The Affordable Care Act has brought some of the most fundamental changes to health care and health insurance in a generation. The biggest cultural change – the individual mandate – will not get underway until next year (2014). However, three major changes are scheduled to take place in the new year:
- Taxes will increase
- Medicaid becomes more lucrative for primary care
- Payments for uncompensated care will change dramatically
On January 1, 2013, several changes will take place which have profound implications on taxes. A new 2.3% tax on the sale of medical devices goes into effect. Estimated to generate $30 billion over 10 years, many expects view this new tax unfavorably because it applies to sales of devices and not on manufacturers’ profits. Theoretically, the tax could dwarf some companies’ profit margins. The cost of the medical device tax will likely be passed along to consumers but could threaten the viability of some firms.
Employers are losing a portion of tax deductibility for the money they pay for retiree drug coverage. The federal government has subsidized employers who provided benefits to retirees at least as generous as the Medicare Part D prescription drug plan. While not losing the subsidy itself, employers can no longer deduct the full amount of benefits paid to retirees while also accepting direct government subsidies. Thus, corporate taxes will go up a slight amount.
Flexible spending accounts, the use-it-or-lose-it plans that some employers offer for health care, will see contribution limits reduced to $2500 annually. This will have the effect of limiting some tax-free compensation for some workers. The changes to flexible spending accounts, which have been used as a tax shelter for some individuals, will affect individuals more in higher tax brackets. Forbes has some interesting ideas to work around the rule change.
The itemized deduction for medical expenses, in the past available once medical costs exceeded 7.5% of income, will see an increased threshold of 10%. While the impact of this change will largely effect senior citizens, fewer than one-half of those eligible for the itemized deduction actually use it.
Lastly, high income earners – singles making over $200,000 and married couples making over $250,000 – will see an increase in Medicare payroll taxes by 0.9% on wages and a 3.8% surcharge on unearned (investment) income. For instance, a single emergency physician making $300,000 would pay an additional $900 in Medicare tax. The money raised through this provision will strengthen Medicare’s financial reserves at the expense of high wage earners.
Medicaid Gets Sweeter
Two big changes to Medicaid promise to make the program more palatable to primary care physicians. First, the federal government will increase its matching payments to states by 1-percentage point for primary care services provided that (a) there are no cost sharing requirements for beneficiaries and (b) the services have received an “A” or “B” grade from the United States Preventative Services Task Force. Whether or not this increased federal match translates to increased revenue for physicians and other providers will be up to the individual states.
Second, primary care payment rates for Medicaid are required to bump up to Medicare rates for the next 2 years. The pay increases will be funded by $11 billion of support from the federal government. At last estimate, primary care payments in Medicaid are only 66% of the national Medicare rates. In all but 6 states (AK, DE, ID, ND, OK, WY), the Medicaid rates are lower than Medicare rates for the same service.
For the average Medicaid provider, this influx of funding amounts to a 73% pay raise. Policy makers sincerely hope this pay raise will influence some physicians who currently take Medicare but not Medicaid to open their practices to low-income patients. Hopefully, this will improve access to care for Medicaid beneficiaries in anticipation of millions of newly eligible low-income Americans in 2014.
By October 1, 2013, disproportionate share payments (DSH) to hospitals seeing high levels of uncompensated care will be trimmed by CMS in both the Medicare and Medicaid programs. Medicare DSH is set to drop by 75% while Medicaid DSH is set to decline by about 5%.
A total of $18 billion from FY2014 through FY2020 will be eliminated from Medicaid DSH payments. Those DSH payments, currently about $11 billion annually, will be cut by $500 million in FY2014. The Secretary of Health and Human Services also must devise a new methodology to divide DSH payments based on the remaining population of uninsured within the states and the amount of uncompensated care provided. The changes start prior to the Medicaid expansion which follows three months later.
However, nine states currently have declared that they are opting out of the Medicaid expansion (AL, GA, LA, ME, MS, SC, SD, OK, TX) and another 5 states are leaning away from the Medicaid expansion. Safety net facilities in these states have a short nine months to figure out how to make up for the decline in DSH funds if their patient populations will not be showing up with the Medicaid dollars expected to offset those losses.
States such as Texas and Louisiana, which have current DSH allotments larger than the total amount to be cut nationwide, could see disastrous consequences to hospitals serving low-income and uninsured populations.
Whereas 2010 was a year for immediate consumer benefits (e.g. elimination of lifetime limits, children staying on their parents insurance until age 26) and 2012 seemed the year for delivery system innovations (e.g. accountable care organizations and bundled payments), 2013 represents a period of collecting revenue to pay for the Affordable Care Act.
Restricting payments to some safety net providers and increasing revenues from certain taxpayers will be translated to improvements in the Medicaid program. Medicaid, it appears, will be a major vehicle through which health reform arrives. At least in those states where recalcitrant governors do not decide to derail progress.
Health advocates in those states where implementation of the Affordable Care Act will be slowed down by uncompromising governors and legislatures must resolve to find workable solutions to guarantee access to care for low-income individuals in their communities.
Cedric Dark, MD, MPH
*UPDATE 1/2/13 11:38am: Medicaid DSH payments will see an additional $4.2 billion cut over the next 10 years as a tradeoff for the Medicare doc-fix included in the “Fiscal Cliff” bill recently passed by Congress