Medicare can help pay for many health care services after age 65, but it is not usually free. New beneficiaries are often surprised to learn that Medicare has several types of costs, including premiums, deductibles, copayments, and coinsurance.
Understanding these terms before your coverage begins can make Medicare easier to use. It can also help you compare Original Medicare, Medicare Supplement insurance, Medicare Advantage plans, and Part D prescription drug plans.
The four main types of Medicare costs
Medicare costs generally fall into four categories. You may not pay every type of cost for every service, but it helps to know what each one means.
- Premium: A premium is the amount you pay each month to keep coverage in place. Many people pay a monthly premium for Medicare Part B. You may also pay premiums for a Medicare Supplement plan, a Part D drug plan, or a Medicare Advantage plan.
- Deductible: A deductible is the amount you may need to pay for covered services before Medicare or another plan begins paying its share.
- Copayment: A copayment, often called a copay, is a set amount you pay for a service. For example, some plans may have a copay for a doctor visit or prescription.
- Coinsurance: Coinsurance is your share of the cost after Medicare pays its portion. It is usually shown as a percentage rather than a fixed amount.
These costs can change from year to year. They may also vary based on your income, the plan you select, the insurance carrier, and the state where you live.
What do Medicare Part A and Part B cost?
Original Medicare includes Part A and Part B. Part A helps cover inpatient hospital care, skilled nursing facility care in certain situations, hospice care, and some home health care. Part B helps cover doctor visits, outpatient services, preventive care, durable medical equipment, and many other medical services.
Many people do not pay a monthly Part A premium because they or a spouse paid Medicare taxes for enough working quarters. However, Part A still has cost sharing. This can include a deductible for hospital care and coinsurance if a hospital stay extends beyond certain covered time periods.
Part B generally has a monthly premium. Part B also has an annual deductible. After you meet that deductible, Original Medicare often pays a portion of the Medicare-approved amount for covered outpatient services, and you may pay the remaining coinsurance.
For many services under Part B, Medicare commonly pays 80% of the Medicare-approved amount, while you may be responsible for 20%. The actual amount you pay can depend on the service, the provider, and whether the provider accepts Medicare assignment.
What is Medicare assignment, and why does it matter?
A provider who accepts Medicare assignment agrees to accept the Medicare-approved amount as full payment for covered services. The provider can still collect your deductible and coinsurance, but generally cannot charge more than the approved amount for that service.
Some providers accept Medicare but do not accept assignment for every service. In many states, these providers may charge an additional amount above the Medicare-approved amount. This is sometimes called an excess charge.
Before an appointment, you may want to ask whether the doctor accepts Medicare and accepts assignment. This can help you understand what your bill may look like.
Does Original Medicare have an annual out-of-pocket maximum?
This is an important question for people comparing Medicare coverage choices. Original Medicare by itself generally does not have a yearly limit on what you could pay for Part A and Part B cost sharing.
That does not mean you will always have large bills. Many people have routine care and manageable expenses. Still, a major illness, hospital stay, surgery, or ongoing outpatient treatment can create significant deductibles and coinsurance under Original Medicare alone.
This is one reason some people consider additional coverage. The two common paths are Medicare Supplement insurance and Medicare Advantage plans. They work differently, so it is helpful to compare the tradeoffs carefully.
How can Medicare Supplement insurance help with costs?
Medicare Supplement insurance, also called Medigap, works alongside Original Medicare. Medicare pays its share first, and the Medicare Supplement plan may help pay certain out-of-pocket costs left behind, such as Part A and Part B coinsurance. The exact benefits depend on the letter plan you choose and the rules in your state.
For example, standardized Medicare Supplement plans can offer different levels of help with deductibles, coinsurance, and certain other Medicare-approved expenses. You generally pay a separate monthly premium for a Medicare Supplement plan in addition to your Part B premium.
Medicare Supplement plans may offer predictable access to doctors who accept Medicare nationwide, without a provider network in most cases. They do not usually include outpatient prescription drug coverage, so many people who choose Medigap also enroll in a separate Part D plan.
You may have your strongest opportunity to buy a Medicare Supplement plan during your one-time Medigap Open Enrollment Period. Outside of certain guaranteed-issue situations, insurance companies may use medical underwriting and can consider your health history when deciding whether to accept an application.
How do Medicare Advantage plan costs work?
Medicare Advantage plans are another way to receive your Part A and Part B benefits through a private insurance company approved by Medicare. These plans can have different premiums, deductibles, copays, provider networks, and rules for referrals or prior authorization.
Many Medicare Advantage plans include prescription drug coverage and may offer extra benefits, such as dental, vision, hearing, or fitness benefits. Benefits and costs vary by plan, carrier, county, and state.
One key feature is that Medicare Advantage plans have an annual limit on out-of-pocket costs for covered Part A and Part B services. However, your costs during the year can depend on the plan's copays, coinsurance, network rules, and the care you need. Prescription drug costs are usually separate from the medical out-of-pocket maximum.
Do you need to budget for Part D prescription costs?
Even if you do not take medications today, it is wise to understand Part D. Medicare Part D helps cover outpatient prescription drugs through private plans.
A Part D plan may have a monthly premium, deductible, copays, or coinsurance. Each plan has a formulary, which is its list of covered drugs. Plans also place drugs into different cost levels, often called tiers.
Before choosing a Part D plan, check whether your medications are covered, what pharmacy options are available, and how the plan treats your prescriptions throughout the year. Drug formularies, pharmacy networks, and plan costs can change annually.
How can you prepare for Medicare health care expenses?
Start by looking beyond the monthly premium. A lower premium can sometimes come with higher costs when you receive care, while a higher premium may reduce some cost sharing. Neither approach is automatically better. The right fit often depends on your doctors, medications, travel habits, budget, and comfort with paying costs as you go.
- Review your current doctors and whether they accept Medicare or participate in a plan network.
- Make a list of your prescriptions, including dosage and how often you refill them.
- Consider how often you expect to see doctors or specialists.
- Think about how you would handle an unexpected hospital stay or outpatient treatment.
- Compare total plan features, not only the monthly premium.
Medicare costs can feel complicated at first, but you do not have to sort through the choices alone. Eric can offer free, no-pressure help as you compare Medicare Supplement options and understand how they may fit with your Medicare budget and health care needs.