Medicare costs you money in four ways: premiums, deductibles, copayments, and coinsurance

Most people think of Medicare as one bill, but it is actually four separate costs that hit at different times. You pay a monthly premium to enroll. You pay a deductible before coverage kicks in each year. Then for each service — a doctor visit, a hospital stay, a prescription — you pay either a fixed copayment or a percentage of the cost called coinsurance. The amount you pay depends on which part of Medicare you have, whether you have supplemental coverage, and your income.

The costs are real and they add up. A person on Original Medicare (Parts A and B) with no supplemental coverage can face thousands of dollars in out-of-pocket costs in a single year. A person on a Medicare Advantage plan (Part C) might pay less upfront but hit an annual cap called a maximum out-of-pocket limit. Understanding what you actually owe — not what Medicare pays — is the only way to budget for healthcare in retirement.

Key Takeaways

  • Medicare Part A (hospital) and Part B (doctor) each have their own monthly premium, annual deductible, and per-service costs that vary by year.
  • Part D (prescription drugs) adds a separate monthly premium and has its own deductible, coverage gap, and out-of-pocket maximum.
  • Medicare Advantage plans (Part C) bundle Parts A, B, and usually D into one plan with a single deductible and maximum out-of-pocket limit, but often require you to use in-network providers.
  • Your income determines whether you pay higher premiums for Parts B and D through Income-Related Monthly Adjustment Amounts (IRMAA).
  • Medigap (supplemental insurance) covers many of the costs Medicare does not, but you pay a separate monthly premium for it.

Part A and Part B premiums and deductibles

Most people do not pay a monthly premium for Part A (hospital insurance) because they or their spouse paid Medicare taxes while working. If you did not work long enough, you can buy Part A, but the premium varies based on how many quarters of work history you have.

Part B (doctor and outpatient services) has a monthly premium that changes every year. The standard amount is set by Medicare each January, but if your income is above a certain threshold, you pay more through an Income-Related Monthly Adjustment Amount (IRMAA). The income threshold is based on your tax return from two years prior, so a large one-time income event (a home sale, a retirement account withdrawal) can raise your Part B premium for the next two years.

Both Part A and Part B have annual deductibles. Part A's deductible applies to hospital stays. Part B's deductible applies to doctor visits, outpatient surgery, and most other services. Once you meet the deductible, you still pay coinsurance — usually 20 percent of the Medicare-approved amount — for most Part B services.

Part D prescription drug costs and the coverage gap

Part D is separate from Parts A and B. It covers prescription drugs through private insurance companies that contract with Medicare. You choose a plan during the annual enrollment period (October 15 to December 7), and each plan has its own premium, deductible, and list of covered drugs.

Part D has a structure that confuses many people: you pay your deductible, then you pay a copayment or coinsurance for each prescription until you reach a spending threshold (called the initial coverage limit). Once you cross that threshold, you enter the coverage gap — a zone where you pay a higher percentage of the drug cost. After you spend enough out of pocket to reach the catastrophic threshold, Medicare covers most of the cost and you pay only a small copayment per drug.

Your income also affects Part D premiums through IRMAA. If you have higher income, you pay a surcharge on top of the plan premium. The income threshold is the same as for Part B, and it is based on your tax return from two years prior.

Medicare Advantage plan costs and maximum out-of-pocket limits

Medicare Advantage (Part C) is an alternative to Original Medicare. Instead of enrolling in Parts A, B, and D separately, you enroll in one Advantage plan run by a private insurance company. The plan covers all three parts and usually includes prescription drugs.

Advantage plans often have lower or zero monthly premiums than Original Medicare plus Medigap, but they come with a maximum out-of-pocket limit — a cap on how much you pay in a calendar year for in-network services. Once you hit that limit, the plan covers 100 percent of in-network costs for the rest of the year. The limit varies by plan and by year, but it is usually between $5,000 and $10,000.

The catch is that Advantage plans require you to use in-network providers. If you see an out-of-network doctor, you pay more — sometimes the full cost. Some plans require referrals to see specialists. Some have prior authorization rules that delay treatment. The lower upfront cost can mean higher hassle and less choice about where you get care.

Medigap supplemental insurance premiums

If you have Original Medicare (Parts A and B), you can buy Medigap (supplemental insurance) to cover the costs Medicare does not. Medigap plans are lettered (Plan A, Plan B, Plan C, and so on), and each letter covers a different set of costs. A comprehensive plan like Plan G covers most of your deductibles and coinsurance. A basic plan like Plan A covers less.

Medigap premiums vary widely depending on your age, your location, the plan letter, and the insurance company. A 65-year-old in one state might pay $100 a month for Plan G, while a 75-year-old in another state might pay $300. The best time to buy Medigap is within six months of turning 65 and enrolling in Part B, because insurers cannot deny you or charge you more based on health conditions during that window. After that window closes, they can underwrite you and charge more if you have pre-existing conditions.

Income-Related Monthly Adjustment Amounts (IRMAA) and higher earners

If your income is above a certain level, Medicare charges you higher premiums for Parts B and D. This surcharge is called an Income-Related Monthly Adjustment Amount. The income threshold changes every year, and it is based on your Modified Adjusted Gross Income (MAGI) from your tax return filed two years before.

For example, if you are filing your 2024 taxes in 2025, Medicare will use that income to set your 2027 premiums. This two-year lag means a large income event — selling a house, taking an early retirement distribution, receiving an inheritance — can raise your premiums years after the money is gone. You can request a recalculation if your current income is lower than your tax return from two years prior, but you must file a form with Social Security.

The income thresholds are the same for Parts B and D, but the surcharge amounts are different. Part B surcharges are higher. If you are married and file jointly, the threshold applies to your combined income. If you are married and file separately, the threshold is much lower and the surcharge is much higher.

What changes year to year and when to expect bills

Medicare costs are not fixed. The Part B premium, the Part A deductible, the Part B deductible, and the Part D deductible all change on January 1 each year. Medicare announces the new amounts in the fall, usually in October or November. If you receive Social Security, your Part B premium is deducted automatically. If you do not receive Social Security, you receive a bill from Medicare.

Part D plans also change every year. The premium, the deductible, the list of covered drugs, and the copayments can all shift. A drug that was covered under your plan last year might not be covered this year, or it might move to a higher tier with a higher copayment. This is why it is important to review your Part D plan every October during the annual enrollment period and switch to a different plan if your current one no longer fits your needs.

Medigap premiums can increase every year, and the rate of increase varies by company and by state. Some companies use age-based pricing (your premium goes up as you get older), some use issue-age pricing (your premium is locked based on the age you bought the plan), and some use community rating (everyone in the state pays the same price regardless of age). The pricing method affects how much you pay over time.

Frequently Asked Questions

Do I have to pay for Medicare if I am still working?

If you are still working and have employer health insurance, you do not have to enroll in Medicare. However, if you do not enroll in Part B when you first become may be able to access, you may face a permanent penalty when you do enroll later. Part A has no penalty. If you are unsure whether to enroll, contact Social Security or Medicare to discuss your specific situation.

What happens if I cannot afford my Medicare premiums?

If your income is low, you may be able to get help paying premiums and out-of-pocket costs through Medicaid or through Medicare Savings Programs run by your state. These programs have income limits that vary by state. You can contact your state Medicaid office or call 1-800-MEDICARE to find out whether you may have access to.

Can I switch from Original Medicare to Medicare Advantage or back?

You can switch during the annual enrollment period (October 15 to December 7) or during the Medicare Advantage Open Enrollment period (January 1 to March 31). If you switch from Original Medicare to Advantage, you lose your Medigap coverage. If you switch back to Original Medicare, you may not be able to buy Medigap again without underwriting, depending on your state and how long you were on Advantage.

Why does my Part B premium depend on my income from two years ago?

Medicare uses your tax return from two years prior to calculate IRMAA because that is the most recent tax information available when they set premiums. If your income has dropped significantly since then — you retired, you had a major loss — you can request a recalculation by filing a form with Social Security. You will need to show proof of the change.

Is there a maximum out-of-pocket cost for Original Medicare?

Original Medicare does not have a maximum out-of-pocket limit. You can face unlimited costs for coinsurance and copayments. This is one reason many people buy Medigap supplemental insurance — it caps your costs. Medicare Advantage plans do have a maximum out-of-pocket limit, but it applies only to in-network services.