How Medicare Works: A Quick Guide

Tamera Jackson by Tamera Jackson | Licensed since 2007
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This article was updated on: 08/22/2018

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How Does Original Medicare Work?

Medicare is the federal health insurance program for United States citizens or legal residents of at least five years in a row who qualify for the program. That includes people who are 65 or older and those younger than 65 who receive disability benefits from the Social Security Administration (SSA) or the Railroad Retirement Board (RRB). Those younger than 65 who qualify for Medicare may include those with Amyotrophic Lateral Sclerosis (also known as ALS or Lou Gehrig’s disease) or End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD).

Original Medicare is different from the health insurance most Americans get from an employer in four key ways:

  1. Original Medicare has two parts.

Medicare Part A and Part B were signed into law in 1965 to provide health insurance coverage for people 65 and older.

  • Part A (hospital insurance) generally covers you for a limited time when you’re admitted as an inpatient to a hospital, skilled nursing or nursing home facility, or when you receive hospice care or covered home health services.
  • Part B (medical insurance) may cover two types of services: The first is medically necessary care aimed at diagnosing or treating medical conditions in an outpatient setting (like a doctor’s office or outpatient surgery center); and the second is care aimed at preventing or detecting illnesses at an early stage. Part B may cover medically necessary durable medical equipment and supplies.
  1. Original Medicare does not limit your out-of-pocket medical expenses.

Medicare’s out-of-pocket medical expenses include any charges you have to pay yourself. With Medicare, these expenses may include copayments, deductibles, and coinsurance.

Part A benefits and out-of-pocket costs might include:

  • Inpatient hospital care – This has an annual deductible.
  • Skilled nursing care – Days 1-20 there is no cost-sharing; for days 21-100 you will have to pay a co-insurance amount per day which is subject to change annually.
  • Long-term care hospitals – If you’re an inpatient in an acute care hospital and are immediately transferred to a long-term care hospital, or admitted to a long-term care hospital within 60 days of being discharged from an acute care hospital, you will not pay an additional deductible. If you are discharged from an acute care hospital and admitted to a long-term care hospital more than 60 days from your discharge date, you will generally have to pay another in-patient hospital deductible.
  • Home health-care services – If you are homebound (unable to leave your home) and require home health services from a nurse, physical therapist, or occupational and speech pathology, you will not have to pay any additional cost-sharing if you meet Medicare’s eligibility requirements. Generally Medicare covers these services for a limited time.
  • Hospice – Most hospice services are covered without any additional cost sharing. You may have to pay a copay for hospice related medications.  You may be assessed a coinsurance amount for respite care.

Part B benefits and out-of-pocket costs:

Medicare Part B has an annual deductible as well as coinsurance or copayments. With Part B coinsurance you typically pay 20% of the Medicare-approved cost of most services, after your deductible is met. A monthly premium is also required for Part B.

  • Durable medical equipment (such as wheelchairs) that is used in your home may be covered under Medicare Part B.
  • Ambulance services may be covered by Medicare Part B.
  • Inpatient and outpatient mental health services may be covered by Medicare Part B.
  • Lab tests may be covered by Medicare Part B.

The flu shot is usually covered by Medicare Part B as a preventative health service.

  1. Original Medicare typically doesn’t cover prescription drugs.
  • Medicare Part A may cover prescription drugs administered to you as a hospital inpatient and Medicare Part B may cover prescription drugs administered to you by a doctor in an outpatient setting. Medicare Part A and Part B generally don’t cover prescription drugs you take at home.
  • Medicare Part D became available in 2006, authorized by Congress. To get Medicare Part D coverage, you must enroll in a Medicare Prescription Drug Plan (described below).
  • Under Medicare Part D, private insurance companies approved by Medicare offer insurance plans that may pay a portion of your prescription drug costs.

Medicare Prescription Drug Plans have formularies, or lists of prescription drugs they cover. Before you sign up for this kind of coverage, you might want to make sure your prescription medications are listed in the plan’s formulary. The formulary may change at any time, but the plan will let you know in writing when it does.

  1. Original Medicare doesn’t have standard “provider networks.”

Doctor visits usually require cost-sharing under Medicare. The amount you pay to see a doctor will depend on which type of doctor you visit. There are three kinds of doctors:

  • Participating doctors – Participating doctors “accept Medicare assignment,” which means they’ve signed an agreement with Medicare to accept the amount of money that Medicare pays for their services as payment in full. With a participating doctor, you usually pay 20% of the cost and Medicare pays 80%.
  • Non-participating doctors – Non-participating doctors have not signed an agreement with Medicare and therefore might not “accept assignment” for all of their services. A non-participating doctor may take a payment from Medicare for 80% of Medicare’s approved cost. But he or she can charge you 15% of the approved cost on top of the 20% amount that you would normally be expected to pay. This additional 15% is called the limiting charge, applies only to certain Medicare-covered services and doesn’t apply to some supplies and durable medical equipment.
  • Doctors that do not accept Medicare assignment – If you choose to see a doctor that does not accept Medicare, you may have to pay up front for the doctor visit; the doctor should submit a claim in to Medicare, but in some cases you might have to submit the claim. In some cases, you may be responsible for all the charges associated with your visit.

Here’s a very basic example of what you might pay for a doctor visit with each of these three types of doctors. The costs represented here are not actual costs; they’re used for illustration purposes only:

Participating Doctor Non-Participating Doctor Doctor Not Accepting Medicare
The amount the doctor charges for the  visit $150 $150 $150
Medicare-covered amount for a doctor visit $100 $100 $100
Medicare may pay $80 $80 $0
You may pay $20 $35 $150

Medicare plan options

There are three distinct types of Medicare plan options aside from Original Medicare. They’re designed to either go along with “Original Medicare” or create a different way to get your Medicare benefits.

  • Medicare Advantage plans – Available from Medicare-approved insurance companies, these plans combine your Part A (hospital), Part B (medical) and usually Part D (prescription drug) coverage into a single health insurance plan. A Medicare Advantage plan must offer the same benefits as Original Medicare Part A and Part B. The exception is hospice care, which is covered directly under Medicare Part A. But Medicare Advantage plans must also limit your total annual out-of-pocket Medicare costs. And many plans include extra benefits such as routine dental and vision coverage.
  • “Stand-alone” Medicare Part D Prescription Drug Plans – Prescription drug coverage is available through the Medicare Part D program. Private insurance companies contract with Medicare to offer stand-alone Prescription Drug Plans. These plans may pay part of your medication costs. This is an optional benefit, but Original Medicare Part A and Part B offers limited prescription drug coverage and does not cover most medications you take at home.
  • Medicare Supplement Insurance plans – Available from private insurance companies, these plans are designed to work alongside Original Medicare to pay some of your out-of-pocket costs that Part A and Part B do not cover. You can buy a Medicare Supplement plan to work alongside a stand-alone Medicare Prescription Drug Plan, but Medicare Supplement plans don’t pay any benefits for coverage under Medicare Advantage plans.

Example: Three common ways people choose to have Medicare coverage. Please note that the Medicare Advantage plan in this example does cover prescription drugs, and is referred to as a Medicare Advantage Prescription Drug plan (MAPD). Not every Medicare Advantage plan is an MAPD.

Original Medicare + Part D Medicare Advantage Prescription Drug Plan

(Part C and Part D)

Original Medicare

+ Part D + Medicare Supplement plan

Original Medicare

·         Part A

·         Part B

One plan might include:

  • Part A
  • Part B
  • Part D
  • Routine dental (sometimes)
  • Routine vision (sometimes)
Original Medicare

  • Part A
  • Part B
Prescription Drug Coverage

·         Part D (stand-alone Medicare Prescription Drug Plan)

Prescription Drug Coverage

·         Part D (stand-alone Medicare Prescription Drug Plan)

Medicare Supplement Plan

How does Medicare Part D work?

Original Medicare, Part A and Part B, offers limited prescription drug coverage and does not cover most medications you take at home.

To get Medicare prescription drug coverage you need to enroll in Medicare Part D, either as a stand-alone Medicare Prescription Drug Plan or through a Medicare Advantage plan that includes prescription drug coverage.

Some out-of-pocket costs of Medicare Prescription Drug Plans may include:

  • Maximum $405 deductible in 2018: You will pay no more than the first $405 (in 2018) for prescription drugs. Some Medicare prescription drug plans have lower deductibles, and some plans may not have deductibles.
  • 25% coinsurance: For every $1 in prescription drug costs you get, you pay $0.25 cents and the insurance company pays $0.75 cents.
  • $3,750 coverage gap – If and when your covered prescription drug costs (deductibles and coinsurance) and the insurance company’s costs combine to total $3,750 in 2018, you typically pay 100% of the cost for your medications for the rest of the year, unless you reach the catastrophic coverage level.
  • $5,000 catastrophic coverage – Once you and the insurer have paid a combined total of $5,000 in 2018 on prescription drugs, you generally pay a substantially reduced rate for any additional prescription drug costs, so long as the drugs are covered by your plan.

 How Does Medicare Advantage (Medicare Part C) work?

Medicare Advantage plans are offered by private insurance companies that contract with Medicare as an alternative way to get your Original Medicare (Part A and Part B, and usually Part D) benefits in a single plan. Medicare Advantage plans may be available as HMOs, PPOs, POS, HMO-POS, PFFS, SNP and MSA-style plans.

Many Medicare Advantage plans include Medicare prescription drug coverage (Part D). In addition to your Part B premium, you need to pay any monthly premium the Medicare Advantage plan may charge for medical and prescription drug coverage.

Plan benefits can change from year to year, so you may have the option to make certain changes to your Medicare coverage every year during Medicare’s Annual Election Period (AEP), also known as “Open Enrollment for Medicare Advantage AND Medicare prescription drug coverage.” The Annual Election Period runs from October 15 to December 7 each year.

How does Medicare Advantage differ from Original Medicare?

Key Differences Original Medicare Medicare Advantage Plans
Limit on out-of-pocket medical expenses No limit Limited
Prescription drug coverage Limited to certain situations Yes, in many cases
Defined provider networks No Yes
Covers routine dental care No Yes, with some plans
Covers routine vision services No Yes, with some plans
Covers routine hearing services No Yes, with some plans
Provides fitness benefits No Yes, with some plans

How do Medicare Supplement Insurance plans work?

Medicare Supplement Insurance plans (also known as “Medigap” plans) are insurance plans offered by private insurance companies. They work like an extra layer of coverage that goes on top of your Medicare Part A and Medicare Part B coverage.

Medicare Supplement plans can help pay the deductibles, copayments and coinsurance that Original Medicare would charge you for some services and items. In 47 states, Medicare Supplement plans are standardized with lettered names A-N (Plans E, H, I, and J are no longer sold).

This grid outlines what each of these lettered plans may cover:

Medigap Benefits

 

Medigap Plans for Most States

 

A B C D * G K L M N
Medicare Part A coinsurance and hospital costs up to an additional 365 days after Medicare benefits are exhausted Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Medicare Part B coinsurance or copayment Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes**
First three pints of blood Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes
Medicare Part A hospice coinsurance or copayment Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes
Skilled Nursing Facility (SNF) coinsurance No No Yes Yes Yes Yes 50% 75% Yes Yes
Medicare Part A Deductible No Yes Yes Yes Yes Yes 50% 75% 50% Yes
Medicare Part B Deductible No No Yes No Yes No No No No No
Medicare Part B Excess Charges No No No No Yes Yes No No No No
Foreign Travel Emergency (Up to Plan Limits) No No 80% 80% 80% 80% No No 80% 80%
Out-of-Pocket Limit*** None None None None None None $5,240 $2,620 None None

*Plan F is also available in a high-deductible version. With the high-deductible Plan F, you pay for all Medicare-covered costs until you reach the deductible of $2,240 in 2018 before your Medigap plan pays anything.

**Plan N pays 100% of the Medicare Part B coinsurance. There are a few exceptions: Certain office visits may require a copayment of up to $20; and emergency room visits that don’t result in your being admitted as an inpatient may require a copayment of up to $50.

***Once you have reached the annual out-of-pocket spending limit and your Medicare Part B deductible, your Medigap plan pays 100% for Medicare-covered costs for the remainder of the calendar year.

As you can see, there are various options for how to get your Medicare coverage.

If you still have questions about Medicare plans available to you, I am happy to help you find answers. If you prefer, you can schedule a phone call or request an email by clicking on the buttons below. You can also find out about plan options in your area by clicking the Compare Plans button.

The purpose of this communication is the solicitation of insurance. Contact will be made by an insurance agent/producer or insurance company.

Medicare Supplement insurance plans are not connected with or endorsed by the U.S. government or the Federal Medicare program.

Benefits, premiums and/or copayments/co-insurance] may change on January 1 of each year.

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