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But the rules acknowledge adverse implications for HSA eligibility

direct primary care arrangement

The IRS has proposed regulations that would treat direct primary care arrangement (DPCA) fees as medical care or medical insurance, opening the door to their reimbursement from health reimbursement arrangements (HRAs). While the proposal is unsurprising in many respects, the definitive guidance is welcome.

But the proposed regulations also restrict the funding or reimbursement of DPCA fees in other respects. For example, except in a very few cases the fees won’t be payable from a health flexible spending account (health FSA) or a health savings account (HSA). And as Lockton has long asserted, in most cases the coverage of an employee under a DPCA will disqualify the employee from making HSA contributions

Several flavors of DCPAs

DPCAs are relatively new types of contracts and vary significantly depending on the provider and the employer.

Fundamentally, a DPCA is a contract between an individual and one or more primary care doctors under which the doctors agree to provide medical care for a fixed fee, usually paid monthly or annually. The doctors do not bill a third party for their basic, or included, services (if there are services offered beyond those that are included, there typically will be a charge submitted to a medical plan).

Although DPCAs are typically individual arrangements, some employers now offer DCPAs on a group basis. The employer might contribute to the arrangement either directly, or via reimbursements to employees who pay DPCA fees with after-tax dollars. The employer could also allow employees to pay DPCA fees on a pretax basis via a cafeteria plan. Alternatively, employers might offer DPCAs as a voluntary, employee-pay-all benefit, where employees pay their DPCA fees with after-tax dollars, with or without employer facilitation of those payments through payroll.

DPCAs typically include “concierge medical arrangements,” in that they include enhanced, “same day” access and other perks not available to patients who do not participate in the arrangement.

DCPAs might be purchased solely for enhanced access, and in those cases the DPCAs would not be considered an expense for actual medical care or insurance reimbursable by the employer on a nontaxable basis. More commonly, however, DPCAs buy access to and payment for primary care that might or might not be needed in the future, and would thus be considered medical insurance. Sometimes they’re considered to provide actual medical care, such as where the DPCA fee buys solely an anticipated course of specified treatments of an identified condition, or solely provides for an annual physical exam, for example.

Lockton comment: As we’ll see below, precisely how the DPCA is designed, and what it pays for (that is, whether the DPCA amounts to medical insurance, medical care or something else) impacts the employee’s eligibility to make HSA contributions, determines ERISA’s applicability to the DPCA, and might trigger Affordable Care Act (ACA) protections, COBRA and other issues.

The proposed rule and HRAs

Under the proposed rule, whether the DPCA is medical insurance or medical care, its fees are reimbursable from an employer-sponsored HRA.

Lockton comment: The proposed rule does not yet extend this treatment to arrangements providing for direct primary care from non-physicians, nor does it apply to arrangements where the care is dental or vision care. In fact, the rule applies only to “primary care physicians” as defined by the Medicare provision of the Social Security Act. That definition describes physicians with “specialty designations of family medicine, internal medicine, geriatric medicine, or pediatric medicine.” The guidance requests comments regarding that definition, and whether fees for DPCA arrangements with other providers should be reimbursable from an HRA.

The proposed rule and HSAs

For many years, purveyors of concierge and other DPCAs have argued that the arrangements do not disqualify their members from making HSA contributions, either because the arrangements are not insurance, or (so the argument goes) they don’t provide significant benefits.

The IRS, in comments attached to the proposed rule, takes the position that if the DPCA is medical insurance (i.e., if the DPCA fee simply buys access to and payment for primary care that might or might not be needed in the future), coverage under the DPCA is disqualifying. It is disqualifying low- or no-deductible medical insurance that prevents the employee from making HSA contributions, unless the DPCA merely provides preventive care or other permitted coverage under the HSA rules.

The IRS also notes that if the DPCA supplies not medical insurance, but medical care (i.e., the arrangement covers only an anticipated course of specified treatments of an identified condition), it would not be disqualifying. However, the DPCA loses this free pass if it is essentially an employer-provided healthcare plan by virtue of the employer paying for all or a portion of the fee.

Lockton comment: Note that because the IRS views employee pretax contributions as employer contributions, even an employee-pay-all DPCA fee arrangement might trigger HSA disqualification if the employees’ fees are paid with pretax salary reductions via a cafeteria plan.

May HSA account holders reimburse themselves, from the HSA, for the DPCA fees they pay? Not on a nontaxable basis, unless the DPCA is medical care as opposed to the more common form of DPCA that amounts to medical insurance.

The proposed rule and health FSAs

Health FSAs may not reimburse medical insurance premiums. As a result, and similar to HSAs, where the DPCA is medical insurance (which is typically the case), the fee is not reimbursable from a health FSA. That is also the case, of course, where the DPCA is purchasing only enhanced access to primary care, and not the care itself.

The proposed rule and healthcare sharing ministries

The proposed rule takes the position that healthcare sharing ministries (HCSMs) are a form of medical insurance. Under ACA rules, 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, regardless of the state in which they live, and retain membership even after developing a medical condition.

Lockton comment: The HCSM or its predecessor must have been in existence since Dec. 31, 1999, and medical expenses of its members must have been shared continuously and without interruption since at least then. The HCSM must also conduct an annual audit (which seems reasonable, given that insurance companies are subject to rigorous and systematic audits and regulatory oversight by state departments of insurance).

Under the proposed rule, an HRA may reimburse HCSM fees. However, because HCSMs are a form of insurance, an employee’s participation in an HCSM disqualifies the employee from making HSA contributions, unless the HCSM operates as a qualifying, high-deductible health plan.

And because the HCSM is a form of insurance, it appears the fees may not be reimbursed from a health FSA, nor on a tax-free basis from an HSA, even though neither the proposed rule itself nor the appended IRS comments speak to that issue.
The proposed rule will likely be finalized later this year. The rule, as proposed, is generally good news for employers and their employees. It provides some welcome guidance and expands the certainty around DPCA and HCSM use, albeit with some limitations employers might be less enthusiastic about (with respect to their compatibility with HSAs).