Understanding Medicare

Hanna Kuprevich/ShutterstockWhether you’re brand-new to Medicare or are a long-time beneficiary, the inner workings of this sprawling, government-mandated health insurance program might remind you of a complicated Rube Goldberg machine—the kind with so many unexpected moving parts that you can’t figure out quite how it operates. Here, we’ll delve into the basics so you never have to be confused again.

What it is:
Medicare is a health insurance program run by the federal government that provides seniors and some younger people with disabilities with coverage for a large amount of their health-care needs. Medicare covers everything from hospital care to doctor’s visits to medical tests to prescription drugs. Roughly one in seven Americans is enrolled in Medicare, making it by far the nation’s biggest health insurance program.

Medicare has operated for 46 years. Today, anyone age 65 and older as well as those younger than 65 who have kidney failure or who receive Social Security benefits for certain disabilities can sign up. And yes, Medicare is growing. As more and more baby boomers celebrate their 65th birthdays (the leading edge of the baby boom generation hit this landmark in 2011), Medicare’s numbers will swell to an estimated 50 million by 2016.

How it’s organized:
Medicare coverage is broken into four parts, designated by the letters A through D. If you want to buy extra coverage beyond those four parts, you can buy “Medigap” plans that run from A to N. Welcome to the infamous Medicare alphabet soup!

Actually, it really isn’t as tricky as it sounds. What’s most important are these four parts.

Original Medicare: Part A and Part B
Run entirely by the federal government, this is Original or traditional Medicare. Unless you choose to enroll in a different part of Medicare, you will fall into Original Medicare. The details:

Part A helps cover the cost of inpatient care in hospitals and skilled nursing facilities (but not custodial or long-term care), hospice care, and home health-care services. (“Inpatient” means you are staying overnight at the facility; “outpatient” means any care or services in which you arrive and then leave the same day.) You won’t pay a monthly premium for Part A if you paid Medicare taxes while you were working; otherwise you’ll pay about $450 per month for the coverage. You’ll also pay a portion of the costs of your care—for example, in 2012 you would have to pay a $1,156 deductible toward each hospital stay of up to 60 days during the year.

Part B helps cover medically necessary health services like doctors’ appointments and tests, outpatient care, and durable medical equipment. You’ll pay a monthly premium for Part B (most paid $99.00 per month in 2012, higher if your individual income was above $85,000 or your joint income was above $170,000). You’ll also pay the first $140 in medical expenses and then 20 percent of most costs after that (higher for some services, such as 45 percent of mental-health office visits.)

Medicare Advantage: Part C
Thanks to a law passed in 1997, Medicare beneficiaries now have the option of getting their Medicare benefits through private insurance plans. These Medicare Advantage plans provide all of your Part A (hospital insurance) and Part B (medical insurance) coverage. You always get emergency and urgent care coverage, as well as all Original Medicare services. The one exception: Hospice care is still covered by Original Medicare.

Since they’re operated by private health companies seeking your business, Advantage plans often offer other benefits, such as coverage for vision, dental, hearing, podiatry, chiropractic, and health and wellness programs. And most also include prescription drug coverage (Medicare Part D).

To enroll in an Advantage plan, you must first be signed up for Part A and Part B. In addition to your Part B premium, you’ll likely pay a premium to your Advantage plan and probably also pay deductibles, co-pays, and coinsurance for doctor visits, treatments, tests, and medications. The most popular Advantage plans are health maintenance organizations (HMOs). These may have the lowest premiums but place the most restrictions on doctors and specialists you can see. Other options are preferred provider organizations (PPOs), which are more flexible about letting you see out-of-network doctors but charge you more for the right. Lastly, there are private fee-for-service plans (PFFS), which usually cost the most but are the least restrictive.

Prescription Drug Coverage: Part D
Prescription drug plans became part of Medicare in 2006. Also run by private health insurance companies, these plans help cover the cost of your medications. Some plans are “stand alone,” meaning all you buy is the drug coverage. Others are rolled into Medicare Advantage plans. Either way, you’ll usually pay a monthly premium, a deductible, and a co-pay or coinsurance for your drugs. Part D contains Medicare’s notorious “donut hole,” a gap in coverage when you’re responsible for the full cost of drugs. In 2013 you’ll enter the “donut hole” when your prescription drug costs reach $2,970. While in the “donut hole”, you’ll pay no more than 47.5 percent of the costs for covered brand-name drugs, and no more than 79 percent for covered generic drugs.

Medigap Supplemental Insurance: Plans A through N
As you can see, Original Medicare doesn’t pay for all of your health care services and supplies. So about one in six beneficiaries also purchases a Medigap policy. Sold by private health insurance companies, they fill in the health-care cost gaps. Some even cover you if you travel outside the United States.

Medigap plans range from the bare bones “A,” which helps with hospital costs and some other out-of-pocket expenses, through the extensive “F,” which offers more comprehensive coverage, but at much higher premiums. (Note: Plans E, H, I, and J are no longer available, but if you signed up for one of them before June 1, 2010, you can stay in the plan.) Medigap plans don’t cover prescription drugs, so you would also need to buy a separate Part D plan.

So how does all that shake out in real life?
Most people take one of these paths for their senior health-care coverage.

1. Original Medicare and nothing else, if resources are low

2. A Medicare Advantage plan

3. Original Medicare plus supplemental drug and/or Medigap policies

4. Original Medicare plus a retiree or employer plan

5. Original Medicare, and for those low-income households that qualify, state-operated Medicaid benefits.