Understanding the rules and costs of Medicare can help you plan for your healthcare needs. But to truly comprehend Medicare, you first need to become familiar with some important — yet often confusing — terms.
Even if you’ve dealt with insurance in the past, Medicare has its own language and uses special words and phrases that apply only to its plans and coverage. Knowing what these terms mean and how they apply to Medicare can help you sort through information, navigate the process, and make the best healthcare choice you can.
Here are the most common terms you may see when exploring your Medicare options:
Amyotrophic lateral sclerosis (ALS)
ALS is a condition that causes muscle deterioration and eventually leads to death. It’s also referred to as Lou Gehrig’s disease, named after major league baseball player Lou Gehrig, who died of ALS in 1941.
If you have ALS, you’re eligible for Medicare even if you’re not 65 years old. And you’re eligible right away — without the 2-year waiting period typically required for Medicare eligibility when you’re under 65 years old and have a chronic disability.
You start receiving what’s called catastrophic coverage once you reach a maximum amount of out-of-pocket spending for your prescription drugs for the year.
In 2020, catastrophic coverage begins at $6,350. Once you reach this amount, you will pay only a small copay or coinsurance for the rest of the benefit year.
Centers for Medicare & Medicaid Services (CMS)
CMS is a federal agency that oversees Medicare and Medicaid, as well as the facilities that contract with them. Regulations published by CMS ensure that all facilities that accept Medicare and Medicaid for payment meet certain standards.
A claim is a request for payment sent to an insurance plan like Medicare. Then, either Medicare or the insurance company providing coverage will process the claim and pay the provider (healthcare professional or facility). Medicare or the insurance company can reject the claim if the service isn’t covered or required conditions weren’t met.
The coinsurance cost of a service is a percentage of the total cost that you’re responsible for. Medicare Part B has a coinsurance of 20 percent of the Medicare-approved amount of most covered services. This means that Medicare will pay 80 percent of the cost and you’ll pay the remaining 20 percent.
A copay, or copayment, is a set amount you pay for a certain service. Your plan covers the remaining cost. For example, your Medicare Advantage plan might have a $25 copay for every doctor’s visit.
The coverage gap, also called the donut hole, refers to a period when you may pay more for your prescription drugs. In 2020, once you and your Medicare Part D plan have paid a total of $4,020 toward your prescriptions, you are officially in the coverage gap. This period ends once you reach the $6,350 required to receive catastrophic coverage.
In the past, this coverage gap left Medicare beneficiaries paying out of pocket for all their prescription medications. But recent changes to insurance laws by the Affordable Care Act have made this gap easier to manage.
Beginning January 1, 2020, rather than paying 100 percent out of pocket, you’ll pay 25 percent of the cost for covered generic and brand-name medications while you’re in the coverage gap.
A deductible is the amount you need to pay out of pocket for a service before your Medicare plan will pay any costs. In 2020, the Medicare Part B deductible is $198.
So, you’ll pay the first $198 out of pocket for healthcare services. After that, your Medicare plan will begin to pay.
The donut hole is another term used to describe the coverage gap between the Part D payment limit and the maximum payment for the year.
Durable medical equipment (DME)
DME includes medical supplies you might need in your home to manage a condition. DME includes things like home oxygen tanks and supplies or mobility aids like walkers. Your Medicare Part B plan covers DME that a Medicare-approved doctor has ordered for you.
End stage renal disease (ESRD)
ESRD is the last stage of renal disease, also called kidney disease. The kidneys of people with ESRD no longer function. They need dialysis treatment or a kidney transplant.
If you have ESRD, you can receive Medicare without the 2-year waiting period, even if you’re under age 65.
Extra Help is a Medicare program that helps participants cover the cost of Medicare Part D. Extra Help programs are based on your income and can help you with coinsurance or premium costs.
A formulary is a list of medications that a specific Part D plan covers. If you take a medication that’s not on your plan’s formulary, you’ll need to either pay out of pocket or ask your doctor to prescribe a similar medication that your plan covers.
General enrollment period
You can enroll in original Medicare (parts A and B) every year between January 1 and March 31. This is known as the general enrollment period. To use this window, you’ll need to be eligible for Medicare but not already receiving coverage.
Health Maintenance Organization (HMO) plans
Medicare Advantage (Part C) plans might be offered in a few different formats, depending on your location. HMOs are a popular Advantage plan type. With an HMO, you are required to use a set network of healthcare providers and facilities if you want your Medicare plan to cover the costs. You may also be required to choose a primary physician and get referrals from that doctor if you want to see specialists.
Income-related monthly adjustment amount (IRMAA)
Medicare beneficiaries who make more than $87,000 will pay more than the standard $144.60 Part B monthly premium. This increased premium is called an IRMAA. The higher your income, the more your IRMAA will be, up to a maximum of $491.60.
Initial enrollment period
Your initial enrollment period is a 7-month window that starts 3 months before the month of your 65th birthday. This is when you’re first able to sign up for Medicare. The enrollment period ends 3 months after your birthday month.
For example, if you turn 65 years old in August 2020, your initial enrollment period would run from May 2020 through November 2020.
Late enrollment penalty
If you don’t enroll in Part B when you first become eligible for Medicare, you might need to pay a late enrollment penalty when you do enroll.
Generally, you’ll pay an additional 10 percent for each year you were not enrolled. The penalty amount is added to your monthly premium payment.
You won’t pay a late enrollment penalty if you qualify for a special enrollment period.
Medicaid is a health insurance program designed for individuals with limited incomes. Medicaid programs are administered by each state, so rules and exact program details can vary.
If you qualify for Medicaid, you can use it alongside Medicare and reduce or eliminate your out-of-pocket expenses.
Medicare Advantage (Part C)
Medicare Advantage plans are also called Medicare Part C plans. They’re offered by private companies that contract with Medicare.
Advantage plans take the place of original Medicare (Part A and Part B). All Medicare Advantage plans must cover everything that parts A and B cover. Plus, many plans add additional coverage for things like dental care, vision services, or medications.
Medicare Advantage plans have their own premiums, deductibles, and other out-of-pocket costs.
Medicare has set prices that it will pay for healthcare services. This set price is called the Medicare-approved amount. All healthcare facilities that accept Medicare have agreed to charge these approved amounts for services.
Medicare Part A
Medicare Part A is hospital insurance. It covers your stays in the hospital, as well as stays in long-term care facilities. You can also get some coverage for home health or hospice care.
Medicare Part B
Medicare Part B is medical insurance. It covers things like doctor’s visits, specialist’s visits, mental health, and durable medical equipment. Part B also covers urgent care and visits to the emergency room.
Medicare Part C
Medicare Advantage is sometimes referred to as Medicare Part C. The two terms refer to the same program. So, a Part C plan is an Advantage plan.
Medicare Part D
Medicare Part D is separate coverage for prescription drugs. Medicare parts A and B offer only limited outpatient prescription drug coverage, so some beneficiaries choose to purchase additional coverage with a Part D plan. Your Part D plan will have a separate premium.
Medicare savings accounts
A Medicare savings account (MSA) is a type of Medicare Advantage plan with a high deductible and an attached savings account. MSA plans deposit money into the savings account, which can be used to pay for your medical expenses before you meet your deductible.
Medigap plans are supplement plans that help you pay for the out-of-pocket costs of original Medicare. There are 10 different Medigap plans.
These plans are offered by companies that contract with Medicare. Your Medigap costs can vary depending on your state.
Open enrollment period
Open enrollment periods occur at a set time every year, from October 15 through December 7. During the open enrollment window, you can sign up for an Advantage plan, purchase Medigap, and more.
Your original enrollment period is when you first enroll in Medicare. This is often during initial enrollment period, in the 7-month window around your 65th birthday. If you’re under age 65, it can also be 2 years after you begin receiving Social Security disability benefits.
Medicare parts A and B together are often referred to as original Medicare, or traditional Medicare. Original Medicare doesn’t include Part C (Advantage plans), Part D, or Medigap plans.
Your out-of-pocket costs are the amounts you pay for your healthcare. They may include your deductible, coinsurance, and copayment amounts.
The out-of-pocket maximum is a cap on the amount of money you will pay for approved healthcare services in any specific year. Once you reach this amount, Medicare will pick up all costs for these approved services.
Out-of-pocket maximums include copayment and coinsurance amounts. Only Medicare Advantage (Part C) plans have them. Each Medicare Advantage plan can set this amount, so it may vary. In 2020, an out-of-pocket maximum cannot exceed $6,700 per year.
A participating provider is a healthcare provider who contracts with Medicare to provide a service or who is part of the network for an HMO or PPO plan. Participating providers have agreed to accept the Medicare-approved amount for services and to treat Medicare beneficiaries.
Preferred Provider Organization (PPO) plans
PPOs are another popular type of Medicare Advantage plan. Like an HMO, PPOs work with a set network of providers. With a PPO, though, you can go outside your network if you’re willing to pay higher copayment or coinsurance amounts.
A premium is a monthly amount you pay for insurance coverage. Since most people pay no premium for Medicare Part A, you’ll usually pay a premium for only Part B when you have original Medicare. The Part B premium in 2020 is $144.60.
Medicare Advantage plans, Part D plans, and Medigap plans are sold by private insurance companies. These may charge a different premium depending on the company or plan you choose.
Primary care provider (PCP)
Your PCP is the doctor who sees you for routine and preventive care, such as annual physicals. Under some Medicare Advantage HMO plans, you’ll need to work with an in-network PCP. And if you need specialized care, your PCP will have to make a referral for your plan to cover this care.
Private Fee-For-Service (PFFS) plans
A PFFS plan is a less common type of Medicare Advantage plan that does not have a network or require you to have a primary physician. Instead, you’ll pay a set amount for each service you receive from any Medicare-approved facility.
Special Needs Plans (SNP)
Some companies offer Medicare Advantage plans known as SNPs. An SNP is designed for beneficiaries with special financial or healthcare needs.
For example, you might see SNPs specifically for:
- people who live in nursing facilities
- people with limited incomes
- people managing a chronic condition like diabetes
Special enrollment period (SEP)
An SEP is a window that allows you to enroll in Medicare outside of initial or general enrollment time frames. SEPs occur when you have a major life change, such as moving to a new coverage area or retiring from a job that had been providing your health insurance.
After your change or life event, you’ll have an 8-month window to sign up for Medicare. If you enroll during this period, you won’t pay a late enrollment penalty.
Social Security Administration (SSA)
The Social Security Administration (SSA) is a federal agency that oversees retirement and disability benefits. If you receive SSA benefits, you can receive Medicare Part A premium-free. If you’ve been receiving Social Security disability benefits for 2 years, you’ll be automatically enrolled in Medicare, even if you’re under age 65.
Two-year waiting period
You can get Medicare if you’re under 65 and have a chronic disability. You’ll need to qualify for Social Security disability income and receive it for 2 years before Medicare coverage begins. This is known as the 2-year waiting period.
It’s important to note that this 2-year waiting period doesn’t apply to people with ESRD or ALS.
Work credits determine your eligibility for Social Security benefits and for premium-free Part A. You earn work credits at a rate of 4 per year — and you’ll generally need 40 credits to receive premium-free Part A or SSA benefits. Younger workers who become disabled can qualify with fewer credits.