The Case for Health Reimbursement Arrangements and DPC

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The key question here is whether a DPC membership is a health plan or a payment for physician services. ~Dr. Lee Gross

In October 2018, the U.S. Departments of the Treasury, Health and Human Services, and Labor issued a proposed regulation that would expand the usability of Health Reimbursement Arrangements (HRAs). The proposed regulation was the final in a series of proposed rules in response to President Trump’s October 2017 Executive Order on “Promoting Healthcare Choice and Competition”. The Treasury Department estimates that 800,000 employers would take advantage of this change, empowering approximately 10 million American workers to have more consumer-driven healthcare choices.

The regulation, if finalized, will affect plans beginning January 1, 2020. The proposed regulation would allow employees to use HRAs to purchase individual coverage on a pre-tax basis. This gives an individual the same tax-preferred advantage as the business, while allowing them additional choices beyond the typical single health plan offering of the employer. In addition, the regulation would also allow employers offering traditional employer-sponsored coverage to offer an HRA of up to $1,800 per year to reimburse an employee for certain qualified medical expenses, including certain health plans.

This proposed HRA rule creates a particular opportunity for Direct Primary Care (DPC). DPC is a fixed-fee arrangement between an individual and a physician for a defined package of healthcare services. The IRS has previously issued an unpopular opinion that DPC is a health plan, disqualifying contributions to a Health Savings Account (HSA). The IRS has never issued any formal guidance on HRAs and DPC, but many have erroneously extrapolated the HSA opinion to include HRAs.

The key question here is whether a DPC membership is a health plan or a payment for physician services. While the IRS has opined that DPC was a health plan, 25 states have passed legislation declaring that DPC is NOT a health plan.

In this proposed rule, there is an opportunity for clarification. Is DPC a health plan or is it a physician service?  It must be one or the other. It can’t be neither. That means that, for the purpose of this rule, the Treasury should pick a bucket to put DPC into. Either it is a qualified medical expense as a physician service or it is a health plan. Either way, it should fall as an HRA eligible expense under one of the newly created designations in the regulation.

At Docs 4 Patient Care Foundation, an organization that I am president, we hired the legal firm of Foley Hoag to make the case for DPC to be treated as a qualifying medical expense, in line with the 25 states that have passed legislation. In an 8-page comment letter submitted to the Department of Treasury, we laid out the legal foundation for the IRS determination of DPC as a qualifying medical expense under section 213(d) of the Internal Revenue Code, bolstered by 31 citations including supportive legal rulings for such a determination.

The public comment period recently ended. Of all the public comments submitted to Treasury on the proposed regulation, a staggering 92.5% were in support of allowing DPC to be a qualified HRA expense. This is due, in large part, to an advocacy call to action by the Association of American Physicians and Surgeons (AAPS).

While there are still efforts underway for a permanent legislative fix for the HRA and HSA issues surrounding DPC, we are hopeful that the Departments will use our legal foundation and the overwhelming public commentary to make the appropriate determination that Direct Primary Care is an eligible physician service to be paid by an HRA under this final rule. We anticipate the final rule to be released sometime this April.

If the Trump Administration is truly seeking to promote choice and competition in healthcare, this HRA determination would be an easy consumer-driven way to lower healthcare costs for millions of Americans.