How Does Medicare Calculate Premiums?
Today in the United States, there are over 65 million people who depend on Medicare insurance to help cover health care expenses. Unlike Medicaid, your eligibility for Medicare enrollment isn’t dependent on your income. You can enroll in Medicare at age 65 if you’re a U.S. citizen, or a permanent legal resident living in the country for at least five years. You may also qualify if you’re younger than 65 and have a disability or end-stage renal disease.
Medicare covers a large percentage of many health care costs, but it isn’t free. Most people who are eligible for Medicare benefits pay monthly premiums, deductibles, coinsurance, and copayments for some parts of their coverage. How much you pay for your Medicare premiums depends on factors such as income, work credits, and the type of plan you choose.
Original Medicare Part A (hospital insurance)
You pay a $0 monthly premium for Part A (known as premium-free Part A) if you:
- Qualify for, or are already receiving, retirement or disability benefits from the Social Security Administration or the Railroad Retirement Board.
- Are receiving Medicare at a younger age than 65.
Typically, people who are 65 or older qualify for premium-free Part A if they, or another qualifying person like a current or former spouse, have worked and paid Medicare taxes for at least 40 quarters or about 10 years.
If you do not qualify for premium-free Part A, you can purchase this coverage. Medicare calculates your monthly premium based on the amount of time you or your spouse worked and paid Medicare taxes. As of 2023, this amount was either $278 or $506.
If you choose to purchase Part A coverage, you must also enroll in Original Medicare Part B.
Original Medicare Part B (medical insurance)
In 2023, most Medicare beneficiaries with Original Medicare Part B paid $164.90 for their monthly premium. Every year Medicare adjusts the cost of this premium and beneficiaries are responsible for paying it even if they don’t get any covered medical services.
If you are above the income threshold set annually by Medicare, you might have to pay a higher monthly premium. Medicare calculates how much you owe for your premium based on your MAGI from your tax returns from two years prior.
This amount changes every year, but in 2023, if you file an individual tax return, you’ll pay a higher premium if your MAGI is $97,000. If you’re married and filing a joint return, the amount is $194,000.
How does Medicare calculate plan premiums?
In general, Medicare calculates your premiums by considering the following:
- Your modified adjusted gross income (MAGI). This is found by adding your total adjusted gross income to your tax-exempt income, which is taken from your tax returns from two years prior to your enrollment in Medicare.
- The number of work credits you, or your spouse, have earned.
- The type of Medicare coverage you have.
Medicare prescription drug (Part D) plans
Medicare prescription drug plans are offered by private insurance companies that work with Medicare. How much you pay for your monthly premium depends on the type of plan you have, the company selling it, and your annual income. Your premium may be higher if your MAGI exceeds Medicare limits for the year.
Medicare Advantage (Part C) coverage
If you choose to enroll in a Medicare Advantage (Part C) plan from a private insurance provider as an alternative to Original Medicare Parts A and B, you may pay a monthly premium to your plan provider who bases the amount on what type of coverage you get.
Many Medicare Advantage plans charge $0 for a monthly premium, and the average monthly cost in the U.S. is around $19 per month. However, even with Part C coverage, you must pay the Medicare Part B monthly premium as well.