5.3 Medicare Structure (Parts A, B, C, D) & Medigap Supplements

Medicare Structure (Parts A, B, C, D) & Medigap Supplements

Core Principle: Healthcare is the single largest non-discretionary liability facing retirees. Navigating Medicare requires understanding the four distinct components of the system, the crucial trade-offs between Original Medicare with Medigap versus Medicare Advantage, and the major structural reforms enacted under the Inflation Reduction Act.

The Core Architecture: Medicare Parts A, B, C, and D

Medicare is the federal health insurance program enacted in 1965 for individuals aged 65 and older and certain younger individuals with permanent disabilities or End-Stage Renal Disease (ESRD). Medicare is divided into four distinct operational components:

1. Part A: Hospital Insurance

Part A covers inpatient hospital care, short-term skilled nursing facility (SNF) rehabilitation, limited home healthcare, and hospice care.

• Financing and Eligibility: Premium-free for individuals (or their spouses) who accumulated at least 40 credits (10 years) of Medicare-covered employment. Individuals with 30 to 39 credits pay a reduced monthly premium, while those with fewer than 30 credits pay the full statutory premium.
• The Benefit Period Concept: Part A cost-sharing is governed by benefit periods, not calendar years. A benefit period begins the day a patient is admitted to a hospital or SNF and ends when the patient has been out of the facility for 60 consecutive days.
• Cost-Sharing Structure: For each new benefit period, the patient pays an inpatient hospital deductible ($1,736 in 2026). Days 1 through 60 carry no daily coinsurance. Days 61 through 90 cost $434 per day in 2026. Days 91 through 150 draw on 60 non-renewable lifetime reserve days at $868 per day. Beyond day 150, the patient is responsible for 100% of all hospital costs.

2. Part B: Medical Insurance

Part B covers outpatient medical care, including physician visits, outpatient surgeries, diagnostic testing, physical therapy, durable medical equipment (DME), and preventive screenings.

• Financing: Funded through general federal tax revenues and beneficiary monthly premiums. Beneficiaries pay a baseline standard monthly premium (deducted directly from Social Security checks) plus a modest annual deductible.
• The 80/20 Coinsurance Danger: After satisfying the annual Part B deductible, Medicare pays 80% of Medicare-approved charges, leaving the beneficiary responsible for 20% coinsurance.
• Critical Risk: Original Medicare Part B features no annual out-of-pocket maximum. A retiree undergoing $200,000 of outpatient cancer immunotherapy without supplemental insurance faces an uncapped $40,000 cash coinsurance liability.

3. Part C: Medicare Advantage

Part C (Medicare Advantage) is an alternative delivery system where private, Medicare-approved commercial insurers (such as UnitedHealthcare, Humana, or Aetna) contract with the federal government to provide all Part A and Part B benefits.

• Structure: Plans operate as managed care organizations, primarily Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs).
• Key Protections & Bundling: Most Medicare Advantage plans include bundled Part D prescription drug coverage (MAPD) and offer supplemental benefits (routine dental, vision, hearing, and gym memberships). Crucially, every Part C plan must cap enrollee cost-sharing for covered Part A and B services with a Maximum Out-of-Pocket (MOOP) limit. CMS sets the upper limit each year: $9,250 for in-network services in 2026, and many plans set lower caps.
• Trade-offs: In exchange for lower monthly premiums and capped out-of-pocket costs, beneficiaries must use restricted local provider networks, obtain specialist referrals, and face strict prior authorization requirements for advanced imaging, surgeries, and specialized therapies.

4. Part D: Prescription Drug Coverage

Part D provides outpatient prescription drug coverage through private stand-alone Prescription Drug Plans (PDPs) for Original Medicare enrollees or integrated into Medicare Advantage plans.

The Historic Transformation: The Inflation Reduction Act (IRA)

The Inflation Reduction Act fundamentally restructured Medicare Part D, completely eliminating the historical coverage gap known as the donut hole and introducing dramatic consumer protections:

• Elimination of Catastrophic Coinsurance: The 5% catastrophic cost-sharing requirement was permanently abolished.
• Annual Out-of-Pocket Cap: Since 2025, Part D caps enrollee out-of-pocket spending on covered drugs. The cap was $2,000 in 2025 and is indexed: $2,100 in 2026. After reaching it, the enrollee pays nothing more for covered Part D drugs that year. Premiums do not count toward the cap.
• The Medicare Prescription Payment Plan (MPPP): Beneficiaries can opt into a payment mechanism that spreads their out-of-pocket drug costs into capped monthly installments over the plan year rather than facing massive lump-sum bills at the pharmacy counter in January.
• Insulin and Vaccine Limits: Covered insulin products are capped at $35 per monthly prescription, and all Advisory Committee on Immunization Practices (ACIP) recommended adult vaccines (including shingles and RSV) are provided with $0 cost-sharing.

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Medigap (Medicare Supplement Insurance): Architecture and Standardization

Medigap policies are standardized private insurance policies designed specifically to fill the cost-sharing "gaps" of Original Medicare, including Part A deductibles and copayments, Part B 20% coinsurance, and foreign travel emergency medical care.

Standardization Across Plans A through N

Federal law standardizes Medigap into lettered plans (Plans A, B, C, D, F, G, K, L, M, and N). Every policy with the same letter must provide identical core benefits regardless of which commercial carrier sells it; only the premium and customer service vary.

• The Demise of Plan F and Plan C: Under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Medigap plans that cover the Part B deductible (Plans C and F) cannot be sold to individuals who became newly eligible for Medicare on or after January 1, 2020. Congress eliminated "first-dollar coverage" to discourage patient overutilization of healthcare.
• Plan G: The Modern Benchmark: Plan G has become the premier choice for newly eligible retirees. It covers 100% of all Medicare cost-sharing gaps, with the sole exception of the annual Part B deductible.
• Plan N: The Cost-Effective Alternative: Plan N features lower monthly premiums than Plan G in exchange for modest cost-sharing: enrollees pay small copayments of up to $20 for doctor visits and up to $50 for emergency room visits that do not result in inpatient admission. Furthermore, Plan N does not cover Part B excess charges (amounts up to 15% above the Medicare-approved rate that non-participating physicians can legally bill).

The Medigap Open Enrollment Period: Guaranteed Issue Rights

The Medigap Open Enrollment Period is a one-time, 6-month window that begins on the first day of the month in which an individual is both age 65 or older AND enrolled in Medicare Part B.

• During this 6-month period, beneficiaries have guaranteed-issue and pricing protections. Private insurers cannot reject applications, use medical underwriting to deny coverage, or charge higher premiums due to health conditions. However, a policy may delay payment of out-of-pocket costs for a pre-existing condition for up to 6 months if it was treated or diagnosed during the 6 months before coverage began. Continuous prior creditable coverage offsets that waiting period; at least 6 months of such coverage eliminates it. Original Medicare still covers Medicare-covered services during any Medigap waiting period.
• Once this 6-month window closes, beneficiaries in most states lose guaranteed issue protections. If they wish to purchase or switch Medigap policies later, insurers can subject them to medical underwriting, charge exorbitant premiums, or decline coverage entirely.

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Enrollment Periods and Lifetime Late Enrollment Penalties

Failing to enroll in Medicare at the proper statutory juncture triggers lifelong financial penalties and dangerous coverage gaps:

1. Initial Enrollment Period (IEP)

The Initial Enrollment Period (IEP) is a 7-month window that begins 3 months before the month an individual turns 65, includes their 65th birthday month, and extends for 3 months afterward.

2. Special Enrollment Period (SEP) and the Active Employment Rule

Individuals who reach 65 but keep working can delay Part B without penalty only if they are covered by a group health plan based on current employment (their own or a spouse's). Employer size matters for coordination: with 20 or more employees, the group plan generally pays first. With fewer than 20 employees, Medicare is usually primary, so delaying Part B can leave large coverage gaps even though the Special Enrollment Period is available.

• Upon separation from employment or termination of group health coverage, the worker enters an 8-month Special Enrollment Period (SEP) to enroll in Part B without penalty.
• The COBRA and Retiree Coverage Trap: COBRA continuation coverage and retiree health plans are not based on active employment. Enrollees who rely on COBRA past age 65 without enrolling in Part B forfeit their SEP, incur lifetime late penalties, and face months without medical coverage.

3. General Enrollment Period (GEP)

Beneficiaries who miss their IEP or SEP must wait for the General Enrollment Period (GEP), which runs from January 1 through March 31 annually, with coverage taking effect the first of the month following enrollment.

Lifetime Late Enrollment Penalties

• Part B Late Penalty: Beneficiaries pay an extra 10% on their Part B monthly premium for every full 12-month period they were eligible for Part B but unenrolled without creditable active-employer coverage. This penalty is permanent for life.
• Part D Late Penalty: A permanent monthly penalty equal to 1% of the national base beneficiary premium multiplied by the number of full months the individual went without creditable prescription drug coverage (if uncovered for 63 continuous days or longer).

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Comparison Table: Original Medicare + Medigap vs. Medicare Advantage (Part C)

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Practical Calculation: Lifetime Part B Late Enrollment Penalty

Harold turned 65 in June 2022 and retired from his small business, dropping his group coverage. Believing he was healthy, he did not enroll in Part B. His Initial Enrollment Period ended September 30, 2022. After developing chronic joint pain, he signs up during the General Enrollment Period in March 2026, and coverage starts April 1, 2026.

Using the 2026 standard Part B premium of $202.90:

1. Months without Part B: October 2022 through March 2026 = 42 months, which is 3 full 12-month periods.
2. Penalty percentage: 3 × 10% = 30%, added for as long as he has Part B.
3. Monthly surcharge: $202.90 × 30% = $60.87.
4. Total monthly premium: $202.90 + $60.87 = $263.77.
5. Long-run cost: Over 18 years at today's premium, the surcharge alone is about $13,100, and it grows as the standard premium rises.

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Advisor-Client Case Scenario: The Dual-State Snowbird Dilemma

Arthur (age 66) and Claire (age 65) spend six months of the year at their primary residence in Connecticut and six months at their winter condominium in Naples, Florida. Arthur enrolled in a $0-premium Medicare Advantage PPO, attracted by bundled dental and gym memberships. Claire consults their advisor, Martin, to decide between Medicare Advantage and Original Medicare with Medigap Plan G.

Martin performs a comprehensive risk audit:

• Arthur recently required an orthopedic consultation and MRI in Florida. Because his Medicare Advantage network is centered in Connecticut, Florida specialists were classified as out-of-network, triggering a 40% coinsurance cost and requiring a 3-week prior authorization delay.
• Martin advises Claire to enroll in Original Medicare + Medigap Plan G + Part D:
  • Claire can access top-tier physicians, academic medical centers, and orthopedic specialists in both Connecticut and Florida without network restrictions or referrals.
  • Her cost-sharing for Medicare-covered services is limited to the annual Part B deductible ($283 in 2026). After that, Plan G pays the remaining Medicare-approved cost-sharing, including Part B excess charges. She still pays premiums and costs for services Medicare does not cover.
  • Seeing Claire's seamless care, Arthur uses the next Annual Enrollment Period to drop Medicare Advantage and transition to Original Medicare, though Martin cautions him that he must pass medical underwriting for Medigap because his initial 6-month Open Enrollment Period has lapsed.

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Exam Tip

Key Medicare facts tested on the RICP examination:

• Original Medicare Part B has NO out-of-pocket maximum. Never tell a client that Part B alone is sufficient protection.
• COBRA does NOT grant a Special Enrollment Period (SEP). Staying on COBRA past 65 triggers permanent Part B late enrollment penalties.
• Medigap Plans C and F cannot be sold to individuals newly eligible on or after January 1, 2020. Plan G is the primary comprehensive replacement.
• The Medigap Open Enrollment Period lasts 6 months from age 65 + Part B enrollment and provides guaranteed issue with zero medical underwriting.
• Under the Inflation Reduction Act, Part D out-of-pocket costs for covered drugs are capped ($2,000 in 2025; $2,100 in 2026), and the coverage gap (donut hole) is eliminated.