How Medicare Billing Actually Works — A Plain Language Guide
Medicare covers more than 65 million Americans but remains widely misunderstood — even by the people it covers. Many enrollees discover too late that it does not cover everything, that it comes with significant out-of-pocket costs, and that the difference between plan types can mean thousands of dollars a year. This guide explains how Medicare billing actually works, what each part covers, and where the gaps are.
The Four Parts of Medicare
Medicare is not a single programme — it is a collection of coverage options with different rules, costs, and trade-offs. Understanding what each part covers is essential to knowing what you will and won’t pay.
THE FOUR PARTS AT A GLANCE
Part A — Hospital insurance. Covers inpatient hospital stays, skilled nursing facility care, hospice, and some home health care. Most people pay no premium for Part A if they or their spouse paid Medicare taxes for at least 10 years. However Part A has a significant deductible — $1,632 per benefit period in 2024 — and no out-of-pocket maximum.
Part B — Medical insurance. Covers doctor visits, outpatient care, preventive services, and medical equipment. Part B has a monthly premium ($174.70 in 2024 for most enrollees, higher for higher earners) and a $240 annual deductible. After the deductible Medicare pays 80% of approved costs — leaving the enrollee responsible for the remaining 20% with no cap.
Part C — Medicare Advantage. Private insurance plans that replace original Medicare. Cover at least the same services as Parts A and B, often with additional benefits like dental and vision. Operate through provider networks. Increasingly controversial for prior authorization practices and overbilling.
Part D — Prescription drug coverage. Purchased separately from a private insurer. Covers outpatient prescription drugs. Notoriously complex with tiered formularies, coverage gaps, and premium variations that leave many enrollees confused about what they will pay.
Original Medicare vs Medicare Advantage
The choice between original Medicare and Medicare Advantage is one of the most consequential healthcare decisions most Americans make, yet it is often made without a full understanding of the trade-offs. Enrollment in Medicare Advantage has grown dramatically — more than half of Medicare beneficiaries are now enrolled in Advantage plans — driven by marketing, low or zero premiums, and added benefits like dental and vision coverage that original Medicare does not provide.
MEDICARE ADVANTAGE PROPONENTS ARGUE
Advantage plans offer better value for most enrollees — lower out-of-pocket maximums than original Medicare, added benefits, care coordination, and often lower premiums. The managed care model encourages preventive care and reduces unnecessary procedures. For healthy enrollees who stay in network the plans often result in lower total costs.
CRITICS ARGUE
Advantage plans use prior authorization requirements to deny or delay care at significantly higher rates than original Medicare. When enrollees become seriously ill they often discover their narrow networks exclude the specialists or facilities they need. Federal investigations have found widespread overbilling by Advantage plans — insurers inflate risk scores to receive higher government payments for enrollees who are healthier than claimed.
How Medicare Sets What It Pays
Original Medicare does not negotiate prices with providers. Instead it sets payment rates administratively through two main systems. For hospital inpatient care Medicare uses Diagnosis Related Groups — fixed payments based on the patient’s diagnosis and expected treatment, regardless of how long the stay actually lasts or what it actually costs. For physician and outpatient services Medicare uses a fee schedule based on Relative Value Units — a measure of the time, skill, and overhead involved in each service.
These rates are set by CMS and updated annually. Many physicians argue they are too low — particularly for primary care — which is a key reason some practices limit the number of Medicare patients they accept. Hospitals generally accept Medicare rates as a condition of participating in the programme, but the rates vary by geography, hospital type, and other factors.
The Medicare Part D Prescription Drug Maze
Part D is widely regarded as the most confusing component of Medicare. Plans vary enormously in premiums, formularies, and cost-sharing structures. A drug that is covered on one plan’s formulary may be on a higher cost-sharing tier on another, or excluded entirely. Formularies change annually — meaning a drug you relied on this year may cost significantly more next year even if you stay on the same plan.
The infamous coverage gap — known as the donut hole — required beneficiaries to pay a larger share of drug costs after crossing an initial coverage threshold. The Inflation Reduction Act of 2022 eliminated the donut hole starting in 2025, capping out-of-pocket drug costs for Medicare enrollees at $2,000 annually. This is one of the most significant changes to Medicare drug coverage since Part D was created in 2006.
KEY DATA POINT
The Medicare Payment Advisory Commission found that Medicare Advantage plans receive payments averaging 6% more per enrollee than original Medicare would cost for the same person — a gap estimated at $27 billion in excess payments in 2023. Critics argue this overpayment subsidises the added benefits Advantage plans use to attract enrollees while inflating programme costs.
Prior Authorization in Medicare Advantage
Prior authorization — the requirement that a provider obtain insurer approval before delivering certain services — is used far more extensively in Medicare Advantage than in original Medicare. A 2022 Senate investigation found that large Advantage insurers denied prior authorization requests at rates between 13% and 18%, compared to a denial rate of less than 2% for original Medicare claims. The same investigation found that a significant proportion of denied requests were for services that met Medicare coverage criteria and should have been approved.
INSURERS ARGUE
Prior authorization is a clinically important tool that ensures patients receive appropriate, evidence-based care and prevents unnecessary procedures. The process protects patients from overtreatment and helps control costs that would otherwise drive up premiums for all enrollees. Most requests are approved quickly and the small percentage that are denied typically involve services that are not medically appropriate.
PHYSICIANS AND PATIENTS ARGUE
Prior authorization delays create dangerous gaps in care, particularly for seriously ill patients who need timely treatment. The administrative burden on physicians is enormous — the AMA estimates physicians spend an average of 14 hours per week on prior authorization tasks. Denials are often reversed on appeal, suggesting they were not clinically justified in the first place but function primarily as a cost-containment mechanism.
What Medicare Does Not Cover
Original Medicare has significant coverage gaps that surprise many enrollees. It does not cover routine dental care, vision care, or hearing aids — three of the most common healthcare needs of older adults. It does not cover most long-term care, including nursing home stays beyond 100 days. It does not cover care received outside the United States. And as noted, Part B has no out-of-pocket maximum, meaning a serious illness can generate unlimited cost-sharing obligations.
These gaps are why many enrollees purchase supplemental Medigap policies — standardised insurance plans that fill some or all of the cost-sharing gaps in original Medicare. Medigap premiums add to the monthly cost of Medicare but provide protection against catastrophic out-of-pocket exposure.
THE BOTTOM LINE
Medicare provides essential coverage for millions of Americans but is far more complex and incomplete than most enrollees realise — with significant out-of-pocket exposure, a confusing array of plan choices, and ongoing controversy over how private Advantage plans are administered and paid.
Explore Individual Medicare Questions
Get plain-language answers to the most common Medicare billing questions — from coverage gaps to prior authorization to the difference between Advantage and original Medicare.
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