Understanding Medicare: Key Changes Coming in 2025

Administered by the Centers for Medicare and Medicaid Services (CMS), Medicare is a healthcare program for Americans aged 65 and older. If you are nearing retirement, you may have already heard about Medicare. However, understanding its ins and outs in detail is important. Considering healthcare is likely to become a financial concern for most retirees in retirement, staying updated with the rules surrounding Medicare, such as coverage, limits, and more, can be helpful. Big changes are on the horizon for Medicare in 2025, and knowing what they mean for you is essential.

This article will walk you through these updates, so you can prepare for them. Consulting with a financial advisor can also help you understand the upcoming changes and tailor Medicare to your unique health needs.

What is Medicare?

Medicare is a federal health insurance program designed to provide healthcare coverage for Americans. It primarily serves those aged 65 or older, but it also extends to younger individuals with disabilities or specific medical conditions like End-Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS). Medicare is divided into four key parts:

1. Medicare Part A: Covers inpatient hospital expenses. Part A is typically premium-free if you or your spouse paid Medicare payroll taxes during your working years.
2. Medicare Part B: Covers outpatient services like doctor visits, ambulance services, and other healthcare needs.
3. Medicare Part C: Also known as Medicare Advantage, this is a private insurance alternative that includes Parts A, B, and sometimes Part D.
4. Medicare Part D: Provides prescription drug coverage.

Eligibility criteria

To qualify for Medicare, you must meet at least one of the following requirements:

1. Age requirement: You must be 65 or older.

• You automatically get enrolled for Medicare Part A and Part B if you have started receiving Social Security benefits when you turn 65.

2. Work history: You qualify for premium-free Medicare Part A if you or your spouse has earned at least 40 credits, which is equivalent to about ten years of work, by paying Medicare payroll taxes.

• One credit equals $1,470 in earnings, and you can earn a maximum of four credits in a year.
• In total, you need to earn at least $58,800 to achieve the required 40 credits.

3. Citizenship/Residency: You must be a U.S. citizen or a permanent lawful resident who has resided in the U.S. for at least five years.

4. Disability benefits: If you have been receiving Social Security Disability Insurance (SSDI) for at least 24 months (not necessarily consecutive), you qualify for Medicare. Automatic enrollment begins at the start of your 25th month of SSDI benefits.

5. ALS: If diagnosed with ALS, also known as Lou Gehrig’s disease, you automatically qualify for Medicare without a waiting period.

6. ESRD: Individuals with ESRD requiring dialysis or a kidney transplant are eligible for Medicare regardless of age.

7. Government employment: You qualify for Medicare if you or your spouse is a government employee who has paid Medicare payroll taxes.

8. Railroad retirement benefits: If you receive a disability pension from the Railroad Retirement Board, you are also eligible for Medicare.

9. Spousal benefits: If you or your spouse qualifies for Social Security benefits, you can access Medicare.

Services not covered

While Medicare provides extensive health coverage, it does not cover every type of medical service or expense. Medicare only covers services deemed medically reasonable and necessary. For example:

• Preventive examinations represented by CPT codes 99381-99397 are not covered.
• Medicare only covers specific prophylactic services, such as immunizations for influenza, pneumonia, and hepatitis B.
• Cosmetic procedures are excluded unless they are medically necessary.
• Certain routine or maintenance services, like routine eye exams for glasses or contact prescriptions and dental care, such as routine cleanings, fillings, and tooth extractions, are not included.
• Medicare only offers limited coverage for specific services, such as podiatry. While it covers treatments related to diabetes-related nerve damage, injuries, or deformities, general podiatric care is not covered.
• Medicare does not cover long-term care costs, such as nursing homes, assisted living facilities, or at-home care.
• Medicare generally does not cover healthcare services received outside the United States.

You can refer to National Coverage Determinations (NCDs) and Local Coverage Determinations (LCDs) to determine if Medicare considers a service to be medically reasonable and necessary.

Below are some of the key changes to Medicare coverage you will see in 2025:

1. Part D donut hole coverage gap has been eliminated

There are some significant Medicare Part D changes for 2025. Starting January 1, 2025, Medicare Part D is eliminating the long-dreaded donut hole coverage gap. This change has been brought about by the Inflation Reduction Act and will establish a hard annual cap of $2,000 on out-of-pocket prescription drug spending under Part D. Before 2025, Medicare Part D had four coverage phases. In the deductible phase, beneficiaries paid the full cost of medications until meeting an annual deductible, which was $545 in 2024. The next phase was the initial coverage phase, where copayments or coinsurance were applied after the deductible. Once total drug costs reached $5,030 in 2024, beneficiaries entered the coverage gap, also known as the donut hole, where they faced higher out-of-pocket costs, especially for brand-name drugs. The catastrophic coverage phase began once out-of-pocket costs reached $8,000. This resulted in little to no cost-sharing for the remainder of the year.

Starting in 2025, the donut hole will be eliminated. Beneficiaries will transition to a new annual out-of-pocket maximum of $2,000 after paying the deductible and copayments. Part D plans can set a deductible of up to $590, after which beneficiaries will continue to pay copayments until reaching the $2,000 cap. To help manage these costs, Medicare will introduce a Prescription Payment Plan, which will allow beneficiaries to spread their drug payments across the year rather than paying large sums upfront. These changes can make prescription drug costs more manageable, especially for individuals with high drug expenses. With no donut hole, patients will also face decreased financial uncertainty.

2. The out-of-pocket spending cap for prescription drugs has been fixed at $2,000

2025 is bringing a significant change for Medicare beneficiaries who rely on prescription drug coverage. There will be a new annual out-of-pocket cap of $2,000, as mentioned above. The new cap will limit the amount you need to spend on prescription medications under both stand-alone Medicare Part D plans and Medicare Advantage plans that include drug coverage.

The $2,000 cap covers coinsurance, copayments, and deductibles for covered prescription drugs. However, it does not apply to premiums for your drug plan, drugs not covered by your plan, and Part B drugs, which are typically administered in a healthcare institution, such as injections.

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3. Fewer Medicare Advantage plans in 2025

While there are no changes to Medicare Advantage 2025 premiums, the number of Medicare Advantage plans available to the average beneficiary will decrease by approximately 7%. Medicare Advantage plans are offered by Medicare-approved private companies. These plans typically combine coverage for Medicare Part A, Part B, and Part D. Many Medicare Advantage plans also provide benefits that go beyond original Medicare, such as routine dental and vision care, fitness programs, wellness services, provider networks, etc.

While the reduced number of Medicare Advantage plans might seem concerning, the total number of plans will still rank among the top three largest since 2010. Having said that, this reduction may lead to fewer additional benefits. With limited plans in the market, some beneficiaries may find fewer options for extra benefits such as vision, dental, or fitness programs that are typically not covered under Original Medicare. Fewer plan options could also lead to increased costs to cover care outside of the plan’s network. It is important for retirees to review the available options during the Medicare open enrollment period carefully. You can also consult with a financial advisor to make better decisions.

4. Premium increases for Medicare Part D and Part B in 2025

As you approach the 2025 open enrollment period, be prepared for potential changes in premiums, copayments, and covered drugs under your Medicare plan. How much will Medicare premiums increase in 2025? Here’s what you should know:

• Medicare Part D premiums will see an increase in 2025. The base beneficiary premium for Medicare Part D will rise to $36.78. This is an increase of $2.08 compared to 2024. The change comes as CMS introduces a 6% cap on how much companies can increase their annual premiums. However, it is important to note that this cap applies only to the base premium and does not limit the total premium that individual plans may charge. Therefore, the actual premium you pay may vary depending on your location and the specific plan you choose.
• Additionally, Medicare Part B premiums, which cover doctor’s services and outpatient care, will increase by nearly 6% in 2025. The new premium for most beneficiaries will be $185.

5. Medicare Advantage plans will provide a midyear statement

If you are enrolled in a Medicare Advantage plan, your plan will provide a midyear statement. Medicare Advantage plans will be required to notify beneficiaries if there are any unused benefits so they can take advantage of them before the end of the year.

This statement will outline the benefits that you have not used till the sentence is generated. It can help you track your benefits and keep you updated on what is available to you for the rest of the year.

6. Fewer stand-alone Part D plans

In 2025, there will be a significant reduction in the availability of stand-alone Medicare Part D Prescription Drug Plans (PDPs). Across the 34 PDP regions nationwide, only 524 PDPs will be offered. This is a 26% decrease from 2024. Despite this reduction, beneficiaries will still have access to an average of 12 stand-alone drug plans in each state. However, the decrease in available plans may lead to changes in the list of covered medications, pharmacy networks, and whether your plan includes a deductible.

7. Part D plans expanding coverage for weight loss drugs in 2025

While Medicare traditionally does not cover drugs prescribed specifically for weight loss, Medicare Part D plans in 2025 may expand coverage for weight loss drugs. In 2024, this is only applicable to drugs that are prescribed for conditions other than weight loss itself. For example, drugs like Ozempic and Mounjaro, which are approved for treating type 2 diabetes, are already covered under Medicare.

In 2025, another drug, Wegovy, which is approved for managing obesity, is expected to be covered for Medicare beneficiaries dealing with obesity or who are overweight. However, Wegovy may be subject to relatively high cost-sharing due to its high cost. On the bright side, the introduction of the $2,000 out-of-pocket spending cap for prescription drugs will benefit Medicare Part D enrollees taking these weight loss medications and help limit their out-of-pocket expenses for these potentially expensive treatments.

8. Increased scope of mental health care and caregiver resources in 2025

In 2025, Medicare will expand coverage to address mental health care and caregiver support. This can offer families access to more resources. Medicare already covers various mental health services, including drug therapies and counseling, and will continue to support treatments for conditions like depression, anxiety, and other mental health issues. Additionally, telehealth services for mental health care will be more widely available to provide greater access to therapy and support for people in remote areas. Medicare will also cover the costs of mental health counselors, licensed marriage and family therapists, and addiction counselors. Previously, these professionals could not enroll as Medicare providers, but now more than 400,000 behavioral health clinicians nationwide will be eligible.

Medicare will also cover dementia care. The Guiding an Improved Dementia Experience (GUIDE) program, launched in 2024, will grow significantly in 2025. This program provides essential support to dementia patients and their caregivers, including up to $2,500 annually for at-home or adult daycare services. The program will expand to 294 organizations starting in July 2025, offering services through hospitals, academic medical centers, and community-based organizations that already serve dementia patients. It is important to note that to qualify for the GUIDE program, participants must be enrolled in Original Medicare, have a dementia diagnosis, and not be receiving hospice or nursing home care.

To conclude

Medicare plays a significant role in your retirement planning, so it is essential to stay updated on the changes to ensure you are making the best decisions for your future healthcare coverage. If you have any doubts or need more information, you can visit Medicare’s official website to learn more and sign up. Additionally, consulting with a financial advisor can be helpful in understanding the different Medicare options available. Your choice of Medicare plans and the parts you opt for should depend on your specific healthcare needs, so take time to evaluate them carefully. Enrolling in the right Medicare plan can help secure coverage for your future healthcare costs and have peace of mind in retirement.

Use the free advisor match tool to get matched with experienced financial advisors who can help understand the key changes to Medicare coming in 2025. Answer some simple questions about your financial needs and get matched with 2 to 3 advisors who can best fulfill your financial requirements.