What Medicare Actually Covers (And What It Does Not)

Medicare is the federal health insurance program for Americans 65 and older. Most people know it exists. Far fewer understand exactly what it covers, what it costs, and where the gaps are large enough to cause serious financial damage in retirement.

Healthcare is consistently the largest underestimated expense in retirement. Fidelity's 2025 estimate puts the average healthcare cost for a retired couple at roughly $315,000 over the course of retirement, not counting long-term care. Understanding Medicare before you reach 65 is one of the most practical things you can do to prepare for that reality.

The Four Parts of Medicare

Medicare is divided into four distinct parts, each covering different services. They do not stack automatically. You need to understand each one and actively enroll.

Part A: Hospital Insurance

Part A covers: Inpatient hospital stays, skilled nursing facility care (under specific conditions), hospice care, and some home health services.

What it does not cover: It does not cover most outpatient care, doctor visits, or prescription drugs.

What it costs in 2026:

• Premium: Most people pay $0 for Part A if they or their spouse worked and paid Medicare taxes for at least 40 quarters (10 years). If you have fewer than 30 quarters of covered work, the full premium is $565/month in 2026.
• Inpatient deductible: $1,736 per benefit period in 2026. This is not an annual deductible. If you are hospitalized, discharged, and readmitted more than 60 days later, the deductible resets. Multiple hospitalizations in a year can mean multiple deductibles.
• Coinsurance: For hospital days 61-90, you pay $434/day. For lifetime reserve days (91-150), you pay $868/day.

Part B: Medical Insurance

Part B covers: Doctor visits, outpatient services, preventive care, durable medical equipment, lab tests, and some home health services.

What it does not cover: Routine dental, vision, hearing aids, and most prescription drugs.

What it costs in 2026:

• Standard monthly premium: $202.90 per month in 2026, up from $185.00 in 2025.
• Annual deductible: $283 in 2026.
• After deductible: You pay 20% of Medicare-approved costs with no out-of-pocket maximum under standard Part B. There is no cap. A serious illness requiring $200,000 in outpatient care could leave you with a $40,000 bill.

IRMAA surcharges: High-income beneficiaries pay significantly more. Individuals with income above $109,000 (or married couples above $218,000) pay surcharges ranging from $81.20 to $487/month on top of the standard premium. These surcharges are based on your tax return from two years prior, which means income spikes from Roth conversions, asset sales, or large RMDs can unexpectedly increase your Medicare premiums two years later. This is an important planning consideration covered in What Is a Roth Conversion and Should You Do One Before Retirement?

Part C: Medicare Advantage

Part C is not a government program itself. It is the option to receive your Medicare benefits through a private insurance company approved by Medicare. These are commonly called Medicare Advantage plans.

What they offer: Most Medicare Advantage plans bundle Part A, Part B, and often Part D (prescription drugs) into a single plan. Many include extras that original Medicare does not cover: dental, vision, hearing, and gym memberships.

The tradeoff: Medicare Advantage plans operate on networks of providers. If you see a doctor outside the network, you may pay significantly more or receive no coverage. This is a major issue for retirees who spend time in multiple locations or who have specialists they have long-term relationships with.

Medicare Advantage plans also have the authority to change their formularies, networks, and benefits annually. A plan that works well in year one may not cover your preferred doctors or drugs by year three.

Original Medicare vs. Medicare Advantage: If your primary concern is flexibility and access to any doctor who accepts Medicare, original Medicare (Parts A + B) plus a Medigap supplemental policy is often the more predictable choice, though typically higher premium. If you are cost-conscious and willing to work within a network, Medicare Advantage can offer comprehensive coverage at lower out-of-pocket costs.

Part D: Prescription Drug Coverage

Part D covers prescription medications. It is offered through private insurers approved by Medicare and is available as a standalone plan if you have original Medicare, or as an integrated component of a Medicare Advantage plan.

Key costs:

• Premium varies by plan, typically $20 to $100+ per month depending on the plan and your medications.
• Deductible: Up to $590 in 2026 before the plan starts covering costs.
• After deductible: Co-pays or coinsurance depending on which tier your drugs fall into (generics are cheapest, specialty biologics are most expensive).

The catastrophic cap: Beginning in 2025, the Inflation Reduction Act eliminated the Medicare Part D "donut hole" and introduced a $2,000 out-of-pocket cap on covered drugs per year. This is a significant improvement over prior years when beneficiaries with high drug costs faced sudden cost spikes mid-year.

What Medicare Does Not Cover: The Critical Gaps

This is the section most pre-retirees are not prepared for.

Routine dental, vision, and hearing: Original Medicare covers almost none of this. Dental cleanings, fillings, crowns, dentures, eye exams, glasses, and hearing aids are not covered. Medicare Advantage plans often include these, but coverage limits and quality vary widely. These costs add up significantly in your 70s and 80s.

Long-term care: Medicare does not cover long-term custodial care: assistance with daily activities like bathing, dressing, and eating over an extended period, whether in a nursing home or at home. Medicare covers skilled nursing facility care only after a qualifying 3-day inpatient hospital stay, and only for up to 100 days under specific conditions. After 100 days, you pay the full cost yourself. The median annual cost of a private nursing home room in 2026 is approximately $105,000. This is the largest uninsured financial risk in retirement for most Americans.

Overseas medical care: Original Medicare provides essentially no coverage outside the United States. If you plan to travel internationally in retirement, supplemental coverage or travel insurance for medical care is necessary.

Medigap Supplemental Insurance

Medigap policies (also called Medicare Supplement Insurance) are sold by private insurers to fill the gaps in original Medicare. They can cover:

• Part A and Part B deductibles
• The 20% Part B coinsurance, removing the unlimited out-of-pocket risk
• Skilled nursing facility coinsurance

Medigap plans are standardized (Plan G, Plan N, etc.) and must cover the same benefits regardless of insurer, though premiums vary significantly. The best time to enroll is during your Open Enrollment Period, the 6-month window starting the month you turn 65 and enroll in Part B. During this window, insurers cannot deny you or charge more based on pre-existing conditions. After this window, medical underwriting applies.

Medicare Enrollment Timing: Do Not Miss the Deadlines

Initial Enrollment Period: A 7-month window: 3 months before, the month of, and 3 months after you turn 65.

Late enrollment penalties:

• Part B: 10% premium surcharge for each 12-month period you were eligible but did not enroll. This surcharge is permanent and applies for life.
• Part D: 1% of the national base beneficiary premium per month of delayed enrollment, also permanent.

If you are still working and covered by employer health insurance at 65, you generally can delay Part B and Part D without penalty. When your employer coverage ends, you have a Special Enrollment Period. Coordinate this carefully with your HR department.

The 2026 Cost Snapshot

Real-World Examples

Example: Ruth, 64, planning ahead

Situation: Ruth retires at 64 and will rely on COBRA from her employer for one year until Medicare at 65. Her COBRA costs $850/month.

Medicare plan: At 65, she enrolls in Part A, Part B, and purchases a Medigap Plan G policy for $180/month plus a standalone Part D plan for $38/month. Total monthly cost: $202.90 + $180 + $38 = $420.90.

Benefit: Medigap Plan G eliminates nearly all out-of-pocket costs beyond the $283 annual Part B deductible. She has predictable, comprehensive coverage with the freedom to see any doctor who accepts Medicare, with no networks.

Example: James, 67, high income

Situation: James sold a rental property in 2024 and had a large income spike. In 2026, he receives a letter from Medicare indicating he owes IRMAA surcharges of $324.60/month additional on top of his standard Part B premium.

Total Part B cost: $202.90 + $324.60 = $527.50/month.

Lesson: He was not expecting the surcharge because he did not connect his 2024 income to 2026 Medicare costs. He consults his accountant about filing Form SSA-44 to appeal the IRMAA determination if his income has since dropped significantly.

Common Mistakes

Assuming Medicare is free. The Part B premium alone is $202.90/month in 2026 and rising each year. Add Medigap or Medicare Advantage, Part D, and out-of-pocket costs, and the average retiree spends $5,000 to $10,000+ per year on healthcare.

Waiting too long to enroll. Late enrollment penalties for Part B and Part D are permanent. Missing your Initial Enrollment Period without qualifying employer coverage is an expensive, irreversible mistake.

Not accounting for long-term care separately. Medicare will not fund your nursing home stay. Long-term care insurance, hybrid life/LTC policies, a dedicated self-insurance savings pool, or a Medicaid planning strategy are separate decisions that need to happen before health deterioration makes them unavailable or unaffordable.

The healthcare cost reality of retirement connects directly to decisions about how much you need to retire and when to claim Social Security since both affect the income available to cover these expenses.

This post is for informational purposes only and does not constitute legal, medical, or financial advice. Medicare rules, premiums, and coverage change annually. Visit Medicare.gov or SSA.gov for current official information. Consult a licensed Medicare advisor or financial planner before making enrollment decisions.