How Medicare Works: Parts A, B, C, and D Explained

What Is Medicare?

Medicare is a federal health insurance program administered by the Centers for Medicare & Medicaid Services (CMS). It primarily serves Americans aged 65 and older, but also covers people under 65 who have received Social Security Disability Insurance (SSDI) for 24 months, those with End-Stage Renal Disease (ESRD), or those diagnosed with ALS (Lou Gehrig's disease).

Medicare is not free insurance — beneficiaries pay premiums, deductibles, and copayments. Understanding how each "part" works, what it costs, and how the pieces fit together is essential for making sound healthcare decisions in retirement. Poor Medicare choices can cost thousands of dollars per year in unnecessary premiums or uncovered medical bills.

Medicare Part A: Hospital Insurance

Part A covers inpatient hospital care, skilled nursing facility (SNF) care following a qualifying hospital stay, hospice care, and some home health services.

Premium: Most people pay $0 for Part A because they or their spouse paid Medicare taxes for at least 40 quarters (10 years) of work. Those with fewer than 30 quarters of work pay the full premium, which is $505/month in 2026.

Medicare Part B: Medical Insurance

Part B covers outpatient care: doctor visits, preventive services, durable medical equipment, lab tests, outpatient surgery, and some home health care. Part B is where most of your routine medical costs are covered.

2026 standard premium: $185/month. However, higher-income beneficiaries pay more through the Income-Related Monthly Adjustment Amount (IRMAA):

Deductible: $257/year (2026). After the deductible, Medicare pays 80% and you pay 20% — with no out-of-pocket maximum in Original Medicare. This 20% exposure is why most beneficiaries purchase supplemental (Medigap) insurance.

Medicare Part C: Medicare Advantage

Part C, known as Medicare Advantage, is not a separate benefit — it is an alternative way to receive your Medicare benefits. Instead of using Original Medicare (Parts A and B) directly through the federal government, you enroll in a private insurance plan approved by Medicare that delivers your Part A and B coverage, and usually Part D prescription drug coverage as well.

Medicare Advantage plans often include additional benefits that Original Medicare doesn't cover: dental, vision, hearing, fitness memberships, and over-the-counter allowances. Many have $0 monthly premiums (beyond the Part B premium you always pay).

Choosing between Original Medicare with a Medigap supplement and Medicare Advantage is one of the most consequential healthcare decisions retirees make. The right choice depends on your health status, preferred doctors, geographic situation, and financial priorities.

Medicare Part D: Prescription Drug Coverage

Part D is voluntary prescription drug insurance provided through private insurers approved by Medicare. If you have Original Medicare, you must purchase a stand-alone Part D plan to get drug coverage. Medicare Advantage plans typically include Part D coverage.

How Part D works (2026 structure):

• Deductible: Up to $590/year (plan-specific; many plans have $0 deductible for preferred drugs)
• Initial coverage: You pay copays or coinsurance until total drug costs hit $2,000
• Catastrophic coverage: After $2,000 in out-of-pocket costs, you pay nothing for covered drugs for the rest of the year (a major 2025 reform eliminated the former "donut hole" and replaced it with this $2,000 cap)

Part D plans use a formulary — a list of covered drugs organized into tiers. Generic drugs are cheapest (Tier 1); brand-name preferred drugs cost more (Tier 3); specialty drugs are most expensive (Tier 5). If your medication isn't on the formulary, you can request an exception.

Late enrollment penalty: If you go 63 or more consecutive days without creditable drug coverage after becoming eligible, you pay a permanent late enrollment penalty of 1% of the national base beneficiary premium for each month you went without coverage.

Enrollment: Timing Is Everything

Medicare enrollment rules are complex and the penalties for missing deadlines are permanent:

Many people working past 65 with employer insurance delay Medicare enrollment — this is generally fine if your employer plan is primary coverage, but you must carefully navigate the transition to avoid gaps or penalties. COBRA coverage does NOT count as qualifying coverage for SEP purposes.

Medigap (Medicare Supplement Insurance)

Medigap policies are sold by private insurers to cover Original Medicare's cost-sharing: the Part A hospital deductible, the Part B 20% coinsurance, and other gaps. Medigap Plan G (the most comprehensive plan available to new enrollees) covers virtually everything except the Part B deductible ($257), giving you near-total predictability of healthcare costs. Medigap premiums vary widely by insurer, location, and age — typically $100–$300/month.

The golden window for Medigap: during your 6-month Medigap Open Enrollment Period (starting the month you turn 65 and have Part B), insurers cannot deny coverage or charge more based on health conditions. After this window, medical underwriting applies and you may be denied or charged more.