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Health Law in the New Year: It's Not Just Exchanges and Medicaid

By John Reichard, CQ HealthBeat Editor

November 28, 2012 -- There's a lot happening in coming weeks to implement the health care law that has nothing to do with what everyone has been talking about in recent days—standing up health insurance exchanges, expanding Medicaid, and establishing a new regulatory structure for the insurance market.

Just consider the changes that occur starting Jan. 1.

That day marks the start of the Medicare bundled payment pilot. It's a form of reimbursement that policy analysts hope will help bend down the upward curve in health care spending, together with other strategies.

Hospitals, doctors, and nursing facilities taking part in the Bundled Payments for Care Improvement Initiative will get one payment for multiple services a patient receives during an episode of care. "For example, instead of a surgical procedure generating multiple claims from multiple providers, the entire team is compensated with a 'bundled' payment that provides incentives to deliver health care services more efficiently while maintaining or improving quality of care," the Centers for Medicare and Medicaid Services explained in a Federal Register notice announcing the program. The pilot will test bundled payments for 48 types of treatment episodes.

According to an HHS official, the project will pick up steam as the year goes on.

"Early in December, applicants will let us know if they would like to participate and the episodes they will participate in that will begin the initial phase of the model," the official said. "For the first two quarters of next year, CMS will share data and the hospitals will not be at risk for their performance. Applicants will give us feedback." The actual bundled payments will begin after that.

It's unclear how many providers will participate. However, a recent study by Robert Mechanic, a senior fellow at Brandeis University, examined data from 100 hospitals that had expressed interest in taking part.

Prescription Drugs

The phasing in of federal subsidies to close the gap in Medicare Part D coverage also begins Jan. 1. Before the health care law, beneficiaries in the "doughnut hole" paid 100 percent of prescription costs. In the case of brand-name drugs, manufacturers in 2013 will continue to give discounts picking up 50 percent of the costs, as they did starting in 2011.

Federal money starts plugging the gap, too, such that next year Uncle Sam covers 2.5 percent of the costs and the beneficiary the remaining 47.5 percent.

In following years, the figures are as follows: 2014, 2.5 percent federal/47.5 percent beneficiary; 2015, 5 percent federal/45 percent beneficiary; 2016, 5 percent federal/45 percent beneficiary; 2017, 10 percent federal/40 percent beneficiary; 2018, 15 percent federal/35 percent beneficiary; and 2019, 20 percent federal/30 percent beneficiary. In 2020 and years thereafter, the federal government will pay 75 percent of prescription costs and beneficiaries will pay 25 percent, just as they do for drugs outside the doughnut hole.

Similarly, the beneficiary share of generic drug prescriptions in the doughnut shrinks in 2013 with the federal government picking up more of the tab. Next year, beneficiaries pay 79 percent of the expense and the government 21 percent (compared to 86 percent and 14 percent, respectively, in 2012).

After 2013, the breakdown is as follows: 2014, 28 percent federal/72 percent beneficiary; 2015, 35 percent federal/65 percent beneficiary; 2016, 42 percent federal/58 percent beneficiary; 2017, 49 percent federal/51 percent beneficiary; 2018, 56 percent federal/44 percent beneficiary; and 2019, 63 percent federal/37 percent beneficiary. In 2020 and years thereafter, the federal government will pay 75 percent and beneficiaries will pay 25 percent.

Hit on Some Taxpayers

January also brings changes that could anger some taxpayers who have big incomes or who qualify for certain tax breaks. For example, the threshold for the itemized deduction for unreimbursed medical expenses rises to 10 percent of adjusted gross income, up from 7.5 percent now. However, the increase is waived for individuals 65 and older for tax years 2013-2016.

Also, contributions to flexible spending accounts that allow payments for medical expenses with pre-tax dollars can no longer exceed $2,500 starting in 2013, with the ceiling raised each year after that by a cost-of-living adjustment.

Until now, employers have been responsible for setting their own FSA limits, which in many cases have ranged from $2,500 to $5,000, according to the Center on Budget and Policy Priorities. The center estimates that one of every seven workers in 2010 had an FSA and that the average account had $1,420.

Also starting next year, affluent wage earners pay higher Medicare taxes. They pay an added 0.9 percent payroll tax for the Medicare Part A trust fund that pays for hospital care. They'll pay the current 1.45 percent on earnings up to $200,000 for individual taxpayers and $250,000 for married couples, but over that limit they pay the added 0.9 percent, for a total of 2.35 percent.

And taxpayers in these income brackets pay a separate 3.8 percent additional Medicare tax on unearned income, such as interest, dividends, annuities and capital gains.

For their part, employers who have been getting federal subsidies to continue retiree drug coverage can no longer also take those subsidies as a tax deduction starting Jan. 1. The provision caused a big stir shortly after the health care overhaul became law when large companies said they would have to take billions of dollars in write-offs, but Democrats said the outcry was overblown.

But there's plenty of controversy now about another tax change, an excise tax of 2.3 percent on the sale of any taxable medical device. The device industry says the provision will force big layoffs. For example, a leading device manufacturer, Kalamazoo, Mich.-based Stryker Corp., announced in November 2011 that it was laying off about 1,000 of its 20,000 workers in 2012, blaming the reduction in part on the excise tax. But the Center on Budget and Policy Priorities asserts that claims of large job losses from the tax are not credible, saying the coverage expansion will increase the number of elective medical procedures performed in the U.S. and that in turn will increase the sales of medical devices.

Medicaid Changes

Perhaps less controversial is a change in Medicaid that provides a one percentage point increase in federal matching payments to states in which Medicaid programs cover preventive services rated A or B by the U.S. Preventive Services Task Force without requiring patients to share any of the costs.

But another Medicaid change—upping rates paid to primary care doctors in 2013 and 2014 to the payment rates Medicare pays—hasn't eluded controversy, even though the increase will be funded fully by the federal government. Florida Gov. Rick Scott, a Republican, is dragging his heels in adopting the change.

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