If you've ever thought about retiring early, one of the biggest concerns you probably have is how you'll deal with potential health-care costs. Because most people get their health insurance through their employers, individuals seeking coverage on their own often face extremely high premiums and have trouble finding insurance at all. Especially if you currently have a medical condition that involves considerable expense, you might be nervous about leaving the security of your employer and its health plan.
However, there's a light at the end of the tunnel. When you turn 65, you're automatically eligible for Medicare, which provides many of the same medical services that private health insurance covers. Because Medicare is such a vital part of most seniors' financial plans, understanding how it works is important, even if you're only starting to plan for your retirement.
The original parts of Medicare
When the Medicare program was signed into law in 1965, it had two basic components. The first, known as Part A, covers many of the costs of medical facilities during your stay as a patient. For instance, Part A helps to cover the cost of a hospital room while you're receiving inpatient care. Under some circumstances, it also covers costs for home health services, hospice care, and skilled nursing facilities. However, nursing home costs are covered only for limited purposes and time periods. To get Medicare coverage for any of these costs, they must be considered medically necessary.
The other original component of Medicare, Part B, covers the costs of medical care, including office visits to doctors, outpatient medical procedures, and laboratory tests. It also helps cover the cost of services related to medical care, including ambulance services, mobility equipment such as wheelchairs and electric scooters, oxygen tanks, and hospital beds for use in your home. In addition to providing coverage for health-care needs that qualify as medically necessary, Part B also covers certain preventive-care services, such as screening for heart conditions, diabetes, and certain types of cancer.
Government and private insurance as partners
Medicare Parts A and B are operated and managed directly by the U.S. Department of Health and Human Services. However, Medicare has also approved similar plans that private insurance companies offer. Under these "Medicare Advantage Plans," sometimes referred to as Part C, Medicare pays a certain amount to the plan provider to help subsidize your insurance coverage. Such plans are required to include the same coverage that Parts A and B provide. The main differences are in the way that services are provided and in what guidelines and limitations the insurance companies impose. Among the insurance companies providing these benefits in certain states are Aetna (NYSE: AET ) , UnitedHealth Group (NYSE: UNH ) , and Humana (NYSE: HUM ) .
There are several different types of plans under Part C. Preferred provider organization plans often offer networks of physicians and other health-care professionals at a lower cost than traditional Medicare provides, although if you need to consult someone outside the network, your costs could be higher. Health maintenance organization plans require that you choose a primary care physician and obtain referrals from that doctor if you need to see a specialist; without a referral, your insurance company may deny you the full benefits of the HMO plan.
Depending on the plan you choose, you may get more benefits under a Medicare Advantage Plan than under traditional Medicare. For instance, many private plans integrate the medical care under Parts A and B with prescription drug coverage. Some of these plans, on the other hand, require that you pay higher premiums than Medicare charges for Parts A and B.
Recently, Medicare added prescription-drug coverage, also known as Medicare Part D. This portion differs from other Medicare services in that seniors have multiple options in choosing their drug coverage. While coverage under Parts A and B is uniform for everyone enrolled in Medicare, the benefits that seniors receive under Part D may vary widely, depending on which prescription-drug plan they select.
The common thread among all Medicare Part D plans is that they cover at least a portion of the costs of prescription drugs. Beyond that, it's difficult to make generalizations. Certain drugs may be unavailable under one plan and completely covered under another. One plan may offer full coverage, while another may cover only a fraction of the cost of drugs. Because the particular benefits that various prescription-drug plans offer are so different, choosing from among the plans requires a great deal of forethought. In many cases, it's impossible to be certain in advance which plan will work best. That presents seniors with a dilemma. Furthermore, many plans have a significant gap in coverage, colloquially known as the doughnut hole, which can create unexpected out-of-pocket expenses.
Overall, Medicare provides comprehensive coverage for many medical expenses that seniors face. As with most things, though, these benefits don't come without cost. The second part of this article examines the ways in which Medicare charges seniors for medical coverage.
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Fool contributor Dan Caplinger isn't anywhere close to getting Medicare, but he's had plenty of experience with those who do. He doesn't own shares of the companies mentioned in this article. UnitedHealth is a Stock Advisor and Inside Value recommendation. The Fool's disclosure policy is there for you both before and after you turn 65.