Understanding Your Medicare Costs: A Detailed Terminology Guide for Beneficiaries

Understanding Medicare costs is key to making informed decisions about your healthcare.

However, in my time as a Broker, I've noticed that even after most individuals have been making healthcare decisions for quite some time, terms like premium, deductible, maximum out-of-pocket cost, copay, coinsurance, and cost sharing?still lead to confusion.

In this article, we'll break down these terms to help you better understand them and then explain how they specifically apply to different parts of Medicare — Part A, Part B, Part D, and Medicare Supplement plans — so you can navigate your healthcare costs with confidence.

In general, Cost Sharing is the general term that encompasses all the ways you share in the costs of your healthcare services, including premiums, deductibles, copays, and coinsurance.

Premiums

A premium is the amount you pay each month to keep your insurance active. Just like car insurance or home insurance, Medicare requires you to pay a premium to maintain your coverage. Depending on the type of Medicare plan you have, premiums can vary.

The reason that beneficiaries may lean toward Medicare Advantage plans is because of the $0 premiums.

Deductibles

A deductible is the amount you pay out of pocket before your Medicare coverage begins to pay for services. Think of it as a threshold; you cover the costs up to a certain point, and once you reach that point, your insurance kicks in.

Maximum Out-of-Pocket Costs

Your maximum out-of-pocket cost is a cap on how much you have to pay for covered healthcare services in a year. After you reach this amount, your plan covers 100% of the costs for the rest of the year. This is a crucial protection against high medical bills.

This is important to note because like we discussed in our last post, Medicare 101, when you're on Original Medicare (Part A and Part B) -- Original Medicare covers 80% of your medical costs. You'll likely need a supplemental plan of some sort in order to cover the remaining 20%. Medicare Advantage plans cap that out of pocket costs with your MOOP.

Copays

A copay is a fixed amount you pay for a specific service or prescription, like a specialty doctor’s visit, physical therapy session or a medication. This amount is usually small and predictable, making it easier to manage your healthcare costs.

Coinsurance

Coinsurance is your share of the costs of a covered service, calculated as a percentage of the total charge. For instance, if your coinsurance is 20%, you pay 20% of the cost, and Medicare pays the other 80%. For example, Jim has a denture bill of $7,000 with a coinsurance of 20% -- His private health care plan will cover $5,600 and he would be responsible for $1,400.

Now that we’ve clarified these terms, let’s see how they apply to each part of Medicare: Part A, Part B, Part D, and Medicare Supplement plans.

Medicare Part A: Hospital Insurance

• Premiums: Most people don’t pay a monthly premium for Part A if they’ve paid Medicare taxes for at least 10 years. If you haven't met this requirement, you may have to pay a premium.
• Deductibles: In 2024, the Part A deductible is $1,600 per benefit period. A benefit period is your use of inpatient hospital and skilled nursing facility (SNF) services. The benefit period begins the day you are admitted to a hospital as an inpatient, or to a SNF, and will end the day you have been out of the hospital or SNF for 60 days in a row. This deductible applies to each hospital stay, not annually.

Medicare Part B: Medical Insurance

• Premiums: Medicare Part B covers doctor visits, outpatient care, preventive services, and certain medical equipment. However, this coverage isn’t free. You pay a monthly premium for Part B, which is determined by your income level. In 2025, the standard Part B premium is expected to increase slightly due to rising healthcare costs. Here’s how it breaks down:

Most people have their Part B premium automatically deducted from their Social Security benefits.

• Deductibles: In 2025, the Part B deductible is $240. After you meet this deductible, Medicare covers 80% of the approved amount for services, and you pay the remaining 20%.

Medicare Part D: Prescription Drug Coverage

• Premiums: The premium for Part D is separate from Part B and is paid to the private insurer that provides your drug plan.
• Deductibles: Many Part D plans have an annual deductible, which can be up to $545 in 2024.
• Maximum Out-of-Pocket Costs: In 2025, the maximum out of pocket cost is $2,000.
• Copays and Coinsurance: Depending on your Part D plan, you’ll pay copays or coinsurance for your prescriptions. These amounts vary by drug tier and plan.

Medicare Advantage (Part C) Plans

Medicare Advantage plans, also known as Part C, are offered by private insurance companies and provide an alternative to Original Medicare (Parts A and B). These plans often include additional benefits like dental, vision, and hearing coverage, as well as prescription drug coverage. Let’s break down how the key terms apply to Medicare Advantage plans:

• Premiums: Most Medicare Advantage plans have a $0 monthly premium, which is separate from your Part B premium. In some cases, these premiums can be as low as $0, but you still need to pay the Part B premium.
• Deductibles: Medicare Advantage plans may have their own deductibles for medical services and prescription drugs. These deductibles vary by plan, so it's essential to review your plan’s specific details.
• Maximum Out-of-Pocket Costs: One of the biggest advantages of Medicare Advantage plans is that they include a maximum out-of-pocket limit. This cap provides significant financial protection by limiting how much you pay for covered services in a year. Once you reach this limit, the plan covers 100% of your healthcare costs for the rest of the year.
• Copays and Coinsurance: Medicare Advantage plans often use a copay structure, where you pay a fixed amount for services like doctor visits, specialist appointments, or prescription drugs. Some plans might also include coinsurance, where you pay a percentage of the service cost. The specific copay and coinsurance amounts vary depending on the specific plan and the services provided.

Let’s utilize a real-life scenario to illustrate how these terms work with a Medicare Advantage plan:

Imagine Mary, a 68-year-old retiree, is enrolled in a Medicare Advantage plan with a $0 monthly premium, a $500 annual medical deductible, and a $4,000 maximum out-of-pocket limit.

She recently had surgery, which cost $10,000.

Here’s how her costs would break down:

• Premiums: Mary pays $0 for her Medicare Advantage plan, but she still pays her standard Part B premium.
• Deductible: Mary pays the first $500 of her surgery costs because her plan requires her to meet this deductible before coverage kicks in.
• Copay/Coinsurance: After meeting her deductible, Mary pays a 20% coinsurance for the remaining $9,500, which amounts to $1,900.
• Maximum Out-of-Pocket Costs: Since Mary’s total out-of-pocket expenses for the surgery ($500 deductible + $1,900 coinsurance) amount to $2,400, she’s still within her plan’s $4,000 out-of-pocket limit. If she incurs additional medical costs later in the year, her expenses will continue to count towards this limit. Once she reaches $4,000, her plan will cover 100% of her covered medical expenses for the rest of the year.

Medicare Supplement (Medigap) Plans

Medicare Supplement plans are designed to cover some of the costs that Original Medicare doesn’t, including deductibles, copays, and coinsurance.

• Premiums: You pay a monthly premium to the private insurance company that provides your Medigap plan. This is in addition to your Part B premium.
• Deductibles: Some Medigap plans cover the Part A and Part B deductibles. For example, Plan G covers the Part B coinsurance and excess charges but does not cover the Part B deductible.
• Maximum Out-of-Pocket Costs: Medigap plans can reduce or eliminate your out-of-pocket costs, but they do not have their own maximum out-of-pocket limit. However, they are designed to cover nearly all the costs Original Medicare doesn’t.
• Copays and Coinsurance: Most Medigap plans cover all or part of your Part B coinsurance (usually 20%) and may cover hospital costs beyond what Medicare Part A covers.

Navigating Medicare and it's costs doesn’t have to be confusing. By understanding how premiums, deductibles, maximum out-of-pocket costs, copays, coinsurance, and cost sharing work with your coverage, you can make informed decisions about your coverage. If you need assistance in reviewing your current plan or exploring new options, don’t hesitate to reach out—I’m here to help guide you through your Medicare journey.