Learn About Medicare Costs and Coverage Options

Understanding Medicare: Basic Program Structure and Who It Serves

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 people with specific disabilities or end-stage renal disease may participate as well. As of 2024, approximately 68 million people are enrolled in Medicare, making it one of the largest health insurance programs in the United States.

The program is divided into four main parts, each covering different types of medical services. Part A covers hospital stays, skilled nursing facility care, hospice care, and some home health services. Part B covers doctors' visits, outpatient care, medical equipment, and preventive services. Part D covers prescription drugs. Part C, also called Medicare Advantage, is an alternative way to receive Parts A and B coverage through private insurance companies, and these plans typically include prescription drug coverage as well.

Medicare is funded through a combination of sources. Payroll taxes (currently 2.9 percent of wages, split between employer and employee) fund Part A. Part B and Part D are funded through general revenue, beneficiary premiums, and other sources. When people turn 65, they enter an initial enrollment period lasting three months before their birthday month, their birthday month, and three months after. During this time, people can join Part B and Part D without penalty, though this varies based on individual circumstances.

Understanding the structure of Medicare is essential because each part has different costs, coverage rules, and out-of-pocket requirements. Many people misunderstand which services fall under which part, which can lead to unexpected costs or gaps in coverage. Some people delay enrolling in Part B thinking it only applies to older retirees, but it covers services many people use regularly, such as doctor visits and lab tests.

Practical Takeaway: Medicare consists of four parts with different purposes. Before choosing a plan, learn what each part covers so you understand what costs you may face for the services you actually use.

Part A and Part B: Hospital Insurance and Medical Services Coverage

Part A is often called hospital insurance because it primarily covers inpatient hospital stays. When someone is admitted to a hospital as an inpatient, Part A covers the cost of the hospital room, meals, nursing care, medications given during the stay, and medical equipment used in the hospital. In 2024, people with Part A pay a deductible of $1,632 for each benefit period that includes a hospital stay. A benefit period is the time from when a person enters the hospital until they have gone 60 days in a row without receiving hospital or skilled nursing care.

Part A also covers skilled nursing facility (SNF) care, but with important limitations. SNF coverage applies only after a hospital stay of at least three consecutive days, and the facility must be a Medicare-participating skilled nursing facility. The first 20 days of SNF care each benefit period are fully covered by Part A. Days 21 through 100 require a copayment of $408 per day in 2024. After day 100 in a benefit period, the person pays all costs. Many people are surprised to learn that regular custodial care in a nursing home—such as help with bathing, dressing, and eating—is not covered by Medicare Part A at all.

Part B covers doctor services, outpatient hospital care, physical therapy, occupational therapy, and durable medical equipment such as wheelchairs or oxygen. It also covers preventive services like annual wellness visits, certain screenings, and vaccinations. In 2024, the standard Part B premium is $174.70 per month, though some people with higher incomes pay more. Everyone with Part B pays an annual deductible of $240, after which Medicare covers 80 percent of approved services and the person pays 20 percent.

An important detail about Part B is that it only covers services deemed "medically necessary" by Medicare standards. If a doctor orders a test or treatment that Medicare determines is not medically necessary, the person may receive a bill for the full cost. Additionally, if a provider is not a Medicare-participating provider, the patient may face balance-billing situations where they pay more than the Medicare-approved amount.

Home health services fall partially under Part A and partially under Part B. Part A covers skilled home health services (nursing care, physical therapy, occupational therapy) when ordered by a doctor after a hospital or SNF stay. Part B covers some home health services for people who haven't recently been hospitalized but are homebound. However, routine personal care is not covered.

Practical Takeaway: Parts A and B have significant out-of-pocket costs through deductibles and copayments. Understanding which services require what cost-sharing helps people budget for medical expenses and avoid surprises.

Part D and Prescription Drug Coverage Options

Part D is Medicare's prescription drug benefit. It covers both brand-name and generic prescription drugs at pharmacies that participate with Medicare. However, Part D is not automatically included in Original Medicare (Parts A and B). People must choose to enroll in a separate Part D plan offered by insurance companies approved by Medicare, or they can choose a Medicare Advantage plan (Part C) that usually includes prescription drug coverage.

Part D plans vary significantly in which drugs they cover and at what cost. Each plan has a formulary, which is a list of covered drugs. A drug on one plan's formulary may not be on another plan's formulary. Additionally, plans can require prior authorization before covering certain medications, or they may require a person to try a less expensive drug first. The structure of Part D costs includes a monthly premium, an annual deductible (which varies by plan), copayments or coinsurance amounts, and a coverage gap.

The coverage gap, sometimes called the "donut hole," is a significant detail many people don't understand. In 2024, once a person and their pharmacy have spent $5,830 in covered drug costs, the person enters the coverage gap. During the gap, they pay a higher percentage of drug costs: 25 percent of brand-name drug costs and 25 percent of generic drug costs (these percentages are set by law and change yearly). The coverage gap ends when total out-of-pocket spending reaches $7,050 in 2024, at which point catastrophic coverage begins and the person pays only 5 percent of drug costs for the remainder of the year.

There are programs that can help people with drug costs during the coverage gap. The Manufacturer Discount Program provides discounts directly from drug manufacturers for brand-name drugs. The Part D Low-Income Subsidy program helps people with limited income and resources pay for Part D premiums and cost-sharing. Additionally, some charitable organizations and patient assistance programs offer support for people struggling with drug costs, though finding and obtaining such support requires research.

Choosing a Part D plan requires careful consideration because plans change yearly. The drugs a person takes, the pharmacies they use, and the plan premiums and cost structures all shift annually. Medicare offers a tool called the Medicare Plan Finder on Medicare.gov where people can enter their current medications and see which plans cover those drugs and at what cost.

Practical Takeaway: Part D plans vary widely in cost and coverage. Taking time to compare plans based on your specific medications and pharmacies each year can save hundreds of dollars in annual drug costs.

Medicare Advantage Plans (Part C): Alternative Coverage Structure and Trade-Offs

Medicare Advantage (Part C) is an alternative way to receive Medicare benefits. Instead of using Original Medicare (Parts A and B), a person enrolls in a private insurance plan offered by insurance companies that have a contract with Medicare. These plans must cover all the services that Original Medicare covers, but they often do so with different cost structures, provider networks, and additional benefits.

Medicare Advantage plans typically include prescription drug coverage (Part D), so a person doesn't need a separate drug plan. Many Medicare Advantage plans also cover services that Original Medicare doesn't, such as dental care, vision care, hearing aids, or fitness programs. These additional benefits can have substantial value for people who need these services. However, these additional benefits come with the understanding that the plans are profit-making businesses, and the coverage of additional services may change year to year.

The primary trade-off with Medicare Advantage is the provider network. Most Medicare Advantage plans operate as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs). With an HMO, a person must use doctors and hospitals within the plan's network, except in emergencies. With a PPO, there is more flexibility to use out-of-