Key Takeaways

• Medicare is not a completely free benefit. You are responsible for multiple ongoing costs, including premiums, deductibles, copayments, and coinsurance.

• In 2025, rising out-of-pocket limits, prescription drug expenses, and delayed supplemental coverage decisions can significantly increase your healthcare expenses.

Medicare’s Financial Structure: What You Should Know

Medicare is a federal health insurance program, but its funding doesn’t eliminate your financial responsibility. While taxpayers and payroll contributions support much of the system, Medicare operates with a cost-sharing structure. You pay a share, and the government covers the rest. But “your share” can become surprisingly large if you’re not prepared.

In 2025, Medicare includes premiums for certain parts, deductibles, copays, coinsurance, and potential penalties if you miss enrollment deadlines. Understanding these components will help you plan realistically for retirement and avoid unexpected financial strain.

Understanding the Four Parts and Their Costs

Part A: Hospital Insurance

You likely don’t pay a premium for Part A if you or your spouse paid Medicare taxes for at least 40 quarters. But that doesn’t mean it’s free.

• Deductible: $1,676 per benefit period in 2025.

• Hospital Coinsurance: $0 for the first 60 days, then $419 per day for days 61–90, and $838 per day for lifetime reserve days.

• Skilled Nursing Facility Coinsurance: $0 for the first 20 days, then $209.50 per day for days 21–100.

If you need multiple hospitalizations in a year, these costs can multiply quickly.

Part B: Medical Insurance

Part B covers outpatient services, doctor visits, and preventive care. You pay a monthly premium, which in 2025 starts at $185 and increases based on income.

• Annual Deductible: $257

• Coinsurance: Typically 20% of Medicare-approved amounts after the deductible

You are responsible for these amounts every year, regardless of how often you use services.

Part C: Medicare Advantage

Medicare Advantage plans combine Parts A and B and may include drug coverage and extra benefits. However, they come with their own cost structures.

• Out-of-pocket limits: In 2025, the maximum allowed for in-network care is $9,350.

• Out-of-network maximums: Can reach $14,000 if the plan allows for non-network services.

Although these plans offer some financial protection, the structure can vary greatly by plan, and additional benefits may come with extra costs.

Part D: Prescription Drug Coverage

Part D plans cover medications but include monthly premiums, annual deductibles, copays, and cost-sharing.

• Deductible (2025): Up to $590

• Out-of-pocket cap: A new $2,000 limit on annual drug spending

This cap helps, but you may still face high monthly costs, especially if you take multiple prescriptions or specialty drugs.

The Role of Supplemental Insurance

Many people turn to supplemental insurance to help cover gaps in Original Medicare. This includes Medigap policies and sometimes employer or union retiree health plans.

• Medigap: Covers Part A and B cost-sharing but comes with its own premium.

• Timing Matters: If you delay buying a Medigap plan beyond your initial eligibility window, you could face medical underwriting or even denial.

Delaying supplemental coverage can leave you exposed to large costs until you qualify or can afford the premium.

Late Enrollment Penalties That Linger

Medicare penalizes late enrollment for both Part B and Part D. These penalties are not one-time charges. They are monthly surcharges that last for as long as you remain enrolled.

• Part B Penalty: 10% for each 12-month period you delay enrollment.

• Part D Penalty: 1% of the national base premium for each month you delay after your Initial Enrollment Period ends.

For example, delaying Part B by three years means paying 30% more on your monthly premium permanently. These penalties can significantly add to your lifetime Medicare costs.

The Myth of “One-Time Enrollment”

You might think you can set your Medicare plan and forget it. In reality, you need to revisit your choices annually during the Open Enrollment Period (October 15 to December 7). Failing to do so can mean:

• Missed opportunities to switch to lower-cost plans

• Unawareness of rising premiums or changes in drug formularies

• Higher out-of-pocket costs in the upcoming year

Inaction could translate to thousands in unnecessary expenses.

Cost Increases With Age and Health Changes

As you age, you’re likely to need more healthcare. Medicare doesn’t adjust your benefits to match your increased needs automatically. If anything, your costs may rise.

• Increased use of specialists means more 20% coinsurance payments.

• More medications can push you closer to your Part D cap sooner.

• Frequent hospital stays mean more Part A deductibles and coinsurance.

While Medicare is designed to protect you from catastrophic expenses, it doesn’t eliminate the financial burden of frequent care.

Telehealth and Mental Health: Expanding Coverage, But Costs Still Apply

In 2025, Medicare permanently covers telehealth for mental health services, including virtual visits from home. This improves access but still comes with standard Part B cost-sharing:

• 20% coinsurance

• Deductibles still apply

• Out-of-pocket limits (if you’re in Part C) still govern your yearly exposure

Also, you are required to meet in-person with your provider at least once every 12 months, unless exceptions apply.

Income-Based Premium Adjustments (IRMAA)

Your premiums for Part B and Part D may be higher if your income exceeds certain thresholds. This is known as the Income-Related Monthly Adjustment Amount (IRMAA).

• Thresholds in 2025: $106,000 (individual) and $212,000 (joint)

• Applies to Part B and Part D premiums

If your income rises due to capital gains, retirement account withdrawals, or delayed Social Security benefits, your Medicare premiums could increase for the next year.

Healthcare Costs Outside Medicare’s Reach

Medicare doesn’t cover every medical service. Exclusions include:

• Long-term custodial care (e.g., nursing homes beyond 100 days)

• Dental, vision, and hearing (in most cases under Original Medicare)

• International care (unless under specific rare circumstances)

These expenses can be substantial. Without separate insurance or personal savings, they fall entirely on you.

Budgeting for Medicare in Retirement

To avoid surprises, include Medicare-related expenses in your retirement budget. Here’s a rough framework for annual planning in 2025:

• Part B premium: $2,220

• Part D premium and drug costs: $1,000–$2,000 depending on usage

• Supplemental coverage: Varies, but often exceeds $2,000/year

• Out-of-pocket expenses: Deductibles, coinsurance, and copays could add another $2,000–$5,000 depending on health status

You could easily spend $7,000–$10,000 or more annually, even with careful plan selection. Planning for these costs ensures you can manage your other retirement needs.

Reviewing Plans Annually Isn’t Optional

Every year, Medicare plans change. Insurers revise formularies, premium amounts, and provider networks. What worked for you last year may no longer be the best option this year.

Take time each fall to:

• Compare plans using the official Medicare Plan Finder

• Check for prescription drug formulary changes

• Evaluate your health and coverage needs

Failing to review your plan can result in:

• Paying for coverage you don’t use

• Losing access to preferred doctors

• Higher medication costs

A yearly check-in could save you hundreds or even thousands.

Medicare Is a Safety Net, Not a Free Ride

While Medicare provides critical protection against medical bankruptcy, it doesn’t replace the need for careful financial planning. The program is designed as a shared-cost model. You’ll pay a sizable share throughout your retirement unless you actively manage your options.

Medicare’s true cost is not just your monthly premium. It’s the sum of every deductible, every 20% coinsurance bill, every non-covered expense, and every year you didn’t re-evaluate your plan.

Protecting Your Financial Health in Retirement

Medicare gives you essential healthcare access, but the price tag can grow without careful attention. To protect your finances:

• Enroll on time to avoid penalties

• Consider supplemental coverage early

• Budget annually for healthcare costs

• Review and adjust plans each fall

• Be aware of IRMAA and rising income

For more help understanding your options and managing your long-term costs, reach out to a licensed agent listed on this website. An expert can help you tailor a Medicare strategy that aligns with your budget, needs, and future goals.