by Robin Hartill, CFP®, Rachel Christian, CEPF®
For most workers, retirement means an end to employer-sponsored health coverage. But your 65th birthday usually comes with a pretty sweet gift from the federal government: Medicare.
But how does Medicare work, anyway?
Whether you’re about to turn 65 or you’ve been enrolled in the program for years, now is a great time to brush up on the federal health insurance program, what it offers, what it costs and how to make changes to your Medicare coverage.
Medicare is the largest health insurance program in the United States, covering more than 60 million Americans.
It’s also one of the most confusing and complex programs.
Contrary to popular belief, Medicare isn’t free and it doesn’t cover all your health care costs either.
Here’s what you need to know to get the most out of your Medicare coverage.
Medicare is the federal government’s health program for people age 65 and older, as well as some younger people with disabilities or kidney failure.
If you’re at least 65 years old and entitled to Social Security benefits or Railroad Retirement benefits, you’re eligible for Medicare. You don’t need to be retired or taking benefits to qualify.
Younger people who have been on Social Security Disability for at least 24 months, or have been diagnosed with end-stage renal disease or ALS are also eligible.
Medicare is funded via payroll taxes, also known as FICA taxes, which are automatically withheld by your employer.
FICA includes a 6.2% Social Security tax and a 1.45% Medicare tax on your earnings  — or 7.65% total.
Self-employed people face a double whammy from the federal government because they pay both the employer’s and the employee’s share of FICA taxes — a total of 15.3%.
No matter how much you make, 1.45% of your paycheck will be withheld for Medicare.
An additional 0.9% Medicare tax may apply to earnings over $200,000 for single filers, or $250,000 for married couples filing jointly.
Original Medicare, also known as traditional Medicare, includes Part A and Part B. Original Medicare covers hospital stays, doctor visits, durable medical equipment, home health care and other medical services. However, it doesn’t cover vision, dental or hearing.
Medicare Part D is optional prescription drug coverage, and serves as a supplement to Original Medicare.
Medicare Part C, better known as Medicare Advantage, is an alternative to Original Medicare. It’s provided by federally approved private insurance companies and bundles features of Part A, Part B and usually Part D drug coverage into a single plan.
You can have other insurance, such as employer coverage, and Medicare at the same time. In this situation, Medicare pays first and your other insurance is the secondary payer.
Medicare Part A is basically hospital insurance. It’s premium-free for most Medicare beneficiaries because you paid into it during your working years via those Medicare taxes.
However, Part A isn’t completely free. You’ll still have Part A deductibles and coinsurance costs.
Medicare Part A covers:
2022 Medicare Part A costs include:
All the costs above are per benefit period. The clock for a benefit period begins when you’re admitted to the hospital or a skilled nursing facility as an in-patient. It ends once you haven’t had any in-patient care for 60 days.
So if you had a 75-day hospitalization, you’d pay a $1,556 deductible, plus coinsurance of $5,835 (for days 61 through 75 at $389 per day).
If you were hospitalized again six months later, you’d start a new benefit period. You’d owe another $1,556 deductible. So it’s possible to owe the Part A deductible multiple times in one calendar year if you’re hospitalized multiple times.
However, so long as you didn’t remain hospitalized for more than 60 days during your second visit, you wouldn’t have any coinsurance costs.
Over 95% of people don’t pay a monthly premium for Part A. But if you worked less than 10 years prior to your 65th birthday, you may owe up to $499 in Part A premiums per month in 2022.
Because of the potential for high out-of-pocket costs, many recipients purchase Medicare supplement insurance policies, better known as Medigap, that help shoulder some expenses.
Medicare Part B covers you for doctor’s services and outpatient care, including:
Medicare Part B covers:
If you have Medicare Part B, you can see any health care provider or primary care doctor who accepts assignment and who is accepting new Medicare patients.
Unlike Medicare Part A premiums, your Part B premiums aren’t free.
Some people who are still working and covered by employer medical insurance or are covered under their spouse’s health insurance plan opt to postpone Medicare Part B coverage until their other coverage ends.
2022 Medicare Part B costs include:
If you receive Social Security, your Medicare Part B premiums are automatically deducted from your benefit each month.
Medicare determines your premiums using your tax returns from two years earlier, so your 2020 return will be used to determine your 2022 premiums.
Medicare Part D is an optional prescription drug coverage program for people enrolled in Original Medicare. This coverage is provided by a private insurance company that Medicare later reimburses.
All Medicare prescription drug plans are required to cover certain categories of prescription drugs, but plans can vary widely in terms of what specific drugs they cover. Thus, your prescription drug costs can vary, depending on the Medicare Part D you choose.
You can shop for a Part D plan on Medicare’s website.
Medicare Part D costs include:
The average Part D premium for 2022 is projected to be $33 a month.
Medicare Part C, better known as Medicare Advantage, is an all-in-one alternative to Original Medicare.
You can buy a Medicare Advantage plan offered by a Medicare-approved private insurance company.
Most Medicare Advantage plans bundle in Part D prescription drug coverage, allowing you to get all your Medicare benefits in a single plan. Many include additional benefits Original Medicare doesn’t cover, like hearing, dental and vision coverage.
These plans may also lower your out-of-pocket costs.
Think of Medicare Advantage like this:
Part C = Part A + Part B + Part D (usually) + some extra services
Medicare Part C covers:
2022 Medicare Part C costs include:
In 2022, the average monthly premium for a Medicare Advantage plan is projected to be $19 a month.
Unlike Original Medicare, Medicare Advantage plans restrict you to health care providers and services within the plan’s local network. You may also need to get prior authorization and approval from your plan for certain services and supplies.
Medigap policies help cover some out-of-pocket costs, such as deductibles and coinsurance, for Original Medicare beneficiaries.
You can only purchase a Medigap policy if you’re enrolled in Original Medicare. Medicare Advantage enrollees can’t buy these supplement insurance policies.
Medicare supplement insurance plans are sold by private insurance companies. You’ll pay an insurer a monthly premium for your Medigap coverage in addition to all your other Medicare costs.
There are several major medical expenses that aren’t covered by Medicare Part A or Part B.
But remember: You can get some of these services covered if you add a Part D plan or switch to a Medicare Advantage plan.
Other services not covered by Medicare:
Funding a health savings account (HSA) before you’re eligible for Medicare is a good way to save for the costs that Medicare won’t cover.
If you’re already receiving Social Security benefits, you’ll be automatically enrolled in Medicare. You don’t have to do anything.
Otherwise, your Medicare eligibility begins around your 65th birthday, and you have a seven-month window to sign up.
This initial enrollment period begins three months before your birthday month, includes your birthday month and extends three months after that. So if you were born on Jan. 5, you could sign up between Oct. 1 and April 30.
You can also sign up during Medicare’s general enrollment period between Jan. 1 and March 31 if you missed the seven-month window around your 65th birthday. But your benefits won’t start until July of that year.
The Medicare enrollment process is handled by the Social Security Administration. If you’re not automatically enrolled, you can sign up by visiting Social Security’s website, calling 800-772-1213 or visiting your local Social Security office.
You can enroll in Medicare even if you don’t plan to retire right when you turn 65.
Medicare open enrollment, also known as the annual election period, runs from Oct. 15 through Dec. 7 each year.
It’s the time when people who are already enrolled in Medicare can make changes to their plans.
If you’re happy with your coverage, you don’t need to do anything.
During open enrollment, you can:
Whatever changes you make won’t go into effect until Jan. 1. So if you make changes during the 2022 open enrollment period, your new benefits will kick in January 2023.
In some cases, yes.
If you have coverage under the Affordable Care Act, COBRA through a past employer or TRICARE for retired military members, you’re required to enroll in Medicare when you turn 65.
You may not have to sign up for Medicare right away if you’re still working and enrolled in your employer’s group health plan coverage or if your spouse is still working and you’re covered under their plan. But be sure to check with your employer. Some companies will require you to enroll in Part A and Part B and use your employer insurance as secondary coverage.
Be sure you’re very clear on the rules. The penalties for late enrollment are steep and, in some cases, can increase your Medicare costs for the rest of your life.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community. Senior writer Rachel Christian contributed reporting.
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