What is Medicare?

Medicare is national health insurance for individuals age 65 and older, individuals with certain disabilities, or end-stage renal failure. There are four basic parts of Medicare, and it’s important to understand how they work together.

Medicare Part A – Hospital Insurance

Medicare Part A covers inpatient costs. In addition to hospitals, Part A helps with skilled nursing facilities, hospice, and home health care. It’s insurance for your “room and board” at the hospital.

While Part A will cover the cost of your room, it does NOT cover treatments such as scans or surgeries. Those fall under Part B.

Medicare Part A coverage is free for most people at age 65. During the years you worked, you paid Medicare taxes from your paychecks. If you don’t qualify for free coverage, most people can still apply, but they pay a premium which can be over $400 per month.

Part A Deductible and Coinsurance Amounts for Calendar Years 2022 and 2023 by Type of Cost Sharing

	2022	2023
Inpatient hospital deductible	$1,556	$1,600
Daily coinsurance for 61st-90th Day	$389	$400
Daily coinsurance for lifetime reserve days	$778	$800
Skilled Nursing Facility coinsurance	$194.50	$200

Medicare Part B – Medical Insurance

Medicare Part B covers outpatient medical expenses such as office visits, doctors’ care when you’re in the hospital, lab work, surgery, etc. Without Part B insurance, you would have to pay for these services out-of-pocket.

Perhaps the most important aspect of Medicare Part B is coverage of cancer therapy and kidney dialysis. These treatments are extremely expensive and could be financially devastating.

There is a cost for Medicare Part B. The amount you pay is determined by the adjusted gross income you report to the IRS. Costs may change from year-to-year. Most Medicare participants pay about $164.90 per month for 2023 for Part B insurance. If your income is in one of the higher brackets, you will pay more.

Medicare Part C – Medicare Advantage

Medicare Part C is also known as Medicare Advantage program and is private insurance. The cost of Medicare Advantage varies from company to company so it’s important to compare plans. To enroll in a Part C plan, you must be enrolled in both Parts A and B. Even if you find a Part C plan with a very low premium, you still pay for Part B.

You also have to live within the plan’s service area. When you enroll in a Medicare Advantage plan, your coverage comes from the insurance company rather than Original Medicare.

Enrolling in Part C is voluntary. Some people prefer to get their coverage from Original Medicare and the traditional Medicare supplements (also known as Medigap plans). If you don’t want a Part C Medicare Advantage plan, simply don’t enroll in one. It is entirely your choice.

Medicare Part D

For over 50 years, Medicare did not have coverage for prescription drugs. In 2006, the government unveiled Medicare Part D. This is coverage for prescription drugs you either purchase at the pharmacy or order by mail. You choose a company and enroll in their prescription drug plan. It’s as simple as that.

Most states have about 30 different prescription plans to choose from, and it’s often best to work with your insurance agent to determine which plan is best for you. He/she will use Medicare’s prescription drug finder tool to help analyze your choices.

Medicare is not the same as Medicaid.

Many people are confused about the difference between Medicare and Medicaid. Medicare is health insurance for the elderly (over 65) and individuals with certain disabilities.

Medicaid is a financial and/or healthcare assistance program for low-income individuals and families. Some people over 65 do qualify for both programs. In those cases, Medicare would be the primary coverage and Medicaid would be secondary.

Even though the programs are different, Medicare has Savings Programs you can apply for through your state Medicaid office. These plans can help you pay your Medicare Part B premiums in addition to drug plan assistance. Contact your state Medicaid office to see if you qualify.

Summary

Medicare Parts A, B, C, and D work together to assist you with your health care coverage after age 65. Here’s a quick review.

Medicare Part A: This part covers hospital “room and board” expenses and is free to people who worked at least 10 years. If you don’t qualify for free coverage, you can apply for Part A coverage, but you pay a premium.

Medicare Part B: This coverage is for outpatient services such as office visits, copays, and inpatient doctors’ services. Everyone pays a premium for Part B coverage.

Medicare Part C: Part C, or Medicare Advantage, is private insurance. You must be enrolled in both Parts A and B to be eligible to enroll in Medicare Advantage.

Medicare Part D: This program covers prescription drugs. Most states have a wide variety of plans to choose from.

What are Medicare Supplements?

A Medicare Supplement Insurance, also known as a “Medigap Plan,” is health insurance you purchase from private insurance companies to cover the fees, or gaps, Medicare doesn’t pay.

Medicare gaps include coinsurance, copayments, and deductibles. You pay for these when accessing medically-approved services. If you have Medicare Supplement Insurance, it will pay for the Medicare gaps.

Think of it as a 1–2-3 payment plan.

Original Medicare pays a part of the cost for your medical service, which reduces what you owe.
The Medicare Supplement Insurance (Medigap Plans) pays part of the cost, which reduces more of what you owe.
After both plans pay their part of the cost, you pay the rest.

Medicare Supplement Insurance covers the gaps of the “out of pocket” cost of Original Medicare. Depending on what policy you choose will determine the amount of coverage.

The 10 Standard Medicare Supplements (Medigap Plans)

In 1990, Medicare standardized all Medicare Supplement (Medigap Plans) and provided specific guidelines. Medicare calls them plans and they are identified by a letter. There is Medigap Plan A, Plan B, Plan C, D, F, G, K, L, M and N. Every insurance company has to provide the same set of benefits for each plan.

This means the monthly premium is the main difference between supplements with the same letter. You can compare multiple insurance companies to get the best rate. We receive the most requests for quotes on Medigap Plans F, G, and N.

What is Not Covered by Medigap Plans?

Medigap plans only pay after Medicare pays its share. If Medicare approves a claim and pays the part it owes, they will send the remainder of the bill to your Medigap Plan. If Medicare denies part of the claim, the Supplemental will also deny that portion and you would be responsible for payment. Your Original Medicare and Medicare Supplement work hand in hand.

What is Not Covered by Medicare or Medigap Plans?

There are some things that are not covered by either Medicare or your Medigap Plan. These are:

Routine dental, vision and hearing exams
Hearing aids
Eyeglasses or contacts
Long-term care or custodial care

Glossary of Terms

Perhaps the most difficult thing about Medicare supplements is the terminology. Let’s look at the benefits as described by Medicare.

It can be confusing to understand all the Medicare and Medicare Supplement terms.

These brief definitions can help you understand plan benefits.

Medicare Part A coinsurance – All Medigap plans have this benefit. It covers the daily hospital copay you begin accruing after your 60th day.

Medicare Part B coinsurance or copayment – Every Medigap plan has this benefit; it’s one of the most important. Medicare covers 80% of your Part B outpatient expenses, a Supplemental plan pays the other 20%. This can be crucial for high-ticket items like cancer treatments or dialysis.

Blood (First 3 pints) – This benefit is part of all Supplemental plans and pays for the first 3 pints of blood in a blood transfusion. Medicare only pays for the 4th pint and above. Blood is very expensive, which makes this a good benefit.

Part A Hospice care coinsurance or copayment – Supplemental plans pay the hospice costs Medicare doesn’t pay and you usually pay nothing.

Skilled Nursing Facility (SNF) coinsurance – Medicare allows for 100 days of skilled nursing facility care after you have been in a hospital. However, Medicare only pays for the first 20 days. A policy with SNF coverage will pay for the other 80 days.

Medicare Part A deductible – The 2022 Part A deductible is $1556. You might pay this deductible more than once a year if, for example, you have two inpatient hospital stays more than 60 days apart.

Medicare Part B deductible – In 2022, the Part B deductible is $233/year. You pay the Part B deductible once per year for services such as doctor’s visits, lab work, or physical therapy.

Medicare Part B excess charges – Medicare providers (doctors, hospitals, etc.) can either accept Medicare’s assigned rates for each service or they can charge you an excess charge. This charge can be up to 15% above the assigned rate. It can increase costs for items like diagnostic imaging or surgery. A Medicare Supplement plan can help cover such an expense.

Foreign Travel Emergency – Since Medicare is a U.S. health insurance program, it does not cover you outside our country. Some Medicare Supplements include a foreign travel benefit. It will pay 80% of your expenses up to $50,000, after you pay a small deductible.

Choosing a Medicare Supplement

Medigap plans are standardized so you know exactly what benefits you are buying. However, there are several things you should know about each insurance carrier before you choose your supplement.

Rates – If you select a Medicare supplement, you pay a premium. It’s the monthly rate you pay to the insurance company which provides your Medicare Supplement coverage. Compare the rates each insurance provider will charge you. Check to see if they are competitive with other Medigap insurance companies in your area.
Rate trend history – Many supplemental policies have an annual rate increase to keep up with medical inflation. Find out what kind of rate increases the insurance company had over the last three years, and find out if it’s reasonable or higher than others.
Financial ratings – Some ratings companies look in depth at the financial stability of insurance companies and provide reports, or grades. Ask your agent about the ratings for each carrier.

Medicare Advantage HMOs, PPOs, and PFFS

Medicare Advantage programs are usually grouped into a few different categories. The three most common types of Medicare Advantage Plans are the HMO, the PPO, and the PFFS. You’re probably familiar with the HMO and PPO types of coverage. Please note, these three plans are not Original Medicare and they are not Medigap plans.

Medicare Advantage HMO

An HMO (Health Maintenance Organization) is a popular choice for medical care. Medicare HMO plans usually have the lowest premium of the three types of plans, but they are also the most restrictive. The HMO plan does not replace Part B coverage. Remember to enroll in any Medicare Advantage plan, you must have Medicare Parts A and B.

Under the HMO option, you select a primary care physician (PCP) from a specific provider network. When you need to see a specialist, you get a referral from your PCP, then select the doctor, hospital, and other provider from the service provider list. In most cases, it costs less to use providers in the HMO network. There are times when you don’t need a referral from your PCP, such as seeking preventative care or emergency room visits.

Some HMO plans have an HMO-POS (Point-of-Service) feature. This is a combination of an HMO and a PPO plan. Under the HMO-POS plan, you can use some providers outside the network, but only in certain situations. Always check with your plan for details.

Many HMO plans include Part D prescription drug plans. You should always check the plan’s formulary list for your specific medication.

Medicare Advantage PPO

A Medicare Advantage PPO (Preferred Provider Organization) plan is similar to an HMO plan, but it’s more flexible. You choose your doctors, hospitals, and other providers from a network list, but you don’t have to select a primary care physician. With a Medicare PPO plan you can see out-of-network doctors, but you will pay a higher cost.

Medicare contracts with providers who are willing to accept their payment amounts for services. You usually save the most money if you select providers from the network list.

There are a few things a Medicare Advantage PPO must provide:

Your Parts A and B benefits
The plan must include an out-of-pocket maximum spending cap, which protects you against catastrophic spending
The maximum any Medicare Advantage plan can set as out of pocket maximum is $6,700 per calendar year.

A Medicare Advantage PPO plan often has a Part D drug plan included, so you don’t pay for additional drug coverage.

When you choose a Medicare PPO plan, you may have additional expenses such as those listed below.

You will still pay for Medicare Part B, $164.90 per month in 2023. People with higher incomes pay more
You will pay a monthly PPO premium. You may find a plan with a $0 premium, but that could change
You will have copays for services
Out-of-network costs may be higher and require an up-front deductible

Medicare Advantage PFFS

PFFS (Private Fee-For-Service) plans are a type of Medicare Advantage plan. It is not a Medicare supplement. When you enroll in a PFFS plan, you agree to pay the premium, copays, and coinsurance rates under the plan.

Two of the most attractive features of the plan are the ability to see any doctor in the US. This makes a PFFS a popular choice among people who are frequent travelers. The other feature of this plan is you can have a separate Part D drug plan. You have the choice of selecting a PFFS with a drug plan, or enrolling in a separate drug plan.

There are a few things which are different from the HMO and PPO plans you should be aware of before you enroll in a PFFS plan.

Providers who are not contracted with the plan are NOT required to treat you, except in an emergency. You have to find out if they are willing to accept the rate the PFFS will pay for the service you need
You will receive a Medicare PFFS plan ID card that is separate from you Original Medicare card, which you must present at the time of service
In addition to agreeing to accept your plan’s service rate, the doctor, or other provider, has to bill the plan

The PFFS plan is not as well-known as the HMO and PPO plans so work with a knowledgeable insurance agent who can help you assess your needs and make the right choice.

Medicare Advantage and Supplemental Plans – The Difference

Under Medicare, you have options for your health care coverage. Most states provide only two options: “Medicare Advantage Plans” and “Medicare Supplemental (Medigap) Plans.” These plans are not the same. Medicare Advantage plans are sometimes called “replacement” plans. The Medigap plans “supplement” your Original Medicare. You should study each plan and select the one that’s right for you. Below is a chart of the main features of each plan.

Medicare Supplemental (Medigap) Plans

Medicare Supplemental or Medigap plans are insurance policies that work with Medicare. You purchase these policies from private insurance companies. Original Medicare acts as your primary coverage, followed by a Medigap plan, and then you pay the rest.

For example, when you incur medical expenses, Medicare reviews the bill and pays its part of the coverage charged by the medical provider.

Next, the remaining bill is sent to your Medigap plan which pays another part of the medical expense (depending on which supplemental plan you select).

Finally, if there are any remaining fees you pay them.

All Medigap plan benefits were standardized by the federal government, which means no matter what insurance company you choose, the plan benefits will be the same. When selecting a private insurance company, compare the premium rates and check the ratings and reputation of the insurance company.

One-time Only Enrollment Period

You have one opportunity to sign up for Medicare Supplemental Plans with no medical questions, guaranteed acceptance, and the choice between all ten plan options. This is your “personal enrollment window” and it only happens once.

The enrollment window begins the month you are 65 and enrolled in Medicare Part B and extends for six months. During the six month enrollment period, you will not have to answer any medical questions, you are guaranteed acceptance, AND you may enroll in any of the ten supplemental plans (as long as they are sold in your state).

If you don’t enroll during this time you might have to go through medical underwriting to be approved on a Medicare Supplement plan.

Guaranteed Issue Rights Enrollment Exceptions

Here are a few situations when you may enroll in Medigap Plans, other than your personal enrollment window at age 65. During these exceptions you may enroll for some of the Medigap Plans. These are called Guaranteed Issue Rights situations. These situations usually result from a change in your insurance coverage.

If you have Medicare Advantage and the provider leaves the Medicare Advantage program or stops offering care in your area, or if you move out of the area
Your employer plan (including retiree or COBRA coverage), or union coverage that pays after Medicare pays, is ending
You have Original Medicare and Medicare Select plan, and you move out of the Medicare Select plan coverage area
You joined a Medicare Advantage Plan or PACE* when eligible and you decide to switch to Original Medicare. (*Programs of All-inclusive Care for the Elderly)
You dropped a Medigap plan to join a Medicare Advantage plan for the first time , and now you want to switch back to your original Medigap plan
Your Medigap insurance ends through no fault of your own, i.e. your Medigap insurer goes out of business
You drop a Medicare Advantage or Medicare Supplement plan due to their negligence in administering the plan

Summary

To summarize, Medicare Advantage is a “replacement” plan which provides the same benefits as Medicare, but it is administered by a private insurance company. Medicare supplemental plans are “supplements” to Original Medicare and there are a variety of plans to choose from. Both options have some prescription drug coverage.

Medical Supplemental (Medigap)

You keep Original Medicare Part A and Part B and ADD supplemental insurance
Covers some or all of the costs not covered by Part A and Part B
Private insurance you purchase from private insurance companies
Medigap does not cover: long-term care, vision, dental, hearing aids, glasses, or private-duty nursing
You must purchase Medicare Plan D prescription drug coverage
Acceptance is guaranteed if you enroll at age 65. No medical questions are asked
Choose any doctor, hospital, or other service provider who accepts Medicare

Medicare Advantage (Replacement)

Enroll in Medicare Advantage Part C – this is a manage care option
Combines Part A and Part B
Government program provided by private insurance companies
Additional benefits available: vision, hearing, dental, health, and wellness
Most plans cover prescription drugs
Open enrollment opportunity each year between October 15th and December 7th
Medicare Advantage pays doctors, hospitals, etc. For best coverage, select doctors, hospitals, or other service providers within the plan’s network

Medicare Part D

Medicare Part D is a government program for prescription drugs administered by private insurance companies. The Medicare Part D program started in 2006. Before that time, Medicare recipients paid thousands of dollars a year for drugs.

How Does Medicare Part D Work?

You pay a monthly premium for your Part D coverage and use the insurance company’s network of pharmacies. You don’t pay full price, but you will have a copay and the insurance company will pay the rest. You’ll receive a Part D insurance card which is different from your Medigap plan.

Like all private insurance plans, Part D follows federal guidelines. Each insurance provider submits its plan to Medicare annually for approval.

Four Stages of Coverage

Coverage by Medicare Part D is administered in four stages, each with its own parameters.

Deductible Phase Until you meet your yearly Part D deductible, you will pay full price for your covered prescriptions. Once the annual deductible is met the plan will begin to cover the cost of your drugs based on the plans prescription drug benefits. While deductibles can vary from plan to plan, no plans deductible can be higher than $505 in 2023, and some plans have no deductible.
Before Gap, or Initial Coverage Phase This is the stage after you have met your deductible, if applicable, and before your total drug expenses, have reached $4,660 in 2023 including amounts you’ve paid and what your Plan has paid on your behalf. In this phase, you will either pay a copay or coinsurance (a percentage of the drug’s cost) when you have a prescription filled. This phase lasts until you and your plan reach a total of $4,660 in 2023 drug spending, at which time you move into the Coverage Gap phase.
During Gap, or Coverage Gap Phase This phase is commonly referred to as the "Donut Hole." It occurs after you and your plan reach $4,660 in 2023 in drug spending. During the Coverage Gap phase, you are usually responsible for paying a higher portion of the drug cost. After your true out-of-pocket costs (TrOOP) reach a total of $7,400 in 2023, you move into the Catastrophic Coverage phase. Out-of-pocket costs include your annual deductible as well as your copayments or coinsurance. Premiums do not count towards out-of-pocket costs.
Note: Some plans provide additional coverage in the Coverage Gap, which can lower your share of the cost for drugs during this phase.
After Gap, or Catastrophic Coverage Phase After you reach a total of $7,400 in 2023 in out-of-pocket prescription drug expenses, you will start paying a different copay or coinsurance for covered, both generic and brand-name prescription drugs. In the Catastrophic Coverage phase, copays are typically lower than during the Initial Coverage phase. This phase lasts until the end of the plan year.

Tracking Part D Spending

Medicare tracks your spending under Part D. This is referred to as your “True Out of Pocket Costs” (TrOOP) each year. This protects you from being charged twice for certain medical costs.

For example, if you satisfy your deductible, but later switch to a different Medicare Part D plan because you move out of state, you won’t have to pay another deductible. Tracking works the same way for the gap and catastrophic coverage.

Part D plans change from year-to-year. You may see changes to your plan’s benefits, formulary, pharmacy network, premiums, copays, or coinsurance on January 1st of each year. You will have an annual election period each year to change your plan if you choose.

Drug Utilization Rules for Part D Coverage

Medicare allows Part D providers to put rules in place for safety and to keep costs down. The three most common rules are listed below.

Quantity Limits – This restricts how much medication can be purchased at one time. If your doctor prescribes more than the limit, he/she has to file an exception form explaining why more medication is needed.
Prior Authorization – The insurance company may require prior authorization before your prescription is filled. This typically applies to very expensive or unusually potent medication. The doctor has to explain why the medication is necessary.
Step Therapy – The insurance company requires you to try a less expensive alternative medication before they pay for the more expensive option. If the less expensive option doesn’t work, you can file a drug exception to request the original medication prescribed. He/she will have to explain what drugs were tried and why they weren’t effective.

Check your plan’s formulary to see if restrictions apply to your medication. There are some medications not covered by Part D, such as non-formulary medications or compound medication. You have to file an exception for approval, but don’t assume all exceptions will be approved. You may have to pay for the prescription out-of-pocket.

It’s important to understand changing from one drug plan to another won’t eliminate restrictions. Restrictions are a normal part of all Part D drug plans, especially with pain medication, narcotics, and opiates.

Part D helps you reduce the hundreds or thousands of dollars you might pay in medication costs, now and in the future. With plans available for as little as $20 per month, it makes sense to take advantage of this valuable coverage.

Medicare Donut Hole

The term “donut hole” was coined by ordinary people who use Medicare Part D. The donut hole is what Part D now refers to as the Coverage Gap. The reason it’s called the donut hole is because it falls in the middle of Part D coverage for a calendar year. Every Medicare Part D plan has a donut hole. The program is designed to encourage Medicare beneficiaries to choose generics or lower cost medication to keep Medicare’s total costs down.

What is the Medicare Donut Hole?

The Donut Hole, or Coverage Gap, stage of Medicare Part D, happens when the spending by you and your insurance company reaches $4,020 in 2022. Not everyone will reach the coverage gap.

During the Initial Coverage stage of Part D, you pay a copay for each medication. When you reach the gap, or donut hole, you pay a percentage of the medication cost. If your medication is expensive, you will pay more during the gap.

How Long Does the Donut Hole Last?

The Part D coverage gap begins when you and your insurance company have spent a combined total of $4,020 in 2022. Medicare sets the limits each year. You will be in the donut hole until out of pocket costs reach $6,350.

Medicare keeps track of the spending between you and your insurance company and after you have paid $6,350 in one calendar year, catastrophic coverage begins. During catastrophic coverage, the insurance pays for 95% of your medication. You will pay no more than 5% of the cost of medication through the end of the year.

Some plans will continue to offer copays during the coverage gap and you will get a discount on generic medications as well.

How Do I Know When I Reach the Coverage Gap?

Your insurance company will track your expenses. Every month, they will send you an Explanation of Benefits (EOB). It will show you how much money you’ve already spent on covered medication and how much money you have before you reach the coverage gap.

The cost of prescription drugs is not the only expenditure that counts toward the $6,350 annual limit. You can include your yearly deductible, coinsurance and copayments. Expenditures that DO NOT count toward your $6,350 annual limit include your Part D premium, a pharmacy dispensing fee, or the cost you pay out of pocket for drugs that aren’t included in your plan’s formulary.

Common Questions

How Do I Know When I Reach the Coverage Gap?

Do Medicare Advantage Plans Cover the Gap?

No. The Part D coverage works the same whether you have a standalone plan or if you selected a Medicare Advantage Plan. Some Part D and Medicare Advantage plans offer coverage of certain medications in the gap, but they are almost always coverage for the generic medication and not for brand names.

How Can I Avoid the Coverage Gap?

You can save money during the Gap by using generic drugs whenever you can. You can also work with your doctor to keep your medication costs down. Review all the medications you take with your doctor. He/she may be able to prescribe a lower price or similar medication that produces the same result.

What’s Excluded from the Coverage Gap?

A common question Medicare users ask is whether or not they can use their Medigap plan to cover the gap in their drug plan. They cannot. Medigap pays for inpatient and outpatient services. Prescription drugs fall under Part D. It is worth repeating here that every Part D plan has a donut hole or coverage gap. There is no coverage you can buy for the donut hole.

Certain people with low-incomes might qualify for a subsidy called Extra Help for Part D. If you qualify, Medicare will waive the gap. Your regular prescription copays will also decrease. The application for the Extra Help for Part D subsidy is available at your local Social Security office or online at their website.