On June 10, the IRS published
a proposed rule that would let employer-funded health reimbursement arrangements (HRAs) pay for employees' care received through direct primary care arrangements (DPCAs) and health care sharing ministries (HCSMs).
Both options, while controversial, have attracted interest as lower-cost alternatives to traditional employer-provided group health care plans or to nongroup health coverage purchased through an Affordable Care Act (ACA) marketplace exchange.
New Coverage Options
A DPCA is
a contract between an individual and primary care doctors under which the doctors agree to provide medical care for a fixed fee, usually paid monthly or annually, explained Ed Fensholt, senior vice president and director of compliance services at Lockton, a benefits brokerage and advisory firm in Kansas City, Mo. An HCSM is a tax-exempt organization under which members share a common set of ethical or religious beliefs and share medical expenses among themselves.
HRAs, including
qualified small employer HRAs (QSEHRAs), HRAs integrated with traditional employer group health plans, and
individual coverage HRAs (ICHRAs) may reimburse employees' expenses for medical care. However, employees have only been allowed to use QSEHRAs or ICHRAs to pay premiums for health coverage purchased on the individual market, such as through an ACA exchange. The proposed rule would allow HRAs generally to pay for or reimburse DPCA and HCSM fees, which the IRS views as akin to paying for reimbursable medical expenses rather than plan premiums.
They rule would also allow people without insurance or stand-alone HRAs to deduct payments to DPCAs or HCSMs as eligible expenses under Section 213 of the tax code.
Not for HSAs or FSAs
In most cases, coverage of employees under a DPCA or HCSM would disqualify them from making health savings account (HSA) contributions, as the ability to do so is limited to people enrolled solely in a high-deduction health plan. The rule does not apply to health care flexible spending accounts (FSAs).
Health Account Restrictions
"The regulations give some clarity on when direct primary care arrangements and membership fees to a health sharing ministry are a qualified medical expense under Internal Revenue Code Section 213(d)," said William F. Sweetnam, Jr., legislative and technical director at the Employers Council on Flexible Compensation, which represents sponsors of account-based benefit plans. Section 213(d) expenses can be paid by an HRA or an HSA, he noted, but employees would not be able to make additional HSA contributions if they were receiving coverage through a DPCA or HCSM.
Sweetman hoped the IRS would provide future guidance on whether health FSAs could pay for any expenses associated with a DPCA or HCSM.
Under the proposal, DPCA fees would only be reimbursable for care provided by primary care physicians, generally meaning those who specialize in family, internal, geriatric or pediatric medicine, Fensholt pointed out, adding that "the proposed rule does not yet extend this treatment to arrangements providing for direct primary care from nonphysicians, nor does it apply to arrangements where the care is dental or vision care."
The proposed rule requests comments regarding the definition of a primary care provider, and whether fees for DPCAs with other care providers should be reimbursable from an HRA.
[SHRM members-only toolkit:
Managing Health Care Costs]
Guidance Welcomed
"The rule, as proposed, is generally good news for employers and their employees," Fensholt said. "It provides some welcome guidance and expands the certainty around DPCA and HCSM use, albeit with some limitations employers might be less enthusiastic about."
Josh Miner, senior product manager at PeopleKeep, a provider of consumer-directed accounts, believes the proposal "makes it clear that the government
is determined to reduce the burden of medical costs of Americans through tax-advantaged HRAs."
Critics' Concerns
Katie Keith, a former research professor at Georgetown University's Center on Health Insurance Reforms and a contributor to the Health Affairs blog,
noted objections to allowing HRAs to pay for DPCA and HCSM fees.
"Concerns have been raised that consumers are treating stand-alone direct primary care arrangements as a substitute for health insurance, leaving significant gaps if and when someone needs more advanced care than a primary care practice can provide (such as emergency care or hospitalization)," she blogged after the IRS proposal was issued.
Although enrollment in HCSMs is on the rise, with an estimated one million people enrolled in more than 100 ministries in at least 29 states where they are permitted, "the increase in enrollment has brought significant concerns about the degree to which health care sharing ministries are illegally operating and being marketed as health insurance," Keith wrote. "At least some members end up with significant unpaid medical bills or in debt collection over even small bills that go unpaid since payment for needed care is not guaranteed."
Comment Deadline
The IRS will accept comments on the proposed rule through Aug. 10, 2020. Fensholt expects the proposal to be finalized later this year.