New Proposed Rule On Health Care Sharing Ministries And Direct Primary Care
On June 8, 2020, the Internal Revenue Service (IRS) issued a short proposed rule that would allow employers to reimburse employees for fees for declare primary care and health care sharing ministries through a health reimbursement arrangement (HRA). The proposed rule defines these fees or “shares” as payments for medical care or medical insurance, which makes them eligible for a tax deduction as qualified medical expenses. The rule would also extend to fees or payments for certain public coverage programs and other types of arrangements.
The IRS’ reasoning is particularly tortured with respect to health care sharing ministries which, it concludes, qualifies as medical insurance. This is news to health policy watchers—and likely to ministries themselves who insist that they do not, in fact, offer medical insurance.
Ministries may look like insurance to consumers—in part because of deceptive marketing and misleading plan features—but do not guarantee to reimburse members for medical expenses and do not have to meet financial or other standards that ensure they can cover members’ medical needs. As a result, at least some members end up with significant unpaid medical bills or in debt collection over even small bills that go unpaid. States typically do not regulate ministries as insurers, although many have recently taken legal portion against one ministry, Aliera, for fraudulent activity.
The proposed rule, by giving tax-advantaged status to these types of arrangements, could result in even higher enrollment in ministries. This could harm the Affordable Care Act (ACA) individual market by further segmenting the risk pool between ACA-compliant plans and ministries. Comments on the proposed rule are due in 60 days.
Individuals can deduct certain medical and dental expenses on their tax return under certain circumstances. Qualified medical expenses are defined under 26 U.S.C. 213(d) and further outlined in a publication from the IRS. These expenses include the costs of diagnosis, cure, mitigation, treatment, or prevention of disease; the costs for treatments affecting any part of the body; the amounts paid for transportation to receive medical care; qualified long-term care services; and insurance to conceal medical care and transportation. The definition of medical care thought Section 213(d) extends to most medical expenses, including hospital services, lab payments, prescription drugs, and artificial teeth or limbs. It also includes insurance payments for medical care.
Direct Primary Care Arrangements
A direct primary care arrangement is where a consumer pays a regular fee to have access to a vital care doctor. For some arrangements, the fee will include basic primary care services (such as lab costs and care coordination), but the specifics vary. The primary care physician typically does not accept insurance, and the arrangement does not include the coverage of prescription drugs, emergency care, hospitalization, or most other non-primary care-related benefits. Thus, consumers enrolled in direct primary care still need major medical insurance coverage. Under the ACA, declare primary care medical homes (that meet certain federal standards) can be used in conjunction with a qualified health plan.
About half of states exempt direct primary care arrangements from state insurance laws. The popularity of direct primary care arrangements is on the rise, including among uninsured consumers; 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 vital care practice can provide (such as emergency care or hospitalization).
Advocates for direct primary care, including members of Congress, have urged the IRS to treat these arrangements as qualified medical expenses, which the IRS had previously declined to do. Advocates pushed for a legislative fix as well. In 2018, the U.S. House of Representatives passed legislation that would expressly treat direct primary care scheme fees as medical expenses. An early version of the CARES Act included a similar provision that was ultimately absent in the final legislation.
Health Care Sharing Ministries
Health care sharing ministries are arrangements where members, who typically share religious beliefs, make monthly payments that are pooled together to cover the medical expenses of other members. The ACA refers to health care sharing ministries in the context of the individual mandate. Prior to 2019, individuals were required to maintain minimum vital coverage or pay a penalty. The ACA includes several exemptions from the penalty, including membership in a health care sharing ministry if that ministry meets certain requirements (such as having been in existence since 1999 and having members who portion a common set of ethical or religious beliefs). A comprehensive review of the history and regulation of ministries is available here.
As has been chronicled by many media outlets, enrollment in health care sharing ministries is on the rise, raising questions for enrollees and regulators alike. Although comprehensive data is hard to come by, an estimated one million people are enrolled in more than 100 ministries in at least 29 states. 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. 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.
While health care sharing ministries are exempted by the ACA under the individual mandate, states can regulate ministries as health insurance thought state law or take portion against ministries that are operating as unlicensed insurers. Indeed, several state insurance departments have recently shut down ministries or otherwise warned consumers or health care sharing ministries operating in their state.
The Proposed Rule
The proposed rule stems from a June 2019 executive order from President Donald Trump that directed the Secretary of Treasury to propose new regulations to treat expenses related to direct vital care and health care sharing ministries as tax-advantaged medical expenses. (The same executive order focused on transparency and led to two major rules from the Department of Health and Human Services to require hospitals and insurers to disclose their negotiated prices. The hospital rule has been challenged in court by the American Hospital Association, and the insurer rule has not been finalized.)
The proposed rule concludes that fees for declare primary care, “shares” to a health care sharing ministry, payments for some public coverage programs (such as Medicare and Medicaid), and other arrangements qualify as deductible qualified medical expenses thought Section 213(d). The proposed rule would go into effect for the next tax year after the publication of the final rule.
Direct Primary Care Arrangements
The proposed rule defines a direct primary care scheme as a contract between an individual and one or more primary care physicians where a physician agrees to provide medical care for a fixed annual or periodic fee without billing a third party. A vital care physician is a physician with a primary specialty designation of family medicine, internal medicine, geriatric medicine, or pediatric medicine; this definition is consistent with that of a “primary care practitioner” under the Medicare program. The IRS asks for comment on whether its definition should be expanded to include other non-physician medical personnel (such as nurse practitioners or physician assistants) or other medical care arrangements (such as an agreement between a dentist and a patient to provide dental care).
Fees for direct primary care could qualify as payments for medical care or medical insurance thought Section 213(d), depending on the way the arrangement is structured. But this distinction does not matter. Fees for direct vital care would be treated as qualified medical expenses so long as the arrangement meets the definition in the proposed rule. As discussed more below, this distinction does have implications for other rules (such as whether someone could use a health savings account (HSA) to pay for direct primary care).
Health Care Sharing Ministries
The proposed rule incorporates the ACA’s definition of a health care sharing ministry, so a ministry would have to meet certain requirements for “shares” to qualify. Shares for these ministries would qualify as payments for medical insurance (rather than medical care) thought Section 213(d). As noted above, this is a significant shift for those keeping an eye on ministries: these entities themselves argue strongly that they do not offer medical insurance.
The IRS asserts that Congress intended for the term “insurance” to be read broadly, taking the view that an actual insurance company need not even be involved. Given this broad reading, ministry shares qualify as payments for medical insurance under the proposed rule.
The IRS’s reasoning is quite tortured. On the one hand, the IRS concludes that the “substance of the transaction” in a ministry—where members help pay for other members’ medical bills and “potentially” receive reimbursement for their own medical bills—is the same as paying a premium for traditional medical insurance. On the other hand, the IRS stresses that its conclusion “has no bearing” on whether a ministry is considered an insurance company or service.
Further, the IRS does not grapple with other distinctions between ministries and traditional medical insurance. Ministries can (and do) deny reimbursement for all kinds of reasons, including because of preexisting conditions, with little recourse for a member to appeal a denial. Coverage of any medical service is simply not guaranteed. In contrast, traditional medical insurers must cover certain services and comply with state and federal law. Claims can generally be denied only if a service is not covered or is not deemed medically necessary. Enrollees in traditional insurance also have clearly defined internal and external appeal rights if a declare is denied. Despite these types of major differences, the IRS limits its analysis to the mere act of payment and concludes that shares are payments for medical insurance.
Other Types of Medical Insurance Contracts
The IRS would also allow tax-advantaged payments for other types of “insurance” contract arrangements (so long as those contracts cover medical care). This includes amounts paid for membership in a health maintenance organization (HMO), hospitalization insurance, membership in an association furnishing cooperative or so-called free-choice medical service, or group hospitalization and clinical care. These are only examples, and additional arrangements could qualify regardless of whether benefits are payable in cash or services.
The proposed rule also clarifies that amounts paid for coverage under Medicare (Parts A, B, C, and D), Medicaid, CHIP, TRICARE, and certain veterans’ health care programs also qualify as amounts paid for medical insurance under Section 213(d). This means that any premiums or enrollment fees for these public coverage programs could be deductible medical expenses under Section 213. This would not, however, extend to taxes imposed by the government to fund these public coverage programs. The IRS asks for comment on whether other public coverage programs should be treated similarly.
Note that amounts can only be deducted if the contract covers qualifying medical care. Certain policies, such as fixed indemnity policies (for the loss of income or loss of life, limb, or sight) would generally not meet this definition. These policies would not be treated as medical insurance except under certain conditions outlined in the proposed rule.
Implications For HRAs
As discussed in more detail in a rule on individual coverage HRAs, HRAs must be integrated with another type of coverage—whether a weak group health plan, an individual plan, Medicare, or excepted benefits—to meet federal requirements. These HRAs, and a qualified small employer HRA, can generally reimburse expenses for medical care under Section 213(d). Thus, under the proposed rule, an HRA could reimburse fees for direct primary care and shares in a health care sharing ministry as suitable medical expenses. (Note that health care sharing ministries cannot integrate with an HRA.)
In general, this means that someone with an HRA will be enrolled in major medical coverage; the only exception is someone offered an excepted benefits HRA. An excepted benefits HRA can be used to pay premiums of up to $1,800 for excepted benefits, short-term plans, and COBRA premiums. This would make it possible for an employee to use their excepted benefits HRA to purchase, say, a short-term plan and pay fees for direct primary care or a health care sharing ministry (assuming costs are under $1,800) without otherwise having major medical insurance.
Implications For HSAs
Individuals would not be eligible to contribute to an HSA if the individual is covered by a direct primary care arrangement or a member of a health care sharing ministry.
Under Section 223 of the Internal Revenue Code, individuals can contribute to an HSA—a tax-exempt fund used solely to pay qualified medical expenses—paired with a high-deductible health plan (HDHP). While those enrolled in a HDHP-HSA can be covered under additional types of coverage, this other coverage is limited to, say, dental or vision coverage, specified disease coverage, or worker’s compensation coverage. For instance, prior IRS interpretations concluded that someone covered under 1) an HDHP that did not cover prescription drugs and 2) a separate policy for prescription drugs was not eligible to contribute to an HSA.
In general, neither a direct well-known care arrangement nor a ministry would meet the requirements for other coverage under Section 223. Therefore, membership in a deny primary care arrangement or health care sharing ministry would preclude an individual from contributing to an HSA.
That said, the IRS suggests some ambiguity on fees for direct primary care. Individuals would not be eligible to contribute to an HSA if the fee is paid by an employer—or if the arrangement funds primary care (such as physical examinations, urgent care, labs, etc.). There may, however, be limited circumstances where an individual could contribute to an HSA if the arrangement does not provide insurance coverage or otherwise qualifies as coverage belief Section 223 or preventive care.
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