How Does Medicare Work -- A Plain-English Guide

Medicare Is Not One Thing -- It Is Four Parts

Most people think of Medicare as a single health insurance plan. It is not. Medicare is actually split into four parts, each covering different things. Understanding what each part does -- and what it does not do -- is the first step to avoiding expensive surprises in retirement.

Here is the short version. Part A covers hospital stays. Part B covers doctor visits and outpatient care. Part C is Medicare Advantage, which is a private insurance alternative to Original Medicare. Part D covers prescription drugs. You do not have to sign up for all four. In fact, most people start with just Part A and Part B, which together are called "Original Medicare."

Part A -- Hospital Insurance

Part A covers inpatient hospital stays, skilled nursing facility care (short-term, not long-term), hospice care, and some home health services. If you or your spouse paid Medicare taxes while working for at least 10 years (40 quarters), your Part A premium is $0. You already paid for it through payroll taxes your entire career.

Part A is not completely free to use, though. There is a deductible each time you are admitted to the hospital -- currently over $1,600 per benefit period. A benefit period starts when you are admitted and ends when you have been out of the hospital or skilled nursing facility for 60 consecutive days. If you go back in after 60 days, a new benefit period starts and you pay the deductible again.

One thing Part A does not cover that catches people off guard: long-term nursing home care. Medicare only covers skilled nursing facility stays up to 100 days, and only after a qualifying hospital stay of at least 3 days. If you need ongoing custodial care -- help with bathing, dressing, eating -- Medicare does not pay for that. That is a long-term care issue, not a Medicare issue.

Part B -- Medical Insurance

Part B covers doctor visits, outpatient care, preventive services (like flu shots and cancer screenings), lab work, medical equipment (wheelchairs, walkers), ambulance services, and mental health care. Unlike Part A, Part B is not free. You pay a monthly premium that comes out of your Social Security check. The standard premium changes every year -- it has been climbing steadily and currently runs around $185 per month.

If your income is above a certain threshold, you pay more. This is called IRMAA -- the Income-Related Monthly Adjustment Amount. It is based on your tax return from two years ago, not your current income. So if you had a high-income year -- sold a house, did a big 401(k) withdrawal, or converted a traditional IRA to a Roth -- your Medicare premiums could be higher two years later. Many people do not see this coming.

Part B also has an annual deductible (currently around $257) and after that, you typically pay 20% of the Medicare-approved amount for most services. There is no annual out-of-pocket maximum on Original Medicare, which is one reason many people add supplemental coverage.

Part C -- Medicare Advantage

Part C is not a separate benefit -- it is an alternative way to get your Medicare coverage. Instead of using Original Medicare (Parts A and B) directly, you can choose a Medicare Advantage plan offered by a private insurance company. These plans must cover everything Original Medicare covers, and most also include prescription drugs (Part D), dental, vision, and hearing.

Medicare Advantage plans often have lower premiums and include extra benefits, which is why they are heavily advertised. The trade-off is that you are usually limited to a network of doctors and hospitals. If you see someone outside the network, you may pay significantly more or have no coverage at all. Original Medicare lets you see any doctor in the country who accepts Medicare.

About half of all Medicare beneficiaries are now enrolled in Medicare Advantage plans. Whether Advantage or Original Medicare is better for you depends on your health, your doctors, where you live, and how often you travel. There is no one-size-fits-all answer.

Part D -- Prescription Drug Coverage

Original Medicare (Parts A and B) does not cover most prescription drugs. For that, you need Part D, which is sold by private insurance companies. Each Part D plan has its own list of covered drugs (called a formulary), its own premiums, and its own cost-sharing structure.

Part D plans can change what they cover and what they charge every year, which is why it is worth reviewing your plan during open enrollment each fall. A plan that was a good deal last year may not cover your medications the same way this year.

If you do not sign up for Part D when you are first eligible and you do not have other creditable drug coverage (like through an employer), you will pay a late enrollment penalty -- a permanent surcharge added to your premium for as long as you have Part D. The penalty is based on how many months you went without coverage. This is one of the most common and most avoidable Medicare mistakes.

Medigap -- Filling the Gaps in Original Medicare

If you stick with Original Medicare (Parts A and B), you are responsible for deductibles, copays, and that 20% coinsurance on Part B services with no out-of-pocket maximum. That can add up fast if you have a major health event. A five-day hospital stay or a surgery can leave you with thousands in out-of-pocket costs.

That is where Medigap (Medicare Supplement) plans come in. These are private insurance policies that help cover what Original Medicare does not -- the deductibles, coinsurance, and copays. Medigap plans are standardized by letter (Plan A, Plan B, Plan G, Plan N, etc.), and each letter covers the same things no matter which insurance company sells it. The only difference between companies is the price.

The most important thing to know about Medigap is timing. During your Medigap open enrollment period -- the six months starting when you turn 65 and are enrolled in Part B -- insurance companies must sell you a policy regardless of your health and cannot charge you more for pre-existing conditions. After that window closes, they can deny you coverage or charge higher premiums based on your health history. This is a deadline you do not want to miss.

What Medicare Does Not Cover at All

Even with all four parts, there are things Medicare simply does not pay for. The big ones: long-term custodial care (nursing homes for extended stays), most dental care, routine eye exams and glasses, hearing aids (though this is starting to change with some Advantage plans), and care received outside the United States. These gaps are why healthcare planning in retirement goes beyond just signing up for Medicare.

The Bottom Line

Medicare is not free, it is not simple, and it does not cover everything. But it is a solid foundation for healthcare in retirement if you understand how the pieces fit together. The biggest mistakes people make are missing enrollment deadlines, not understanding what is and is not covered, and failing to budget for premiums and out-of-pocket costs. Knowing the basics puts you ahead of most people walking into their 65th birthday.