How does Medicare work? A simple guide for those turning 65

One of the most common and important questions I receive from clients approaching retirement is, “How does Medicare actually work?” For many, the approach of age 65 brings not only the anticipation of new freedom but also uncertainty about their healthcare coverage as they age. Medicare can feel like a maze with all the different terms--Part A, Part B, Part D, Medigap, Advantage plans—and navigating it all can be overwhelming without clear guidance. In this post, I’ll break down the basics of Medicare in plain English so you can make confident, informed decisions about your healthcare as you transition into this next chapter of life.

The Four Parts of Medicare

In short, Medicare is a federally run health insurance program primarily for US Citizens or permanent residents aged 65 and over. However, it does cover some younger people with certain types of disabilities and medical conditions.

The four main parts of Medicare are Part A, Part B, Part C, and Part D.  Here is a breakdown of each part and what it covers:

  Part A

Part A is considered “hospital insurance.”  This covers inpatient hospital care, skilled nursing or hospice.  It generally covers what the facility charges.  Usually, you do not pay a premium for Part A if you have worked in the United States over 10 years.

Part B

Part B covers doctor visits, outpatient care, and preventative services.  There is a monthly premium for Part B, which starts at $185 per month in 2025, per person, and can increase dependent upon your Modified Adjusted Gross Income.  Usually, most participants have this premium amount deducted from their monthly social security benefit.

Part C

Part C is generally called a “Medicare Advantage” plan.  This is a private insurance plan (not run by the federal government) that bundles parts A, B, and usually D and can include added benefits like dental and vision coverage which are not covered by traditional Medicare.  It normally includes HMOs and PPOs.

   Part D

Part D is prescription drug coverage.  This will vary by plan and location and can be purchased standalone or can be included in an Advantage plan.

It is important to understand what Medicare does not cover.  It will not cover long-term care in most instances.  It also does not cover dental, vision, cosmetic, routine foot care, and hearing needs unless specified within a Medicare Advantage plan.  Medicare also does not cover medical expenses incurred outside of the United States which is important to know if you travel internationally.

Original Medicare (Parts A&B) also only pays a percentage, usually 80%, of medical expenses covered.  You will have to either pay out-of-pocket for the remainder or purchase a Medigap Plan to supplement original Medicare.  The cost and availability of these plans will vary by your state of residency.  Coverage, however, is generally standardized.

Key Enrollment Periods

The Initial Enrollment Period (IEP) is a 7-month window: 3 months before you turn 65, the month of your 65th birthday, and 3 months after you turn 65.  If you are already collecting Social Security before your 65th birthday, you will be automatically enrolled and will receive the red, white, and blue Medicare card.  If you are not collecting social security, you may want to enroll during this period.  However, if you are covered by an employer-sponsored health insurance plan, and you intend on continuing to work, you may want to wait, especially if you are contributing to a Health Savings Account (HSA).  You will want to discuss your situation with your financial advisor to determine what is best for you.  There are costly penalties for not enrolling in Medicare during the Initial Enrollment Period if you do not have existing coverage.  For example, I had a client that lost their job 2 months after their 65th birthday and never enrolled for Medicare because they were employed and covered on the employer plan when they turned 65.  With all the busyness of finding a new job, they forgot to enroll before the 3-month window closed and they now must pay the penalties for not enrolling on-time.  These penalties are also for the duration of their life so the total cost can be rather steep.

After your initial enrollment, you can switch to a different plan during Open Enrollment every year, which starts October 15th and runs to December 7th every year.

If you delay Part B due to employer coverage, you will want to enroll for Medicare as soon as you lose that coverage.

Filling the Gaps with Medigap Plans

As stated, Original Medicare only pays for about 80% of medical expenses covered.  In addition, it has deductibles (what you must cover out-of-pocket for certain treatments before Medicare will pay).  For example, a normal two-night stay in a hospital in my area of Houston, Texas, could run upwards of $50,000 or more dependent on the various tests that may be ordered and the number of specialists involved.  Without a Medigap plan to supplement Original Medicare, you could wind up paying $12,500 or more out-of-pocket for this incident.  This can really drain your savings if you become ill.  That is why it is important to get a Medigap plan in addition to Original Medicare.  You will also want to compare the Medigap plan to Medicare Advantage plans to determine the best fit for you based on your needs and affordability.  Generally, Medicare Advantage plans have less expensive premiums, but they are more restrictive for care, and can be more expensive if you are not healthy.

Secure Prescription Drug Coverage

A common mistake many people make is not securing a prescription drug plan in addition to Original Medicare or a Medicare Advantage plan.  With many medicines costing over $1,000 per dose, a Part D plan is crucial.  You can compare plans based on the medications you take right on the Medicare website (www.medicare.gov/plan-compare/ ).

Navigating Medicare doesn’t have to be overwhelming.  With the right information and a thoughtful approach, you can make confident decisions that protect both your health and your finances in retirement.  Don’t be afraid to ask for help; your financial advisor should be able to assist you if they are a CFP® practitioner.

If you have questions about how Medicare fits into your overall financial plan or just need help getting started with a plan, I am happy to help.  Feel free to email me directly at neil@arkalliancefinancial.com with any questions or to set up a time to talk.  Let’s ensure you enter this next chapter prepared, informed, and well cared for.