How Does Medicare Work?

As your turn to enroll in Medicare approaches, it’s natural you become more interested in Medicare.

Medicare is a federal health insurance program for people 65 or older, and those under 65 and permanently disabled and  receiving social security benefits for at least 25 consecutive months.

Medicare enrollment is not automatic for most people.    But those who started receiving social security income early, at least four months prior to turning 65, may be automatically enrolled in Medicare.

Confusion with Medicare can only cause trouble, leading to potentially permanent mistakes. These mistakes can quickly become costly, resulting in late-enrollment penalties or your health coverage claim being denied.

So yes, it’s better to understand the parts of Medicare before your enrollment. And the sooner you do that, the better, ensuring you avoid any issues.

In this post, we’ll discuss Medicare in more detail. Namely, we’ll talk about how Medicare works. Why is that important? Because by knowing how each Medicare part works, you will be able to choose the best one for your needs.

In our guide, we’ll cover the following topics:

• how Medicare works;
• how Medicare Advantage works and how it differs from Medicare Supplement Insurance (Medigap);
• how to enroll in Medicare;
• and how Medicare works with Medicaid and other coverage policies.

However, first of all, let us briefly talk about Medicare basics.

What Is Medicare?

Medicare is a federal government health insurance program for:

• US citizens 65 years old or older;
• younger people with disabilities who have received Social Security disability income for at least 24 months;
• people with End-Stage Renal Disease (permanent kidney failure) requiring dialysis or transplant or amyotrophic lateral sclerosis (Lou Gehrig’s disease).

Once you turn 65, you automatically become eligible for Medicare coverage. You will then be able to enroll in Medicare during the specific enrollment periods (which we’ll talk about in more detail later).

How Does Medicare Work?

The purpose of Medicare is to help its beneficiaries with healthcare-related expenses. However, it’s important to note that Medicare doesn’t cover all healthcare costs. It helps with a significant amount, but you might still need to pay some out-of-pocket costs.

Several Medicare insurance plans are available, providing distinct coverage and benefits. These are:

• Medicare Part A and Part B (Original Medicare)
• Medicare Part D (prescription drug coverage)
• Medicare Advantage (also called Medicare Part C)

To be clear, Medicare Advantage Plans (Part C) are replacement plans.  Medicare Advantage replaces Medicare Part A and Part B medical insurance.  However, most Medicare Advantage Plans include Part D the Medicare drug plan..

You can also opt for a Medicare Supplement plan, referred to as Medigap, a supplemental policy to your Medicare plan. Let’s see how each of these plans works.

Original Medicare

Original Medicare includes Medicare Part A (hospital insurance) and Medicare Part B (outpatient insurance). These standard Medicare Parts cover your healthcare needs that are considered medically necessary. 

However, Medicare does not cover 100% of your healthcare. You might still need to cover some expenses yourself, and there’s no limit on the out-of-pocket amount you’ll have to pay a year.

So what does Original Medicare cover? Part A will cover your hospital-related expenses, such as inpatient hospital stays, meals, nursing care, skilled nursing facility, or hospice care. Part B covers outpatient care, medical services and supplies, such as doctor visits, medical equipment, and preventive services (screenings, tests, etc.). In addition, Medicare Part B also covers medications not covered by Part D. 

You can also enroll in Medicare Part D if you want your prescription drugs covered. Medicare Part D prescription drugs are those you would normally pick up at the pharmacy.

As for the costs, you likely qualify for a premium-free Part A, provided you or your spouse paid Medicare taxes and worked for at least 10 years. However, you will have to pay a deductible before your coverage starts. For Medicare Part A, the deductible is $1,600 for 2023. This is a “per-event” deductible that resets every 60 days you are out of the hospital.

Medicare Part B has a monthly premium. In most instances, Part B premiums are $164.90 in 2023. However, that amount can be higher if you have a higher income. There’s also a deductible of $226 (2023) paid annually and typically a 20% coinsurance cost Medicare Part B covers 80% of approved services, you pay 20%. 

To learn more about Medicare costs, refer to our comprehensive Medicare cost guide or our Resources Page for up-to-date costs. 

Medicare Part D

Part D plans are Medicare prescription drug plans.   Like Medicare Advantage, prescription drug coverage plans are offered by Medicare-approved insurers and come with their distinct premiums, copayments, and deductibles.

Medicare drug coverage is worthy of it’s own article.  Medicare drug coverage includes Part A inpatient drugs and Part B outpatient drugs.   The Medicare Part D drug plan is just part of how Medicare will pay for medications.

Often, Part D prescription drug coverage will be included in your Part C plan. If you opted for Original Medicare, you would need to purchase a separate Medicare prescription drug plan called a “Stand-Alone Part D Plan”..

Learn More About Medicare Part D

Medicare Advantage

Besides Original Medicare, you can also take advantage of Medicare Advantage, also referred to as Medicare Part C. Medicare Part C replaces your Original Medicare. Your benefits and control of your healthcare are from the private insurance company.

Medicare Advantage plans are Medicare-approved plans offered by private insurance companies, covering the same healthcare categories of services as Original Medicare plus, in most cases, prescription drug costs (Part D). Many Medicare Advantage plans also cover extra services like routine dental, vision, and hearing services.

With a Medicare Advantage plan, your coverage may be limited to the insurance company’s network of contracted physicians. The network of health care providers supporting a Medicare Advantage plan is usually specified. Contrast this with Original Medicare, where you can see any doctor that accepts Medicare patients.

The significant benefit of Medicare Advantage is that there’s a limit on the amount of out-of-pocket costs you’ll have to pay. Once your reach it, the plan will pick up 100% of the covered expenses that are approved by the insurance company.

However, it’s vital to note that to enroll in Medicare Advantage, you must first enroll in Medicare Part A and Part B coverage. There’s also confusion on whether Medicare Advantage and Medicare Supplement Insurance are the same plans. They are not. We’ll cover Medicare Supplement coverage in the next section.

You can also learn about the key distinctions by reading our guide to the Differences Between Medicare Advantage and Medigap.

Medicare Supplement Insurance (Medigap)

Finally, there’s Medicare Supplement Insurance, otherwise known as Medigap. These health insurance plans are offered by  private insurance companies.  Their supplemental coverage benefits are standardized by the US Government.  They are designed to cover the deductibles, coinsurance, and copays of Original Medicare.

What’s important to note is that Medigap is not a stand-alone health insurance policy. It’s a supplemental policy to your existing Original Medicare coverage. Medicare makes all decisions. The supplement simply does as instructed by Medicare.  

For most, the extra monthly premium of a supplement plan is worth every penny because it creates a maximum out pocket limit that is very manageable. 

Regarding the costs of Medigap plans, these will vary between insurers. You will, however, be required to pay premiums, copayments, and deductibles, like in any other Medicare coverage plan. You also must be enrolled in Medicare Part A and B before enrolling in Medigap.

Learn More About Medigap

How to Enroll in Medicare?

Once you’ve learned how Medicare works, it’s time to discuss how you can enroll.

If you already collect Railroad Retirement Board or Social Security benefits, you will automatically enroll in Medicare Part A and B when you turn 65.

In other instances, or if you want to enroll in Part D, Medicare Advantage, or Medigap, you will need to do it yourself during dedicated enrollment periods:

• Initial Enrollment Period
  The Initial Enrollment Period starts three months before your 65th birthday month, includes your entire birthday month, and ends after three months after your birthday month ends (7 months in total). If your birthday falls on the first day of the month, your entire Initial Enrollment Period moves forward by one month.
• General Enrollment Period
  Medicare’s General Enrollment Period starts January 1st and lasts until March 31st of each year. As of 2023,  if you enroll during this period, your coverage will start on the first day of the next month. Failing to enroll during Initial Enrollment Period and doing so during General Enrollment might result in late penalties.
• Special Enrollment Period
  During the Special Enrollment Period, you can enroll or make changes to your Medicare plan. You’re granted that chance based on several specific life events, such as moving, losing employer coverage, or experiencing material problems with your current coverage.

These are the three periods during which you will be able to enroll in any Medicare plan. To enroll, you can apply online via the Social Security site or contact the Social Security Administration by phone. You can also contact your local Social Security office.

Of course, applying online is the fastest and most efficient way. Typically, an online Medicare application shouldn’t take you more than 10 minutes.

How Does Medicare Work with Other Insurance?

Our strong advice is to never enroll in Medicare Part B until you want Medicare to be your primary insurer. If you enroll in Part B and expect to keep your employer coverage you can lose out on your ability to apply for a Medicare supplement plan with the need to qualify medically.  

If you or your spouse has employer coverage and that employer has 20 or more employees, then you do not need to enroll in Medicare. The employer coverage is creditable and can be used instead for Medicare.

If the employer has fewer than 20 employees it is not considered creditable coverage. You will need to enroll in Medicare and should get a supplement plan. 

You can enroll in Medicare Part A even if you have creditable employer coverage.   Your Medicare Part A will be secondary insurance, adding to your other hospital insurance coverage. 

Key Takeaways

That’s about it. Hopefully, after reading our guide, you now have a better understanding of how Medicare works and what each part covers. As you can see, while it might seem intimidating, Medicare is not that challenging to understand once you get a grip on how it works.If you wish to learn more, feel free to browse through our resources. They contain lots of useful information regarding Medicare and Medigap plans. You can also contact us directly via phone or online form. We’ll be more than happy to help with any Medicare or Medigap-related issue you might have.