Medicare Explained

Most people think of Medicare as the health insurance nirvana: get to age 65 and there’s a free healthcare plan waiting to take you through retirement. With political debate centering around expanding the program, it’s important to understand what it will provide and what it won’t.

First, who qualifies? With more than 50 million people currently using Medicare, one might think that everyone does. In fact, there are some specific rules. Namely you must be a US citizen, have reached age 65 and must have been a permanent resident of the US for five continuous years prior to applying. Moreover, in order to receive free benefits, you must have paid into social security for at least 10 years (40 quarters).

Next, core Medicare comes in three different plans, each with its own costs and coverage.

Part A: Hospital Insurance

This is the no-premium portion of Medicare for most people. It covers hospital visits and some rehabilitation related to an acute – not ongoing – medical need. Each health incident comes with a new 2020 deductible of $1,408 that the patient must pay before Medicare kicks in.

Part B: Medical Insurance

This portion covers services by doctors and healthcare providers for doctor visits, lab work, surgeries, and more. Part B is paid for by monthly premiums and by cost sharing by the patient of 20% of covered costs. The premium for 2020 is $144.60 per month but is subject to increases if your income is above certain thresholds. Many high income payers will face premiums of nearly $500 per person in 2020, per month for this coverage.

Part D: Prescription Drugs

A prescription drug plan that is offered by private insurers which has both a monthly premium and a co-pay. The average plan costs $50 per month per person but again comes with a high income surcharge that can bring the monthly payment to $136.

What income affects Medicare premiums? Medicare considers the income from your prior year tax return (income from two years ago) in pricing the next year’s premiums. It includes income from any taxable source along with capital gains and it also includes income from tax-exempt municipal bonds.

Those are the three core plans. There is also private “Medigap” insurance available to cover some of the limits and costs of Parts A and B although costs can be high. A private plan alternative (often referred to as Part C) exists which is offered by many private insurers, which can be more comprehensive and in some cases less expensive.

Another note is to sign up just before or near your 65^th birthday. Both Part B and Part D raise the costs significantly for delayed enrollment.