Medicare is the federal health insurance program for people aged 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (ESRD). While the program pays a substantial portion of healthcare expenses, it does not cover everything. The remaining balance that a beneficiary must pay is known as “cost sharing.” This out-of-pocket spending varies significantly depending on the specific type of Medicare coverage a person chooses. Understanding these financial obligations is a necessary step in managing healthcare costs effectively.
The Language of Medicare Cost Sharing
Cost sharing is managed through three primary financial mechanisms across most Medicare plans. A deductible is the initial amount a beneficiary must pay for covered healthcare services each year before the plan begins to pay its share. This amount is paid entirely out-of-pocket and resets annually.
Once the deductible is met, cost sharing shifts to either coinsurance or a copayment. Coinsurance is the beneficiary’s share of the costs of a covered health service, calculated as a percentage of the Medicare-approved amount. For example, a person might pay 20% of the cost for a service, and Medicare would cover the remaining 80%.
A copayment is a fixed dollar amount a beneficiary pays for a covered service, such as a doctor visit or a prescription refill. Unlike coinsurance, the copayment amount does not change based on the total cost of the service. These three tools determine the total out-of-pocket spending for a Medicare beneficiary.
How Cost Sharing Works in Original Medicare (Parts A and B)
Original Medicare, which includes Part A (Hospital Insurance) and Part B (Medical Insurance), relies primarily on deductibles and coinsurance. Part A covers inpatient hospital stays and skilled nursing facility care, using a cost structure based on “benefit periods.” A benefit period begins the day a person is admitted as an inpatient and ends after they have been out of the hospital or skilled nursing facility for 60 consecutive days.
A beneficiary pays a deductible for each new benefit period. After the first 60 days of an inpatient stay, coinsurance applies, increasing for days 61 through 90. If a stay extends beyond 90 days, a beneficiary must use their 60 lifetime reserve days, each requiring a daily coinsurance payment.
Part B covers most medical services, including doctor visits, outpatient care, and preventive services. Beneficiaries must first meet an annual deductible, after which they pay a 20% coinsurance for most Medicare-approved services. This 20% responsibility is uncapped, meaning Original Medicare does not have a federal maximum out-of-pocket limit, which can expose beneficiaries to significant financial risk in the event of a serious illness or injury.
Cost Structures in Medicare Advantage (Part C) and Part D
Medicare Advantage (Part C) plans are an alternative to Original Medicare, offered by private insurance companies approved by Medicare. These plans must cover all services included in Parts A and B, but they utilize a different cost-sharing structure that often substitutes the Part B 20% coinsurance with fixed copayments.
A defining difference for Part C is the mandatory maximum out-of-pocket (MOOP) limit for all Medicare Parts A and B services. Once a beneficiary’s spending on deductibles, copayments, and coinsurance reaches this annual limit, the plan must pay 100% of covered Part A and B services for the rest of the year. This federal requirement offers financial protection not available under Original Medicare.
Medicare Part D provides prescription drug coverage, which has a distinct, phased cost-sharing structure. Coverage typically begins with an annual deductible, which plans may vary or waive. After the deductible, the initial coverage phase begins, where a beneficiary pays a copayment or coinsurance until the total drug costs reach a set limit. The coverage gap, formerly known as the “donut hole,” has been eliminated, and beneficiaries now move directly from the initial coverage phase to the catastrophic coverage phase once their out-of-pocket costs reach a set cap. In the catastrophic phase, a beneficiary pays nothing for covered drugs for the remainder of the calendar year.
Strategies for Minimizing Out-of-Pocket Costs
To manage the cost sharing inherent in Original Medicare (Parts A and B), many beneficiaries purchase a Medigap policy, also known as Medicare Supplement Insurance. These standardized policies, sold by private companies, are specifically designed to pay for the “gaps” in Original Medicare. Medigap policies can cover the Part A deductible, Part B coinsurance, and other cost-sharing amounts that would otherwise be paid by the beneficiary.
For individuals with limited income and resources, federal and state assistance programs are available to reduce or eliminate cost sharing. Medicare Savings Programs (MSPs) help pay for Medicare Part B premiums, and for some, can also cover Part A and B deductibles and copayments. For prescription drug costs, the Part D Extra Help program, or Low-Income Subsidy (LIS), is available to help pay for Part D premiums, deductibles, and copayments. These programs ensure that eligible individuals receive the same drug coverage with significantly reduced out-of-pocket spending.