Medicare Basics: Part I

What Does Medicare Cover (and how much does it cost)?

Navigating Medicare can be one of the most unexpectedly frustrating parts of retirement. In fact, you wouldn’t be alone in thinking it just about takes an advanced degree and a case of Red Bull to decipher the whole system. To that end, the purpose of this two-part series on Medicare is to discuss in plain language how it may impact you and the healthcare decisions you make throughout retirement. Today we will cover the basics – what Medicare covers and how much Medicare costs on average.

Part II covers arguably the most important part of Medicare – when you should apply for Medicare.

In a rush?  Here’s a quick summary:
  • What Medicare is: a health insurance program for those 65+. Medicare is divided into four separate parts, with part run by the government and the other part run by private insurance companies. The different parts of Medicare cover the following: 
    • Part A – covers hospitalization expenses; most people don’t pay a monthly premium, but you will pay deductibles + co-insurance for covered services
    • Part B – covers medical services, such as doctors’ visits, preventative care, and medical equipment; you pay a monthly premium + an annual deductible + co-insurance
    • Part D – an optional plan that covers prescription drugs; you pay a monthly premium + co-pays/co-insurance
    • Medicare Advantage and Medigap – two different types of optional, supplemental coverage – Medicare Advantage is generally a “one-stop-shop”-type plan, while Medigap helps pay for Part A & B deductibles and co-insurance, among other things
    • What Medicare IS NOT:  long-term care insurance; it also does not cover dental or vision services, among other procedures, unless you purchase supplemental coverage
    • How much does Medicare cost: each part costs a different amount. There is no monthly premium for Part A. Medicare Part B costs around $145 per month per person (but more if you have high income). There are extra monthly costs for optional plans like Part D, Medicare Advantage, or Medigap. Like regular health insurance, you will also pay out-of-pocket costs like deductibles, co-pays, etc. when you have a healthcare event.


Healthcare is a hot-button issue in America today, but the debate has hardly been relegated to 21st century politics alone. Politics aside, both sides of the aisle have been debating the merits of a nationalized healthcare system for more than 100 years, going back to the days of Teddy Roosevelt. It wasn’t until 1965 that government-run healthcare became a reality as President Lyndon Johnson signed legislation creating a system known as Medicare: the purpose of which was to provide health insurance to those 65 and older. Why this demographic? Well, during that era many retirees had few (if any) options when it came to securing health insurance after leaving the workforce.

Medicare is separated into four parts – Parts A & B, and the two “add-ons” of Part D and Medicare Advantage/Medigap. As a whole, Medicare today operates quite similarly to how it did in the beginning – except today, of course, it covers more than 60 million Americans and accounts for roughly 5% of annual GDP!

teddy roosevelt healthcare
President Theodore Roosevelt (AP Photo)

The Basics - Parts A & B

Part A and Part B are what most people envision when they think of Medicare. They are also referred to as Original Medicare, because in the beginning these were the only programs offered.

Part A

Part A is hospital insurance. It mostly covers the ancillary costs of going to the hospital, i.e. the room, meals, inpatient drug treatment, nursing care, etc. It also covers rehab in skilled nursing facilities, as well as some home-health and hospice care.

How much does Medicare Part A cost?

Most people don’t pay a monthly premium for Part A, but you will pay deductibles and co-insurance if you have to go to the hospital or other facility mentioned above. Part A’s deductible is assessed on a 60-day period, unlike traditional insurance where the deductible is generally only charged once per year. In 2020 the Part A deductible is $1,408

Co-insurance depends on the type of care you need, but it is usually a daily flat fee based on how long your visit lasts. For example, here are the out-of-pocket expenses you’d incur under Part A for a typical trip to the hospital (click here to see other services):

  • Deductible: $1,408 (each time, if more than 60 days since last visit) 
  • Days 1 – 60: $0 
  • Days 61 – 90: $352 per day
  • Days 91 and up : $704 per day, up to a “lifetime reserve” of 60 days
  • Over 60 “lifetime reserve” days: you pay all costs; Part A does not cover anything

Part B

Part B is medical services insurance. It covers the services and supplies needed to diagnose and treat medical conditions, doctors’ office visits, preventative care, ambulance rides, and medical equipment.

How much does Medicare Part B cost?

You pay a monthly premium for Part B. In 2020 Medicare Part B costs $144.60/month (per person), but it can increase based on your annual income. The premium increases anywhere from $58 to $347 more per month if your income is over $87,000 (singles) or $174,000 (married). Click here to see a full scale. You’ll also pay an extra fee the rest of your life if you don’t apply on time (covered in Part II). 

Other things you’ll pay are an annual deductible (not per-visit) and co-insurance depending on the service or procedure. In 2020 the deductible is $198 per year. The co-insurance rate is usually 20%, which means Medicare pays 80% and you pay 20%. Most preventative services such as flu shots are free.

A common misconception is that Medicare caps how much recipients pay out-of-pocket each year, similar to how traditional health insurance typically limits your out-of-pocket expenses to no more than a few thousand dollars per year. This is simply not the case: under current law there is NO CAP on Medicare recipients’ annual out-of-pocket expenses, meaning an expensive procedure could leave you on the hook for an unlimited sum of money if you don’t have supplemental insurance coverage (see Medicare Advantage and Medigap below).

You should also know what Parts A and B do not cover. Namely, they do not cover: dental and vision care, outpatient prescription drugs, cosmetic surgery, hearing aids, routine foot care, acupuncture, and, most importantly, long-term care services. Repeat: Medicare does not cover long-term care expenses! If you’re traveling abroad, you should also know Parts A and B only cover care outside the U.S. in specific circumstances. 

Visit this website if you’d like to learn more about what is and isn’t covered. 

The Basics - Part D, Medicare Advantage, and Medigap

Parts D and Medicare Advantage/Medigap are relatively new additions to the system. Generally speaking, they were created to cover some of the shortfalls of Parts A and B. You are not required to sign up for any of these plans, though most people choose to do so simply because – as you saw above – there is a lot Parts A and B do not cover. 

Part D

Part D is prescription drug insurance. You need to go through a private insurance company such as Humana, Cigna, UnitedHealthcare, etc. to purchase a Part D plan. Each company is required to provide a base level of benefits, but otherwise plans will vary from company to company. You can search for a plan straight off Medicare’s website

How much does Medicare Part D cost?

According to last year Part D cost $33 per month on average. Just like Part B, your premium may be more depending on your income (the highest bracket pays an extra $76.40 per month – click here for everything in between), and there is a lifetime late fee if you miss your designated enrollment window (discussed more in Part II)

Most Part D plans have an annual deductible. The deductible may vary from plan to plan, but under current regulations it cannot be more than $435 per year. Most plans also have co-payments and/or coinsurance.

Medicare Advantage

Medicare Advantage bundles Parts A, B, and oftentimes D into one comprehensive policy. Some Advantage plans also include dental and vision services. Medicare Advantage is oftentimes referred to as Part C because it bundles everything into one package.

Under a Medicare Advantage plan you typically must receive all your care through a designated network of providers, and you may need a referral before seeing a specialist. You should check whether your doctors are included in the plan’s network before signing up for an Advantage plan. One benefit of Medicare Advantage is that it is required to cap your annual out-of-pocket expenses. As of 2019 the cap was $6,700 per year. Recall, there is no such cap if all you have is Parts A and B. 

How much does Medicare Advantage cost?

Last year the Medicare Advantage cost was $28/month on average. It will generally vary by plan, insurance company, and where you live ( 


Medigap, also called Medicare Supplemental Insurance, is just that – it supplements or fills in the gaps of Parts A & B. It does not bundle everything into one policy, so if you choose Medigap you must also purchase a Part D plan and also vision and dental insurance plans, if desired.

The “gaps” Medigap addresses are mainly the Part A & B deductibles and co-insurance you’d otherwise pay out-of-pocket. Medigap currently comes in 8 different flavors, labeled Plans A – N, each offering a different level of benefits. For example, Medigap Plan G covers 100% of the Part A deductible, whereas Plan K only covers half (see chart to the right for more info).

How much does Medigap cost?

Medigap costs anywhere from $100 – $500/month, depending on which plan you choose and where you live. 

what is medigap
click to enlarge

What's the difference between Medicare Advantage (Part C) and Medigap?

Most people elect to add either a Medicare Advantage or Medigap plan into their arsenal of insurance coverage to make up for the deficiencies in Parts A and B.

You cannot have both, so how do you know which one is right for you? The choice ultimately comes down to individual preferences, budget, and medical needs. Here’s chart to help compare some of the pros and cons.



  • Cheaper monthly premiums
  • "All-in-one" solution that can bundle more services - such as prescriptions, dental, and vision - into one policy
  • Required by law to set a cap on your annual out-of-pocket expenses
  • Annual open enrollment period makes it easy to switch plans if need be


  • Generally limited on which doctors and facilities you can use
  • Will have co-pays and co-insurance for doctors' visits and covered services - can be more costly on the back end as you receive care
  • Usually need a referral before seeing a specialist
  • Out-of-network services either not covered or cost extra
  • Networks may only operate in certain regions, so depending on where you live you might not even be able to purchase an Advantage plan
  • Plan might not provide health insurance coverage when traveling outside of U.S.
  • Out-of-pocket limits might only be applicable for specific types of care/services (i.e. could be on the hook for all costs for excluded services)
What is a SEP IRA?



  • Reduced or $0 co-pays/co-insurance/deductibles (depending on the plan)
  • Costs are more predictable if you require frequent medical care
  • More flexibility - typically can see any doctor who accepts Medicare, and usually don't need a referral to see a specialist
  • Most provide health insurance coverage when traveling outside of U.S.


  • More expensive monthly premiums
  • Eight different plans to choose from, with each providing different benefits and levels of coverage
  • Plans do not cover prescription drugs, dental, or vision services so you still need to sign up for Part D and buy a dental and vision plan
  • Insurance company can deny your application (after medical underwriting) or charge extra if you miss your enrollment window

Medicare is an important topic for today’s retirees, especially as longer life expectancies create the very real possibility of a decades-long retirement. The Medicare program exists to provide a basic level of care for retirees, but the unfortunate caveat is that it can be a complex system to navigate. Make sure to review all your options well in advance of retirement. As we’ve discussed ad nauseam, Medicare does not cover everything so you’ll want to be sure to have insurance coverage that works for your specific needs. In regards to how much Medicare costs, most people pay nothing ($0) each month for Part A, a small monthly premium for Part B, and then extra monthly premiums for add-ons like Part D, Medicare Advantage, or Medigap. Generally you will also have out-of-pocket costs for any health services you receive year in and year out. 

Please call or email if you have questions or want to discuss how Medicare costs may impact your financial plan. Our financial advisors are happy to help!



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