If you’ve landed on this page of our website, then you’ve probably been wondering, “What is Medicare?” Maybe you have questions regarding Obamacare and Medicare as a new enrollee, or maybe you’re curious whether the current health care laws have any kind of effect on Medicare benefits for people who are already signed up.
First, let’s talk about how Medicare came to be and why it was created. Once you understand its purpose, you can see how it ties in with the current health care reforms under the Affordable Care Act. We’ll also discuss the status of Medicare today.
Health Care for Seniors
In 1965, Congress, under the leadership of President Lyndon B. Johnson, signed into law Title XVIII of the Social Security Act, which created Medicare. Medicare is a social insurance program that’s managed, administered and partially funded by the federal government. Medicare formally got underway in 1966. It was designed to provide guaranteed health insurance benefits to American senior citizens.
Medicare specifically provided coverage to those who were at least 65 years old. When the program was first created, people retired earlier because they didn’t live as long as they do now. Once retired, seniors didn’t have a way to get employer-sponsored coverage, and health insurance for the elderly was prohibitively expensive.
Eligibility for Medicare has also expanded over the years to include people with specific terminal illnesses and certain disabilities. If you’re under 65 and receiving Social Security disability benefits, then you qualify for the program as well. Medicare still seeks to provide older Americans with a source of reliable and affordable health insurance. That goal hasn’t changed in 50 years even though the pool of beneficiaries is larger, workers retire later and people live longer than they did in the mid-1960s.
What types of plans does Medicare offer?
Original Medicare comprises two parts: A (hospital coverage) and B (medical coverage). There’s also Medicare Part C (or Medicare Advantage), which combines the coverage of A and B with prescription drug benefits. For supplementing Original Medicare, you can sign up for Medigap insurance or a Medicare Savings Account. You can read more about Medigap and Medicare Savings Accounts on our site. Finally, Part D covers prescription drugs. All four parts of Medicare and its supplemental insurance plans are optional. You don’t have to sign up for coverage even if you’re eligible, but there are benefits to enrolling. Let’s look at the different parts more closely.
Medicare Part A
- Medicare Part A is hospital insurance. Under Part A, you get coverage for inpatient hospital care, skilled nursing facilities and hospice care.
- The Affordable Care Act (ACA) requires most Americans to have minimum essential health insurance. Medicare Part A counts as minimum essential coverage for the purposes of the law.
- You have an initial enrollment period with Medicare. It runs for seven months: three months before the month you turn 65, the month you turn 65 and three months after that month. If you want Part A, then you should sign up when you’re first eligible for the program. Otherwise, you might have to pay a monthly penalty fee later if you decide to enroll outside of this initial window.
- If you qualify for Medicare based on disability, then you’re eligible for coverage starting three months before the 25th month that you collect disability benefits. You’ll be enrolled automatically into the program.
Medicare Part B
- Medicare Part B is medical insurance. It generally covers doctors’ services and other outpatient care related to everyday healthcare, such as lab testing, diagnostic or preventive care, and some home healthcare services. Part B will also cover any supplies that are deemed medically necessary.
- Under the Affordable Care Act, Part B does not count as minimum essential coverage. If you want to meet the law’s requirements and avoid the penalty fee for noncompliance, you’ll need to enroll in Part A, a private health plan or some type of supplemental insurance that qualifies as minimum essential coverage.
- As with Medicare Part A, Part B has an initial sign up period that lasts for seven months based on when you turn 65: three months before your birthday month, your birthday month and three months after your birthday month. Those who qualify due to disability will be enrolled in Part B automatically three months before they reach their 25th month of disability benefits. You can opt out of Part B if you’re enrolled automatically.
If you miss the initial enrollment period for Original Medicare (Parts A and B), you can enroll during the general enrollment period, which runs from January 1 through March 31. Original Medicare is managed and administered by the Centers for Medicare & Medicaid Services (CMS). The CMS is a division of the Department of Health and Human Services (HHS), and all claims, payment of premiums and payouts are administered through CMS.
Special note: If you have Medicare, it’s illegal for anyone to knowingly sell health insurance to you on the private market, which includes the marketplaces that were created under the ACA. Also, you can’t buy Medicare plans – Original or Advantage – from the exchange sites.
Medicare Part C (Medicare Advantage)
- Medicare Part C, also known as Medicare Advantage, was created as a private option for people who needed more coverage than the public option provides. Many different private insurance companies offer Medicare Advantage plans. To learn more about signing up for an Advantage plan, visit the Medicare.gov website or check out our overview of the program.
- Open enrollment for Medicare Advantage plans begins on October 15th and ends on December 7th. During this period, you can join, make changes to or drop an Advantage plan or a Part D drug plan.
- Medicare Advantage plans have the same initial eligibility window as Original Medicare. There’s a 7-month time frame for new enrollees who aren’t on disability. Those with disabilities will not be enrolled automatically into Medicare Advantage. Instead, they can sign up during a special 7-month time frame: three months before the 25th month of receiving disability benefits, the 25th month of disability benefits and the 3-month period following the 25th month of disability benefits.
- Medicare Advantage plans must offer comparable coverage (at least) to Original Medicare. Most Medicare Advantage plans also offer prescription drug benefits. Under Original Medicare, drug coverage is purchased separately.
- Medicare Advantage plan types include Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), Private Fee-for-Service plans (PFFS) and Special Needs Plans (SNPs). Keeping up with the plan types can be confusing, so we’ll outline below what each of these entails.
Medicare Part C Plan Types
HMO: If you have an HMO plan, you’re limited to a network of providers unless there’s an emergency and you can’t get to your network. Under an HMO, you have a list of healthcare providers that you’re able to see (in network). Going outside of this list in a non-emergency (out of network) results in higher costs – and your insurer may deny a claim altogether.
HMO plans typically require the patient to pick a primary care doctor and receive referrals from that primary doctor to see specialists. Prescription drug coverage is usually covered under HMO plans.
PPO: Under a PPO, you can see any doctor, specialist or hospital that you wish, but you’ll pay less to see providers who are in network. If you go outside of the network, your claim will still be covered but at a higher cost to you.
You don’t need to designate a primary care physician with a PPO plan, and you don’t usually need a referral to see a specialist. Prescription drugs are often covered by PPO plans as well. You can’t buy Medicare Part D with a PPO, so make sure you know whether your PPO plan covers prescriptions if you need them. PPO plans also typically cover more services than Medicare Part A and Part B combined, but these plans are also more expensive to compensate for those extra services.
PFFS: These plans work differently from other types of coverage, and not every healthcare professional accepts PFFS plans. Under a PFFS plan, you have the freedom to choose any doctor, hospital or healthcare provider you want – with a big caveat. The provider has to agree ahead of time to accept the plan’s payment terms. Some PFFS plans have networks, but others don’t. If the PFFS plan has a network, then the network of providers has usually agreed to see you every time. Otherwise, you’ll have to check with your provider each time to make sure you’re still accepted as a patient.
PFFS plans determine how much they will pay certain healthcare professionals per service and how much the patient will have to pay. The payment sharing is not considered a co-payment and should be disclosed to you when you first sign up for the plan. Under a PFFS plan, you don’t have to choose a primary care physician and don’t need a referral to see a specialist. Prescription drugs are not always covered under PFFS plans. You can always sign up for Medicare Part D to receive coverage if not otherwise covered by PFFS.
SNP: This type of Medicare Advantage plan is only available to people who suffer from specific chronic conditions, such as diabetes, autoimmune disorders, cancer, ESRD, HIV or AIDS, chronic heart failure or dementia. They’re also available to those who are living in an institution, like a nursing home; those who require nursing care at home; or those who have both Medicare and Medicaid (dual eligibility).
The purpose of SNPs is to offer tailored benefits that meet the specific needs of people living with chronic health problems. Unless there’s an emergency, people with an SNP plan must receive their care from doctors, specialists and hospitals that are in network (on the plan’s preapproved list). Typically, SNPs require patients to choose a primary care doctor and get referrals for specialists. There are certain services provided by specialists that do not need referrals first. SNPs must also offer prescription drug coverage.
Medicare Part D
- Medicare Part D is the prescription drug coverage portion of Original Medicare. It’s also available to any Medicare Advantage members who don’t have an Advantage plan with drug coverage.
- The purpose of Part D was to decrease the costs of generic and name brand medications for Medicare beneficiaries.
If you need prescription drug coverage, it’s best to sign up when you first become eligible. For people without disabilities, the initial enrollment period is the same as the enrollment period for Original Medicare: three months before you turn 65, the month you turn 65 and three months after the month you turn 65. If you qualify based on disability, then your 7-month enrollment period starts three months before your 25th month of receiving disability benefits and runs for three months after the 25th month of receiving disability benefits. There are other enrollment periods for Part D if you decide you need coverage later:
- April 1st through June 30th: You can sign up for a drug plan during this enrollment period if you enrolled in Part B during Part B’s general enrollment period (January 1st to March 31st). You don’t have to be enrolled in Medicare Part A to sign up during this time.
- October 15th through December 7th: This is the open enrollment period for Medicare. During this time, you can add, switch or drop a Medicare Part D drug plan.
CMS has tasked the Social Security Administration (SSA) to manage eligibility requirements of Medicare. The SSA also issues subsidies to lower-income participants for Medicare Part D and collects certain Medicare premiums. If you’re eligible for Medicare, then you’ll start with your local Social Security office or the SSA website. Medicare Advantage is sold through private plans, so you’ll enroll directly with the insurer or agent who’s selling the plan.
How do I pay for Medicare?
Medicare is funded primarily through three components:
- The federal government
- Contributions from payroll taxes
- Premiums from Medicare enrollees
Medicare funding has been a source of contention since its inception. According to the Kaiser Family Foundation, spending for Medicare Advantage alone topped $233 billion in 2018, up from $99 billion in 2008. The Medicare program as a whole accounted for about 15 percent of federal spending in 2018 and is expected to hit 18 percent by 2029.
One of the goals of the Affordable Care Act (ACA) is to optimize Medicare spending. The law has proposed $716 billion worth of cuts over the next decade to improve spending, reduce waste and eliminate fraud. The intention is to reinvest billions of dollars in cuts back into Medicare to provide more benefits and subsidies to enrollees. Obamacare also created a tax increase on businesses to inject the Medicare program with new money to fund improvements.
Paying for Medicare Part A:
- Medicare Part A is often referred to as “premium-free Part A” because most enrollees don’t pay a monthly premium. If you worked and paid payroll taxes for 10 years prior to getting Medicare, then you probably won’t have a premium. Those who qualify based on disability, Social Security benefits or end-stage renal disease (ESRD) also don’t pay a premium for Part A.
- There are still copays and deductibles for Part A regardless of whether you have to pay the monthly premium.
- For the small percentage of people who do have to pay a premium for Part A, the cost varies. If you earn 30 to 39 work credits by the time you’re eligible for Medicare, your premium will be $252 a month in 2020. If you’ve earned fewer than 30 work credits, you’ll have to pay the full premium of $458 a month in 2020. These amounts increase to $259 and $471 a month, respectively, in 2021.
- There’s an annual deductible for inpatient hospital stays of $1,408 in 2020. This increases to $1,484 in 2021. You’ll also pay a flat coinsurance rate for extended hospital stays and skilled nursing facility stays. Medicare updates these costs each year.
Paying for Medicare Part B:
- Premium rates for Part B depend on your income, but there is a standard amount of $144.60 per month for new enrollees in 2020 ($148.50 in 2021). Higher-income enrollees will pay more. The threshold for the standard premium is an individual income of up to $87,000 a year or a joint income of up to $174,000 for people who file joint taxes on their 2018 returns. If you earn more than these amounts, then you’ll pay a higher Part B premium.
- New for 2021: Income brackets have changed. If you earned more than $88,000 as a single tax filer or $176,000 as a joint tax filer in 2019 (the year that Medicare will use to determine your 2021 rates), review the new income brackets to determine how these affect your premium rates for Part B (and Part D).
- The annual deductible for Medicare Part B is $198 in 2020. This increases to $203 in 2021.
- Once you pay the deductible, Medicare will typically cover 80 percent of Medicare-approved costs of your care, which means you’re responsible for about 20 percent of those costs.
Paying for Medicare Part C:
- The monthly cost of a Medicare Part C (Medicare Advantage) plan varies by type, company and coverage limits.
Paying for Medicare Part D:
- How much you pay for prescription drug coverage depends on your income and plan type. For those who make $87,000 or less as an individual tax filer, the premium is whatever your plan charges. In many cases, there’s a small premium for Part D.
- The base national premium for Part D – used for calculating late payments and income-adjusted premiums – is $32.74 in 2020. In 2021, the base premium is $33.06.
- For higher-income enrollees, there’s an extra charge applied on top of the plan’s monthly premium. In 2020, those who earned between $87,000 and $109,000 in 2018, for example, pay their plan’s premium plus $12.20 a month. IRMAA amounts change each year and are based on your tax returns from two years earlier.
- There’s also a yearly deductible for Part D plans, but it varies by plan. Medicare does put a cap on the deductible. In 2020, the maximum yearly deductible is $435. That will increase to $445 in 2021.
The Affordable Care Act took on the issue of the “donut hole.” Also known as a coverage gap, the donut hole is a financial situation that happens when you’ve exceeded the initial coverage limit for the year before you get to the out-of-pocket threshold. The Part D coverage limit for 2020 is $4,020. Next year, that initial coverage limit increases to $4,130. This amount includes the cost associated with prescription drugs claims, such as deductibles.
Before the ACA took effect, people stuck in the donut hole were responsible for the full cost of their medication. The ACA wanted to close this gap by 2020, so there’s a plan in place to help offset the cost of drugs for people in the donut hole. Thanks to new measures by the CMS and Trump administration, the donut hole closed a year earlier for brand name drugs. As of 2020, both gaps are now closed. You’ll pay 25 percent of the cost of your medications while you’re in the donut hole until you reach the “other side.”
Once you hit the other side (i.e., the catastrophic coverage provision of your drug plan) – which is effectively the out-of-pocket (OOP) threshold for spending – you’re out of the donut hole. In 2020, the OOP limit is $6,350.00. That increases to $6,550 in 2021.
Keep in mind that not every Part D beneficiary hits the donut hole. In fact, only 6 percent of Part D enrollees hit the donut hole in 2009 according to Forbes. But for those 6 percent, the problem can be significant. Excessive prescription costs are among the key financial problems associated with Medicare.
History of Medicare
During his final years in office, President Johnson examined the landscape of the healthcare system. He noticed that America’s senior citizens were often paying two or three times the cost for insurance coverage compared with younger demographics. Considering the fact that people often stopped working at 65, the rising costs of maintaining health coverage was a huge problem for the country. In response, President Johnson asked Congress to revise the Social Security Act to create a healthcare program exclusively for citizens over the age of 65. This program would be managed and implemented by the federal government and would be uniform among all participants. The program would also lessen the financial burden of buying insurance while maintaining the quality and quantity of care. Medicare got signed into law on July 30, 1965, and July 1 of the following year was the first day that people could sign up for coverage. The program saw more than 19 million enrollments on that first day.
The Medicare program has evolved over the last 50 years. One of the most important changes occurred in 1972 when the Medicare eligibility requirements were expanded. Medicare was changed to include individuals who were under the age of 65 years old but who had long-term disabilities that made them eligible to receive Social Security benefits. People under age 65 with end-stage renal disease were included as well. Here are a few highlights along the history of Medicare:
- In 1980, coverage for home health care services was broadened to include more types of care. That same year, Medigap coverage was brought under the jurisdiction of the federal government.
- In 1987, Congress passed the Omnibus Budget Reconciliation Act of 1987. This law improved the protections of residents living in nursing homes.
- In 1988, the Medicare Catastrophic Coverage Act was passed, which sought to accomplish several goals, including: improving hospital and skilled nursing facility benefits, capping patient liability, requiring coverage for mammograms, and incorporating outpatient prescription drug benefits. Unfortunately, the act was repealed in 1989 after higher-income participants protested the increased monthly costs imposed due to these additions.
- In addition, 1989 also saw more regulation on the fee schedules and billing requirements for physicians and other professional services. These physicians and other professionals were invoicing Medicare for reimbursement.
- The official website for Medicare, Medicare.gov, was launched in 1998. It was designed to provide participants and their families with an adequate source to conduct research and receive news and other related updates. The phone number at (800) Medicare (633-4227) became nationally available in 1999.
- The amount of Medicare reimbursements for particular providers and managed healthcare organizations increased through two laws: The Balanced Budget Refinement Act of 1999 and The Benefits Improvement and Protection Act of 2000.
- On December 8, 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement and Modernization Act. This law added outpatient prescription drug benefits and a prescription drug card to Medicare. It also included new preventive benefits. Changes regarding the prescription drug benefits would only last until 2006. That year, the Medicare Part D prescription drug program was implemented.
- The Medicare Prescription Drug, Improvement and Modernization Act required Medicare to consider the income levels of participants when issuing federal subsidies for the new Part D prescription drug program. It also required that higher-income participants pay higher costs for Medicare Part B to offset the premium costs for lower-income participants. The passing of this Act was considered the most significant change to the Medicare program since the Medicare Catastrophic Coverage Act was repealed in 1989.
The Centers for Medicare and Medicaid Services reported that about 61.4 million people were enrolled in Medicare in 2019, which represents the total number of people — aged and disabled — enrolled in both Original Medicare and Medicare Advantage. The latter program, Medicare Advantage, accounts for about 36 percent of total Medicare enrollment and is an increasingly popular choice among America’s seniors. Both versions, federal and private, offer affordable health insurance and coverage to a population that demands greater access to healthcare than ever before.