Medicare and Medicaid are similar-sounding programs, but they work in different ways to help older Americans pay for medical care. Understanding how each program operates is an important part of preparing financially for retirement health care. When you know how each one stacks up, you're better prepared to navigate your health care expenses.
Here's what you need to know about Medicare vs. Medicaid.
What Is Medicare?
The Medicare program is set up as a health insurance policy for individuals who have reached age 65 or younger individuals who are either disabled or on dialysis. Medicare pays a portion of medical care for beneficiaries using trust funds that have been funded by taxpayers. Beneficiaries are also required to pay deductibles and co-pays to help pay for their care. Regardless of income, Medicare is extended to everyone who is eligible based on age or disability status.
Medicare offers multiple coverage options. Original Medicare is made up of Medicare Parts A and B. Part A may also be referred to as hospital insurance, since it only (partially) covers inpatient hospital or skilled nursing facility care, home health care or hospice care. Medicare beneficiaries who need to stay in a hospital or require skilled nursing care will see Medicare Part A pay for a portion of that care.
Most people do not have to pay a premium for Medicare Part A. As long as you or your spouse paid income taxes toward Medicare for a minimum of 10 years, you will owe no out-of-pocket premiums for Medicare Part A.
Medicare Part B acts more like a traditional health insurance policy. Referred to as medical insurance, this coverage asks beneficiaries to pay a monthly premium to enroll in Medicare Part B, which for most people is set at $148.50 for 2021. However, individuals earning more than $88,000 and married couples earning more than $176,000 per year will have higher monthly premiums.
Medicare Part B covers many medical care costs, including preventive services. However, Part B does not cover self-administered prescription drugs, long-term care, dental or eye car, dentures, or hearing aids.
Part B beneficiaries are required to pay all costs of services until they meet an annual deductible, which is set at $203 as of 2021. After meeting your deductible, beneficiaries are typically required to pay 20% of approved medical services — Medicare covers the rest.
Additional Medicare Plans
In addition to original Medicare, beneficiaries may also choose to sign up for Medicare Advantage (also known as Medicare Part C) or Medicare Part D.
Medicare Advantage is offered through private insurers, and it bundles Medicare Parts A and B together into one policy to give beneficiaries a single insurer and set of paperwork for medical bills. Most Medicare Advantage plans include prescription drug coverage as well. With a Medicare Advantage plan, all monthly premiums, co-pays and other coinsurance amounts go through the private insurer. There are specific times throughout the year when you may join or leave a Medicare Advantage plan.
Medicare Part D, also offered through a private insurer, is a prescription drug coverage insurance policy. The specific premium and co-pay costs vary from insurer to insurer, as does the deductible you must meet before your prescription drugs are covered. However, Medicare has mandated that no Part D prescription drug insurance policy can have a deductible greater than $445 in 2021. After you have met your deductible, your plan will help pay for covered prescriptions until you reach a dollar limit of $4,130 in 2021, after which point you enter the coverage gap. In this gap, you will be responsible for 25% of the cost of your prescriptions until you reach the catastrophic coverage period, which is when you have paid more than $6,550 (as of 2021) out of pocket for the year.
What Is Medicaid?
Unlike Medicare, a program primarily for those who are 65 or older, Medicaid is an assistance program for low-income individuals of any age. Both the federal government and U.S. state governments work together to offer Medicaid, which means the specific requirements and options may vary depending on where you live. In general, Medicaid beneficiaries do not have to pay out-of-pocket costs for covered medical procedures, although there may be coinsurance amounts for some Medicaid patients.
To qualify for Medicaid, you will generally need to meet one of the following criteria:
- Have an income at or below 133% of the federal poverty level
- Experience blindness or a disability
- Have significant health needs
If your income is higher than the Medicaid threshold, you may only be able to qualify for this program if you have significant medical needs and you reside in a state that offers a "medically needy program." Otherwise, the only other way to qualify for Medicaid is to spend down your income by paying out of pocket for medical care for which you do not have health insurance. Medicaid is required to allow potential beneficiaries who are blind, disabled or over the age of 65 to qualify for the program by spending down their assets to reach income eligibility levels.
What Does Medicaid Cover?
All Medicaid plans are required to offer certain mandatory benefits. However, states may also cover certain optional benefits. The mandatory coverage includes the following benefits:
- Inpatient and outpatient hospital services
- Early and Periodic Screening, Diagnostic and Treatment Services (EPSDT)
- Nursing facilities
- Physician services
- Health clinic and center services
- Home health services
- Laboratory and X-ray services
- Transportation to medical care
In addition to these, all Medicaid programs are required to offer a number of services for family planning, pregnancy and pediatrics.
However, states may or may not offer optional benefits such as prescription drug coverage, physical and occupational therapy, eye and dental care, and hospice care.
Medicare vs. Medicaid: What's Right for You?
Unless you are living on a reduced income that is at or below 133% of the poverty level, it is unlikely that you will have to decide between Medicare and Medicaid. Most retirees will qualify for Medicare because of their age and will not qualify for Medicaid because their income is higher than the eligibility threshold. No matter which program you are eligible for, though, it's important to recognize that neither one offers perfect low-cost coverage.
With Original Medicare, beneficiaries can expect to pay a monthly premium and coinsurance amounts for eligible medical care. Keep in mind while building a retirement budget, though, that not all medical services and prescription drugs are covered under Medicare.
Though Medicaid does not have premiums and generally requires no coinsurance from beneficiaries, its coverage still has gaps. Depending on the state you live in, you may find that Medicaid does not cover certain important medical services and needs, such as prescription drugs or physical therapy. This could be very difficult for Medicaid beneficiaries, who are already living on a lower income.
Understanding the differences between Medicare vs. Medicaid can help you make the best possible decisions for your finances and health care. Speak to a financial adviser or insurance specialist to decide the best fit for your health care needs and retirement goals.