The Complete Guide to Medicare Out-of-Pocket Costs

When determining the cost of a Medicare plan, it’s important to look beyond the premiums to see what your total healthcare costs might be. Of course, it’s impossible to confirm all of the services you’ll need in a year, but understanding how your out-of-pocket costs work can help you avoid surprises when your medical bills are due. 

What are out-of-pocket costs?

Your out-of-pocket costs include everything you pay for healthcare services aside from your premiums—in other words, your deductibles, copayments, and coinsurance. A deductible is the amount you have to spend before your insurance begins to cover its portion of your healthcare. Copayments are a set amount you pay for specific services. Your coinsurance is the percentage of costs you’ll cover once you meet your deductible. 

Your out-of-pocket costs are important for two key reasons. First, by understanding your deductible, copays, and coinsurance amounts, you can better estimate the cost of services before you receive treatment. Second, supplemental Medicare plans come with out-of-pocket maximums that protect you from catastrophic costs. You'll need to understand how each treats out-of-pocket costs to choose the best combination of Medicare parts and plans for your needs.

Original Medicare out-of-pocket costs

After you meet your deductible, Medicare only covers 80% of covered services. This leaves you to pay for the remaining 20% of covered services (this is your coinsurance). Because Original Medicare has no out-of-pocket limit, you could be on the hook for thousands of dollars if you have more considerable medical expenses. For this reason, most people on Medicare choose to increase their insurance coverage with additional Medicare options. The three types of supplemental Medicare options are Medigap, Part D, and Medicare Advantage, and the details of these plans’ out-of-pocket costs are detailed below.

Medigap out-of-pocket costs

Medigap (also called Medicare Supplement) plans were designed to limit out-of-pocket expenses by filling the gaps in costs not covered by Original Medicare. There are ten different types of Medigap plans with different coverage options. Regardless of the plan you choose, you can significantly limit your out-of-pocket expenses and have greater financial predictability. 

Most plan types eliminate coinsurance. The two that don’t eliminate coinsurance (Plan K and Plan L) still significantly reduce your coinsurance and come with out-of-pocket limits. Use the chart found here to understand how out-of-pocket costs work for each type of Medigap plan. And remember, each type of plan (so, all Plan Gs) will have the exact same coverage even if they have different insurance carriers or premiums. 

Part D out-of-pocket costs

Medicare Part D is your prescription drug coverage. Part D is generally included in Medicare Advantage plans. If you’re on a Medigap plan or a Medicare Advantage plan that does not have prescription coverage, you can enroll in a separate Part D plan. Part D plans, like other insurance plans, have deductibles, copayments, and coinsurances—but how these costs work is more complex. 

The various drug plans cover different prescriptions. Plans also place drugs on different tiers, and higher-tier drugs will have higher costs. To understand a plan's drug coverage, you can check its formulary (drug list) and identify the tiers your drugs fall within. All Part D plans also have four phases during which you'll pay different amounts for the same drugs. 

1. Deductible Phase

During your deductible phase, you’ll pay 100% of the cost of drugs. Your deductible will vary depending on your specific Part D plan, but no plan may have a deductible higher than $545 (in 2024). Some Part D plans don’t have a deductible. Others that do have a deductible will cover some drugs before you’ve met your deductible. Pay attention to which drugs are on your plan and how they’re covered to maximize your savings. 

2. Initial Phase

You and your drug plan share your costs during your drug coverage's initial phase. Your costs come in the form of copays or coinsurance. The coverage phase lasts until you and your drug plan have paid up to $4,660 on covered drugs. At this point, you'll enter the coverage gap.

3. Coverage Gap

During the coverage gap (also known as the donut hole), you'll pay no more than 25% of the cost of prescriptions. For generic drugs, Medicare covers 75% of the cost, and only the amount you pay goes toward your out-of-pocket costs. For brand-name drugs, the manufacturer discounts the cost, and almost the full price (95%) of a drug will count toward your out-of-pocket costs to help you get out of the coverage gap. 

In some cases, your plan may have additional coverage in the gap. You can look at your Explanation of Benefits to see if you're entitled to extra savings.

4. Catastrophic Phase

Once your total out-of-pocket costs have hit $8,000 (in 2024), you’ll enter the catastrophic phase. During this phase, you'll only pay a small copayment or coinsurance percentage (up to 5%) for your covered drugs for the rest of the year. 

Finding a prescription drug plan that saves you money on the prescriptions you need is one of the things Chapter Medicare Advisors do best! We’re careful to check each and every medication you take to be sure you’re on a plan that provides the best coverage. If you’re having trouble paying, we’ll help to determine if you can save money by changing your pharmacy or enrolling in the Part D Extra Help Program (a low–income subsidy). 

Medicare Advantage out-of-pocket costs

Medicare Advantage plans are an alternative to Original Medicare. They cover at least the same amount as Parts A & B and often have additional coverage for things like dental, vision, and prescriptions. These plans vary a lot, and the differences matter when looking at covered drugs and services as well as premiums, deductibles, and copayments. 

While out-of-pocket costs will vary for Medicare Advantage plans, they must all have an out-of-pocket limit of no more than $8,850 for covered, in-network medical services (in 2024). Some plans may choose to have a lower out-of-pocket limit. Once you hit your limit, your plan will pay 100% of the costs for covered medical services.

Navigating Medicare and its related costs can be confusing—but it doesn't have to be! If you ever need help understanding how Medicare costs work or which plan will best meet your health and financial needs, our Advisors are here to help! Just schedule a consultation, and we'll happily walk you through the different options and associated costs.