Understanding Basic Medicare

Understanding Basic Medicare: Parts A, B, D, and Supplemental Insurance

Medicare enrollment and coverage can be confusing, and many Americans still mistakenly believe that Medicare will cover all or most of health care costs in retirement.

The truth is original Medicare (Parts A and B) will only cover approximately 20 percent of total costs.   In truth, retirees become responsible for 100% of the costs for comparable coverage (Medicare Parts B, D, and supplemental insurance) that they once received from employer-sponsored plans (but were only responsible for 25% of premiums).

The Difference between Medicare and Medicaid

 It is important to distinguish that Medicare is an entitlement everyone receives.   To be eligible, subscribers must be 65 years or older, a citizen for 5 years, or suffer from a qualified disability.  Medicaid recipients must qualify based on their level of income (reserved for those who cannot pay for health care).

 Parts of Medicare

There are volumes written about Medicare, but here’s a simple outline to introduce basic benefits.

Medicare Components

  • Part A—Free for most, but it is not an all-inclusive insurance. Part A covers most hospital care (but not all) and one wellness physical per year with no vitals or blood work.
    • Covered services
      • Inpatient care
      • Skilled nursing facilities
      • Hospice care
    • Must enroll between Oct. 15 and Dec. 7 at 1-800-772-1213.
    • If eligible at age 65, subscriber has a 7-month period that begins 3 months before, includes the month of, and extends three months after 65th
  • Part B—Supplementary, but everyone enrolled must pay based on income.
    • Covered services
      • Most other necessary medical services, such as doctor visits, physical therapy, medical equipment, etc.
    • Costs
      • 20% copay
      • In 2016, first-time Medicare recipients are charged a monthly premium of $121.80 (up from $104.90 in 2015).
        • Some current subscribers do not have to pay the increase because there was no Social Security Cost of Living Adjustment (COLA).
      • Premiums are deducted from Social Security benefits.
      • Individuals who makes more than $85,000, or a couple earning over $170,000, may be subject to Part B surcharges.
      • Additional penalties can be incurred for signing up late.
    • Medicare Part C—Formerly known as Medicare Plus Choice, now known as Medicare Advantage Plan.
      • Similar to HMO plans
      • Provides almost the same coverage as A and B at a lower cost, but some referrals and “in-network” restrictions can apply.
      • Subscribers are responsible for 100% of cost for out-of-network doctor visits.
    • Medicare Part D—Prescription drug coverage
      • Covers most or all of six main prescription drug categories, but specific drug coverage and cost can vary and be quite complex.
      • Premiums are based on terms and conditions set by private insurance companies.
      • Everyone is eligible, but the open enrollment period lasts from November 15 to December 31. This is the only time when plans may be changed.
      • Premiums can be impacted by income and state of residency.
      • Part D has a coverage gap referred to as the “Donut Hole.”
        • Occurs when a person’s payments reach a set amount ($3,310 in 2016).
        • Subscriber is then responsible for 100% of their Part D costs.
        • Once donut hole ceiling is reached, coverage begins again.


  • Supplemental Insurance
    • Policies are purchased from private insurance companies
    • Covers copays, deductibles, and out-of-pocket expenses.
    • Costs vary depending on the plan offered in each particular state.
    • Plan F is most expensive and comprehensive (will be phased out by 2020).


Impact of State of Residence

Prescription drug and supplemental insurance policies are regulated by state, which approves carriers, policies that can be sold within its borders, and associated pricing.  Therefore, retirees may discover significant price disparities for similar policies depending on where they choose to live..


Table 1:  Supplemental Insurance State Premium Cost Comparison in Future Dollars  

Table 1 reveals a 49% difference in supplemental premium costs between Hawaii and Massachusetts

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State differences in retirement health care expenses highlights the problem of utilizing national averages when budgeting for future medical expenses.  Instead, supplemental-plan costs should be based on a retiree’s future state of residence.