For most workers, retirement means an end to employer-sponsored coverage.
But your 65th birthday usually comes with a pretty sweet gift from the federal government: You become eligible for Medicare. That’s essential since medical costs soar as you get older.
7 FAQs About Medicare and Open Enrollment
While Medicare makes health care a lot more affordable for older Americans, it’s also an extraordinarily complex program to navigate, and it doesn’t cover all your medical costs.
Here’s what you need to know if your 65th birthday is approaching.
1. What Is Medicare?
Medicare is the federal government’s health program for people ages 65 and up. If you’re 65 or older and you’re entitled to Social Security benefits or Railroad Retirement benefits, you’re eligible for Medicare. You don’t need to actually be retired or taking benefits to qualify.
Younger people who have been on Social Security Disability for at least 24 months, or have been diagnosed with end-stage renal disease or ALS are also eligible.
2. How Is Medicare Funded?
Medicare is funded via payroll taxes, also known as FICA taxes, which are automatically withheld by your employer. Most employees have 7.65% of their paychecks withheld, and their employers are required to match that 7.65%. Self-employed people face a double whammy because they pay both the employer’s and the employee’s share — meaning they’re on the hook for 15.3%.
You pay 6.2% on the first $137,700 of your earnings for Social Security in 2020, though that number will increase to $142,800 in 2021. The remaining 1.45% goes to Medicare — with no wage cap.
No matter how much you earn, you still have to pay at least 1.45% for Medicare. If you’re a single tax filer who earns more than $200,000 or you’re married filing jointly with more than $250,000 of income, you’ll pay an additional 0.9% Medicare tax.
3. What Do the Different Medicare Parts Cover?
Together, Medicare Parts A and B are known as traditional Medicare or original Medicare. Part D is optional prescription drug coverage. Part C combines these coverages, typically with some extras thrown in.
Part A: Hospital Coverage
Medicare Part A provides hospital coverage. It’s the part of Medicare that’s free for most people, though you do pay deductibles and coinsurance costs. Medicare Part A covers you for:
- Hospital care for up to 150 days per stay
- Up to 100 days in a skilled nursing facility following a hospital stay
- Unlimited in-home post-hospital visits
- Lab tests
- Hospice care
What it costs you: If you paid Medicare taxes for 40 quarters or more — the equivalent of 10 years of full-time work — you won’t pay Medicare Part A premiums. For about 99% of recipients, Medicare Part A premiums are free. But that doesn’t mean your care is free. In 2021, your costs will include:
- A $1,484 deductible for hospital stays. That means you pay $1,484 before your benefits kick in.
- Coinsurance costs for hospital stays of more than 60 days. For days 61 through 90, you’ll pay $371 per day. After day 90, you can dip into a reserve of 60 days that you get over your lifetime, but you’ll pay $742 a day. Once you’ve run out of lifetime reserve days, you’re responsible for the full cost.
- Coinsurance of $185.50 per day for days 21 through 100 of skilled nursing care after a hospitalization. There’s no deductible or coinsurance for days one through 20. Beyond day 100, you pay all the costs.
All of the costs above are per benefit period. The clock for a benefit period begins when you’re admitted to the hospital or a skilled nursing facility as an inpatient. It ends once you haven’t had any inpatient care for 60 days.
So if you had a 75-day hospitalization, you’d pay a $1,484 deductible, plus coinsurance of $371 for 15 days (days 61 through 75). If you were hospitalized again six months later, you’d start a new benefit period. You’d owe another $1,484 deductible, but as long as you didn’t remain hospitalized for more than 60 days, you wouldn’t pay the $371 per day coinsurance.
Because of the potential for high out-of-pocket costs, many Medicare recipients choose to buy Medigap policies that shoulder the expenses. We’ll discuss Medigap policies shortly.
Part B: Medical Coverage
Medicare Part B covers you for doctor’s services and outpatient care. It includes a pretty broad list of services, including:
- Doctor visits
- Labs and diagnostics
- Mental health care
- Physical therapy
- Medical equipment
- Ambulance services
What it costs you: Unlike Medicare Part A premiums, your Part B premiums aren’t free. In fact, some people who are still working and covered by health insurance or are covered under their spouse’s plan opt to forgo Medicare Part B. In 2021, you’re responsible for:
- Monthly premiums of $148.50. If you’re single with an income above $88,000 or you’re married with a joint income above $176,000, your premium will be higher. If you receive Social Security, your premiums are deducted from your benefit each month.
- A $203 annual deductible
- 20% coinsurance
Medicare determines your premiums using your tax returns from two years earlier, so your 2019 return will be used to determine your 2021 premiums.
Part D: Drug Coverage
Part D is Medicare’s optional prescription drug coverage. It’s different from Parts A and B in that it’s offered by private insurers, but Medicare foots part of the bill. All plans are required to cover certain categories of drugs, but plans can vary widely in terms of what specific drugs they cover. You can shop for a Part D plan on Medicare’s website.
What it costs you: Your costs will depend on your income and what plan you choose. If you’re a single filer whose income is above $88,000 or you’re married filing jointly with a combined income above $176,000, you’ll also pay a surcharge. Your plan may have a deductible, but it’s capped at $435.
Medicare Advantage Plans (Part C)
As an alternative to original Medicare — that is, Parts A and B — you can buy a Medicare Advantage Plan offered by a Medicare-approved private insurer. Most of these plans bundle in Part D, as well. Many include additional coverage, like dental, vision and wellness programs.
These plans may also lower your out-of-pocket costs. Medicare contributes a fixed amount for your coverage, but you’re paying for the extras. Think of it like this:
Part C = Part A + Part B + Part D (usually) + some extra services
Medigap Policies (Medicare Supplement Policies)
Medigap policies help with your out-of-pocket deductibles and coinsurance for Parts A and B. You can only use a Medigap policy to help with original Medicare costs; you can’t use them for Medicare Advantage Plan out-of-pocket costs.
If you have both a Medicare Advantage Plan and a Medigap policy, consider dropping the Medigap policy.
4. What Doesn’t Medicare Cover?
There are several major medical expenses that Medicare Parts A and B don’t pay for. But remember: You can get a lot of these services covered, but you’ll have to pay extra for Part D coverage or a Medicare Advantage Plan. Check with your plan for details.
- Long-term care: Medicare coverage for nursing care is mostly limited to short-term rehabilitative stays. If you can afford long-term care insurance, it’s worth serious consideration, given the high costs of nursing care. Medicaid — which assists people with low income, regardless of age — often picks up the tab for skilled nursing care, but only once you’ve depleted your financial resources.
- Prescription drugs: Part D coverage is necessary.
- Dental: Original Medicare doesn’t cover routine dental care, like cleanings, fillings, tooth extractions and dentures, but Part A may cover dental expenses you incur during a hospital stay.
- Vision: Original Medicare won’t pay for eye exams, glasses or contact lenses.
- Hearing aids: Original Medicare doesn’t pay for hearing aids or exams for fitting hearing aids.
Funding a health savings account (HSA) before you’re eligible for Medicare is a good way to save for the costs that Medicare won’t cover.
5. How Do I Sign Up for Medicare?
When your 65th birthday is approaching, you have a seven-month window to enroll in Medicare: the three months before your birthday month, your birthday month and the three months after your birthday month. So if you were born on Jan. 1, you could sign up between Oct. 1 and April 30.
You can sign up during Medicare’s general enrollment period between Jan. 1 and March 31 if you miss the seven-month window after your 65th birthday. But your benefits won’t start until July of that year.
If you’re already receiving Social Security, you’ll be automatically enrolled in Medicare. Otherwise, you can apply through Social Security’s website or by calling 800-772-1213 between 8 a.m. and 7 p.m. weekdays. Normally you can also sign up by visiting your local Social Security office, but as of November 2020, most offices remain closed due to COVID-19.
6. What Is Open Enrollment?
Medicare open enrollment runs from Oct. 15 through Dec. 7 each year. It’s the period when people who are already enrolled in Medicare can make changes to their plans. If you’re happy with your coverage, you don’t need to do anything, though. During that window, you can:
- Switch from original Medicare to Medicare Advantage or vice versa.
- Change to a different Medicare Advantage plan.
- Sign up for Part D if you didn’t originally enroll when you first became eligible.
- Change to a different Part D plan.
Whatever changes you make won’t take effect until January. So if you make changes during the Oct. 15-Dec. 7, 2020 window, your new benefits take effect in January 2021.
7. Is Signing Up for Medicare Mandatory?
In some circumstances, yes. If you have coverage under the Affordable Care Act, COBRA through a past employer or TRICARE for retired military members, you’re required to enroll in Medicare.
You may not have to sign up for Medicare if you’re still working and covered by your employer’s plan or if your spouse is still working and you’re covered under their plan. But be sure to check with your employer. Some companies will require that you enroll in Parts A and B and use its insurance as secondary coverage.
Be sure you’re very clear on the rules here. The penalties for late enrollment are steep and can increase your Medicare costs for life in some cases.
Robin Hartill is a certified financial planner and a senior editor at Codetic. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].