Proposed Direct Primary Care Regulations Threaten HSAs

On June 10, 2020, the IRS issued proposed regulations to “treat expenses related to certain types of arrangements, potentially including direct primary care arrangements . . . as eligible expensed under Section 213(d) [of the Internal Revenue Code]” in accordance with an Executive Order issued by President Trump last summer.

In layman’s terms, the President directed the IRS to update its rules to allow for direct primary care, often called concierge medicine, to be treated as a medical expense for tax purposes. If finalized, the new rules will allow individuals to claim retainers paid to a primary care physician for guaranteed as a medical expense. They would also allow employers to help pay for a direct primary care doctor on behalf of their employees through the use of a health reimbursement arrangement. More details on how this works are available here.

Unfortunately, the proposed regulation is not as “friendly” to the direct primary care movement as first glance suggests. If finalized, this regulation poses a significant risk to the direct primary care movement. Specifically, the regulation is drafted in a way that would not allow an individual covered by a direct primary care arrangement to participate in a health savings account (or HSA). Over 21 million Americans currently take advantage of HSAs in order to save for future health expenses on a tax-deferred basis. However, as with all tax benefits, there are rules.

In the case of HSAs, in order to qualify, an individual must be covered by a high deductible health plan. Subject to several exceptions, most notably preventive care, this means that in 2020, an individual must pay out of pocket for at least $1,400 in medical expenses before their health insurance kicks in ($2,800 if they have family coverage). The philosophy here is that high deductible health plans help make the insured more informed healthcare consumers. The reward for individuals taking “control” over their health care spend is access to an HSA.

This is where the problem arises for direct primary care. According to the regulators, direct primary care is a form of “insurance.” They note that these arrangements provide services such as physicals, vaccinations, urgent care, labs, and diagnosis and treatment of illness BEFORE a high deductible has been satisfied. Therefore, they conclude that “an individual generally is not eligible to contribute to an HSA if that individual is covered by a direct primary care arrangement.”

This statement is certainly made as if excluding individuals with a direct primary care physician from participating in an HSA is an inevitable conclusion. That is not the case. It is well within the IRS’ discretion to determine that direct primary care does not count as insurance. This alone would resolve the issue. And, there is very little explanation as to why the IRS concludes DPC is insurance in a manner contrary to how limited coverage such as this has been treated for other purposes. Importantly, this could be done while still treating direct primary care as a tax-deductible medical expense.

Other alternative solutions exist. For example, the IRS could classify the services provided by direct primary care providers as “preventive” in nature. Currently, participants in HSAs can have plans that cover preventive care before the deductible. And, the definition of preventive care for HSAs is already broad enough to many maintenance medications. Why, then, couldn’t the regulations simply allow for individuals with direct primary care to participate in HSAs?

The short answer is that they probably could. With any luck, the IRS will review the comment letters being submitted on this issue by key stakeholders, including direct primary care providers and health insurance advisors, and come to a different conclusion with respect to this key issue. If not, unfortunately, these new regulations that were designed to help expand access to direct primary care will prove not to be a gift to the industry, but instead a trojan horse.


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