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Employees Can Use Pre-tax Money to Pay for 24/7 Direct Care

The Internal Revenue Service (IRS) has proposed a new rule that allows employees to use tax-advantaged, health reimbursement accounts for pay for direct primary care (DPC).

The agency announced June 8 it was proposing new regulations involving section 213d of the Internal Revenue Code and the comment period ended August 11. The rules still classify DPS as a “health plan,” which block consumers from paying for such arrangements using health savings accounts (HSAs). For the first time, however, employees can use an HRA to pay for DPC and health care sharing ministry memberships (HCSM). Additionally, taxpayers without employer plans would be allowed to deduct DPC and HCSM fees as a medical expense from their tax returns if those expenses exceeded 7.5 percent of adjusted gross income.

HRAs are funded by employers for health care but the employee, not the employer decides how to spend the money. The Trump Administration has taken steps to expand the use of HRAs in the workplace.

DPC are arrangements in which consumers pay an affordable, flat fee, usually under $100 a month per person, for what is often 24/7 primary care. Members can get discounted prescription drugs, lab and imaging services.  DPC practices keep their prices low by not accepting third-party payers, thus eliminating administrative overhead.

The new rule is a big, first step, says John Goodman, president of The Goodman Institute and co-publisher of Health Care News. “To the disappointment of many, the ruling does not allow similar employer contributions to employee HSAs,” said Goodman. “Millions of employees have an HRA and a roughly similar number (26 million) have an HSA. Employees cannot have both accounts at the same time.”

That would take an act of Congress, said Goodman. “President Trump has said he would like to make DPC available to HSA holders.”

Murkiness, not Clarity

The change, however, fails to fix a definition of DPC under the tax code, which has implications for consumers wanting to use HSAs to pay for the service, says Philip Eskew, D.O., J.D., founder of DPC Frontier and policy advisor to The Heartland Institute, which publishes Health Care News.

“It does end the 213 (d) debate, but the 223(c) gap plan one remains,” Eskew said.

Under the proposed regulations, consumers who use DPC or HCSM are still disqualified from contributing to an HSA because IRS still views them as “gap plans.” HSAs are accounts funded by consumers using pre-tax dollars to pay for medical expenses and must be linked to a high deductible insurance plan. Taxpayers cannot use HSAs to pay fees for health plans.

Eskew, whose organization tracks policy issues involving DPC, did an analysis of the 26-page proposed rule and highlighted sections he believes still discriminate against DPC. Another advocacy organization, DPC Alliance, posted the mark-up on its website, with a sample letter encouraging members to voice concerns to the IRS. The comment period for the rule ended August 10.

“For HSA correction to happen 223(c) and 213 (d) must both be corrected,” Eskew wrote on the DPC Frontier website. “For our patients to continue to fund an HSA while members of a traditional DPC practice, we need Congress to pass a bill.”

DPC Confuses IRS

The new rule undermines private practice and patient access to care, says Twila Brase, president and co-founder of Citizen’s Council for Health Freedom.

“DPC is an innovation that allows people to pay a doctor directly for medical care – no middle man or insurer is involved,” Brase said. “It’s an affordable, patient-centered, free-market option for medical care that should be expanded.”

The IRS continues to be confused about DPC, says Mark Blocher, president and CEO of Christian Healthcare Centers.

“The IRS doesn’t seem to comprehend that DPC is a relationship between a patient and a physician, much like a plumber and a homeowner,” Blocher said. “Service providers such as plumbers and electricians enter into agreements with businesses and homeowners for routine maintenance and repair service all the time. No one calls this insurance. What makes it so hard to understand when a doctor and patient have a similar relationship?

“The reality is that the IRS is adversely influenced by members of Congress who are heavily lobbied by insurance companies that spend millions in campaign contributions to prevent competition,” Blocher said. “It is a rigged system that works against patients and doctors.”

The buck stops with Congress, says Adam Habig, CEO and co-founder of Freedom Healthworks and policy advisor to The Heartland Institute.

“Congress has so far failed to clarify this innovation, so the IRS is forced to view it through an outdated regulatory lens,” Habig said. “All levels of government, local, state and national need to encourage innovation in health care deliver, since the inefficient government-dominated, insurance-based system is bankrupting the nation and delivery mediocre results.”

AnneMarie Schieber (amschieber@heartland.org) is managing editor of Health Care News.

AnneMarie Schieber
AnneMarie Schieber is a research fellow at The Heartland Institute and managing editor of Health Care News, Heartland's monthly newspaper for health care reform.

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