely noticed Medicare taxes come out of your paychecks but probably haven’t thought about how much you’ll be paying for healthcare once you become eligible.
Medicare consists of several parts and, contrary to popular belief, doesn’t pay for everything. These facts make it seem complicated, but once you know how the program’s facets function, it becomes easier to understand.
This article provides an introduction to understanding Medicare, including the basics of each part and factors to consider when choosing coverage.
Understanding Medicare Basics
What is Medicare?
Before we jump into the various options that go into understanding Medicare, we first need to explain what Medicare is.
Medicare is national health care coverage in the United States, primarily for individuals ages 65 and over. You can also enroll if you’ve received Social Security Disability Insurance (SSDI) for more than 24 months or are diagnosed with end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS).
When you become eligible for Medicare, you have an Initial Enrollment Period, beginning three months prior to your 65th birthday and ending three months after. For disabled beneficiaries, this enrollment period begins after 24 months of collecting SSDI and repeats when they turn 65.
The term “Original Medicare” refers to Parts A and B. One must enroll in these parts of Medicare through Social Security, either online, on the phone, or in person.
Medicare Part A provides inpatient coverage, which pays for hospital-related costs. These costs include semi-private rooms, hospital meals, special care units, lab tests, x-rays, skilled nursing facility care, short-term nursing home care, hospice, and more.
People who have paid into Medicare taxes for at least 40 quarters, or ten years, are eligible for premium-free Part A. If they have paid their Medicare taxes for at least 30 quarters (7.5 years), they’ll have to pay a $259 monthly premium in 2021. For those who paid Medicare taxes for fewer than 30 quarters, Part A’s premium is $471 per month in 2021. This amount is subject to increase every year.
Should you choose to delay enrollment in Part A and lack creditable coverage (meaning at least as good as Medicare), you’ll need to pay a late enrollment penalty. This penalty is 10% of your monthly premium for twice the number of years you were eligible but didn’t enroll.
However, it usually isn’t worth it to delay enrollment in Part A because, for most people, it doesn’t involve a premium. If you do choose to delay enrollment, an example of creditable coverage is employer coverage through a company with at least 20 employees.
Medicare Part B covers outpatient care, such as doctor visits. This part of Medicare also includes laboratory tests, mental health care, and ambulance services. The standard premium for Part B in 2021 is $148.50. For higher-income earners, this amount is subject to adjustment based on their income bracket. Those with lower incomes and limited resources may be eligible for a Medicare Savings Program, covering the Part B premium.
Delaying coverage from Part B while lacking creditable coverage also results in a late enrollment penalty. This penalty is 10% of the monthly premium for each year you weren’t enrolled. Like the late enrollment penalty for Part A, this gets added to your monthly premium.
Part C (Advantage)
Medicare Advantage plans are also known as Part C, or “replacement” plans. These plans stand-in for Original Medicare as long as you have them. Private health insurance companies offer Part C plans, often for low monthly premiums. Sometimes, Advantage plans have zero-dollar premiums.
Along with their low price point, extra benefits make Advantage plans attractive to potential enrollees. Often, the plans include dental, vision, hearing, and prescription drug coverage. Original Medicare doesn’t cover any of these benefits.
Before enrolling in an Advantage plan, make sure to do your research and investigate the star rating. This rating system shows how satisfied others in your area have been with these plans.
Advantage plans commonly take the form of Preferred Provider Organizations (PPOs) or Health Maintenance Organizations (HMOs), which means they involve doctor networks. Thus, it’s important for those who choose to enroll in one of these plans to ensure their preferred physicians are in-network. Otherwise, out-of-pocket costs can add up fast.Making sure your preferred providers are in network is a great way to save money on healthcare costs.
Additionally, people on Advantage plans are likely to need referrals to see specialists.
Part D (Prescription Drug Plans)
The prescription drug portion of Medicare is Part D. In 2006, Medicare introduced this component to provide coverage for outpatient prescription drugs.
This coverage is optional, but it can be beneficial to sign up as soon as possible. If you delay Part D enrollment without creditable coverage (meaning a drug plan at least as good), you will have to pay a late enrollment penalty as long as you have Part D coverage. This penalty is equal to 1% of the national average premium for every month you’ve lacked coverage.
Even if you aren’t taking any prescription medications when it’s time to sign up for Medicare, it’s wise to pair your coverage with a Part D plan. The average Part D monthly premium in 2021 is $33.06 per month. So, it’s likely that the money you save on prescription medication you’ll need in the future will be worth the premiums you spend each month when you don’t need any medication.
Medicare Supplement (Medigap)
With Original Medicare, beneficiaries are still responsible for copayments, deductibles, and coinsurance. Medicare Supplement plans (or Medigap) are secondary insurance covering the 20% of costs those on Medicare otherwise pay out-of-pocket.
For a monthly premium, you can add a Medigap plan to your coverage. Note that you cannot have Medigap and Advantage at the same time. At a minimum, these plans include:
- Coinsurance and copays for Parts A and B
- The first three pints of blood
- Hospital costs for up to 365 more days after using up Medicare benefits
Most Medigap plans include foreign travel emergency costs up to the plan limits, which is good news for those who enjoy traveling outside of the United States. Advantage plans don’t cover these costs, which makes Medigap plans more attractive to international travelers.
Most states identify Medicare Supplement plans by letters, A through N. Massachusetts, Minnesota, and Wisconsin identify the plans differently. Still, the coverage they offer is equal to some of the lettered plans.
However, Medigap plans in all states are standardized by the federal government. This means that while private insurance companies issue the plans, the benefits are the same no matter the carrier. Additionally, unlike Advantage plans, the benefits won’t change.
Plans with more benefits have higher monthly premiums. Also, the older you are when you sign up for a Medigap plan, the higher your premiums will be. That’s why it’s advisable to sign up during your Medicare Supplement Open Enrollment Period.
This time frame begins when you become eligible for and enroll in Part B, and lasts six months. During this window, Medigap plans cannot deny you. But, once the window closes, you’ll have to go through medical underwriting and could be denied.
Making Wise Choices About Your Coverage
Understanding Medicare basics is essential for helping you plan and prepare for your Golden Years.
When planning to enroll in Parts A, B, and D, consider whether you have creditable coverage so you can avoid the late enrollment penalties. Enrolling as soon as you’re eligible or lack creditable coverage can save money in the future that you would otherwise spend on inflated premiums.
If you don’t need to visit doctors frequently and a Medigap premium is out of your price range, an Advantage plan could be the way to go. Alternatively, if you have frequent doctor appointments, prefer certain physicians, and enjoy traveling outside of the United States, a Medigap plan would be a better bet for your money.
No single plan is the best fit for every Medicare beneficiary. While choosing a combination of coverage to suit your needs, consider your present and future health as well as your budget. It is likely better to sign up for more coverage initially to avoid the potential for higher costs as you age.
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