Medicare can be described as labyrinthine, to say the least. It gets even more complicated when you start seeing commercials with celebrities offering you different forms of it. It’s a subject that practically has an entire industry built around explaining it, so it’s next to impossible for the average Unites States citizen to understand it on their own. Rather than simply give you a large collection of links to let you frustrate yourself with trying to figure out, we’re going to attempt to give you an overview of what it is and why you’re seeing William Shatner and the “DYN-O-MITE!” guy trying to sell you more of it.
This series will not be a comprehensive explanation of every detail of this state-run insurance system. That would require a level of education well above the pay grades of anyone at OnOurWayTo100.com. Instead, it will be an overview of the system and what you need to know in order to make the best decision when it comes to your coverage. We’ll do our best to get you the information that matters to you, in a way that’s digestible for everyone. Let’s start out with the first question of:
What is Medicare?
Medicare is a federal health insurance program in the United States primarily designed for individuals aged 65 and older, though it also covers younger individuals with certain disabilities or specific conditions like End-Stage Renal Disease (ESRD) and Amyotrophic Lateral Sclerosis (ALS). Established in 1965 under the Social Security Act, Medicare is meant to ensure that older adults and other eligible individuals have access to affordable healthcare, regardless of their income or medical history.
Medicare operates as a safety net, helping millions of Americans pay for hospital stays, doctor visits, preventive care, prescription drugs, and other healthcare services. Without Medicare, many elderly and disabled individuals might struggle to afford necessary medical care, which could lead to worsened health outcomes and financial hardships. The program is divided into different parts, each covering specific services. Understanding Medicare’s structure is essential for anyone approaching eligibility or helping loved ones navigate the complexities of healthcare in their later years.
All working Americans pay into Medicare and increasingly more of them are drawing on the system as time goes on. With greater numbers of Americans living longer lives, it only makes sense that the insurance is spending more money each year. In fact, in 2014, Medicare and Medicaid made up the second largest expenditure for the United States budget, after Social Security. Medicare spending jumped 10% between 2018 and 2019 alone. The total cost in 2022 was a massive $944.3 billion. It’s on track to break a trillion dollars very soon, so the average American may as well understand what it is and why they’re paying for it.
Medicare Parts Breakdown
Medicare is made up of four main parts: Part A, Part B, Part C (also known as Medicare Advantage), and Part D. Each part serves a distinct role, providing different types of healthcare coverage.
Medicare Part A (Hospital Insurance)
Medicare Part A primarily covers inpatient hospital care, but it also includes coverage for some skilled nursing facility stays, hospice care, and limited home health care. For most individuals, Part A is premium-free if they or their spouse have paid Medicare taxes for at least 10 years, or 40 quarters. However, those who have not met the tax contribution requirement may need to pay a premium for Part A coverage.
What it covers:
- Inpatient hospital care: This includes care received in a hospital setting for conditions requiring overnight stays, surgeries, or treatments.
- Skilled nursing facility care: Medicare Part A covers a limited stay in a skilled nursing facility if it follows a hospital stay of at least three days and is medically necessary.
- Hospice care: Part A provides hospice services for terminally ill patients with a life expectancy of six months or less.
- Home health care: Under certain conditions, home health services like physical therapy and intermittent skilled nursing care are also covered.
Costs:
- Most beneficiaries do not pay a monthly premium for Part A.
- Beneficiaries may be responsible for deductibles and co-insurance for hospital and skilled nursing facility care.
Medicare Part B (Medical Insurance)
Medicare Part B covers outpatient care, doctor visits, preventive services, and some home health care not covered by Part A. Part B is optional, but most beneficiaries choose to enroll to ensure broader coverage. Unlike Part A, Part B requires a monthly premium, which is based on the beneficiary’s income.
What it covers:
- Doctor visits: Medicare Part B covers medically necessary services like office visits, outpatient surgery, and consultations with specialists.
- Preventive services: Part B covers a range of preventive services, including vaccines, cancer screenings, and annual wellness visits.
- Durable medical equipment (DME): Items like walkers, wheelchairs, and oxygen equipment are also covered under Part B.
- Outpatient care: Part B helps pay for outpatient hospital services, mental health services, and diagnostic imaging like MRIs and X-rays.
Costs:
- Beneficiaries must pay a monthly premium for Part B, which varies based on income.
- In addition to premiums, Part B has an annual deductible, and once that deductible is met, beneficiaries typically pay 20% of the Medicare-approved amount for services.
Medicare Part C (Medicare Advantage Plans)
Medicare Part C, also known as Medicare Advantage, is an alternative to Original Medicare Parts A and B. These plans are offered by private insurance companies approved by Medicare and provide all the benefits of Part A and Part B. Many Medicare Advantage plans also include prescription drug coverage and may offer additional benefits not covered by Original Medicare, such as vision, dental, and hearing services.
Medicare Advantage plans often operate as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs), meaning beneficiaries are typically required to use a network of doctors and hospitals to get the lowest cost coverage.
What it covers:
- Everything covered under Original Medicare (Parts A and B).
- Additional benefits like prescription drug coverage, dental care, vision care, and wellness programs.
Costs:
- Beneficiaries continue to pay their Part B premium and may also have an additional premium for their Medicare Advantage plan.
- Costs, including deductibles, co-pays, and out-of-pocket limits, vary depending on the plan and provider.
Medicare Part D (Prescription Drug Coverage)
Medicare Part D helps cover the cost of prescription drugs. This coverage is offered through private insurance companies that are approved by Medicare, and beneficiaries can purchase it as a stand-alone plan to supplement Original Medicare (Parts A and B) or as part of a Medicare Advantage plan that includes drug coverage.
Each Part D plan has its own formulary, or list of covered drugs, and these formularies are divided into tiers. Drugs on lower tiers tend to be less expensive, while those on higher tiers come with higher out-of-pocket costs.
What it covers:
- Prescription drugs: Each plan covers different drugs, and beneficiaries should ensure their medications are included in their chosen plan’s formulary.
- Vaccines: Certain vaccines, like the shingles vaccine, are covered under Part D.
Costs:
- Beneficiaries must pay a monthly premium for Part D coverage.
- Part D plans include an annual deductible and co-pays or co-insurance for prescription drugs. There is also a coverage gap, known as the “donut hole,” which can increase out-of-pocket costs for some beneficiaries.
Enrollment and Eligibility
Most individuals become eligible for Medicare when they turn 65. However, younger individuals with disabilities, ESRD, or ALS may also qualify. Understanding when and how to enroll is crucial to avoid penalties and ensure coverage begins when it’s needed.
Initial Enrollment Period (IEP): This is a seven-month period that begins three months before an individual’s 65th birthday, includes the birthday month, and ends three months after. During this time, individuals can sign up for Medicare Parts A and B, as well as Part D or a Medicare Advantage plan.
General Enrollment Period: If someone misses their IEP, they can enroll in Medicare during the General Enrollment Period, which runs from January 1 to March 31 each year. Coverage will begin on July 1 of that year, but late enrollment penalties may apply.
Special Enrollment Period (SEP): Individuals who delay enrolling in Medicare because they are covered under a group health plan through their or their spouse’s employer may qualify for a Special Enrollment Period when that coverage ends.
Medicare Supplement Insurance (Medigap)
While Medicare covers many healthcare costs, it does not cover everything. To fill these gaps, many beneficiaries choose to purchase Medicare Supplement Insurance, commonly known as Medigap. Medigap policies, offered by private insurance companies, help pay for out-of-pocket costs like co-insurance, co-pays, and deductibles that Original Medicare doesn’t cover.
Medigap policies only work with Original Medicare and cannot be used with Medicare Advantage plans. There are 10 standardized Medigap plans, labeled A through N, each offering different levels of coverage. Some plans cover additional costs, such as foreign travel emergency care.
Funding Medicare
Medicare is primarily funded through two sources:
Payroll taxes: Medicare is funded largely through a payroll tax of 2.9%, split equally between employees and employers. Self-employed individuals pay the full 2.9% themselves. This tax helps finance Medicare Part A, ensuring hospital coverage for beneficiaries.
Premiums and general revenue: While Part A is funded through payroll taxes, Medicare Part B and Part D are funded through a combination of premiums paid by beneficiaries and general revenue from the federal government.
High-income earners may be required to pay higher premiums for Part B and Part D under the Income-Related Monthly Adjustment Amount (IRMAA).
Challenges Facing Medicare
Medicare has been a critical source of healthcare coverage for millions of Americans since its inception, but the program faces several challenges, particularly concerning its long-term financial sustainability.
Rising healthcare costs: As healthcare costs continue to rise, the financial burden on Medicare grows. The aging population and the increasing cost of medical treatments, hospital stays, and prescription drugs strain the system.
Aging population: The U.S. population is aging, with baby boomers retiring and becoming eligible for Medicare in large numbers. This demographic shift is placing a significant financial strain on the program as more beneficiaries require services.
Potential for insolvency: The Medicare Trustees’ annual report often warns that the Medicare Hospital Insurance (Part A) Trust Fund is at risk of insolvency. Without changes to funding or spending, Medicare may not be able to fully cover hospital care costs in the future.
Lots of Information
So that’s part 1 of this Medicare series. It’s a lot of information, but all of it is important information. You don’t necessarily have to understand every nuance of what we’ve presented to you. It’s a good idea to keep this page handy as we continue our breakdown of the system. Come back to it whenever you have a question about the information in later entries. This is a general view of Medicare as a whole and it should give you a footing to begin understanding the rest of it.
There are plenty of twists and turns coming up, but there’s one thing to keep in mind the whole time. If you’re reading this between the months of January, February, or March, you’re going to see many commercials advertising Medicare Advantage. They make it sound like you need it, but that may not be the case. Keep in mind that these are commercials created by for-profit companies. They have a stake in whether or not you give them your money, so tread carefully. You could end up losing out if you jump in without understanding what’s going on. We’re going to cover this addition in a later installment. To put it very simply, people who require hospital stays can end up paying thousands of dollars out of pocket while others may see a financial saving. It’s such a touchy subject that the government has stepped in to make providers of part C disclose their private status as not being part of the government run Medicare. We’ll get into all that, so make sure you come back to get the information you need to make an informed decision about your most precious commodity, your health!