Jeffrey Wade
Medicare is a health insurance program for individuals over 65, run by the Centers for Medicare and Medicaid Services (CMS). While Medicare eligibility isn't influenced by income, income is a significant factor in calculating the cost of coverage. The government sets a base premium each year, which most beneficiaries pay about 25% of, with the remaining 75% covered by federal funding. The CMS uses information from the tax return filed two years prior to assess whether an individual falls into a higher income bracket and will need to contribute more. This is known as the Income-Related Monthly Adjustment Amount (IRMAA). Other factors that can influence the cost of Medicare coverage include location and lifestyle habits.
| Characteristics | Values |
|---|---|
| Medicare cost | Pay a monthly premium for coverage and part of the costs each time you get a covered service |
| Yearly limit | No yearly limit on what you pay out-of-pocket unless you have supplemental coverage |
| Supplemental coverage | Medicare Supplement Insurance (Medigap) policy or a Medicare Advantage Plan |
| Help with costs | If you have limited income and resources, your state may help with costs |
| Medicare Part B | Helps pay for doctors' services, outpatient care, physical and occupational therapy, and some home healthcare |
| Medicare Part B premium | Beneficiaries pay 25% of the premium, with the government paying the remaining 75% |
| Higher-income beneficiary | You'll pay a larger percentage of the total cost of Part B |
| Medicare Part D | Helps pay for prescription drugs |
| Higher-income beneficiary with Medicare Part D | You'll pay monthly premiums plus an additional amount |
| Medicare Advantage plan | You must pay an extra charge if you're over the income limit |
| Medicare premium calculation factors | Income from two years prior, location, and lifestyle habits |
| Late enrollment penalty | 10% increase in the monthly premium for each year of delay |
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What You'll Learn
Medicare Supplement Insurance (Medigap)
Medicare Supplement Insurance, also known as Medigap, is extra insurance that you can purchase from a private health insurance company. It helps to cover your share of out-of-pocket costs in Original Medicare (Parts A and B). Medigap policies can include additional benefits, such as coverage when travelling internationally.
Medigap plans are available in all 50 states and Washington, D.C., with varying premiums and enrolment eligibility. They are typically standardized, but not all plans may be available in your area. To enrol in a Medigap plan, you generally must already have Original Medicare, which includes Part A (Hospital Insurance) and Part B (Medical Insurance).
Medigap policies are designed to assist with out-of-pocket expenses not covered by Parts A and B, such as deductibles, copays, and coinsurance. It is important to note that you must continue paying your Part B premium to maintain your Medigap coverage. The cost of Medicare Part B is typically shared between the government and the beneficiary. For most beneficiaries, the government pays around 75% of the Part B premium, while the beneficiary pays the remaining 25%. However, for higher-income beneficiaries, the percentage paid by the beneficiary increases based on their income reported to the IRS.
Additionally, Medicare prescription drug coverage is available, where the government pays a significant portion, and the beneficiary pays the rest. Higher-income beneficiaries with this coverage will pay monthly premiums plus an additional amount based on their reported income. This amount is determined using a base premium specified by law and is deducted from monthly Social Security payments.
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Medicare Advantage Plan
Medicare Advantage, also known as Medicare Part C, is offered by private insurance companies approved by and under contract with Medicare. These plans combine hospital coverage under Part A and medical coverage under Part B (also called Original Medicare) and often include prescription drug coverage under Part D as well. Some plans may also cover extra benefits that Original Medicare doesn't cover, such as vision, hearing, dental, and fitness programs. Medicare Advantage Plans often have lower premiums than other Medicare plans, and they usually require you to pay a share of the costs for covered services. There are several types of Medicare Advantage Plans, including Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), Private Fee-for-Service Plans (PFFS), Special Needs Plans (SNPs), and Medicare Medical Savings Account Plans (MSAs).
The cost of a Medicare Advantage Plan includes the monthly premium, any deductibles, copayments, and coinsurance. The premium is the monthly fee you pay to the insurance company for your coverage. Some plans may have a $0 premium, which means Medicare pays the private insurance company offering the plan a set amount every month for your coverage, and you pay nothing extra. However, even with a $0 premium plan, you will still need to pay the monthly Part B premium, which covers your doctor and outpatient services. The deductible is the amount you pay before your insurance plan starts to pay for services. Each plan has its own deductible amount, and you may have different deductibles for different types of services.
Copayments and coinsurance are the amounts you pay when you receive a covered service. A copayment is usually a set dollar amount, like $20 for a doctor's visit, while coinsurance is a percentage of the cost of the service, such as 20% of the cost of a hospital stay. There may also be out-of-pocket maximum limits on your copayments and coinsurance, after which the plan pays 100% of the allowed amount for covered services. It's important to carefully review the details of each plan, including the provider network, covered benefits, prescription drug coverage, and out-of-pocket costs, to determine which Medicare Advantage Plan best suits your needs and budget.
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Medicare Part B
The deductible for Medicare Part B in 2023 is $223 per year. This means that you will pay 100% of your medical costs until your bills reach $223 in a given year. After you meet the deductible, you typically pay 20% of the Medicare-approved amount for most doctor services, outpatient therapy, and durable medical equipment, while Medicare pays the other 80%. It's important to note that Medicare has specific rules about what it considers medically necessary, and coverage decisions are often based on these guidelines.
Similar to Part A, your late enrollment in Medicare Part B can result in a penalty, leading to higher premiums. For each 12-month period that you could have had Part B but didn't sign up, your monthly premium may go up by 10%. You'll likely pay this higher amount for as long as you have Medicare. There are special enrollment periods that may exempt you from this penalty, so it's important to review your options if you think you might be late in signing up.
Understanding what services are covered by Medicare Part B is crucial. In addition to doctor services and outpatient care, Part B also covers certain preventive services and screenings, ambulance services, durable medical equipment, mental health services, and limited outpatient prescription drugs. It's important to note that Part B does not cover everything, and there may be gaps in coverage that you might want to address with supplemental insurance or a Medicare Advantage plan (Part C).
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Medicare prescription drug coverage
If you have limited income and resources, you may be able to get Extra Help to pay for your plan premiums and other drug costs (like deductibles, coinsurance, and copays). If you qualify, you won't have to pay the Part D late enrollment penalty. The amount you pay is determined using a base premium, and if you are a higher-income beneficiary, this amount is deducted from your monthly Social Security payments.
If you file your taxes as "married, filing jointly" and your MAGI is greater than $212,000, you will pay higher premiums for your Part B and Medicare prescription drug coverage. If you file your taxes using a different status and your MAGI is greater than $106,000, you will also pay higher premiums.
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Income-Related Monthly Adjustment Amounts (IRMAA)
The Medicare Income-Related Monthly Adjustment Amount (IRMAA) is an additional amount you may have to pay on top of your Part B or Part D premium if your income is above a certain level. The Social Security Administration (SSA) sets four income brackets to determine your IRMAA. This is based on the income you reported on your IRS tax return in the second last year—i.e., two years before the year that you start paying IRMAA. The income that counts is the adjusted gross income you reported plus other forms of tax-exempt income.
If you are required to pay IRMAA, the SSA will notify you that you have a higher Part B premium. You have the right to request that the SSA lower or eliminate your premium increase if you believe you should not pay IRMAA, your circumstances have changed, or your IRMAA was miscalculated.
The income threshold for premium surcharges is indexed for inflation each year. In 2024, the threshold is $103,000 for a single individual, and in 2025, it will increase to $106,000. Most people do not pay any premium for Medicare Part A, and there is no income-related surcharge, so Part A premiums are not affected by income.
The Modified Adjusted Gross Income (MAGI) may differ from your Adjusted Gross Income, as some people have additional income sources that must be added to their AGI to determine their IRMAA-specific MAGI. This additional income will increase your Modified Adjusted Gross Income and may subject you to higher Medicare Part B and Medicare Part D premiums.
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Frequently asked questions
The cost of Medicare medical insurance changes annually.
The cost of Medicare medical insurance is influenced by factors such as income, tax filing status, and location.
The government calculates the cost of Medicare medical insurance using an individual's yearly income level. Higher-income beneficiaries pay a larger percentage of the total cost of Medicare medical insurance.
The Income-Related Monthly Adjustment Amount (IRMAA) is an additional charge that some people pay on top of their regular plan premiums for Medicare medical insurance. The IRMAA is influenced by an individual's gross income, with higher earners paying more.
If you sign up for Medicare medical insurance late, your monthly premium will increase by an additional 10% for each year of delay.
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