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What Medicare Is and How It Works

Medicare is a federal health insurance program run by the Centers for Medicare & Medicaid Services (CMS). It primarily serves people age 65 and older, though some younger individuals with specific disabilities or conditions like end-stage renal disease may also be covered. As of 2024, Medicare covers approximately 67 million people in the United States.

The program has four main parts, each covering different types of medical care. Understanding what each part does helps you see what services might be covered under different circumstances. Medicare Part A covers hospital stays, including inpatient care, skilled nursing facilities, hospice care, and some home health services. Part B covers outpatient medical services like doctor visits, lab tests, imaging, and preventive care. Part D covers prescription drug costs. Part C, also called Medicare Advantage, is an alternative way to receive Parts A and B benefits through private insurance companies.

Medicare operates on a calendar year basis, running from January 1 through December 31. The program uses a cost-sharing system where beneficiaries typically pay premiums, deductibles, and copayments depending on the specific service and which part of Medicare covers it. For example, in 2024, the Part B premium is $164.90 per month for most beneficiaries, though some pay higher amounts based on income.

Many people have questions about what Medicare covers and what it does not. For instance, Medicare generally does not cover routine dental work, vision exams for glasses or contacts, hearing aids, or long-term custodial care in nursing homes. Some services require prior authorization before they are performed, meaning your doctor must get approval from Medicare first.

Practical takeaway: Knowing the basic structure of Medicare—its four parts and what each covers—helps you understand where to look when you have questions about specific services or medications. This foundation makes it easier to navigate more detailed information about your own situation.

Understanding Medicare Part A and Part B Coverage

Medicare Part A and Part B are the foundation of original Medicare coverage. Part A is typically premium-free for people who have worked and paid Medicare taxes for at least 10 years (40 quarters). Part B is optional but recommended for most beneficiaries, and it requires a monthly premium.

Part A covers inpatient hospital care, which means overnight stays for treatment of illness or injury. When you are admitted to a hospital as an inpatient under Part A, you pay a deductible per benefit period (which is not the same as a calendar year). In 2024, the Part A deductible is $1,632 per benefit period. A benefit period starts when you are admitted to the hospital and ends 60 consecutive days after you leave the hospital without having received skilled care during that time. After you meet the deductible, you typically pay copayments for each day of hospitalization beyond the first 60 days.

Part A also covers skilled nursing facility care, but only if you have been hospitalized for at least three consecutive days and are transferred within 30 days of hospital discharge. This is an important distinction because many people assume Medicare covers nursing home care, but it only covers skilled nursing care following a hospital stay, not custodial care for long-term conditions. You pay no copayment for the first 20 days, then $204 per day for days 21 through 100 in 2024.

Part B covers doctor services, outpatient hospital services, medical equipment, and preventive care like screenings and vaccines. After you meet the Part B deductible ($240 in 2024), you typically pay 20 percent of the approved amount for most services. Part B also covers important preventive benefits at no cost to you if you have had a Part B-covered office visit in the past 12 months. These include screenings for colorectal cancer, mammograms, bone density scans, and cardiovascular disease screenings.

Understanding the difference between inpatient and outpatient care matters because the costs and coverage rules differ significantly. An outpatient visit means you receive care but do not stay overnight in the hospital. Outpatient care is covered under Part B. Observation status in a hospital is considered outpatient care even if you stay overnight, which can affect what costs you pay and what skilled nursing coverage you receive afterward.

Practical takeaway: Learn the distinction between Part A (hospital) and Part B (doctor and outpatient) coverage. Note that Part A requires a hospital stay of at least three consecutive days to lead to skilled nursing facility coverage. Knowing these rules prevents surprises about what services are covered and what you will pay.

What You Should Know About Medicare Part D and Prescription Drugs

Medicare Part D provides coverage for prescription drugs. This coverage is offered through private insurance companies that contract with Medicare. Part D is optional, but if you do not have creditable drug coverage (coverage as good as Medicare's) and you delay enrolling, you will face a late enrollment penalty for as long as you have Medicare.

The Part D coverage structure has several stages. First, you pay your monthly premium, which varies by plan. Then, you pay out-of-pocket costs until you reach your deductible. Most plans have deductibles between $0 and $550 in 2024. After meeting your deductible, you enter the initial coverage stage where you pay coinsurance (a percentage of the drug cost) or a copayment (a fixed dollar amount). This continues until your total drug costs and your insurance payments reach $5,850 in 2024, at which point you enter the coverage gap, sometimes called the "donut hole."

In the coverage gap, you are responsible for a larger share of your drug costs, though manufacturers offer discounts on brand-name drugs. The coverage gap ends when your out-of-pocket costs reach $8,000 in 2024. After that, you enter catastrophic coverage where Medicare covers most of your costs and you pay only a small coinsurance or copayment.

Part D plans vary widely in which drugs they cover and at what cost. Each plan maintains a formulary, which is a list of drugs the plan covers. Some drugs may not be on a particular plan's formulary, or they may require prior authorization or step therapy (trying a different drug first). Comparing Part D plans during the annual enrollment period, which runs from October 15 through December 7, can result in significant savings. For example, the same medication might cost $40 in one plan and $100 in another.

Extra Help, also called the Low-Income Subsidy Program, reduces Part D costs for people with limited income and resources. In 2024, you may qualify if your monthly income is below $1,631 for an individual or $2,175 for a married couple. If you receive Extra Help, you pay much lower copayments and deductibles.

Practical takeaway: Review your Part D plan every year during open enrollment, especially if you take medications regularly. Compare the annual cost of your current medications across plans rather than focusing solely on monthly premiums. Check whether your drugs require prior authorization, as this can affect when and how quickly you receive them.

Medicare Advantage (Part C) as an Alternative to Original Medicare

Medicare Advantage, officially called Part C, is an alternative way to receive your Medicare Part A and Part B benefits. Instead of enrolling in original Medicare (Parts A and B), you can join a Medicare Advantage plan offered by a private insurance company that contracts with Medicare. As of 2024, approximately 28 million beneficiaries are enrolled in Medicare Advantage plans, representing about 42 percent of all Medicare beneficiaries.

Medicare Advantage plans must cover everything that original Medicare covers, but they can do so with different rules and costs. Many Medicare Advantage plans include Part D prescription drug coverage, dental, vision, hearing, and fitness benefits—services original Medicare does not cover. However, these additional benefits come with trade-offs. Most Medicare Advantage plans use network restrictions, meaning you must use doctors and hospitals within the plan's network, except in emergencies. You typically need referrals to see specialists, and you may face prior authorization requirements for certain services.

Cost structures differ from original Medicare. Instead of the Part B premium ($164.90 in 2024), you pay a Medicare Advantage plan premium, which varies by plan and can sometimes be $0. However, you may pay higher copayments and coinsurance when you use services. Most Medicare Advantage plans have an out-of-pocket maximum, which is the most you will pay in a year for covered services.