When you’re ready for Medicare, you may be surprised by some of the costs involved. And you wouldn’t be alone.
Many people assume that years of Medicare payroll deductions translate to free health care in their later years. In fact, Medicare has been a cost-sharing program since its inception in 1965. Medicare pays the majority of the costs, but individuals covered by Medicare have some financial responsibilities as well.
By planning for predictable expenses—and being aware of situations that could lead to unpredictable costs—you may be able to avoid unnecessary financial risk.
Medicare costs to plan for
Premiums
Your premium is the base amount you pay each month to a health insurance company to maintain your health care coverage. The cost remains fixed throughout your plan year.
For Original Medicare, there are different premiums for Part A (hospital insurance) and Part B (medical insurance):
- If you (or your spouse) have been employed and paid Medicare taxes for 40 quarters (about 10 years), you can generally get premium-free Part A. (If you worked less than that, you may have to pay a premium, based on the number of quarters you worked and paid Medicare taxes, to enroll in Part A.)
- Most people pay the standard monthly premium for Part B coverage, which can change annually. If you have a higher income, there may be an additional amount added to the standard charge.
To enroll in a Medicare Advantage (Part C) plan, you generally pay a premium, although some insurers offer plans with monthly premiums as low as $0. When you choose Medicare Advantage, you still need to enroll in Part A and Part B—and pay the corresponding premiums.
Stand-alone Part D prescription drug plans also have varying monthly premiums, which are set by health insurance companies and may change annually. If you have a higher income, there may be a surcharge on top of your monthly premium.
Premiums for Medicare Supplement (Medigap) plans depend on factors such as the specific plan you choose, your location, and your age. Some plans may be discounted for women or nonsmokers, or for people who pay the full cost of a year all at once, make automatic payments from their bank account or credit card, or purchase multiple plans per household.
Medicare Supplement SELECT policies may have lower premiums but could require use of specific health care providers and medical facilities.
Penalties and other extra charges to avoid
Knowing when to sign up for Medicare can help you avoid financial penalties that could make your coverage more expensive.
Prescription drug coverage
It may be tempting to save money by skipping prescription drug coverage if you’re not currently taking medications. Why would you consider prescription coverage when you don’t take medication? Because that can change. According to data from CDC’s National Health Statistics Report, nearly 89% of US adults ages 65 and older took prescription drugs in 12 months (2021-2022).1
Even though you can add drug coverage to Original Medicare or a Medicare Advantage plan at certain times during the year, you may face financial penalties if you don’t buy it when you’re first eligible.
- The late enrollment penalty for prescription drug plans is 1% of the national average cost of a drug plan—for each month you delay enrolling. For example, if you enroll five months late, you pay a 5% penalty in addition to your premium every month.
- This is a permanent penalty and applies for as long as you’re enrolled in a Medicare Part D prescription drug plan. It doesn't decrease if you switch to a lower-cost plan.
- If you miss your Initial Enrollment Period (and don’t qualify for a Special Enrollment Period), you’d have to wait until the Annual Enrollment Period (Oct. 15–Dec. 7) to sign up.
Part A coverage
If you don’t qualify for premium-free Part A coverage (see above), be sure to sign up as soon as you’re eligible. If you delay, you could be charged an additional 10% for your premium. This penalty would stay in place for double the number of years you delayed. For example, if you delay for two years, you pay the penalty for four years.
Part B coverage
If you miss your window for enrolling in Part B coverage, you pay a penalty of 10% of your Part B premium for each 12-month period that you could have—but did not—enroll in Part B. For example, if you delayed your enrollment for three years, your enrollment penalty would be 30%. This is a permanent penalty and applies for however long you’re enrolled in Part B. Also, if you miss your window to enroll in Part B, you have to wait until the next January 1–March 31 enrollment period to enroll.
Health Savings Account (HSA)
To avoid paying a tax penalty, you and your employer must stop contributing to your HSA six months before your Medicare coverage begins. Find out more about How HSAs work with Medicare.
IRMAA surcharges
As mentioned above, having a higher income can mean paying a surcharge on standard Part B and Part D premiums. Calculated by the Social Security Administration (SSA), your Income Related Monthly Adjustment Amount (IRMAA) surcharge is based on your tax returns from two years ago and includes both your and your spouse’s income. Here are some tips for asking SSA to lower or remove your IRMAA surcharge.
Medicare Supplement
During the first six months you're enrolled in Part B, health insurers must offer you Medicare Supplement coverage at the best available rate (known as "guaranteed issue"). After that time, you may have to undergo medical underwriting, which takes your health status and history into account while determining your rate—and whether to accept you into the plan.
Other types of out-of-pocket expenses to consider
No matter what type of coverage you have, some Medicare expenses—in addition to premiums—will be your responsibility. Out-of-pocket costs can add up surprisingly fast, especially if you have a health issue or develop a chronic condition. The total can impact even the most carefully planned budget.
- Deductible: Your deductible is the fixed amount you must pay annually before your health plan begins to cover the agreed-upon portion of costs. Deductibles vary depending on the type of Medicare coverage you choose. (You may be responsible for 100% of the cost of your care until you meet your deductible. After you meet the deductible, you pay according to the terms of your coinsurance.)
- Copayment (or copay): Your copayment or copay is the fixed amount you pay for a service your health plan covers. For example, your copay for a medical appointment may be $30, even though your health plan pays the provider a larger, agreed-upon amount. Copays may vary depending on your coverage, and on the type of service, health care provider, or medical facility.
- Coinsurance: After you meet your deductible, your health plan may require you to pay a percentage of the cost of the health care services it covers. Coinsurance varies depending on the type of Medicare coverage you choose. (You may be responsible for 100% of costs until you meet your deductible.)
When are out-of-pocket costs capped?
Original Medicare generally pays for about 80% of covered Part B costs, but you pay the other 20%. There is no out-of-pocket maximum if you only have Original Medicare, with no additional coverage. That means there’s no limit to the amount encompassed in that 20%. While your share of lower-cost services may be manageable, 20% of a surgery or hospitalization may not be. Selecting a Medicare Advantage or Medicare Supplement plan would help with your 20% cost responsibility. Certain Medicare Supplement plans may cover some or all of the remaining 20% of costs.
Medicare Advantage plans cap your out-of-pocket costs for medical services. After you reach the annual limit, you don’t pay anything else for your covered services that year. While Medicare Advantage and Medicare Supplement plans sometimes have deductibles for medical services, they often use only copays and coinsurance.
While the cost of prescriptions was once a wildcard, the annual limit for out-of-pocket drugs is now $2,000, due to Inflation Reduction Act changes in effect as of 2025. The IRA also added a payment plan for prescription medications. You can now pay on a monthly basis instead of all at once at the pharmacy.
Uncovered services to watch out for
Keep in mind that there are Medicare doesn’t cover certain services and care Medicare doesn’t cover. While there are some exceptions, these are examples of services that you would have to pay for in full:
- Nonmedically necessary foot care
- Long-term care
- More than 100 days of care in a skilled nursing facility. There’s usually a required three-day inpatient hospital stay before it’s covered at all.
- Routine dental and vision care
- Hearing aids
- Cosmetic surgery
It’s important to be clear about the out-of-pocket and uncovered costs you may face. Like rates for your premiums, they can change from year to year. That makes it essential to evaluate your Medicare coverage regularly—and reduce your financial risk by expecting the unexpected.
Source
1. Centers for Disease Control and Prevention’s National Health Statistics Report, Sept. 5, 2024. Prescription Medication Use, Coverage, and Nonadherence Among Adults Age 65 and Older: United States, 2021–2022.
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