Medicare Part A and Part B split your health coverage along a single dividing line: Part A pays for care you receive as an admitted hospital inpatient, while Part B pays for outpatient medical services, doctor visits, and preventive care. That sounds simple enough, but in practice the boundary between “inpatient” and “outpatient” is blurrier than most people expect, and the two parts differ in how you pay for them, how they are funded, and what financial risks they leave uncovered.
What Part A Covers
Part A is sometimes called hospital insurance, and that label captures most of what it does. When you are formally admitted to a hospital as an inpatient, Part A picks up the tab for your room, meals, nursing care, medications administered during the stay, lab work, and any surgeries performed while you are admitted. It also covers stays in a skilled nursing facility after a qualifying hospital stay, hospice care for people with a terminal diagnosis, and some home health services.
Most people do not pay a monthly premium for Part A. If you or a spouse paid Medicare taxes for at least ten years (40 quarters of work), you are automatically enrolled at no premium cost when you turn 65. People who did not work long enough can still buy into Part A, but the monthly premium can be steep, running several hundred dollars a month depending on how many quarters of work history they have.
Even without a premium, Part A is not free at the point of care. Each “benefit period” carries a deductible you pay before coverage kicks in. A benefit period starts the day you are admitted and ends once you have been out of the hospital or skilled nursing facility for 60 consecutive days. If you are readmitted after that gap, a new benefit period begins and the deductible applies again. After the deductible, Part A covers the full cost for the first 60 days of a hospital stay. Beyond 60 days you start owing daily coinsurance, and past 90 days the costs climb further unless you tap into a limited pool of “lifetime reserve days.”
What Part B Covers
Part B is the outpatient side. It covers doctor office visits, specialist appointments, outpatient surgeries, diagnostic tests, lab work ordered by your doctor, durable medical equipment like wheelchairs and oxygen supplies, mental health services, and ambulance rides. If you go to the emergency room but are never formally admitted as an inpatient, those ER charges typically fall under Part B as well.
Part B also carries a strong preventive-care component. Annual wellness visits, flu shots, cancer screenings such as mammograms and colonoscopies, cardiovascular screening blood tests, and diabetes monitoring are all covered. Many of these preventive services come with no coinsurance or deductible at all, which is a deliberate policy choice meant to encourage people to get screened early. Research bears out the effect: in a large study matching nearly 382,000 Medicare patients, those who completed the Annual Wellness Visit were substantially more likely to follow through with other preventive services in the following year, with increased odds ranging from about 46 percent to 143 percent depending on the specific service.1Preventive Medicine. The effect of Medicare’s Annual Wellness Visit on preventive care for the elderly
Unlike Part A, everyone pays a monthly premium for Part B. The standard premium is set each year by the federal government and is usually deducted directly from your Social Security check. Higher-income enrollees pay more through an income-related surcharge. On top of the premium, Part B has an annual deductible, and once you meet it, you typically owe 20 percent of the Medicare-approved amount for most services. That 20 percent coinsurance has no cap, which is one of the biggest financial risks in Original Medicare.
The Observation Status Trap
The distinction between Part A and Part B matters most in a situation many people never see coming: hospital observation status. You can spend two or three days in a hospital bed, receive medications through an IV, and be monitored around the clock, yet never be classified as an inpatient. Hospitals sometimes place patients under “observation,” which Medicare treats as an outpatient service billed under Part B, not Part A.
This classification has a direct financial consequence. To qualify for Medicare Part A coverage of a subsequent skilled nursing facility stay, you must have been formally admitted as a hospital inpatient for at least three consecutive midnights. Days spent under observation do not count toward that three-day requirement.2PubMed Central. The Origin and Disposition of Medicare Observation Stays If you are discharged from observation and need rehab or nursing care, you could face the full cost of a skilled nursing facility out of pocket.
The scope of this problem has been studied in detail. One analysis found that of 320 observation patients who were discharged to skilled nursing facilities, only about 35 percent had stays long enough to meet the three-midnight threshold that would qualify them for Part A’s skilled nursing benefit.3JAMA Internal Medicine. “Observation Status” for Hospitalized Patients: Implications of a Proposed Medicare Rules Change The remaining two-thirds looked like hospital patients to any outside observer but were technically outpatients the entire time.
The practical takeaway is straightforward: if you or a family member is in the hospital and there is any chance a skilled nursing facility will be needed afterward, ask whether the stay is classified as inpatient or observation. Hospitals are required to notify you of your status, but the notice can be easy to miss during the stress of an illness. Knowing your classification early gives you a chance to request a formal review if you believe inpatient admission is warranted.
How Each Part Is Funded
Part A and Part B draw from entirely separate funding pools, which affects their long-term financial stability in different ways. Part A is funded primarily by payroll taxes, the 1.45 percent you and your employer each contribute from every paycheck. Those taxes flow into the Hospital Insurance (HI) trust fund. Because the money coming in depends on the size of the workforce and wage levels, the HI trust fund can run into trouble when healthcare costs grow faster than wages. Policy discussions about Medicare “going broke” almost always refer to this trust fund.
Part B operates differently. Its funding comes mostly from general federal revenue combined with the premiums enrollees pay. Each year, the premium and the federal contribution are recalculated to match expected spending for the coming year. That annual recalibration means the Part B trust fund, known as the Supplementary Medical Insurance (SMI) fund, does not face the same kind of shortfall risk that the Part A trust fund does.4KFF. FAQs on Medicare Financing and Trust Fund Solvency However, this automatic balancing mechanism means Part B premiums can rise year over year whenever outpatient healthcare costs increase, which they frequently do.
How Doctors Interact with Part B Billing
When a doctor or other provider agrees to “accept assignment” for Part B services, they agree to accept the Medicare-approved amount as full payment. You owe your 20 percent coinsurance on that approved amount, and the provider cannot bill you for more. The vast majority of physicians participate in Medicare on these terms.
A smaller group of providers are “non-participating,” meaning they treat Medicare patients but do not accept assignment on every claim. These doctors can charge up to 15 percent above the Medicare-approved amount, a practice known as balance billing. Research into the effects of Part B reimbursement levels and balance billing has found that lower Medicare payment rates and tighter restrictions on balance billing are associated with lower patient ratings of their doctor’s care, likely reflecting the strain that reimbursement pressure places on appointment time and resources.5International Journal of Health Care Finance and Economics. Medicare Part B reimbursement and the perceived quality of physician care For you as a patient, the main thing to know is that asking in advance whether a provider accepts assignment can save you from a surprising bill. Some states have their own laws capping balance billing further, so your exposure depends partly on where you live.
A third, very small category of doctors have opted out of Medicare entirely. They do not submit any claims to Medicare, and you pay them directly under a private contract. Medicare will not reimburse you for those visits at all. Opt-out providers are rare, but they are most commonly found in psychiatry and certain surgical specialties.
The Gap in Financial Protection
One of the most misunderstood aspects of Original Medicare is that neither Part A nor Part B includes an annual out-of-pocket maximum. Most employer-sponsored insurance and marketplace plans cap what you spend each year, but Original Medicare does not. Under Part B, you owe 20 percent of every approved charge with no ceiling. A series of expensive treatments, a long course of chemotherapy, or a complex surgery with extensive follow-up care can push your coinsurance into tens of thousands of dollars.
This open-ended exposure is why most people on Original Medicare carry some form of supplemental coverage. Medigap (Medicare Supplement) plans are sold by private insurers and cover some or all of the cost-sharing gaps in Part A and Part B. Different lettered plans (Plan G, Plan N, and so on) cover different slices of the cost-sharing, and premiums vary widely by location and age. Alternatively, Medicare Advantage plans, which replace Original Medicare entirely, are required by law to include an annual out-of-pocket cap, giving enrollees a defined worst-case scenario each year.
Choosing between these options involves trade-offs that are not always clearly communicated. Research has highlighted that Medicare should provide beneficiaries with better projections of annual out-of-pocket spending, including whether an out-of-pocket cap applies and whether additional clinical benefits are offered, to help people make more informed decisions between Advantage plans and Medigap supplemental coverage.6Inquiry. Medicare Must Provide Additional Cost and Access Information to Enhance Decision Making Around Trade Offs Between Medicare Advantage and Medigap In practice, many people pick a plan based on its premium alone without understanding that a low-premium Advantage plan and a higher-premium Medigap policy can leave you with very different bills when something serious happens.
Help for People Who Cannot Afford Part B Premiums
The Part B premium is a fixed monthly cost that can be difficult to absorb on a limited income, and the coinsurance on top of it adds up. For people with low incomes and modest assets, federal and state programs can eliminate or reduce these costs. The Medicare Savings Programs (MSPs) are the main vehicle. Once enrolled, beneficiaries receive premium assistance and, in some cases, help with cost-sharing from their state’s Medicaid agency, with estimates suggesting out-of-pocket spending reductions of up to roughly $1,100 per year.7JAMA Network Open. Medicare Savings Program Take-Up Estimates and Profile of Enrolled and Unenrolled Individuals
The level of help depends on which program you qualify for. The most comprehensive tier, the Qualified Medicare Beneficiary (QMB) program, covers both the Part A and Part B premiums along with deductibles and coinsurance. Other tiers, including the Specified Low-Income Medicare Beneficiary (SLMB) and Qualifying Individual (QI) programs, cover the Part B premium only, leaving cost-sharing up to you.7JAMA Network Open. Medicare Savings Program Take-Up Estimates and Profile of Enrolled and Unenrolled Individuals Despite being available, these programs are widely underused. Many eligible people simply do not know about them or assume they would not qualify. Applying through your state Medicaid office is typically the first step, and qualifying for an MSP also automatically enrolls you in the Extra Help program that reduces prescription drug costs under Part D.
Enrollment Timing and Penalties
Part A and Part B have different enrollment rhythms, and missing the window for Part B carries a lasting financial penalty. Most people are enrolled in both parts automatically when they turn 65 if they are already receiving Social Security benefits. If you are not yet collecting Social Security, you need to sign up during your Initial Enrollment Period, which is the seven-month window centered on the month you turn 65.
For Part A, there is generally no penalty for late enrollment if you qualify for premium-free coverage, and you can sign up retroactively up to six months back. Part B is less forgiving. If you miss your Initial Enrollment Period and do not have qualifying employer coverage that excuses the delay, you face a late enrollment penalty of 10 percent added to your Part B premium for every full 12-month period you could have been enrolled but were not. That penalty lasts for as long as you have Part B, meaning it compounds over years and never resets.
The exception is for people who are still actively working and covered by an employer group health plan. In that case, you can delay Part B without penalty and sign up during a Special Enrollment Period once the employment or coverage ends. The key word is “active” employment. COBRA continuation coverage and retiree health plans do not count, a distinction that catches many people off guard. If you retire at 63 with COBRA coverage that bridges you to 65, you are fine. If you retire at 66 and rely on COBRA thinking it protects you from the Part B penalty, it does not.
What Parts A and B Do Not Cover
Understanding the gap between Part A and Part B also means understanding what falls outside both. Neither part covers prescription drugs you take at home. That is the job of Part D, a separate and optional benefit with its own premium, deductible, and coverage structure. Drugs administered during an inpatient stay fall under Part A, and drugs given in a doctor’s office or outpatient clinic (like chemotherapy infusions) fall under Part B, but the pill bottles in your medicine cabinet are Part D territory.
Dental care, routine vision exams, and hearing aids are also excluded from both Part A and Part B. These are among the most commonly cited frustrations with Original Medicare, particularly since dental problems and hearing loss become more prevalent with age. Some Medicare Advantage plans bundle dental and vision benefits into their coverage, which is one of the reasons those plans have grown in popularity. Under Original Medicare, you either pay out of pocket, buy a standalone dental or vision plan, or go without.
Long-term custodial care is another major exclusion. Part A covers skilled nursing care after a qualifying hospital stay, but only for a limited time and only when you need skilled rehabilitation, not simply help with daily activities. If you need ongoing assistance with bathing, dressing, or eating, and that need is custodial rather than medical, Medicare does not cover it. This gap is one of the largest financial risks facing older adults, and it is the reason long-term care insurance exists as a separate product.