What Is Medicare? Understanding Your Coverage

Get a brief overview of what's included in your Medicare Coverage.

Meredith Miller
Published on
December 6, 2023
Updated on
March 4, 2024

Medicare is a healthcare program designed for American seniors and people with certain disabilities. The health program is both financed and managed by the federal government and more specifically, the Centers for Medicare & Medicaid Services (CMS). In order to become eligible for Medicare, you need to be an American citizen or permanent legal resident, and at least one of the following listed items must apply to you as well:

  • You are at least 65 years old.
  • You receive disability benefits from the Social Security Administration (SSA) or the Railroad Retirement Board (RRB), regardless of age.
  • You have been diagnosed with amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease.
  • You have end-stage renal disease (ESRD).

If you still find yourself asking what is Medicare? Don’t worry, you’re definitely not alone. In fact, according to a report released by MassMutual, nearly 65% of adults between the ages of 60 and 64, struggle to answer basic Medicare questions. The reason being, the program is a bit intimidating at first and more complex than the traditional health plans you are used to. That’s why we’re going to break down each part for you and help you learn the ins and outs of Medicare.

The first thing you need to know is that Medicare is made up of four different parts, each one designed to cover different medical expenses. These four parts include:

Make sure to click on any of the above links for a deeper understanding of what each part does. Even more so, there are also currently ten Medicare Supplement plans that help pay expenses left by gaps in your Medicare coverage, which is also why they are referred to as Medigap plans.

How Medicare Works

This is where things get a bit tricky. If you’re wondering how Medicare works, it’s best for us to take it one step at a time. As mentioned above, there are four different parts to Medicare, and we’ll start with the first two, Parts A and B.

Medicare Part A and Medicare Part B are often referred to as Original Medicare or Fee-for-Service coverage. Part A, known as hospital insurance, and Part B, known as medical or health insurance, work together to provide you with most of the benefits you’ll need.

Most Americans are eligible for free hospital insurance and are typically enrolled automatically once they become eligible. There is a monthly premium for medical insurance, so you will likely have enrolled in this part yourself.

Together, Original Medicare will cover 80% of your healthcare costs, and you will be left with the remaining 20% of your costs, known as coinsurance, which falls under the category of out-of-pocket expenses. Keep in mind, there is no cap or annual limit on your out-of-pocket expenses, so if you need extensive treatment, it will end up costing you.

If you’re worried about out-of-pocket costs sending you to financial ruins, you may want to consider coupling your Original Medicare coverage with supplemental plans to pay for any gaps in your coverage. These supplemental plans are often called Medigap plans. They are sold by private insurance companies and are only able to be purchased to cover things like your deductible, copay, and coinsurance. Medigap plans can only be purchased if you’re already enrolled in Medicare Parts A and B.

While Original Medicare offers you great benefits, the one area where it lacks is prescription medication, and that’s where Part D comes into play. Medicare Part D is a stand-alone prescription drug plan that helps you pay for all your medication. It works together with Parts A and B, and when you have all three parts, you’ll find yourself well equipped to take on healthcare costs in your senior years, especially if you add on Medigap plans.

Three parts and a supplement plan may seem like a lot to keep track of, and for many, it does become overwhelming. Wouldn’t it be nice if there was a single, all-inclusive Medicare plan that keeps you covered? Well, there is, and you may have noticed we skipped Part C. The reason for that is Medicare Part C, also known as Medicare Advantage, is your all in one option.

Medicare Advantage plans are required to offer all the benefits afforded under Original Medicare, and usually come with lower out-of-pocket expenses too. Medicare Advantage also has prescription coverage options, and eliminate the need for any supplemental plan. The catch is, they are sold by private insurers, and you will need to pay a monthly premium that may be more than you would have to pay under Original Medicare.

Why Medicare Is So Important For Seniors

As far as government programs go, Medicare is one of the most important for the benefits it provides, both directly and indirectly. The US healthcare system definitely favors younger, healthier individuals due to its business like nature. So, for decades in the US, health insurance companies rarely took on the risks associated with older members, primarily because they were more likely to cost the company money. When Medicare was created, for the first time, individuals aged 65 years or older had access to comprehensive coverage that didn’t cost them an arm and a leg.

It isn’t just beneficiaries that reap the benefits of Medicare, it’s family members too. By providing affordable health coverage for people, relatives don’t have to worry about helping out with growing medical costs. This not only eases responsibility felt by younger family members but relieves any stress that may cause evolve into stain or tension.

When It Was Created - A Brief History

The term Medicare was originally used for a healthcare program for dependents and families of active military personnel, passed under the Dependents’ Medicare Care Act in 1956. Although, the current program wasn’t signed into law until nearly a decade later under Lyndon B. Johnson under the Social Security Act. It was only then that the federally managed program known today as Medicare began providing healthcare to Americans over the age of 65 years old.

Over the years, changes have been made to the Medicare program, and the following are some of the most notable:

  • 1972 - Medicare benefits expanded to include speech, physical, and chiropractic therapy. Coverage is also extended to individuals under 65 years old who receive Disability Insurance (SSDI) and individuals with End-Stage Renal Disease (ESRD).
  • 1980 - Health Care Financing Administration (what would later become Centers for Medicare and Medicaid Services) is created, administering both Medicare and Medicaid programs. Medicare Supplemental (Medigap) plans were also created to help with costs Original Medicare doesn't cover.
  • 1988 - Medicare Catastrophic Coverage Act of 1988 is passed, expanding Medicare to include outpatient prescription drug benefits and a cap on out-of-pocket expenses.
  • 1989 - Medicare Catastrophic Coverage Act is repealed, but cost-sharing assistance is left intact.
  • 1996 - Health Insurance Portability and Accountability Act (HIPAA) is passed to prevent fraud, waste, and abuse within the Medicare program.
  • 2001 - Consolidated Appropriations Act is passed making extending Medicare benefits to individuals under 65 years old with ALS.
  • 2006 - Medicare Part D goes into effect, subsidizing the cost of prescription drugs through a Part D or Medicare Advantage plan.
  • 2008 - Medicare Part B premiums are based off income.

Currently, Medicare is run by the Centers for Medicare and Medicaid (CMS), which is a branch of the larger Department of Health and Human Services (HHS). As the Name suggests, the CMS also oversees the state-run Medicaid programs. Medicare was originally named the Health Care Financing Administration (HCFA) but later changed their name in June of 2001.

Who Funds Medicare?

Medicare receives its funding from the Social Security Administration (SSA). What that really means, as with all government programs, funding comes directly from the taxpayer.

If you ever looked over your paycheck deductions, you probably noticed 1.45% of your earnings being taken out under FICA (Federal Insurance Contributions Act). The FICA tax deduction is actually going towards Medicare. If you think that isn’t enough to cover Medicare for everyone, you’d be right. That’s why your employer matches your contribution with an additional 1.45% FICA payment, bringing the total to 2.9%.

Is It Free For Those Eligible?

As the saying goes, there’s no such thing as a free lunch, and the same applies to Medicare. Most people qualify for premium-free Medicare Part A, which means it won’t cost you a dime in monthly payments. However, there are other working people picking up the tab on your behalf. So, while Part A may be free for you, the cost is made up elsewhere.

Of the four different Medicare parts, only Part A waives the premium for those who qualify. However, there is another way for individuals to take advantage of free Medicare, and it’s through Medicaid.

Contrary to their similar sounding names, Medicaid is quite different from Medicare. Both government healthcare programs are overseen by the Centers for Medicare and Medicaid Services (CMS), but with Medicaid, the CMS works jointly with states to provide discounted or free coverage for qualifying individuals.

There is what’s known as dual eligibility, which you can probably guess from the name, means you qualify for both programs. The beauty of dual eligibility is that you may not have to pay a dime. Medicare will be used as your primary coverage, but any additional out-of-pocket costs you may have to pay could be covered by your Medicaid. To qualify, you’ll need to meet the age and disability requirements of Medicare, along with the income limits of Medicaid.

Can It Be Deducted From Your Social Security?

Yes, your Medicare premiums can actually be deducted from your Social Security benefits, and is more common than you think. If you are signed up for Social Security and Medicare Part B, the Social Security Administration (SSA) will likely deduct your premiums automatically each month. For individuals who need to pay a premium for Part A, the SSA can deduct your Medicare payments as well.

If you’re enrolled in an Advantage or Prescription Drug plan, getting your Medicare payments deducted is takes a little more work. Since Medicare Part C and Part D plans are sold by private companies, you have two options. The first, pay a monthly premium to your insurance provider each month. Or, you can contact your company and opt into having your premiums deducted from your Social Security Benefits.

Is Medicare Optional?

Most Americans have enrolled in Medicare Part A automatically since they don’t have to pay a premium. However, you can opt out of Medicare coverage altogether, but it comes at a price most are unwilling to pay.

For starters, if you choose not to enroll in Medicare, then you will also have to forfeit your Social Security benefits. The majority of American seniors, especially those in retirement, rely on Social Security for financial security. It’s important to note that you’ll only lose your Social Security benefits if you opt out of premium-free Medicare Part A, you can choose to forego Part B, C, and D without a penalty.

If you still want to enroll in Medicare, but just want to delay when your coverage begins, you may be subject to a late enrollment penalty. It’s probably a good idea to go over your options with an experienced Medicare agent before deferring your coverage, or opting not to enroll.

Getting Started With FirstQuote Medicare

Hopefully, you have a better understanding of Medicare and how it works, but don’t worry if you’re still confused. The program, in itself, is extremely complicated, and often difficult to navigate. That’s why we decided to make your life a little easier.

At FirstQuote Medicare, we not only give you the tools, information, and resources you need to find the perfect coverage. The best part? It’s completely free to use! By entering your zip code, or calling in, you can talk to an experienced agent who can walk you through the process, with no obligation. You can also choose to shop around, comparing Medicare quotes in your area. Get started, and get covered today.

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