The document summarizes changes to Medicare and Medicaid that took effect on January 1, 2013 as mandated by the Affordable Care Act. Key changes include an increase in Medicare tax for high-income individuals, elimination of tax deductions for the retiree drug subsidy, increased Medicaid payments for primary care physicians, and authorization of bundled payments under Medicare. It provides questions and answers about these changes and their potential impact.

1. Legislative Alert:
2013 Changes to
Medicare & Medicaid

2. On January 1, 2013, several important changes to
Medicare and Medicaid mandated by the Patient
Protection and Affordable Care Act (PPACA) took
effect. This Legislative Alert provides a brief update
of many of those changes. For any specific legal or
financial advice, it is recommended that you consult
with a licensed professional in your state.

3. Medicare Tax Increase
Beginning on January 1, 2013, employers must
withhold an additional 0.9 percent Medicare tax
from employee paychecks with incomes over
certain thresholds.

4. Questions and Answers
Q. When are employees or individuals subject to the
tax?
A. If an employee or individual’s wages, compensation, or
self-employment income is above certain thresholds, the
person will be subject to the increased tax. The tax will apply
to wages and compensation above the following thresholds:

5. Questions and Answers
Q. What wages are subject to the tax?
A. Any wages that are currently subject to the Medicare
tax will be affected by the tax increase.

6. Questions and Answers
Q. Does an employer have to withhold the additional
tax from my employee’s wages?
A. Yes. An employer must withhold the additional tax from
wages paid to an individual in excess of the $200,000 amount
regardless of the individual’s filing status or wages paid by
another employer.

7. Questions and Answers
Q. If an employee surpasses the threshold limit via
multiple sources of income, can the employee request
additional withholding from his employer?
A. Not specifically for the purpose of the additional Medicare tax. If an
employee anticipates that their total income will surpass the threshold,
but not through a single employer, the employee may request the
employer withhold an additional amount of income withholding on the IRS
Form W-4. The additional income tax withholding will then be applied
against the employee’s taxes as shown on their tax return, including any
additional Medicare tax liability.
The employee also may make estimated tax payments if the employee
believes that he or she will exceed the threshold via multiple sources
of income.

8. Questions and Answers
Q. If an employee or individual makes over $200,000
annually, files jointly with his or her spouse, and the
couple makes less than $250,000, can the employee
ask the employer to stop withholding the additional
tax?
A. No. The employer must withhold the additional tax amount.
However, the couple may claim credit for any additional
Medicare tax liability against the total tax liability on your
individual income tax return.

9. Questions and Answers
Q. Are employer’s required to match the amount of the
additional Medicare tax?
A. No. Employers are not required to match the additional tax
amount.
For more information on the increased Medicare tax, please
see the following IRS Question and Answer page.

10. Employer Retiree Coverage Subsidy
Another key change in 2013 concerns the Retiree Drug
Subsidy Reduction. As of January 1, 2013, employers
will still receive the tax-free subsidy, but employers will
no longer be able to deduct the cost of prescription
drugs to the extent reimbursed by the federal subsidy
on their federal tax returns.

11. Questions and Answers
Q. How is the Employer Retiree Coverage Subsidy
changing?
A. Prior to January 1, 2013, employers were eligible for a tax-free subsidy
of 28% of the costs they incurred to provide a prescription drug benefit
program to their retirees. This subsidy was authorized by the Medicare
Modernization Act of 2003. Employers were also able to deduct any
outlays made with these subsidies to provide retiree drug coverage for
income tax purposes.
This year, employers may still receive the subsidy, but will not be able to
deduct the cost of the prescription drugs to the extent reimbursed by the
subsidy on federal tax returns.

12. Questions and Answers
Q. What types of coverage does this apply?
A. Prescription drug coverage that is actuarially equivalent to
the coverage offered under Medicare Part D is eligible for the
federal subsidy.

13. Questions and Answers
Q. Is this coverage included in taxable income?
A. The coverage is not included as taxable income.
However, this change will eliminate the tax deduction to the
extent of the subsidy received.

14. Questions and Answers
Q. What kind of impact will this change have on
businesses?
A. Although the change just recently went into effect, a
Towers Watson study estimated the total cost for U.S.
corporate financial statements would be $14B if companies
did not shift their retirees out of drug subsidy plans. An
American Benefits Council study estimated that between 1.5M
and 2M retirees would have their drug coverage terminated
because employers would be forced to shift them into
Medicare Part D coverage.
The exact impact on businesses remains to be seen.

15. Increasing Medicaid Payments for
Primary Care Doctors
Beginning in 2013, the federal government is increasing Medicaid
payment rates to primary care physicians. This increase is in
response to Medicaid programs preparing to cover more patients.
In 2013, the Medicaid payment rates are being increased to at
least 100 percent of associated Medicare rates.
From 2011 to 2015, the federal government will also provide
funding to Medicare to provide a 10 percent bonus payment for
primary care provided by qualified physicians. However, it should
be noted that Medicare and Medicaid reimbursements are
typically lower than private payer reimbursement rates.

16. Expanded Authority to Bundle Medicare Payments
To encourage hospitals, doctors and other providers to work
together, PPACA allows for payment bundling. This means
hospitals, doctors and providers are paid a flat rate for an episode
of care rather than the current fragmented system where each
service or test is billed separately to Medicare.
These are only some of the changes that will be implemented in
2013.
We will continue to keep you apprised of changes as they occur,
and will tell you what you need to know to remain compliant with
PPACA.

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