Medicare: The Basics

How it works: Established by the Social Security Act of 1965, Medicare is a social insurance program that provides health insurance coverage to people who are 65 and over and others who meet special criteria (such as having a permanent physical disability). The basic Medicare plan pays up to 80 percent of medical costs; by adding a Medicare Advantage plan, individuals over 65 can receive more complete benefits.

Who's eligible: If you're 65 or over, a U.S. citizen (or have been a legal resident of the United States for at least five years), and if you or your spouse has paid Medicare taxes for at least 10 years, you're eligible for Medicare. Some people under 65 also are eligible, such as those who are disabled and receive Social Security Disability Insurance benefits.

Why? Although Medicare and its various parts and regulations can be confusing, it is still the best deal you're likely to find on hospital and medical insurance.

Why not? While Medicare is a valuable program for older Americans, it doesn't cover all the potential health-care expenses you could incur. To be better prepared for additional expenses, consider supplemental coverage in addition to original Medicare, such as a Medicare Advantage plan, a health-care savings account, or long-term care insurance. Keep in mind that not every health-care provider accepts Medicare.

2011 changes: Starting this year, if your prescription drug costs go beyond what is paid by your Medicare drug plan -- a condition referred to as "the doughnut hole" -- you'll receive a 50 percent discount on brand-name drugs and a 7 percent discount on generic drugs beyond that threshold. Also in 2011, Medicare began requiring Medicare Advantage plans to put a $6,700 cap on total out-of-pocket expenses. For the first time, this year participants in an original Medicare plan also are entitled to free coverage for 20 preventive services.

Tools: Check out the Doughnut Hole Calculator and the federal government's Medicare Plan Finder

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