Medicare, funded and regulated by the Center for Medicare and Medicaid Services (CMS), is primarily a health insurance program for older adults. (Medicare funds are also used to support certain components of postgraduate medical training and programs that regulate and monitor quality of care.)
Each state has a State Health Insurance Assistance Program, which patients can call for assistance in understanding and choosing Medicare plans, understanding bills, and dealing with payment denials or appeals.
Physicians should understand basic Medicare rules, supply documentation used to determine whether patients are eligible for benefits, and make referrals to legal and social services for counseling and support.
The following groups are eligible for Medicare:
United States citizens who are ≥ 65 and are eligible for benefits under Social Security, Civil Service Retirement, or Railroad Retirement
People of all ages with end-stage renal disease requiring dialysis or transplantation or with amyotrophic lateral sclerosis
People who are < 65 and have been receiving disability benefits from Social Security (or certain disability benefits from Railroad Retirement) for ≥ 24 months
In 2020, about 62 million people in the United States were covered by Medicare; 86% were ≥ 65 years old.
The type and range of services that Medicare covers change regularly with new statutory and regulatory amendments. Medicare has 4 parts.
Original Medicare (sometimes referred to as the fee-for-service plan) has 2 parts:
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 plans (funded through Medicare, but created and administered under CMS regulation by private insurers) are
People must enroll in Parts A and B before they can enroll in a Medicare Advantage plan.
Each part covers specific health care services (see table Funding Sources by Type of Care). Original Medicare does not cover intermediate or long-term nursing care (except for the Part A services noted below), nor does it cover routine eye, foot, or dental examinations. Medicare Advantage plans must meet or exceed Original Medicare coverage and also usually include Part D coverage.
Funding Sources by Type of Care
If a patient’s claim is denied, a Medicare Summary Notice is issued to the patient to provide information about services or supplies that Medicare does not cover. The denial of coverage may be reversed by a challenge made within 120 days of the notice. The challenge must be supported by an appeal in a fair hearing administrative forum, in which the insurance company handling Medicare claims reviews the case. If unsatisfied with the outcome of that review, the patient has the right to a hearing before a judge.
More than 95% of people ≥ 65 are enrolled in Part A, via either Original Medicare or a Medicare Advantage plan. Part A is supported by a payroll tax collected from people who are working; it represents prepaid hospital insurance for Medicare-qualified retirees. Generally, only people who receive monthly Social Security payments are eligible, and most of those who are eligible do not pay premiums. However, people may be required to pay premiums if they or their spouses have worked < 40 quarters at a job that is considered Medicare eligible (ie, if they or their employer paid the payroll tax required by the Federal Insurance Contributions Act [FICA]). Premiums vary depending on how long people have been employed; in 2021, they are $259/month for people with 30 to 39 quarters of eligible employment and $471/month for those with 0 to 29 quarters of eligible employment. People whose income and assets are below certain thresholds are eligible for financial assistance from the Medicare Savings Programs.
Part A covers the following under the circumstances outlined below:
Care in a hospital or a skilled nursing facility is paid for based on benefit periods. A benefit period begins when a person is admitted to a facility and ends when the person has been out of the facility for 60 consecutive days. If a person is readmitted after the 60 days, a new benefit period begins, and another deductible must be paid. If a person is readmitted in < 60 days, an additional deductible is not paid, but the hospital or facility may not receive full payment for the 2nd admission. There is no limit to the number of benefit periods.
Medicare Prospective Payment Systems determine what Medicare will pay for each aspect of care it covers (eg, for hospital inpatient care, skilled nursing facility care, or home health care).
Under Part A, the beneficiary pays only a deductible for the first 60 full coverage days of the benefit period; the deductible is established annually ($1484 in 2021). If the hospital stay exceeds 60 days, the beneficiary pays a daily co-payment equal to one fourth of the deductible (in 2021, $371 per day) for days 61 to 90. If the hospital stay exceeds 90 days, the beneficiary pays a daily co-payment equal to half of the deductible (in 2021, $742 per day) for days 91 and beyond. Days 91 to 150 during a hospital stay are designated as reserve days. Part A benefits include 60 lifetime reserve days for use after a 90-day benefit period has exhausted. The 90-day benefit period renews each year, but the 60 reserve days are not renewable and can be used only once during a beneficiary’s lifetime. Payment is automatically made for such additional days of hospital care after the 90 days of benefits have been exhausted unless the beneficiary chooses not to have such payment made (thus saving the reserve days for a later time). Even if all reserve days are available, the beneficiary is responsible for all charges beyond 150 days.
Part A covers virtually all medically necessary hospital services, except it provides only limited coverage for inpatient mental health care services. Part A pays for a semiprivate room or, if medically necessary, a private room, but not for amenities. Other covered services include discharge planning and medical social services, such as identification of eligibility for public programs and referrals to community agencies.
The prospective payment system determines payment for inpatient hospital care based on the diagnosis-related group (DRG). The DRG is determined by the beneficiary’s principal diagnosis with some adjustment for age, severity, sex, comorbidities, and complications. Hospitals are reimbursed a set amount for a given DRG regardless of their actual expenses in providing care. Thus, a hospital’s financial profit or loss depends partly on length of stay and costs of diagnosis and therapy for each patient. Under the prospective payment system, the financial pressure for early discharge and limited intervention may conflict with medical judgment. When a patient cannot be discharged home safely or to a nursing home because no bed is available, Medicare typically pays a relatively low per diem cost for an alternative level of care.
Coverage of skilled nursing care and skilled rehabilitation services is complex and can change every year. These services are covered only if initiated immediately or shortly after discharge from a hospital admission of ≥ 3 days. The period of coverage is usually < 1 month (specific duration of coverage depends on documented improvement in the patient’s condition or level of function). In 2021, the first 20 days are covered completely; the next 80 days are covered but require a co-payment of $185.50/day. Benefits are limited to 100 days per benefit period.
Medicare’s prospective payment system assigns patients in skilled nursing facilities to a resource utilization group system (RUGS IV) based on various categories:
These categories reflect the types and amounts of resources a patient's care is expected to cost. They are subdivided based primarily on the patient’s functional dependence. This system is updated annually. The goal is to increase efficiency and avoid excessive payment for patients who require little care. Prospective per diem rates cover routine, ancillary, and capital costs of care for a patient in a skilled nursing facility.
RUGS IV uses data from the Minimum Data Set (MDS) 3.0, the mandated uniform assessment instrument for patients in skilled nursing facilities. The MDS requires ongoing review of patients, making it possible to link patient outcomes with RUGS categories.
Generally, part A covers certain medical services provided in the home (eg, part-time or intermittent skilled nursing care; home health aide services incidental to skilled care; home infusion therapy) if they are part of a physician-approved care plan for a homebound patient. A prospective payment system limits the amount and duration of coverage; however, annual limits for physical, speech, and occupational therapy have been eliminated. Medical supplies are covered when billed by a home health agency.
Hospice is a concept and a program of care that is specifically designed to minimize suffering for dying people and their family members. Medical and support services for a terminal illness provided through a hospice program are generally covered by part A if a physician certifies that the patient is terminally ill (estimated life expectancy of 6 months or less). However, the patient must choose to receive hospice care instead of standard Medicare benefits.
Non-skilled personal assistance with activities of daily living (ADLs), such as eating, dressing, toileting, and bathing, is covered in the home only when skilled care (services of a professional nurse or therapist under a physician-authorized plan of home care) is also required. Such custodial care in a skilled nursing facility is covered when it is part of posthospital acute or rehabilitation care.
The federal government pays an average of about 80% of Part B costs, and beneficiaries pay 20%, after the annual deductible ($203 in 2021) is met. Part B is optional; although Social Security beneficiaries are automatically enrolled in Part B at age 65, they may decline coverage (95% elect to keep Part B coverage). All beneficiaries pay a monthly premium, which varies by income—$148.50 in 2021 for new beneficiaries whose income in 2019 was ≤ $88,000 (≤ $176,000 if they were married and filing a joint return). Premiums are higher for people with a higher income. Premiums are automatically deducted from monthly Social Security checks. People who decline coverage but later change their minds must pay a surcharge based on how long they delayed enrollment. Premiums generally increase by 10% for each year’s delay in enrollment, except for people who delay because they are covered by group insurance through their, their spouse’s, or a family member’s employer; such people do not pay the surcharge if they enroll when employment or health care coverage ends (whichever comes first). Most states have Medicare Savings Programs that pay Part B premiums for people who meet certain financial qualifications.
Participants may stop coverage at any time but must pay a surcharge on the premium if they reenroll.
Part B covers a percentage of the following: cost of physician services; outpatient hospital care (eg, emergency department care, outpatient surgery, dialysis), with certain restrictions; outpatient physical, speech, and occupational therapy; diagnostic tests, including portable x-ray services in the home; prosthetics and orthotics; and durable medical equipment for home use (including continuous positive airway pressure [CPAP] 3 month trial for obstructive sleep apnea and implantable automatic defibrillators for certain patients with heart failure) (see list of covered equipment at Medicare.gov). If surgery is recommended, Part B covers part of the cost of an optional 2nd opinion and, if these opinions differ, a 3rd opinion.
Part B also covers medically necessary ambulance services, certain services and supplies not covered by Part A (eg, colostomy bags, prostheses), spinal manipulation by a licensed chiropractor for subluxation shown on x-ray, drugs and dental services if deemed necessary for medical treatment, optometry services related to lenses for cataracts, smoking cessation counseling, and the services of physician assistants, nurse practitioners, clinical psychologists, and clinical social workers. Outpatient mental health care, with certain limitations, is covered.
Drugs and biologicals that cannot be administered by the patient (eg, drugs given IV), some oral anticancer drugs, and certain drugs for hospice patients are 80% covered by Part B. Otherwise, Part B generally does not cover self-administered outpatient drugs; Part D may cover these.
Part B covers several preventive services, including bone mass measurement, serum cholesterol screening, abdominal aortic aneurysm screening, diabetes services (screening, supplies, self-care training, and eye and foot examinations), colorectal cancer screening, prostate cancer screening and prostate-specific antigen tests, an initial physical examination (the “Welcome to Medicare” examination), glaucoma screening, vaccinations (influenza, pneumococcal, hepatitis B), mammograms, and Papanicolaou (Pap) tests.
Part B does not cover routine eye, hearing, foot, or dental examinations and does not cover hearing aids.
Under Part B, physicians may elect to be paid directly by Medicare (assignment), receiving 80% of the allowable charge directly from the program, once the deductible has been met. If physicians accept assignment, their patients are responsible for paying only the deductible. Physicians who do not accept assignment of Medicare payments (or do so selectively) may bill patients up to 115% of the allowable charge; the patient receives reimbursement (80% of the allowable charge) from Medicare. Physicians are subject to fines if their charges exceed the maximum allowable Medicare fees. Physicians who do not accept assignment from Medicare must give patients a written estimate for elective surgery if it is > $500. Otherwise, patients can later claim a refund from physicians for any amount paid over the allowable charge.
Medicare payments to physicians have been criticized as inadequate for the time involved in giving physical and mental status examinations and obtaining the patient history from family members. A Medicare fee schedule based on a resource-based relative value scale for physician services became effective in January 1992 and is updated annually (see Physician Fee Schedule Search at CMS.gov) in an attempt to correct this problem.
Medicare Advantage (also called Medicare Part C and formerly called Medicare Choice) offers several all-in-one alternatives to the Original Medicare fee-for-service programs (ie, Parts A and B). These alternatives are provided by private insurance companies; Medicare pays these companies a fixed amount for each beneficiary (capitation). Several different types of plans are available; they include Coordinated Care Plans (CCPs) (eg, Health Maintenance Organizations, Preferred Provider Organizations, Special Needs Plans), private fee-for-service (PFFS), medical savings accounts (MSAs), and Employer Group Waiver Plans.
About one-third of Medicare recipients choose a Medicare Advantage plan instead of Original Medicare.
Medicare Advantage plans must cover at least the same level and types of benefits covered by Medicare A and B. Most plans include Part D. CCPs must offer at least one plan with Part D. PFFS plans can offer Part D optionally. MSAs are prohibited from offering Part D.
Medicare Advantage plans may include additional benefits (eg, coverage for dental, hearing, and vision care and for home lifestyle support such as meal delivery, transportation to doctor's office, home health aides, bathroom grab bars, and wheelchair ramps), although participants may pay an additional monthly premium for the additional benefits. Plans differ on whether participants are free to choose any physician and hospital they want, whether they can keep coverage from an employer or union, and what costs are paid out-of-pocket, including how much (if at all) they charge for a premium, whether they pay any of the Part B premium, and how much their deductible and co-payments are. Plans have a yearly limit on out-of-pocket costs, and some plans may have lower out-of-pocket costs than Original Medicare.
Medicare Part D helps cover costs of prescription drugs not covered under Part A or B. It is optional. Plans are provided by insurance or other private companies working with Medicare. There are over 1000 plans available nationwide. Premiums generally increase by an additional 1% for each month that people delay enrolling after they first become eligible for Medicare.
Plans vary in the drugs they cover (formulary) as well as in pharmacies that can be used. However, formularies must include ≥ 2 effective drugs in the categories and classes of drugs most commonly prescribed for people who use Medicare. Formularies must also cover all available drugs for the following 6 classes: anticonvulsants, antidepressants, antiretroviral drugs, antineoplastics, antipsychotics, and immunosuppressants. Formularies may change over time (often annually). Formularies must also have an appeals process by which nonformulary drugs can be approved if necessary.
Specific drug costs may vary depending on whether the drug is on the plan's formulary and whether the prescription is filled by a pharmacy in the plan's network (if the plan has any). Many plans use tiered copayment charges (based on the price of the drug) rather than a uniform rate.
Costs in 2021 are as follows for the basic benefits (see also Costs for Medicare Drug Coverage at Medicare.gov):
Premiums: Premiums vary greatly by plan, geographic region, and income. They range from about $10 to $85/month, but the base beneficiary premium averages $32.74/month for people earning ≤ $88,000/year in 2019 (≤ $176,000 if married filing jointly); those earning more pay an additional $12.30 to $77.10/month above the plan premium.
Annual deductible: Patients pay the first $445 of drug costs (maximum allowable deductible; some plans do not have a deductible).
Initial co-payments: For the next $3685 of drug costs (after the $445 deductible), patients pay the lesser of 25% of drug costs or a flat cost based on the tier assignment of the drug. Thus, the maximum amount patients pay for the first $4130 of drug costs is $1366.25 ($445 deductible + $921.25 co-pay).
Coverage gap (doughnut hole): After the first $4130 of drug costs, people must pay 25% of costs until the out-of-pocket drug cost threshold is reached ($6550 in 2021).
Reduced co-payments: Once the out-of-pocket threshold is reached, Medicare pays most of additional drug costs until the end of the year. The patient's reduced co-payment is the larger of either 5% of the drug's cost or a flat cost between $3.70 and $9.20.
Many companies also offer enhanced plans that provide more coverage (eg, lower deductibles or co-payments), although these plans have higher monthly premiums.
People with low income and minimal assets (eg, those who have full Medicaid coverage, who belong to a Medicare Savings Program, or who get Supplemental Security Income) may be eligible for financial assistance with premiums, deductibles, and co-payments. In addition to providing insurance assistance, many states have state pharmacy assistance programs that help pay for prescription drugs, based on some combination of the person’s need, age, and medical disorders; information about these programs is available from the State Health Insurance Assistance Program.