Medicare, these days, seems like a moving target.

The Patient Protection and Affordable Care Act of 2010 made a number of sweeping changes in the way Medicare is delivered and funded. These changes are due to unfold over the next several years.

Rather than speculate about what further changes Congress might make, it is worth taking a moment to understand how Medicare works today.

Benefits are organized into four parts:

• Part A covers a portion of the costs of a hospital or skilled nursing facility stay, home health care, hospice care, and inpatient medications. Workers pay for Part A during their working years through payroll deductions. There is no additional premium if sufficient Medicare taxes are paid during this time.
• Part B covers a portion of the costs for physicians (inpatient and outpatient) and a variety of outpatient services and medications. You pay for Part B monthly once benefits begin. The premium schedule includes five payment tiers and was organized into an income-based system a few years ago.
• Part C is an optional way to receive Medicare benefits through a private insurance company which receives reimbursement from Medicare. Known as a Medicare Advantage plan, coverage includes Parts A and B and often a Part D prescription drug plan. Part C provides basic Medicare coverage plus additional benefits to fill in gaps not covered by Medicare. Insurance companies charge a monthly premium for Part C and require that you be enrolled in Parts A and B and separately pay for Part B in order to receive coverage.
• Part D covers a portion of prescription drug costs. Coverage is provided by private insurance companies and is paid through an additional monthly premium (unless covered under Part C above). The federal government, starting in 2011, also now charges a modest monthly premium for high-income individuals.

Folks who are not covered by a Part C Medicare Advantage plan are well-advised to enroll in a Medicare Supplement (or Medigap) policy from a private insurer in order to fill in the cost and service “gaps” not covered by basic Medicare.

Generally, you qualify for Medicare at age 65 or older if you are a US citizen or permanent legal resident and you or your spouse worked long to be eligible for Social Security or railroad retirement benefits. A few exceptions apply.

If you do not qualify on your own or spouse’s work record, you generally can still be covered under Medicare starting at age 65 if you pay Part A premiums in addition to Parts B and D premiums.

It is critical that you sign up for Medicare at the right time to avoid penalties being added permanently to your premiums.

If you are retired, you should apply during the Initial Enrollment Period – the month you turn age 65 and the 3-month periods before and after. This will require an active step on your part unless you are already receiving Social Security benefits, in which case you are automatically enrolled and will receive your Medicare card in the mail.

You can delay applying for Medicare without penalty if you have group health insurance through your or your spouse’s employer. Once your group coverage ends, you can avoid a late penalty by applying during the Special Enrollment Period – a period of 8 months from the date your group coverage ends.

If you miss your Part B enrollment deadline, your only choice is to sign up during the General Enrollment Period – January 1 to March 31 each year with coverage beginning July 1. For late Part D enrollment, you can apply only in the October 15 to December 7 Part D Open Enrollment Period with coverage beginning January 1. In both cases, late enrollment results in a permanent dollar penalty added to your premiums.

Given that Medicare premiums are now tied to income and adjusted annually, some income planning may be helpful. If you have control over income timing (capital gains, for example), try to manage income so that higher premiums are more focused, not spread over several years. Also, if you are over 70-1/2 and wish to make a sizeable charitable contribution, consider using the direct IRA-to-charity transfer route in order to reduce the impact of a required minimum distribution on your 2013 adjusted gross income. (Note that this charitable giving method sunsets at the end of 2013.)

The summary presented here merely scratches the Medicare planning surface. To develop a more comprehensive understanding/strategy, consult directly with your trusted financial planner.