Medicare

Key Takeaways

This guide explores Medicare's structure, eligibility requirements, enrollment processes, and the key differences between Medicare parts and related programs. Whether approaching Medicare eligibility or planning for future healthcare costs in retirement, these educational concepts provide a foundation for informed discussions with healthcare advisors and financial planning professionals.

• Medicare is the federal health insurance program primarily for people age 65 and older, funded through payroll taxes, premiums, and federal revenue
• Medicare Part A covers hospital care and is premium-free for most people with sufficient work history
• Medicare Part B covers outpatient services and doctor visits, with income-based monthly premiums
• Medicare Part C (Medicare Advantage) offers private plan alternatives that bundle Parts A and B, often with additional benefits
• Medicare Part D provides prescription drug coverage through private insurers approved by Medicare
• Original Medicare (Parts A and B) does not cover prescription drugs, dental, vision, hearing, or long-term care
• The Initial Enrollment Period begins three months before turning 65 and extends three months after
• Medigap policies help cover out-of-pocket costs not paid by Original Medicare
• Medicare differs from Medicaid, which is income-based rather than age-based healthcare coverage
• Dual eligible individuals qualify for both Medicare and Medicaid, with Medicaid helping cover Medicare costs

What Is Medicare?

Medicare is a national health insurance program run by the U.S. government. It primarily covers people age 65 and older, but it also provides benefits to younger individuals with disabilities or specific medical conditions.

Medicare is funded through a mix of payroll taxes, premiums, and general federal revenue. Under the Federal Insurance Contributions Act (FICA), most workers pay 1.45 percent of their wages toward Medicare, with employers matching the contribution. Higher earners pay an additional 0.9% Medicare tax on wages above certain thresholds.

The program is divided into four main parts:

Medicare Parts Explained

Part A (Hospital Insurance)

Medicare Part A covers inpatient hospital stays, skilled nursing facility care, hospice, and some home health care. This coverage does not include long-term assisted living or custodial care facilities.

Most people do not pay a monthly premium for Part A if they or a spouse have made Medicare contributions through payroll taxes for at least 10 years, though there are deductibles and coinsurance costs. In 2025, the Part A deductible for each benefit period is $1,676. If you receive Social Security benefits, coverage is automatic; otherwise you can enroll through the SSA website.

Part B (Medical Insurance)

Medicare Part B covers outpatient services such as doctor visits, lab tests, preventive care, and durable medical equipment. Unlike Part A, Part B has a monthly premium, which is adjusted based on income. The standard monthly premium for Part B enrollees is $185 for 2025 and the annual deductible is $257.

Higher-income beneficiaries pay Income-Related Monthly Adjustment Amounts (IRMAA), which are surcharges added to the standard Part B premium. These adjustments are based on income from two years prior, so 2023 income determines 2025 premiums.

Part C (Medicare Advantage)

Part C, known as Medicare Advantage, is offered by private insurance companies approved by Medicare. These plans bundle Parts A and B coverage and often include prescription drug coverage (Part D). Many Advantage plans add extra benefits like dental, vision, hearing care, or fitness programs. Costs vary by plan, and enrollees must generally use providers within the plan's network.

Medicare Advantage plans come with tradeoffs commonly discussed in Medicare planning. Many plans require prior approval before covering certain services, and provider networks can limit choice of doctors and hospitals. Individuals who switch from Medicare Advantage back to Original Medicare may face medical underwriting for supplemental coverage, potentially limiting Medigap options or resulting in higher premiums.

Part D (Prescription Drug Coverage)

Part D provides coverage for prescription medications and is run through private insurers approved by Medicare. Enrollees in Part A or Part B can enroll in Part D to receive coverage for prescription drugs that Original Medicare plans do not cover.

Each plan has its own formulary (list of covered drugs), premiums, and cost-sharing rules. Healthcare planning professionals often emphasize enrolling in Part D when first eligible because delaying can lead to a late-enrollment penalty. As of January 1, 2025, the Part D coverage gap (donut hole) was completely eliminated under the Inflation Reduction Act. Medicare Part D now consists of three phases: deductible, initial coverage, and catastrophic coverage. Beneficiaries have a $2,000 annual out-of-pocket maximum, after which they pay $0 for covered drugs for the remainder of the year.

2025 Part D Changes Under the Inflation Reduction Act:

• $2,000 Out-of-Pocket Cap: Annual out-of-pocket costs for covered Part D drugs are capped at $2,000 in 2025 (indexed for inflation in future years)
• Catastrophic Coverage: Once the $2,000 threshold is reached, beneficiaries pay $0 for covered medications for the rest of the calendar year
• Simplified Benefit Structure: The three-phase design (deductible, initial coverage, catastrophic) eliminates the confusing coverage gap that previously existed
• Medicare Prescription Payment Plan: Beneficiaries can opt to spread high prescription costs over monthly payments throughout the year

Part D IRMAA Surcharges: Higher-income beneficiaries pay income-related monthly adjustment amounts ranging from $13.70 to $85.80 per month in addition to their Part D plan premium, based on the same income brackets as Part B IRMAA.

Medicare Supplement Insurance (Medigap)

Medicare Supplement Insurance, often called Medigap, is sold by private companies to fill the gaps in Original Medicare. These policies help pay for out-of-pocket costs like deductibles, coinsurance, and copayments that Parts A and B do not cover. Individuals typically must have Original Medicare to buy a Medigap policy.

Medigap policies are standardized in most states with lettered plan types (Plan A through Plan N), though benefits vary by plan type. Enrollment during the Medigap Open Enrollment Period (six months starting when you turn 65 and are enrolled in Part B) guarantees acceptance regardless of health conditions. Outside this period, insurance companies may use medical underwriting.

Medicare vs Medicaid

It is common to confuse Medicare and Medicaid because their names are similar and they are both government-sponsored health insurance programs, but they have different eligibility requirements.

Medicare is a federal program that provides health insurance mainly based on age or certain health conditions, and it is available regardless of income. Medicaid, on the other hand, is a joint federal and state program that provides health coverage for people with limited income and resources. Medicaid often covers services that Medicare does not, such as long-term care in nursing homes.

Some individuals qualify for both programs, known as being "dual eligible," which allows Medicaid to help cover Medicare premiums and out-of-pocket costs.

Medicare Eligibility Requirements

Age-Based Eligibility

Most people become eligible for Medicare at age 65. If you or your spouse worked and paid Medicare taxes for at least 10 years (40 quarters), you generally qualify for premium-free Part A.

If you have not accumulated sufficient work credits, you may still buy into Medicare by paying premiums. Those purchasing Part A in 2025 pay up to $518 per month if they have fewer than 30 quarters of Medicare-covered employment, or $285 per month with 30-39 quarters.

Disability-Based Eligibility

People under 65 may still qualify for Medicare Part A without paying premiums if they meet certain conditions. This includes individuals who have received Social Security Disability Insurance (SSDI) benefits for at least 24 months, those with ALS, who qualify immediately without a waiting period, or people living with end-stage renal disease. Eligibility can also extend to certain railroad or government workers, as well as their spouses or children, provided they meet SSDI or work credit requirements.

Part B Enrollment for All Eligible Individuals

Anyone who qualifies for no-cost Medicare Part A is entitled to enroll in Part B, though they will need to pay a monthly premium based on income. US citizens or residents for 5+ years who do not qualify for Part A coverage can purchase Part B independently if over the age of 65.

Medicare Enrollment Process

Initial Enrollment Period

There are a few ways to sign up for Medicare. If you receive Social Security retirement benefits between age 62 and up to four months before turning 65, you will be automatically enrolled in Parts A and B at 65. If you apply for Social Security three months before or after your 65th birthday, you can enroll in Medicare at the same time.

The Initial Enrollment Period lasts seven months, beginning three months before the month you turn 65 and ending three months after. Missing this window may lead to late penalties. If you are still working at 65 and not ready to claim Social Security, you can apply online for Medicare only, or delay enrollment until you retire if you qualify for a special enrollment period.

You can enroll in Medicare at the Social Security Administration (SSA) website.

Special Enrollment Periods

Special Enrollment Periods allow enrollment outside the Initial Enrollment Period under certain circumstances, such as still having employer-based health coverage at age 65. Individuals with creditable coverage (coverage at least as good as Medicare) through an employer, union, or TRICARE can delay Part B enrollment without penalty. When this coverage ends, an eight-month Special Enrollment Period begins to enroll in Part B.

Annual Open Enrollment

The Annual Election Period (also called Medicare Open Enrollment) runs from October 15 to December 7 each year. During this time, beneficiaries can switch from Original Medicare to Medicare Advantage or vice versa, change Medicare Advantage plans, add or drop Part D coverage, or switch Part D plans. Changes take effect January 1.

Late Enrollment Penalties

Late enrollment in Medicare Part B results in a permanent 10% penalty for each full 12-month period you were eligible but not enrolled, unless you had creditable coverage. For Part D, the penalty equals 1% of the national base beneficiary premium multiplied by the number of months without creditable drug coverage, also permanent. These penalties are added to premiums for as long as you have Medicare coverage.

Medicare Costs Overview

Medicare involves various costs that significantly impact retirement budgeting:

Part A Costs

• Premium: $0 for most beneficiaries with sufficient work history; up to $518/month if purchasing coverage
• Deductible: $1,676 per benefit period (2025)
• Coinsurance: Varies by length of hospital stay

Part B Costs

• Standard Premium: $185/month (2025)
• IRMAA Surcharges: $74 to $443.90/month additional for higher earners
• Deductible: $257 annually (2025)
• Coinsurance: Typically 20% of Medicare-approved amounts

Part C Costs

• Premiums: Vary widely by plan, some $0-premium options available
• Out-of-pocket maximums: Required by law, amounts vary by plan
• Additional costs: Copays and coinsurance vary by plan

Part D Costs

• Premiums: Vary by plan, national average around $35-$50/month
• Deductible: Up to $590 (2025), varies by plan
• IRMAA Surcharges: Apply to higher-income beneficiaries

Medigap Costs

• Premiums: Vary significantly by plan type, state, age, and insurance company
• No deductibles or coinsurance after Medigap pays its share

What Medicare Does Not Cover

Original Medicare does not cover several important healthcare services:

• Long-term care: Custodial care in nursing homes or assisted living facilities
• Dental care: Routine exams, cleanings, fillings, extractions (most dental services)
• Vision care: Routine eye exams, eyeglasses, contact lenses
• Hearing: Hearing aids and exams for fitting hearing aids
• Cosmetic surgery: Procedures not medically necessary
• Acupuncture: With limited exceptions
• Concierge medicine: Membership fees for enhanced access to physicians

Some Medicare Advantage plans include coverage for dental, vision, and hearing services not covered by Original Medicare.

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