How Medicare Works

At some point—and that point might be now—you likely will rely on Medicare to help cover the cost of your medical care. However, figuring out this complicated federal health insurance program for adults 65 and older can be a challenge.

Fortunately, Danielle Kunkle Roberts—co-founder of Boomer Benefits, an insurance agency that helps baby boomers navigate their entry into Medicare—sat down with Carefull as part of the Taking Care of Mom & Dad’s Money virtual summit to explain the ins and outs of this program. An edited version of her interview is below. You can listen to her full interview, as well as interviews with other financial, legal and caregiving experts, in the Carefull Community. ‍

The Cost of Medicare‍

Cameron Huddleston, Careful’s family finance expert: I think people might think Medicare is free healthcare. Let's start there. Is Medicare truly free? ‍

‍Danielle Kunkle Roberts: That is the number one assumption people make about Medicare before they reach Medicare age. When they're working, they see their FICA taxes coming out of their check. And that makes us think that when we get to Medicare age, everything will be covered, and it will all be free. And of course, that's not the case. 

So when you're working and you pay taxes over at least a 10-year period in your lifetime, or you're married to someone who did, your hospital insurance for Medicare is at no cost once you enroll at 65 or beyond. So that part you could say is true.

It's not exactly free, though, because you did pay for it with all of those taxes over your lifetime of work. But Medicare Part B and D and Advantage plans and supplements, all of these pieces cost money. There are premiums that you're going to pay for that once you enroll in Medicare. So if you think about the average Social Security check in America being $1,400, $1,500 or so, and the Medicare Part B premium right now is $148.50. That's 10% of your Social Security check right there that you're going to spend every month on Medicare Part B, which doesn't cover all of the expenses. You still have things like deductibles, cost sharing and co-insurance just like you do on your insurance that you've had under 65.

Medicare Coverage Options

Huddleston: You mentioned the various alphabet soup of Medicare: Part A, the Part B, the Part D, supplements and Advantage. Could you break that down for us?

Roberts: There is an alphabet soup, and it's something that causes more confusion. So I like to say that Medicare starts with the parts. The first two parts you need to know are original Medicare that's been around since the 60s, which is your Part A hospital insurance, and your Part B outpatient medical insurance. 

Your original Medicare benefits, or what we call traditional Medicare, you sign up for those at the Social Security office or the Railroad Retirement Board, depending on if you've retired from there. And those two parts of Medicare are the only parts that you sign up for through the Social Security office. 

The other two parts, C and D, came later, and they are optional and usually carry an additional premium. Part C is the Medicare Advantage program. That's something that you can opt into if you want to get your Medicare benefits from an insurance company locally, instead of from the federal government. Part D is the newest part of Medicare rolled out in 2006, and it is voluntary outpatient drug coverage. So many, many decades went by with people having no outpatient drug coverage on Medicare.

Part D was created to give people help with the cost of prescription medicines. It functions kind of like a pharmacy card. You purchase this insurance policy from a private insurance company. You pay a premium so that you can show that card at the pharmacy. Then you're not going to pay full price for the drug. You're going to have your share of the drug cost, just like the insurance company has its share of the drug. 

Those are the only four parts to Medicare itself. On the supplemental side, one of the biggest mistakes that they made in designing these plans originally is they have Medigap, which is the Medicare supplement. Medigap plans A, B, C, D—it goes on all the way up to N, so there are 10 of them. And that really throws people for a loop because why are they named the same? And so they'll get the words “parts” and “plans” confused. 

So just remember Medicare itself has parts: hospital A, outpatient B, C is optional Advantage program, D is optional part D drug program, But the last two come from insurance companies. 

And then you add to that with what we call plans. So when you're looking at a supplement, you don't call that a part. We call it a plan because it's actually a policy that you purchase from the insurance company, and it helps to pay for the deductibles that Medicare has, If you go in the hospital right now with Medicare Part A, if you spend one night at the hospital, you're going to have a $1,484 deductible.

And then you leave the hospital, and you're out for 60 days. You go back in, you’ve got to pay the deductible again on the outpatient side. The [Medigap] plans with the confusing letters are actually really necessary so that you don't find yourself in a situation where every time you go to the hospital and you're paying a deductible, every time you go to the doctor or have physical therapy or have an imaging,or even have something serious like chemo treatment, you're paying 20%. 

The parts that come with Medicare are different than the plans that come from Medigap companies, but they work together to help provide coverage so that you have peace of mind that you're not going to face a $50,000 bill after you have an illness, injury or hospital stay.

What Medicare Doesn’t Cover

‍Huddleston: I think before we get into Medicare Advantage versus the supplement plans, I want to ask you about something because I want to make this very clear to people. I think there's a lot of confusion about what Medicare does and does not cover, especially when it comes to long-term care. Can you explain this briefly?

Roberts: That's another surprise that people often find, right? It just seems like Medicare would be the thing that would provide for you when you need to go into assisted living or a nursing home. Unfortunately, that's just not the case. So Medicare covers your medical needs for the rest of your life -- even if you're living in an assisted living center. But Medicare does not pay the monthly cost of staying in that facility. 

So you might think of it as your rent. Maybe you are in a place that costs $3,000. Some of them cost $8,000 a month.That is a burden that's just too high for Medicare to shoulder. Already, Medicare costs quite a bit. Can you imagine if they started including all those other benefits, how expensive Medicare would be? 

Medicare doesn't cover routine, dental, vision hearing, or long-term care expenses. That means that you need to have a plan earlier in your life for what you're going to do for that expense should you need it? Statistically, roughly one in two people will have a long-term care stay in their lifetime. So you don't want to be caught off guard by that. 

You have options to purchase long-term care insurance, which is what I've done for my mom and stepdad. I helped them find a plan that will pay for up to five years of care. Or you can privately pay it yourself out of whatever retirement funds that you have. And then the last option sometimes people end up facing is spending down all their assets and going on Medicaid, which provides you a semi-private room. You may not be choosing the hospital or location that you're in. It's kind of a last resort because so many people don't think about it. 

[Read: How to Pay for Long-Term Care]

Medicare Advantage vs. Medigap

Huddleston: So let's go back and talk about Medicare Advantage versus the supplement plans. How do you decide between the two options?

Roberts: You can purchase a Medigap plan, and that's going to have a higher premium with less cost sharing from you on the backend because Medicare is going to pay first. Then your Medigap plan is going to pay, and then only what's left over is for you to pay. Depending on the plan you choose, such as Plan G, there's almost nothing left over for you [to pay]. 

When you choose that option, you can see any provider in the nation that accepts Medicare, which is over 1 million providers—93% of all physicians accept Medicare. You don't have to pick a primary care doctor. You don't have to get a referral.

There's a lot of flexibility, but those plans were created back in the 60s before Part D came out. If you go that route, you would add on a separate standalone Part D drug plan to help pick up the drug coverage. So now you're paying for Part B, you're paying for your Medigap plan, and you're paying for your Part D drug plan. Some people like this option.

It's great to do a Medigap plan if you're going to travel. If you snowbird, if you need to see a doctor in Colorado and Florida, depending on the time of year, these plans are really good. They're good if you have a serious health condition, and you want to go in knowing that you've got the fullest coverage that you can buy. Those Medigap plans work really well for people who like freedom of choice, that don't want to hassle with the network. But you're going to pay more for that coverage.

The other option that came out much, much later and now incorporates Part D is the Medicare Advantage plan. If you go that route, instead of your provider sending the bills to the federal government, your providers will send the bills to the Medicare Advantage plan that you join. Now you're giving an insurance company the decision-making over your health care. 

It's going to be similar to what you experienced with group coverage under 65. You will have copays for various things, but Medicare advantage plans get paid by Medicare to take on your medical risk. So now if you get really sick, it's not Medicare's problem anymore. The Medicare Advantage plan bears that risk. The Medicare Advantage plans want to get paid by Medicare to provide your care. So they will offer really low premiums for these kinds of plans. In urban areas, you could find some counties may have 20 to 30 plan offerings. All the main insurance companies that you’ve heard of participate in this space.

If you go the Medicare Advantage route, you're going to have a lower premium that you pay for the plan but higher cost sharing on the back end. You need to read the fine print because you might find one Medicare advantage plan that has a $10 co-pay at the doctor. And the other one that has a $30 co-pay. You might find one plan that has a $200 copay for imaging or diagnostic imaging, and another one that's going to charge you 20% of the cost of that test. All Medicare advantage plans have out-of-pocket maximums. The highest that could be in 2021 is $7,550. So what that means is you pay less for the plan, but throughout the year  you're paying the copays.

If you have a year of bad health, you could be spending and spending, and your spending won't be capped until you reach that out-of-pocket maximum. Depending on the plan, it can be as high as that $7,500. 

We like to tell people if you go that route with an Advantage ban because you're attracted to the lower premium—or maybe you're really healthy and you just think, “I want to spend less. And I don't think I'm going to have a lot of usage”—you need to have a rainy day fund. Ten years down the road if you get sick and there are a lot of expenses, you're not in a panic over how you're going to pay them because you have this little medical nest egg that you've set aside and don't touch it for anything except medical needs.

You also have to be OK with networks because most Advantage plans will operate either an HMO or PPO network. If you have one or two doctors, it's pretty easy to find a Medicare Advantage plan that will fit you. If you have seven or eight, sometimes we may not be able to find a plan that has all of those same ones in the network. 

So the trade-off is that when you have a Medigap plan, you're paying more upfront, but you don't have so much on the backend. With a Medicare Advantage plan, you're going to pay less upfront. In years where you have more usage, you're going to pay more and you need to work with a network … So take a look through the summary of benefits when you're enrolling in a plan like that, find out what are you going to pay if you have a surgery. What are you going to pay if you need cancer treatment? What is the maximum out-of-pocket that you would be exposed to on that plan in that year? Make your decision from there.

Options to Switch Medicare Plans

Huddleston: I hear sometimes from people whose parents were essentially talked into a Medicare plan that was not right for them. Is there an option for a do over?

Roberts:  There is in, in a way. The thing to know about the Medicare supplement, which is the more comprehensive one, you have a six-month window. When you get Medicare, it starts with your Part B effective date, and it goes for six months. During that window, you can sign up for any Medigap plan you want with no health questions asked. Thereafter, in most states, you would have to apply and answer health questions. They could look at your health history and your medications, and they can choose to accept you or decline you for a policy. 

Where that question comes in with Medicare Advantage, “Could I go with the less expensive coverage and later if it does get too expensive because I get sick, could I go back to the more robust [Medigap] coverage?” The answer is, usually in most states, the health condition that's causing you to have all the expenses on the Advantage plan might also be something that causes a Medigap company to decline you. 

You can always get back to original Medicare, but you may not be able to get back to the Medicare supplement. So when we run into someone in this situation that you just mentioned, we look for the next allowable exit from their Advantage plan, which often is during the annual election period in the fall, which is the time when you can enroll in, change or leave a Medicare Advantage plan or a Part D drug plan. so you can leave the plan during that time.

We might apply for the Medigap plan prior to you leaving to make sure that it gets approved before we disenroll you from the Medicare Advantage plan. Because if you leave the Advantage plan and you go back to original Medicare, that's fine. But you don't want to find out after you've done that that you can't get the Medigap plan that you were hoping for.

[Keep Reading: What to Know About Social Security]