What is Medicare?
Medicare is federally funded health insurance for people older than 65, though younger people may qualify if they have a disability or certain specific diagnoses. To qualify, you must be a U.S. citizen or a legal resident who’s lived in the country for the five years prior to your application.
There are several components of Medicare that can be used in various ways. This structure—namely how to combine the various parts and which structure to choose—tends to be the most confusing part of Medicare.
Medicare Part A (hospital insurance)
Part A covers inpatient hospital stays, short-term stays at care facilities (such as nursing homes), hospice, and some in-home healthcare. Medicare Part A tends to be premium-free for anyone who’s worked for roughly 10 years or a similar equivalent. (Stay-at-home spouses may qualify for premium-free coverage via their spouse’s work history.)
Medicare Part B (medical insurance)
Part B covers more traditional healthcare expenses like checkups and preventative care, lab work and tests, outpatient procedures, medical equipment that you may need as you age, and so on. Medicare Part B comes with a monthly premium and an annual deductible. The standard monthly premium is relatively low (less than $200) and can vary based on income; the annual deductible is also relatively low ($257 in 2025) and the same for everyone.
After that deductible is met, however, Medicare will typically only pay 80% of the expense, meaning you’ll likely be responsible for the remaining 20% with no out-of-pocket maximum. For major illnesses or expensive treatments, these costs can add up. You can insure against these costs by purchasing supplemental coverage.
Medicare Part D (prescription drug coverage)
Part D is a plan offered through private insurance companies and covers prescription drugs. If you don’t sign up for Part D prescription coverage when you first become eligible, you can be penalized. While the penalty is minimal in theory (1% of the national base premium for every month you aren’t covered), it’s also permanent and can add up quickly.
If, for instance, you wait until you turn 67 to purchase coverage, you’ll pay 24% (24 months) of the national base premium, which may increase over time, rounded up to the nearest dime, on top of your actual monthly premium, for as long as you have coverage (typically, the rest of your life).
Even if you don’t want this coverage, it’s a good idea to opt in (there are low-to-no cost plans available) to avoid future penalties and having to wait until the next enrollment period to apply for coverage.
Plan G: Medigap coverage (traditional Medicare supplement)
Private insurance companies who offer Medigap plans are designed to pick up where original Medicare leaves off. The most common Medigap plan is Plan G (plan, not part).
With this option, Medicare Parts A and B remain your primary coverage, and if you incur significant expenses beyond your Part B deductible, these plans help cover the 20% of costs you’re responsible for. In addition to this if you have in-patient hospital stays under Part A, Plan G will pay the deductible for you.
If you sign up for Medigap coverage when you enroll in Medicare, generally, there is no underwriting process, meaning your age and health won’t impact your premiums. While Medigap plans are issued by private insurers, they are accepted anywhere that takes Medicare. So, if you have gap coverage from Insurer A, you don’t have to find a doctor who takes Insurer A, so long as they accept Medicare.
Medicare Part C or Medicare Advantage (alternative to Parts A and B)
Medicare Part C, also known as Medicare Advantage, is an alternative to Medicare Parts A and B. This is part of the complexity that sometimes confuses people, so we want to be explicit: If you choose Medicare Part C, you cannot use Parts A and B (commonly referred to as “original Medicare”), but you must remain enrolled in them
Medicare Advantage plans are a private alternative to Medicare offering similar coverage through private insurers. Often, these plans include perks like vision or dental coverage and many times Part D Prescription Drug coverage.
On the positive side: Medicare Advantage plans tend to be cheaper than original Medicare since they usually have out of pocket maximums like a more traditional private insurance plan.
However, a more cost-effective option, per experts, may be to combine original Medicare with traditional Medicare supplemental policies as described in the previous section.
Choosing the right Medicare plan
Generally speaking, most retirees choose between original Medicare with a supplement (so Parts A, B, D and a Plan G) and Medicare Advantage with drug coverage (so Parts C and D). When considering these two options, you’ll want to consider cost, coverage, and acceptance. Because Medicare Advantage plans are privately run, you will need to find providers that accept that insurance (versus providers who accept Medicare). This can limit your coverage options.
Because Medicare is widely accepted, many older Americans who aren’t sure where they will live or what their health concerns might be in retirement opt for a combination of original Medicare and gap coverage.
It’s important to know: You don’t have to get it right the first time when it comes to selecting your Medicare coverage options. However, if you decide to switch plans, you may have to wait for specific enrollment periods.
Beyond that, the underwriting process may vary significantly which could impact your premiums and the overall cost of healthcare as you age. If you start with Medicare Advantage and then switch to a combination of original Medicare and Plan G coverage, you will have to go through an underwriting process so this gap coverage could be more expensive.
When to sign up for Medicare
You’re eligible to sign up for Medicare starting three months before you turn 65 and for four months after your birthday. This is known as the initial enrollment period (IEP). Regardless of whether you sign up for Medicare when you turn 65, be sure to at a minimum sign up for Plan D prescription drug coverage to avoid penalties.
If you are still working at 65, you don’t need to sign up for Medicare as long as your employer has more than 20 employees. In that case, you can stay on your employer-sponsored plan if you prefer it. Some people may elect to sign up for Medicare in addition to employer care to supplement coverage.
Tip: We suggest talking to a financial professional or health insurance expert before making these decisions. For instance, if you’re signing up for Medicare to supplement your health insurance, you may not need or want Plan G gap coverage. However, signing up for original Medicare and not adding gap coverage to the mix could lead to more expensive premiums in the future. (You must sign up for Plan G coverage within six months of signing up for Medicare Part B to secure coverage without underwriting.)
If you miss your IEP, you can sign up for Medicare any year after you turn 65 during the general enrollment period (GEP) which is essentially the first quarter of any year—January 1 to March 31. When you sign up in the general enrollment period, your coverage begins July 1 of that year.
If you don’t like your Medicare coverage, you can change it during open enrollment periods (OEP) which generally take place between mid-October and early December.
As with other types of health insurance, you can also sign up for Medicare if you experience a qualifying event, like leaving your job and losing employer-sponsored coverage. The government calls this a special enrollment period (SEP).
What’s next for Medicare?
The government created Medicare in 1965, meaning it’s a fairly new federal program. Congress has updated the program numerous times since then.
- They expanded it to include people with disabilities in the early 70s.
- They added Part C in 1999 and Part D in 2006.
- Most recently, they revised how Medicare pricing impacts the negotiations between prescription drug companies and insurance providers. It’s unclear how exactly these new rules will play out as many are still taking effect.
Our goal in sharing this isn’t to provide a history lesson so much as to highlight that Medicare, more than Social Security, has the potential to evolve and change. This is truer now than ever before, given Medicare enrollment continues to surge as Baby Boomers turn 65 or retire.
Still, many of our clients find Medicare to be a useful part of retirement planning; coverage tends to be cheaper than private options and its wide acceptance can create flexibility for couples who hope to travel or relocate in retirement.
If you have questions about Medicare, or broader questions about how to budget for healthcare spending in retirement, contact us to discuss.
