Medicare is a primary source of health coverage for most retirees aged 65 and older, but there are limits to what is covered under the massive taxpayer-funded government insurance program. However, Medicare coverage doesn't provide financial assistance for all services. It does not include coverage for things like dental, vision or hearing services. So knowing what’s covered by Medicare, and preparing for what is not, should be an essential part of your retirement income planning.
You are eligible for Medicare if you have worked and paid Social Security taxes for at least 10 years. If you are receiving Social Security before your 65th birthday, you will be automatically enrolled in the program. Otherwise, you will have to enroll on your own within six months of turning 65. Employees who are still working and covered by their employer's plan should check with their employer to see how their plan aligns with Medicare and make the determination whether Part B coverage should be obtained while still employed.1
Parts of Medicare
It’s important to understand how Medicare works because there are different options for coverage. The program has four major parts: Part A, Part B, Part C and Part D. Parts A and B are known as “Traditional Medicare.” They work together to provide a range of coverage. The other parts—Part C and Part D—are optional and can be purchased based on your needs. Here’s an overview of how each part works.
Part A is hospital coverage. It pays for in-hospital care, inpatient care in a nursing home, home healthcare and hospice care. There is an annual deductible of $1,364 in 2019 that adjusts annually. Anyone who has worked for at least 10 years and paid payroll taxes qualifies for Part A, and those who do not qualify have the option to purchase Part A benefits.
Part B is medical insurance. It pays for doctor visits, routine exams and other services and supplies not covered by Part A. There is a monthly premium for Part B, which is $135.50 (or higher depending on your income) in 2019 and is paid for through a deduction in Social Security benefits, if you are already receiving Social Security. There is also an annual Part B deductible, which is $185 per year in 2019. If you aren’t already receiving Social Security, this will be charged to you as a separate premium.
Part C plans are also known as Medicare Advantage plans. These are federally approved policies you can purchase from private insurers as an alternative to Traditional Medicare Parts A and B. These are optional policies providing the same coverage you would get with Traditional Medicare, and some offer additional benefits, such as vision, hearing, dental or drug coverage. Most also offer low or no deductibles. Monthly premiums depend on the type of plan you choose.
Part D is prescription drug coverage. It is federally approved and offered through private insurers to help individuals save on their prescriptions. All Part D plans offer a certain degree of prescription drug coverage, and some offer enhanced benefits and options. The plans are set up to share the cost of drugs until you reach your annual limit or gap in coverage, known as the donut hole.
You can add Part D coverage to Traditional Medicare or to a Part C Medicare Advantage plan, although some Medicare Advantage plans include prescription coverage. Monthly premiums vary by plan, but it helps if you enroll as soon as you are eligible for Medicare. Otherwise your premiums will be higher and you may pay a penalty.
There is also something known as Medicare Supplement insurance or Medigap coverage. Offered by private insurers, these plans are designed to help pay for things that Traditional Medicare does not.2 However, you must be enrolled in Original Medicare in order to enroll in a Medigap plan.