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Medicare

By

Roger I. Schreck

, MD

Last full review/revision Feb 2020| Content last modified Feb 2020
Click here for the Professional Version
Topic Resources

Current details regarding funding and availability of medical care in the United States remain unsettled. The reader is referred to the Centers for Medicare & Medicaid Services and The Henry J. Kaiser Family Foundation for recent information.

Medicare is a health insurance program that helps older people in the United States pay for health care services. It is funded and regulated by the federal government, which provides detailed information regarding the program at www.medicare.gov. In 2018, about 59 million people were covered by Medicare. Of these, 85% were age 65 and older. Younger people with certain disabilities also are covered by Medicare.

Different parts of Medicare help cover costs of specific services.

Original Medicare (sometimes referred to as the fee-for-service plan, because it pays providers for each service they provide) has 2 parts:

  • Part A: Inpatient hospital care, hospice care, skilled nursing facilities (under certain circumstances)

  • Part B: Doctor and other health care providers' services and outpatient care, including certain medical equipment

Original Medicare is available nationwide and is administered through private companies called Medicare Administrative Contractors. A complete description of Part A and B services and other provisions (called Medicare & You) is available at www.medicare.gov or by calling 800-633-4227.

Optional Medicare plans (funded through Medicare, but created and administered by private insurers) are

  • Part C: Medicare Advantage (a range of alternatives to Original Medicare that include managed care plans, preferred provider organization plans, and private fee-for-service plans)

  • Part D: Prescription drugs

Each state has a State Health Insurance Assistance Program that people can call for assistance in understanding and choosing Medicare plans, understanding bills, and dealing with payment denials or appeals.

Medicare eligibility

People generally are eligible for Medicare if they

  • Are age 65 or older

  • Are on kidney dialysis or have had a kidney transplant

  • Are under age 65 with certain disabilities

  • Have amyotrophic lateral sclerosis

People who are under age 65 and meet the qualifications for Social Security Disability Insurance for at least 24 months may be eligible for Medicare.

Deductibles and co-payments

Medicare pays only for services it considers appropriate (called covered services). For each covered service, Medicare has what is called an allowable charge. The allowable charge is the maximum amount Medicare will permit health care providers to charge people on Medicare for a service. However, Medicare does not pay for all of the allowable charges for covered services. The first time a certain service is needed, people must usually pay a small fixed amount (called a deductible) before Medicare pays anything. If people need the same service again after a specified time has passed, they have to pay another deductible. After the deductible has been paid, people usually also have to pay a certain percentage of the costs (called a co-payment) each time they use a service. For example, in 2020, the deductible for outpatient services (such as a doctor’s visit) is $198 for the calendar year, and the co-payment for each use of most outpatient services is 20% of the allowable charges. This arrangement means that people pay the first $198 of their outpatient bills. Then, for the rest of the year, they pay 20% of the allowable charges each time they use a service, and Medicare pays 80%. When the calendar year is over, the process starts over, and people must pay another deductible for services used that year.

Medicare supplemental insurance

Some people have supplemental insurance (Medigap) to help pay for Medicare co-payments and other medical expenses that are not covered by Medicare. This insurance is sometimes provided by the person's previous employer as part of a retirement benefit. Other people buy supplemental health insurance from private insurance companies.

Because Medicare and Medigap do not cover long-term care, some people buy separate insurance to pay for long-term care. The decision to buy long-term care insurance depends partly on whether people expect to need help paying for long-term care and on whether they can afford the premium.

People who have low income and few assets may be eligible for supplemental coverage through the government-funded Medicaid program.

Original Medicare (Parts A and B)

Available nationwide, Original Medicare is administered through private companies called Medicare Administrative Contractors and operates on a fee-for-service basis. It has two parts:

  • Part A (often referred to as hospital insurance) covers hospital services and some outpatient services commonly needed for a short time after a hospital stay.

  • Part B (often referred to as medical insurance) covers outpatient services, including doctors’ fees.

Original Medicare pays a set amount—what it considers a usual, customary, and reasonable amount—for each service it covers. Under Part B, doctors can choose to be paid directly by Medicare (called assignment) and receive 80% of the allowable charge directly from Medicare and a 20% co-payment from the patient (after the deductible). Doctors who accept Medicare are required to file a claim themselves within one year after they provided their service. However, people should follow up to make sure claims are filed on time, because Medicare can not apply payments toward peoples' deductibles until the claim is filed.

With Original Medicare, a person's choice of doctor and hospital is not limited. However, some doctors do not accept Medicare payments as full payment (that is, they do not accept “assignment” from Medicare). They may charge more for a service than Medicare pays. These doctors may charge up to an extra 15% of the Medicare-approved amount. (Doctors who charge more than an extra 15% may be fined.) Paying any extra charges is the person’s responsibility. Some doctors may require that people pay the bill and fill out the paperwork (file the claim) for reimbursement by Medicare. So people should ask doctors in advance if they accept Medicare as full payment.

Did You Know...

  • People should ask doctors in advance if they accept Medicare as full payment.

Part A

Enrollment in Part A is automatic at age 65 for people who have already been receiving Social Security or Railroad Retirement benefits for 4 months or more. Such people are sent their Medicare card (inside their Welcome to Medicare Packet) about 3 months before their 65th birthday. Other people, including those who continue to work after age 65, must enroll in Part A by contacting the Social Security Administration during the initial enrollment period (the 7-month period starting 3 months before their 65th birthday and ending 3 months after). Enrolling after this period often costs more.

Part A is paid for by a federal tax that is automatically deducted each month from payroll checks (as for Social Security). Thus, people with a sufficient employment history do not have to pay monthly fees for Part A. Certain people who are not eligible because of an insufficient employment history may be required to purchase Part A.

Part A helps pay for the following:

  • Hospital care

  • Care in a skilled nursing facility but only if services are needed daily after a related minimum 3-day stay in a hospital

  • Home health care (certain types)

  • Hospice care but only for people nearing the end of life

For people who are homebound and need part-time skilled nursing care or rehabilitation, Part A helps pay for home health care, including help with personal care (such as bathing, going to the bathroom, and dressing). Part A does not pay for home health care or long-term care that does not involve skilled nursing care.

When hospice care is selected, the hospice organization manages all benefits from Medicare (and Medicaid).

Part A pays for care on the basis of benefit periods. For hospital care, a benefit period begins when people are admitted to a hospital and ends when they have been out of the hospital for 60 days in a row. When people are admitted to a hospital, they pay a deductible, and Medicare pays for most other costs (see Limitations of Parts A and B). If people are readmitted after the 60 days, a new deductible must be paid. There is no limit to the number of benefit periods. If a hospital stay lasts longer than 60 days, people pay a percentage of costs. Costs are as follows:

  • For days 1 to 60: A deductible for each benefit period ($1,408 in 2020)

  • For days 61 to 90: A co-payment of one fourth of the deductible per day ($352 per day in 2020)

  • For days 91 and beyond (called reserve days), but no more than 60 days in a lifetime: A co-payment of one half of the deductible ($704 per day in 2020)

  • After the 60 lifetime reserve days are used up: All costs

For a stay in skilled nursing care facility, Medicare pays for services only if the stay begins immediately or shortly after discharge from a hospital. Usually, Medicare covers all costs for stays of 20 days or less. Medicare covers part of the costs for the next 80 days, but people must pay a co-payment ($176 per day in 2020). After that, people must pay the full amount.

Part B

This part is optional. If people are eligible for Part A, they are eligible for Part B. People who choose to enroll can purchase Part B insurance for a fee paid each month. The fee is usually deducted from their Social Security, Railroad Retirement, or Civil Service Retirement check. The best time to sign up for Part B is during open enrollment. Otherwise, the rates may be higher. At age 65, some people are still working, or their spouse is still working. Many of these people have health insurance through their employer or their spouse’s employer. These people have a delayed enrollment option, which enables them to enroll in Part B later but at the open-enrollment rate. The open-enrollment rate for Part B changes every year. In 2020, the rate is $144.60 a month per person, but it is higher if annual income was more than $87,000 for single people or more than $174,000 for married people who file a joint tax return. These rates range from $202.40 to $491.60, depending on people’s income.

Part B helps pay for many services and supplies that are used on an outpatient basis and that are medically necessary, such as the following:

  • Doctor’s fees

  • Emergency department visits

  • Outpatient surgery (with no overnight stay in the hospital)

  • Transportation by ambulance when other types of transportation are likely to be unsafe

  • Rehabilitation

  • Diagnostic tests

  • Outpatient mental health care

  • Reusable (durable) medical equipment, such as wheelchairs and many other items for home use (see list of covered equipment at Medicare.gov)

Part B may pay for home health care for homebound people when Part A does not. If surgery is recommended, Part B helps pay for a second opinion and, if opinions differ, a third opinion. For people with diabetes, Part B pays for some of the costs of monitoring sugar (glucose) levels in the blood. Part B helps pay for some preventive care. Examples are an annual influenza (flu) vaccine and screening tests such as mammography, Papanicolaou (Pap) tests, bone density measurements, and tests for prostate cancer and colorectal cancer. It helps pay for glaucoma tests for people who are at increased risk because they are black and over 50, have diabetes, or have a family history of glaucoma.

Limitations of Parts A and B

Neither Part A nor Part B covers the following:

  • Private-duty nursing

  • A telephone and television in the hospital

  • A private hospital room (unless medically necessary)

  • Most prescription drugs and all nonprescription drugs

  • Personal care at home or in a nursing home unless people also need skilled nursing care or rehabilitation

  • Hearing aids

  • Vision care

  • Dental care

  • Care outside the United States, except in certain circumstances

  • Experimental procedures

  • Some preventive care

  • Cosmetic surgery

  • Most chiropractic services

  • Acupuncture

Medicare Advantage (Part C)

Medicare Advantage (Part C) allows people to enroll in a private health insurance plan instead of the original fee-for-service Medicare (Parts A and B). For this plan, Medicare pays other organizations, such as insurance companies, hospital systems, or managed care organizations, to provide care. Medicare Advantage is available in many areas of the United States. Plans vary from state to state.

Most Medicare Advantage plans are managed care plans. However, some are unrestricted, private fee-for-service plans. In these fee-for-service plans, people can choose any doctor or hospital, and the plan pays for a share of the cost. However, a private company, not Medicare, decides how much a service costs, so costs may be higher than when the original Medicare plan is used.

The managed care plans are handled by a health maintenance organization (HMO) or preferred provider organization (PPO).

  • In HMOs, people choose a primary care doctor within the HMO’s network. (The network includes doctors, medical clinics, and hospitals that the HMO has selected and contracted with to care for its members.) The primary care doctor may refer people to other health care practitioners as needed. Practitioners must be part of the HMO network for the HMO to cover care. Emergency care when people are out of the area is an exception.

  • In PPOs, people can, within some limits, choose doctors outside the PPO’s network. But the monthly fee for PPOs is higher than that for HMOs.

Some HMOs offer a point-of-service (POS) option for an additional monthly fee. As in PPOs, people with this option can choose some doctors outside the HMO’s network, and the HMO pays for part of the costs.

Medicare Part C provides all services covered by Parts A and B, including preventive care. Some plans offer coordination of care, lower or no deductibles and co-payments, and benefits not covered by the original Medicare plan. For example, Part C plans usually help pay for prescription drugs and may also help pay for eyeglasses, hearing aids, and assessment by an interdisciplinary team that specializes in caring for older people. People with Medicare Part C continue to pay a monthly fee for Part B and may have to pay an additional monthly fee for the extra benefits. The amount depends on the plan they choose. However, the additional fee is still usually less than that for a supplemental Medigap plan.

When deciding about Medicare options, people should consider what they want in terms of out-of-pocket costs, extra benefits, choice of doctors, convenience, and quality.

Medicare Part D

Medicare Part D helps cover costs of prescription drugs. To obtain Part D, people have to sign up for it (enroll) and pay the required monthly premium. Enrollment involves choosing a plan provided by an insurance or other company working with Medicare. There are over 1,600 plans available nationwide. The best time for people to enroll in Part D is when they first become eligible for Medicare. If they enroll later and they have not had another comparable plan for drug coverage during that time, their monthly premium is increased by an additional 1% for each month that they delay.

Covered drugs

Each plan has a list of drugs it covers—called a formulary. The drugs covered by each plan vary, but the list must include at least two effective drugs in the categories and classes of drugs most commonly prescribed for people who use Medicare. Each plan may make changes to the list of drugs they cover. A plan that covered a person’s drugs one year may not cover some of them the next year. Also, doctors may prescribe new drugs that are not covered by the plan. Thus, people must review their plan each year to ensure that the plan continues to meet their needs.

Standard Part D benefits

Medicare has defined a standard benefit plan. Companies must offer a plan that is at least equal in value. Many companies also offer enhanced plans that provide more coverage (such as a lower deductible or no deductible), but these plans have higher monthly premiums.

Medicare does not cover all drug costs. In 2020, the standard Part D benefit involves the following costs:

  • Annual deductible: Before receiving any reimbursement, people must pay the deductible, which may vary between plans but cannot exceed $435.

  • Co-payments: The amount a person pays for each prescription after the deductible (if applicable) is either a co-payment (a set amount) or co-insurance (a percentage of the cost). Some Medicare Prescription Drug Plans have different levels (called tiers) of co-payments or co-insurance, with different costs for different types of drugs.

  • Coverage gap: After the first $4,020 of drug costs, people must pay a higher percentage of drug costs (no more than 25% of the plan's cost for covered brand-name prescription drugs and 25% for generic drugs). They pay this percentage until their total out-of pocket drug payments equal $6,350. This out-of-pocket total includes the deductible and the co-payment.

  • Reduced co-payments: When total out-of-pocket drug payments equal $6,350, Medicare provides "catastrophic coverage," and coinsurance amounts or copayments for covered drugs are small for the rest of the year.

Part D premiums

Monthly premiums vary depending on where people live, whether they have standard or enhanced coverage, and which insurance provider they use. Premiums may also vary depending on income level, as may deductibles and co-payments. On average, people pay a base premium of about $33 per month. But in addition to their monthly premium, people whose income is above a certain amount also pay an adjustment fee of between $12.20 to $76.40 per month depending on income. The adjustment fees begin when people have an annual income of more than $87,000 or, for married people filing jointly, more than $174,000. For people with a very low annual income and few assets, Part D costs may be lower or be nothing, and financial assistance with premiums, deductibles, and co-payments may be available.

Table
icon

How Medicare Part D Works*

Stage

Amount Insured Member Pays During Stage

Trigger to Move to Next Stage

1. Deductible

All drug costs

Meet plan's deductible ($0-$435)

2. Initial Coverage

Fixed co-payments or co-insurance

Reach $4,020 in covered drug costs (considered as the out of pocket payments plus amounts paid by insurance)

3. Coverage Gap (Donut Hole)

Generic drugs: 25%

Brand-name drugs: no more than 25%

Reach $6,350 in out-of-pocket costs (includes costs for covered drugs paid since the beginning of the year plus the value of discounts† received on brand-name drugs while in this stage)

4. Catastrophic Coverage

Generic drugs: the greater of $3.60 or 5%

Brand-name drugs: the greater of $8.95 or 5%

* Data shown are for 2020 and may be different after that year.

† For brand-name drugs, there is typically a manufacturer discount of about 50% of the price. This amount is counted as part of the out-of-pocket cost, which will help people get out of the coverage gap sooner.

Each year, the process starts over, with people having to pay another deductible.

Costs do not remain the same from year to year. Premiums, deductibles, co-payments, and out-of-pocket spending limits may change annually.

PACE

The Program of All-Inclusive Care for the Elderly (PACE) is another Medicare option that is designed to provide more comprehensive, better-integrated health care for older people. In some areas of the country, PACE programs are also referred to as LIFE programs (Living Independence for the Elderly). PACE programs use funds from Medicare and Medicaid. As a type of managed care, these programs may require a monthly fee. As of July 2019, there are 129 PACE programs within 31 states.

PACE is designed for older people frail enough to need care in a nursing home. However, the goal of PACE is to enable older people to live at home as long as possible. In PACE, an interdisciplinary team assesses the participant’s needs, develops a care plan, and provides all necessary health care. It includes medical and dental care, adult day care (including transportation to and from the facility), health and personal care at home, prescription drugs, social services, rehabilitation, meals, nutritional counseling, and hospital and long-term care when needed.

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