Understanding Medicare: What It Is and How It Works

Medicare is a federal health insurance program designed for people age 65 and older, regardless of income or medical history. The program also covers some younger individuals with disabilities and people with end-stage renal disease. Created in 1965, Medicare serves over 66 million beneficiaries as of 2024, making it one of the largest health insurance programs in the United States.

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The program operates through four main parts, each covering different types of medical services. Understanding how these parts work together helps you see what types of care are covered and what costs you might encounter. Unlike private insurance plans that vary by company, Medicare follows standardized rules set by the federal government, though you do have choices about how you receive your coverage.

Medicare is funded through payroll taxes that workers and employers contribute during working years. When you turn 65, you become part of this system if you or your spouse paid Medicare taxes for at least 10 years. The program is structured so that different parts cover different services—some cover hospital stays, some cover doctor visits, and others cover prescriptions and preventive care.

One important thing to know is that Medicare is not the same as Medicaid, even though the names are similar. Medicaid is a separate program run by states and the federal government together, primarily for people with lower incomes. Some people qualify for both programs, sometimes called "dual eligible" individuals, but they are distinct insurance systems with different rules.

The structure of Medicare can seem complicated at first, but breaking it into parts makes it manageable. Each part has a specific purpose, and together they create a framework for healthcare coverage in later years. Learning what each part covers is the first step toward understanding your coverage options.

Practical Takeaway: Medicare consists of four parts that cover different services. Spend time learning which part covers which services so you understand what types of care fall under your coverage and what you might need to pay for separately.

Medicare Part A: Hospital Insurance Coverage

Medicare Part A is hospital insurance that covers inpatient hospital stays, skilled nursing facility care, hospice care, and some home health services. Most people do not pay a premium for Part A because they or their spouse paid Medicare taxes while working. In 2024, if you need to use Part A, you pay a deductible of $1,632 for each benefit period, which is the amount you must pay before Medicare starts covering costs.

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An inpatient hospital stay is when you are admitted to a hospital and stay overnight for treatment. Part A covers your room, meals, nursing care, and other hospital services. If you stay longer than 60 days in a single benefit period, you begin paying daily coinsurance amounts. A benefit period starts when you are admitted and ends 60 days after you leave the hospital without receiving any skilled care.

Skilled nursing facility care is different from regular nursing home care. A skilled nursing facility provides specialized medical care like physical therapy or wound care after a hospital stay. Medicare Part A covers up to 100 days in a skilled nursing facility per benefit period, but you pay nothing for the first 20 days. From days 21 to 100, you pay a daily coinsurance amount of $408 per day in 2024.

Home health services covered by Part A include part-time skilled nursing care, physical therapy, occupational therapy, and speech-language pathology services—but only if you are homebound and a doctor orders the care. Home health coverage also requires that you recently received care in a hospital or skilled nursing facility. You pay nothing for home health services under Part A, though you may pay 20 percent of the cost for medical equipment.

Hospice care is covered when a doctor determines that a person is unlikely to live longer than six months. Medicare Part A covers hospice care with minimal out-of-pocket costs, including medications related to the terminal condition, medical supplies, and counseling services. This coverage reflects Medicare's recognition that end-of-life care has different needs than acute medical treatment.

Practical Takeaway: Part A covers hospital stays and skilled care after hospitalization. Knowing the deductible and daily coinsurance amounts helps you understand what costs to expect if you need hospital or skilled nursing care.

Medicare Part B: Medical Insurance for Doctors and Outpatient Services

Medicare Part B covers doctors' services, outpatient care, medical equipment, and other healthcare services not covered by Part A. Unlike Part A, Part B requires a monthly premium that most beneficiaries must pay, though the amount depends on income. In 2024, the standard Part B premium is $174.70 per month for those with incomes up to $97,000 for individuals or $194,000 for married couples filing jointly. Higher-income beneficiaries pay more through a system called Income-Related Monthly Adjustment Amounts (IRMAA).

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Part B also requires an annual deductible of $240 in 2024, which you must pay before Medicare begins sharing costs. After you meet the deductible, Medicare typically pays 80 percent of approved amounts for most services, and you pay the remaining 20 percent. This cost-sharing continues all year with no maximum out-of-pocket limit under Original Medicare, meaning your costs can be substantial for ongoing treatment.

Doctor visits and office services covered by Part B include routine checkups, treatment for injuries or illnesses, and care from specialists. Preventive services like screenings for cancer, heart disease, and diabetes are covered at no cost to you when performed by an in-network provider. These preventive benefits include mammograms, colonoscopies, bone density tests, and cardiovascular screening.

Outpatient hospital services are covered through Part B when you receive care at a hospital without being admitted as an inpatient. This includes emergency room visits, same-day surgery, lab tests, and imaging services performed in a hospital outpatient setting. Mental health services, including therapy and psychiatric care, are also covered under Part B with the same 80/20 cost-sharing as other services.

Durable medical equipment like wheelchairs, walkers, oxygen equipment, and diabetic supplies are covered when prescribed by a doctor. You typically pay 20 percent of the approved amount for equipment rental or purchase. Physical therapy, occupational therapy, and speech therapy are covered as outpatient services when medically necessary, though Medicare limits the number of visits in some cases based on medical review.

Practical Takeaway: Part B covers doctors and outpatient services with a monthly premium and annual deductible. After meeting the deductible, you pay 20 percent of costs, so budget for ongoing healthcare expenses throughout the year.

Medicare Part D: Prescription Drug Coverage

Medicare Part D covers prescription medications through private insurance plans approved by Medicare. This is not directly run by the government like Parts A and B—instead, insurance companies offer Part D plans to Medicare beneficiaries. You must enroll during your Initial Enrollment Period, which begins three months before the month you turn 65, or you may face a permanent penalty if you go without coverage and later enroll.

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Part D plans vary in which medications they cover and how much you pay. Most plans have a formulary, which is a list of medications covered by that plan. When looking at Part D plans, it is important to check whether your current medications are on the formulary and what tier they are assigned to. Tier 1 medications (usually generics) cost less, while Tier 5 medications (usually brand-name drugs) cost more.

The way you pay for medications under Part D changes throughout the year as you reach different cost stages. In 2024, you first pay a monthly premium for the plan. Then you pay out-of-pocket costs until you reach the deductible amount, which can be up to $545. After meeting the deductible, you enter the initial coverage stage where you pay a copayment or coinsurance for each prescription, and Medicare pays its share.

The coverage gap, sometimes called the "donut hole," occurs after you and your plan together have spent $5,850 on covered drugs in 2024. During the gap, you pay 25 percent of brand-name drug costs and 25 percent of generic drug costs. The gap ends when your out-of-pocket spending reaches $8,550 in 2024, at which point you enter catastrophic coverage and pay only a small copayment per prescription for the rest of the year.

Low-income beneficiaries may qualify for Extra Help, a program