How Does Medicare Work?

Medicare is a health care system that everyone in America will deal with at some point in their lives, but very few people understand exactly what Medicare is or how it works. Today we’re going to go over everything you need to know about Medicare before you enroll.

What Is Medicare?

Medicare is a government-run insurance program for American citizens over age 65. The program, created in 1965, was built by the federal government when it became apparent that citizens over age 65 were struggling to find health insurance coverage from private insurance companies at a reasonable premium with the benefits they needed. Medicare essentially strives to make health care “universal” after Americans hit age 65, which makes planning for health insurance costs much more straightforward as you approach retirement.

The program provided coverage to more than 58 million people in 2017, and continues to grow. Although the program has seen a variety of changes over the years, the basics have stayed relatively consistent:

•      Those enrolled in Medicare receive health care coverage over age 65 for a set cost that’s often more affordable than private health insurance companies.
•      Medicare is broken into several “Parts” that allow you to pick and choose what type of coverage (or how much coverage) you need during retirement.
•      Penalties exist for those who fail to enroll in a timely manner.

Medicare Part A-D

Medicare is broken into four clear “Parts” – labeled A, B, C, and D. This is easily one of the most confusing aspects of Medicare. Most people envision the program as a kind of umbrella policy. They assume that once they’re enrolled in Medicare they, to some extent, receive coverage for everything they might need. This couldn’t be farther from the truth.

Medicare Part A and B are what we traditionally think of when we think of health insurance coverage. Medicare Part A covers hospital care, nursing home care, hospice, home health services, and nursing facilities. Medicare Part B covers necessary medical expenses. These two, when combined, are the baseline Medicare coverage that most people enroll in. This isn’t unlike many private health insurance companies who also cover (or cover a portion of) hospital costs and medically necessary expenses or procedures.

Medicare Part C isn’t part of “traditional” Medicare. It’s often referred to as Medicare Advantage. This type of coverage is usually found through a private insurance company, and acts as a more all-in-one healthcare coverage option for individuals over age 65. It includes a baseline of coverage (what would be Medicare Part A and B), as well as additional coverage for dental or vision. Remember that Part C Medicare comes from private insurance providers, so their costs (including out of pocket minimums) will differ. It’s wise to spend some additional time weighing different Part C plans if this is the route you choose to take.

Finally, we have Medicare Part D. Medicare Part D is coverage specifically for prescription drugs. You can only enroll in Medicare Part D if you’re already enrolled in “traditional” Medicare (Part A and B). It acts as a supplement to help reduce the total cost of prescription drugs for Medicare participants. It’s important to remember that you can shop around for different Medicare Part D options to find one that fits your unique prescription drug needs.

Enrolling in Medicare

Once you determine what type of Medicare coverage you need, you’re ready to enroll. Enrollment for Medicare happens during a 7-month window. The window “opens” 3 months before you turn 65, and extends 3 months after your birthday month. In many cases, if you’re already enrolled in and receiving Social Security, you will be automatically enrolled in Medicare. Keep in mind, that in some cases you may qualify for a special enrollment period (SEP) that can help you to enroll in the Medicare coverage you need outside of this specific 7-month window. Exercising your right to enroll in Medicare during your SEP can also help you to side step some notable penalties you could face for enrolling late.

Penalties to Watch Out For

Many people don’t realize that if they fail to enroll in Medicare in their allotted window, they could face some serious penalties. Your late enrollment penalty (if you don’t qualify for premium-free Medicare Part A coverage) is 10% of your total monthly premium, and is determined based on how many years you failed to enroll. That’s a huge percent that adds up over time to make a significant negative impact on your finances during retirement!

Need Help?

Contact Arnold & Mote Wealth Management today! We’re happy to walk you through the ins and outs of Medicare, and help you get a clear idea of how it impacts your financial plan as you head into retirement.