How Does Medicare Work?

Dana Anspach

March 17, 2023

Most people who work in the U.S. have heard of Medicare, the federal health insurance program. If you’ve worked in the U.S. long enough to be eligible for Social Security, then at 65, you’ll be eligible for Medicare (some disabled people and people with End-Stage Renal Disease are eligible prior to age 65).

What many don’t know, though, is that there are several parts to Medicare.

Medicare Part A is hospital insurance and is the more commonly known feature of Medicare. It covers inpatient care, including care received while in a hospital. If you meet certain conditions, such as having a qualified hospital stay, it may cover time in a skilled nursing facility for a limited number of days and, in limited circumstances, care at home.

It does not, as many Americans believe, cover long-term care assistance, defined as needing help at home to handle the activities of daily living such as bathing, cooking, getting dressed, etc.

Part A is free if you worked long enough to be eligible for Social Security. You can begin Medicare at 65, even if you aren’t claiming Social Security yet. Part A is what most people think about when they refer to Medicare.

What is the difference between Medicare Part A and Medicare Part B?

Medicare Part B covers services and supplies that are medically necessary to treat a health condition. These can include outpatient care, preventive services, mental health services, screenings, ambulance services, and some forms of medical equipment.

It also covers some home and rehabilitative services, such as physical therapy (if authorized by a doctor).

There are premiums for Medicare Part B, and higher-income households will pay a larger premium.

When do you sign up for Medicare Parts A & B?

If you have retired but are not receiving Social Security benefits, you must sign up for Part A when you turn 65. There is an open enrollment period that starts three months before you reach age 65 and extends three months past the month you turn 65, for a total of seven months. However, if you already receive Social Security benefits, you will be automatically enrolled in Medicare parts A & B when you turn 65.

Make sure you enroll in Parts A & B on time; hefty penalties apply if you sign up late. However, since Plan A is premium-free for those entitled to receive Social Security benefits on their own earnings record or based on someone else’s, there are no penalties for late enrollment in plan A.

Individuals who must sign up for Part B but miss the deadline when they are first eligible will pay a 10 percent penalty on the annual premium for each year that they delay enrollment. Based on your circumstances, that penalty can be harsh or not so harsh; it depends on your total income and savings.

Most people must sign up for Part B at the same time they sign up for Part A – but there are exceptions if you are still working and covered by certain types of employer plans.

The question is, do you have to sign up for Part A & B at 65 if you are still working?

Do I need to enroll in Medicare Part A & B if I’m still working?

If you are still working at 65 and enrolled in a group health insurance plan offered by an employer with 20 or more employees, or enrolled in such a plan based on your spouse’s employer, you do not need to sign up for either Part A or B. Your employer’s (or spouse’s employer) group health plan will be the primary insurer. When you retire (or your spouse leaves their job or retires and you go off the group plan) you will have a special enrollment period of up to eight months to sign up for Parts A & B, without penalty. (See Medicare.gov for detailed rules on if you need to sign up for Medicare while working.)

But if you are covered by an employer (or spouse’s employer plan) with fewer than 20 employees, you must enroll in Medicare Part A & B when you are first eligible at age 65.

When you enroll, Medicare will become the primary insurer, which means it pays before your employer’s insurance pays. If you don’t enroll, your employer’s plan can refuse to cover you for services that Medicare would have covered. That means you may have to pay for those services out of your pocket.

When you do retire, you’ll need to add Part B within eight months of the earliest of either the end of your employment or the end of your group health coverage. This enrollment option falls under one of the designated Special Enrollment Period offerings.

How much does Medicare Part B cost?

The premiums you pay for Medicare Part B depend on your total income as filed on your tax return two years prior. The higher your income, the larger your premium.

This process is called “means testing.” If your income shows you have the means to pay more, a higher premium applies. The technical term is IRMAA or Income-Related-Monthly-Adjustment-Amount. The table below shows 2023 premiums.

2023 Medicare Part B Premium Schedule (IRMAA)

How IRMAA Works

The IRS supplies your tax filing status, your adjusted gross income, and your tax-exempt interest income to the Social Security Administration for the purpose of calculating what your premiums will be.

If 2023 will be your first year on Medicare, your premiums will be calculated based on your 2021 modified adjusted gross income. There is a separate premium schedule for Part D, which covers prescriptions. The Part D premiums are also means-tested but are in a lower range, from $12 to $77 per month.

When the Social Security Administration reviews your benefits application, they take your adjusted gross income (AGI) and add back any tax-exempt interest income to determine your modified adjusted gross income (MAGI).

This number, MAGI, is used to determine your Medicare Part B & D premiums. If you are collecting Social Security, the premium is deducted from your benefits. If you have not started Social Security, you will receive a quarterly invoice for the premiums.

If you sold a home or business or had a large bonus, it may have boosted your income in a prior tax year, which can result in increased Medicare Part B & D premiums two years later. Fortunately, you may be able to appeal this increase (see below).

As you near retirement, sometimes there are ways to manage your MAGI to keep it from crossing into the next threshold. Managing MAGI means planning a few years ahead as to how much you will take out of an IRA or 401(k). It also means managing capital gains, losses, and other types of investment income with an awareness of how it may impact your premiums.

Can I appeal a Part B premium?

Your premium amount is determined by your MAGI from your tax return two years prior. But what if your income is much lower the year you apply for Medicare Part B?

There is a way to appeal the IRMAA premium and ask for a reduction. The seven valid reasons for having the premium reduced include the death of a spouse, marriage, divorce or annulment, work reduction, work stoppage, loss of income from income-producing property, and loss or reduction of certain kinds of pension income.

Work stoppage and work reduction are the most common reason for appeals by our clients.

Each year, the Social Security Administration sends out a notice regarding your upcoming Medicare Part B premiums. If you think you are eligible for a premium reduction, you must appeal immediately.

As with all topics related to health insurance and Social Security, and every other retirement planning-related issue, to make the most of your money, it is essential you develop a working knowledge of the rules or find trusted advisors to guide you.

To learn more about health care costs in retirement, check out our free recorded YouTube Class Planning for Health Care Costs in Retirement.