New IRS Rule Has Pros and Cons for Direct Primary Care

We told you that SOMEDAY we would write a blog post again that didn’t focus on the coronavirus. As it turns out, Day #102 is our lucky day! What caused the deviation from mandatory health plan changes, tax credits, and PPP nonsense? Why a proposed regulation to expand the definition of qualified medical expenses. The good news is the measure would let employers reimburse direct primary care fees and other health insurance arrangements through health reimbursement arrangements (HRA). The bad news is it makes it almost impossible to both participate in a direct primary care (DPC) program and: 

  1. enroll in a qualified high deductible health plan (HDHP); 
  2. contribute to a health savings account (HSA); or
  3. use existing HSA funds to pay for DPC fees on a tax-preferred basis.

The idea for the new rule came right from President Trump. He issued an Executive Order almost one year ago instructing the Treasury Department to:  

“propose regulations to treat expenses related to certain types of arrangements, potentially including direct primary care arrangements and healthcare sharing ministries, as eligible medical expenses under section 213(d) of title 26, United States Code.”

The Internal Revenue Service (IRS) acted on his directive with a proposal to treat direct primary care arrangement fees as either medical care under IRC §213(a)(1)(A) or medical insurance as outlined in IRC §213(a)(1)(D), depending on the arrangement’s structure. 

Many people are talking about how the proposed rule also classifies healthcare sharing ministries as medical insurance for qualified medical expense purposes. That provision doesn’t interest us much, though. It only applies to ministries in continuous existence since December 31, 1999. The only bit we do appreciate is the tortuous way the IRS tried to clarify that while health care sharing ministries are considered medical insurance for the purpose of the rule, that doesn’t mean they are actually health insurance. The circular talk amuses us since healthcare sharing ministries have long resisted being termed as insurance. That would subject them to what they seem to view as the horror of state-based regulation.

What we truly want to discuss is the impact this regulation could have on DPC arrangements and both HRAs and HSAs.  Employers are increasingly turning to DPC to provide employees with access to a quality medical home for their immediate needs. At the same time, DPC can reduce overall employer health care spending.  A recent American Academy of Actuaries report illustrates the growing popularity of DPC and its benefits for both employees and group plans.

As it stands right now, the rule could expand DPC’s use by employers that offer HRAs as part of their group benefits arrangement. It explicitly allows employers to use HRA funds to reimburse employees for DPC fees as qualified medical expenses. Existing rules establish that HRAs must integrate with another type of comprehensive health coverage, or for an excepted benefit HRA, with an excepted benefit plan. The proposed rule indicates that DPC alone is insufficient for this purpose, so traditional group coverage (or in the case of a qualified small employer HRA or individual coverage HRA, individual major medical coverage) must be in place as well. We are excited about this section of the proposed rule. DPC is a very cost-effective way to improve the quality of an individual’s primary care experience. For the employer group plans that can handle the administrative issues associated with offering HRA coverage and want to utilize that plan design, the rule provides an excellent new care option.

When it comes to account-based plans, though, many business owners who want to promote consumerism prefer HSA-compatible plans to HRAs. Since HRA funds are purely owned and controlled by the employer, there are no tax advantages or cost savings for employees who make responsible medical choices. 

Unfortunately, the proposed rule would make it virtually impossible for the more than 21 million people with HDHP coverage and an HSA to engage in DPC services. It also seems to rule out people using funds in an existing HSA to pay for DPC fees, even if they do not have HDHP coverage currently.   

The concept of DPC pairs quite well with the cost-saving and personal responsibility components of qualified HDHP coverage combined with an HSA. Still, there’s always been legal uncertainty about combining them. Federal law outlined in IRC §226 states that a person may contribute to an HSA account only if also enrolled in a qualified HDHP. Section 226 of the Internal Revenue Code also regulates what other sources of medical care coverage an individual may have in addition to an HDHP. 

The preamble to the proposed rule eliminates any previously existing ambiguity about the IRS’s view of the relationship between HSAs and DPC.  Instead, it makes it clear that the IRS feels it is almost impossible for a person to engage in a DPC arrangement, even on their own, and still have HDHP coverage and legally contribute to an HSA. When it comes to an HDHP, the IRS officially deems DPC as other health insurance coverage. The rule explains that in this circumstance, DPC generally provides access to services before the application of the HDHP deductible that goes beyond the scope of what the IRS considers to be preventive care and meets the standard of other health insurance. This stipulation comes even though:

  1. Thirty-two states consider DPC to be a medical service rather than a health plan and exempt it from insurance regulation
  2. The federal Department of Health and Human Services shares the view expressed by the majority of states, noting the March 12, 2012, final exchange rule that “direct primary care medical homes are not insurance.”  
  3. In the HRA section of the measure, the IRS implies that DPC is not health insurance for HRA integration purposes. 
  4. When defining DPC for the entire rule, the IRS calls it “ a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care (as defined in section 213(d)(1)(A)) for a fixed annual or periodic fee without billing a third party.” 

In the spirit of fairness, we want to point out that the rule does indicate in specific circumstances a person might engage in a minimal direct primary care arrangement and also contribute to an HSA, but not if an employer pays for DPC fees in any way. 

Beyond the issue of disallowing current HSA contributions when engaging in DPC services, the proposed rule seemingly prohibits the use of existing HSA funds to reimburse DPC fees for most people, even if they aren’t a current HDHP policyholder. The rule may deem DPC fees to be qualified medical expenses under IRC §213. However, it also indicates that for HSA purposes, DPC arrangements will almost always be considered other disqualifying health insurance. People can’t generally use HSA funds to pay for health insurance premiums on a tax-preferred basis unless they are over age 65. So yet again, this proposal would make DPC way less attractive to any HSA account-holder or employer plan sponsor that favors HSAs.   

We find the IRS’s point of view regarding HSAs and DPC and employer-sponsored coverage to be infuriating, to put it mildly. That’s why we are also pretty interested in the politics surrounding the rule. The whole HSA section should make it a poison pill for many of the Trump Administration’s traditional champions, as most of them are long-standing HSA proponents. In Congress, the concept of DPC and HSA integration has bipartisan support. Also, the timing of the regulation is notable. There’s a 60-day public comment period, which lasts through August 10, 2020. Only after all public comments are reviewed may the Trump Administration finalize the proposal. So, a version of this plan could have the force of law around the time of the presidential election. As currently drafted, this regulation would go into effect on January 1 of the first year after finalization.

Needless to say, we’ll be carefully observing the development of this rule. What do you think about the proposal?  Friends, we’d love to hear your views.


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Joel White

Horizon Government Affairs

Horizon Government Affairs was founded in 2007 by Joel White, a veteran of Capitol Hill who served as staff director for the Ways and Means Health Subcommittee. Since then, we have built an impressive bipartisan team of thought leaders and problem solvers with decades of experience in securing wins for our clients.
As experts in our field, we help our clients pass legislation, change regulations, testify to Congress, and drive the conversation on emerging issues. We do this through creative policy development, data driven-insights, innovative issue campaigns and advocacy strategies and through coalitions of allies we have cultivated for years.
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Jennifer Berman, Esq.

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Jen Berman is an employee benefits attorney. In that capacity, Jen routinely negotiates service contracts and drafts employee benefit plans, summary plan descriptions and employee communications. She also reviews client benefit programs for compliance with the Internal Revenue Code, ERISA, HIPAA, COBRA, ACA, wellness plan rules and other applicable statutes.

Since the passage of the Affordable Care Act in 2010, Jen has also become an “ACA compliance educator.” She is a leader in analyzing health care reform developments and frequently serves as a speaker and commentator on a wide variety of health care reform and employee benefits issues.

In addition to serving as CEO of MZQ Consulting, LLC, Jen is also a member of Holder Law Group LLC. Prior to joining Holder Law, Jen practiced at Venable LLP as part of their Employee Benefits and Executive Compensation practice group. Jen graduated cum laude from the University of Pennsylvania Law School, where she was Editor-in-Chief of the University of Pennsylvania Journal of Labor and Employment Law. Jen also completed her undergraduate studies at the University of Pennsylvania, graduating magna cum laude with a Bachelor’s of Arts in Political Science. She is an avid lover of textile arts, frequently wearing stunning pieces she has hand-crafted herself.

Alan Schulman

Alan Schulman
Alan Schulman is President of Insurance Benefits and Advisors. IBAA is a leading diversified comprehensive insurance brokerage and advisory practice specializing in life insurance, health and welfare services, retirement plan consulting, property & casualty insurance, and wealth management. Alan started his career in 1980 as a Certified Financial Planner and transitioned into the insurance industry in 1988 to work with company owners on their employee benefits. Alan is licensed in health, life, long term care and all lines of business insurance, and assists top executives in creating and preserving wealth and a secure retirement. Alan is past President of The Greater Washington National Association of Health Underwriters (GWAHU) and is past President of the Maryland Association of Health Underwriters (MAHU). He is a lifetime member of the Leading Producers Round Table of the National Association of Health Underwriters (NAHU), and was appointed in 2010 to sit on the Board of Directors for NAHU’s political action committee, the Healthcare Underwriters Political Action Committee (HUPAC). On March 6th, 2014 Alan testified before the U.S. Congressional Small Business Committee, representing NAHU and his client, on the impact of the Patient Protection and Affordable Care Act (PPACA, commonly referred to as “Obama Care”), on small and medium size businesses. Alan currently serves on the Joint Legislative Task Force in Maryland, and meets with legislators in Annapolis to assist in the creation of laws that positively affect the cost of health insurance. He was an original member of the MD and DC Health Insurance Exchange Advisory Committees. Passionate about serving his community, Alan is a member of the Maryland Nonprofits Association and Maryland Association of Community Services (MACS). In 2014, he served on the Board of Directors for Hearts & Homes for Youth, a non-profit organization serving young survivors of neglect and abuse. Alan is a board member with JCRC. He is also an active member of the Metro Bethesda Rotary Club. Alan and his wife Robin have been married for 35 years and have resided in Olney Maryland for 33 years, where they raised their two daughters.

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