How Medicare Works

In order to start to understand how Medicare works, it’s helpful to have a bit of background. Both the Medicare and Medicaid programs were signed into law in 1965 by President Lyndon B. Johnson to provide basic health services for Americans who didn’t have health insurance. Medicare was designed for retirees, while Medicaid was designed for low-income individuals and families, minor children, and people with disabilities. Fast forward to today.

The Sign-Up Period for Medicare

For people turning 65 who are retired or considering retirement, signing up for Medicare comes with deadlines. You must sign up for Medicare within a seven-month window—the time period three months before, the month you turn 65, and three months after—or pay late enrollment fees which are often permanent and go up the longer you wait. The only exception is for people who are still working (or whose spouse is still working) and have health insurance coverage through an employer with 50 or more employees that qualifies as creditable coverage by Medicare. Even if you have coverage through work, when you turn 65 it is advisable to go ahead and sign up for Medicare Part A because it’s free for most people who qualify.

Medicare Doesn’t Provide Long-Term Custodial Care

As it has evolved through time, Medicaid provides long-term care services, not Medicare. Medicare Part A covers up to 100 days of care for approved rehabilitation or medical treatment, but it does not cover ongoing custodial care needed for things like dressing, bathing, going to the bathroom, and other help required by the elderly, disabled, or those with dementia. Eligibility rules vary by state, but in general, in order to qualify for Medicaid for long-term or nursing care you must have a need for constant care, have very limited physical ability, and spend down all assets to total around $2,000 or less. The need for spend-down has taken many families and spouses by surprise during a time of crisis, potentially leaving them with nothing. In some cases, a spouse may even be forced to divorce in order to continue to have the assets needed for living expenses. The average cost for long-term custodial care in a semi-private room in a nursing facility in 2024 was more than $9,000 per month!

The Parts A, B, C, and D of Medicare

• Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing facility care, hospice care, and limited home health care. This is normally free for most people who have qualified for Medicare coverage.
• Part B (Medical Insurance): Covers doctor visits, outpatient care, home health care, and preventive services like screenings and wellness visits, along with durable medical equipment (e.g., wheelchairs). Part B coverage is the premium that will be deducted from your Social Security check if you don’t choose Medigap or Part C.
• Part D (Prescription Drug Coverage): Helps cover the cost of prescription medications, including certain vaccines. You can get Part D as a standalone plan along with Part B or as part of a Medicare Advantage Plan.
• Medicare Supplemental Insurance (Medigap): Extra coverage from private insurers to help pay for out-of-pocket costs in Original Medicare, such as copayments and coinsurance. Plans are standardized by letter (e.g., Plan G, Plan K).
• Part C (Medicare Advantage Plans): Private, Medicare-approved plans that may bundle Part A, Part B, and often Part D (prescription drug) coverages. Usually limited to providers within the plan’s network. May have different out-of-pocket costs and additional benefits not available in Original Medicare, like vision and hearing coverage.

Comparing Your Choice of Original Medicare with Medicare Advantage Part C Plans

Medicare Is Not Free

Fidelity’s 2025 retiree health care cost estimate for an individual 65 or older is $172,500, which includes expected Medicare premiums, out-of-pocket costs, and services not covered by original Medicare. The estimate does not include costs such as dental care, vision care, over-the-counter medications, or long-term care, which are significant out-of-pocket expenses not covered by original Medicare.

Medicare Costs More For Higher Income People With a 2-Year Lookback

One thing that will have a big impact on your Medicare costs is your modified adjusted gross income (MAGI). Once you retire, you may be surprised to find that a combination of income from pensions, investment earnings, traditional (non-Roth) IRA withdrawals, and traditional 401(k) withdrawals may land you with a higher MAGI than you realized. While you may no longer be earning a traditional income from working a job, your MAGI will still reflect all of your taxable income. For 2025, the monthly premium per person for Medicare Part B for those with MAGIs of $106,000 or less in the 2023 tax year is $185 per month. At the highest income bracket for Medicare, the monthly Part B premium is $628.90 per person.

If you would like to discuss Medicare as part of your overall retirement plan, call us at least five to 10 years before you plan to retire!