Understanding the Medicare Basics

Medicare Funding

Did you ever notice the word “FICA” on your pay stub from work and not know what it was for?  FICA stands for Federal Insurance Contributions Act.  Basically, that’s the amount for your Social Security income and for Medicare that’s been taken out of each and every check all of your working life.

The amount that is taken out of your paycheck for Medicare is 1.45%.  If you work for an employer, they have to match this amount to put into Medicare.  If you’re self-employed, you have to match this amount as if you’re the employer, so you have to pay a total of 2.9% of your check towards Medicare.

So likely you’ve paid tens of thousands of dollars already into the system.

But, what exactly is Medicare?  I’m glad you asked…

Medicare Defined

Medicare is the national health insurance program in the United States for folks that are 65 and older, or for those younger than 65 who qualify because of certain disabilities.  It has four main parts:

• Part A
• Part B
• Part C
• Part D

You don’t need all these parts of Medicare to be covered.  Also, depending on your situation, you may sign up for one or more of these parts now, and wait to sign up for others later.  But, we’ll get into that in much more detail in the next chapter.

These four parts in a bit more detail are…

Part A – Hospital Insurance

Part A of Medicare is known as Hospital Insurance.  The only way to use Part A of Medicare is either to be admitted to the hospital as an inpatient, or be eligible for hospice.  So since the average person is not hospitalized or eligible for hospice all that often, Part A covers a pretty limited scope of your Medicare coverage.

Here are the things that fall under Part A:

• Inpatient coverage
• Skilled nursing facilities
• Hospice
• Home health care (also covered under Part B)

Part B – Medicare Insurance

Part B of Medicare is known as Medical Insurance.  Part A and Part B together are known as “Original Medicare”.  So, if you’ve ever heard that term, just know it’s referring to Part A and B together.  Parts A & B are also the only two parts of Medicare provided directly by the federal government.  The other parts are provided through private insurance companies.

Another thing to keep in mind is that when you do sign up for Medicare, your Medicare card will show only Parts A & B and what your start dates are for both.  It won’t show any other details about other parts of Medicare.  You’ll get separate cards for those after you sign up for them.

You’ll use Part B quite often.  It covers anything physician, or doctor, related.  This could be:

• Tests
• Treatments
• Outpatient procedures
• Medical equipment
• Urgent or emergency services
• Drugs administered in a doctor’s office or outpatient setting
• Doctors’ visits

Part B includes some other things not listed here as well.

One other thing to point out is that when you’re admitted to the hospital, that is covered by Part A as mentioned above.  However, a lot of the doctor-related treatments, procedures, and so-forth you have while hospitalized will fall under Part B coverage.

Part C – Medicare Advantage Plans

Part C of Medicare is also known as Medicare Advantage Plans.   I’ll dive much deeper into these plans in Chapter 6.  Just know for now that Part C is referring to this type of secondary insurance coverage.

Part D – Prescription Drug Coverage

Part D of Medicare refers to prescription drug coverage.  It can be a little tricky to understand Part D since you can get it one of two different ways.  Take a look at the chart below to see what I mean:

Medicare Costs

I know you’re probably thinking, “hey if I’ve already paid in tens of thousands of dollars into Medicare, why do I have to pay anything more?!”

I don’t really have a good answer for you.  My job is just to show you how things work and bring you the facts.  Don’t kill the messenger, ok?

Let’s break down what you’ll spend by looking both at monthly premiums and out-of-pocket costs:

Monthly premiums

We’re going to restrict our discussion here to Original Medicare, just Parts A & B, since we’ll cover the other parts in later chapters.

Part A premium

The good news is that almost nobody pays a monthly premium to have Part A.  As long as you’ve worked 40 quarters (10 total years) where they’ve taken out that 1.45% FICA amount out of your paycheck, you’re entitled to “premium-free” Part A.

If you’ve only worked 30 – 39 quarters, your premium will be $259.  If you’ve worked less than 30 quarters, you’d have to pay $471 per month just to have Part A.

Part B premium

Most folks new to Medicare in 2020 and 2021 have to pay $148.50 per month for Part B.  But, if your income is over certain amounts, you’ll have to pay more for Part B.  This is called the Income Related Monthly Adjustment Amount (IRMAA).  This is more likely to come into play if either you and/or your spouse are still working when you start Part B.

Take a look at the chart below to see how much you could pay:

Keep in mind these income amounts are Modified Adjusted Gross Income, or MAGI.  You can figure out what your, or your household’s, MAGI is by finding the Adjusted Gross Income on your tax return and adding in any tax-exempt bond interest you received that year.

The MAGI amounts are based on those from your tax return from two calendar years ago.  For example, if you're starting Part B in 2018, then your 2016 MAGI is the one that's considered.

If your income is high enough to have to pay an IRMAA and you're starting Part B, but one or both you and your spouse are retiring, you can appeal to have this IRMAA lowered or waived.  You'll likely be successful in your appeal too.  Just select "Work Stoppage" in Step 1 when you fill out this form.

If you’re drawing Social Security income when Medicare starts, your Medicare premium will just be taken right out of your check starting the month you turn 65.  Otherwise, you’ll receive a bill in the mail about four times per year to pay 3 months’ worth of premium at a time.

If you'd rather pay monthly instead of quarterly before your Social Security starts, just fill out the Medicare Easy Pay form to have it taken electronically right out of your preferred bank account.

Out-of-Pocket amounts

Alright so we’ve just figured out how much Medicare will cost us each month whether we use it or not.  This is what “premiums” are.

But, when we do use Medicare as our primary health insurance, we will have out-of-pocket (OOP) costs too.  Now keep in mind, the secondary insurance like Medigap and Medicare Advantage plans, even work insurance, we’ll talk about in later chapters will help cover these OOP costs.

But for now, let’s look at what these OOP amounts are under Original Medicare by itself…

Part A OOP amounts

Alright now on to…

Part B OOP amounts

These amounts are a lot more straightforward and will take a lot less time to discuss.

You’re responsible for coming up with the first $203 each year for anything Part B related.  Unlike the Part A deductible that worked with complicated “benefit period” rules, the Part B deductible is much simpler.  It’s based on a given calendar year, and it starts over every January 1st.  The amount can change a little bit from year to year, as well.

Also, it’s not $203 for each type of test or procedure, or even for each health condition you may be treating.  It’s a running total for everything Part B related throughout the year.  So, you might have a doctor’s visit in February and have some bloodwork done in April, and the two things together could total together to meet your deductible.

Once you pay the first $203, Medicare then pays 80% of Part B related costs.  So, it’s up to you to cover the other 20%.  When I talk to folks about the basics of Medicare, the main thing they know is they need supplement insurance to cover the other 20%.  As you can see, there’s a bit more to it than that, but they’re on the right track.

The biggest problem with this 20% gap (this 20% is known as your Part B coinsurance) is that there is no limit to how much money it could be!  If you have lots of medical expenses like surgery, chemo, or physical therapy you could easily have a Part B bill of $100,000 or more!   Paying 20% of this would not be fun!

Whew, we just learned a lot about what’s involved with Original Medicare (Parts A & B).  We’ve learned what types of things it covers and what we’d be responsible for paying.  But, Medicare doesn’t cover some things that may surprise you.  Let’s take a look at those things now…

Things Medicare Does NOT Cover

Medicare uses the term “medically necessary” a LOT. There are certain things it does and does not consider to be “medically necessary”. We’ll break down these into some different categories here:

Dental, Vision, and Hearing

This is the one I get a lot of complaints on.

Medicare doesn’t consider routine dental, vision, or hearing coverage to be “medically necessary”.  So, they don’t cover it.  This list includes (but isn’t limited to):

• Cavity fillings
• Tooth extractions
• Root canals and crowns
• Teeth cleanings
• Routine eye exams
• New glasses, including lenses or frames
• Hearing aids

Some of the Medicare Advantage plans provide some basic coverage for some of these expenses.  We’ll touch on those in Chapter 6.

Now, there are some things in these areas are medically necessary and therefore will be covered.  Again, some examples of these are:

• Cataract surgery
• New glasses or contacts after cataract surgery (in some cases)
• Costs incurred to treat and monitor diseases of the eyes (glaucoma, for example)
• Costs incurred to monitor the health of the eyes (for diabetics, for example)

Custodial Care

We touched on this one earlier when talking about nursing homes.  If you don’t need to be in a nursing home for a medical reason, then you likely qualify for custodial care instead.

Usually, custodial care is defined when someone can’t perform 2 or more of the following activities of daily living (ADLs) such as:

• Dressing
• Bathing
• Toileting
• Transferring
• Continence
• Eating

This type of care can be given by non-licensed caregivers, so this is why Medicare considers it as not medically necessary and won’t cover it.

Misc.

A couple other things worth mentioning here that Medicare doesn’t cover are acupuncture and cosmetic surgery.  Medicare also doesn’t cover certain types of prescriptions, but we’ll talk about that in a later chapter.

Limits on Treatment

For some things Medicare does cover, it will set a limit on how much it will cover for certain time periods. For example, we saw earlier that Medicare sets a limit on how many hospital and SNF days it will cover in a certain benefit period. Here are a few other:

Physical (PT), occupational (OT), or speech therapy (SLP) - in general, Medicare will only cover up to $2,110 worth of PT and OT combined for the year, and $2,110 for SLP. In some cases, you can get an exception to get more covered but you have to go through an approval process.

Psychiatric hospital stays – Medicare limits you to 190 days of lifetime coverage in this type of facility.

Foreign Travel

Conclusion