Direct Primary Care Plans Aren't Health Plans, Physicians' Group Says

June 19, 2019

Hon. David Kautter
Assistant Secretary for Tax Policy
United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Dear Assistant Secretary Kautter:

Docs 4 Patient Care Foundation (D4PCF) requests that the United States Department of the Treasury clarify the interaction between Direct Primary Care (“DPC”) practices and Health Savings Accounts (“HSAs”). D4CPF is a 501(c)(3) nonpartisan, nonprofit organization committed to unleashing human ingenuity in health care. D4PCF is the only health care policy think tank whose board is composed of practicing physicians who possess hands-on, practical knowledge of the American health care system.

A DPC practice represents an innovative alternative payment model between individuals and their healthcare providers for healthcare services rendered. Under the Treasury Department and IRS's current guidance, it is not clear whether a taxpayer may contribute to a Health Savings Account (“HSA”) and simultaneously participate in a DPC practice model. In a letter addressed to Senator Patty Murray of Washington dated June 30, 2014 (the “Koskinen Letter”), former Internal Revenue Service (IRS) Commissioner Koskinen stated that “[a] DPC medical home plan appears not to be one of the listed disregarded coverage plans in section 223(c)(1)(B) . . . an individual would not be able to make tax-deductible contributions to an HSA while covered by both [a high deductible health plan] and a DPC.” Apart from the Koskinen Letter correspondence, however, the IRS has not directly opined on this issue in any regulation or sub-regulatory guidance specifically intended to inform affected parties of the IRS' position on the matter.¹

As set forth in this letter, we believe that the IRS' position as articulated in the Koskinen Letter mischaracterizes DPCs as a “health plan” subject to the exclusion in section 223(c)(1)(A)(i) of the Internal Revenue Code (IRC). Accordingly, we request that the IRS reverse the position that it tentatively articulated in the Koskinen Letter and issue formal guidance clarifying that a DPC is not a “health plan” for purposes of section 223(c)(1)(A)(i) of the IRC. This would allow DPCs to be paired with HSAs and for HSA funds to be used to offset the monthly fees associated with DPCs.

I. Background

A. Health Savings Accounts (HSAs)

An HSA is a tax-exempt trust or custodial account with a qualified HSA trustee set up to pay or reimburse certain medical expenses incurred by the taxpayer. In general, a taxpayer who is an “eligible individual” may deduct contributions to an HSA owned by the taxpayer. See § 223(a) of the IRC. The Code defines “eligible individual” as any individual who is (1) covered under a high-deductible health plan and (2) not covered under any other health plan which provides coverage for a benefit that is covered under the taxpayer's high-deductible health plan, unless the coverage is permitted coverage. Id. at § 223(c)(1)(A)(i)-(ii) of the IRC.

The Code expressly identifies several forms of coverage that may be paired with HSAs. This “permitted” or “disregarded” coverage includes (1) coverage provided by “permitted insurance”, (2) coverage for accidents, disability, dental care, vision care, or long-term care, and (3) certain types of flexible spending arrangements (“FSAs”). See § 223(c)(1)(B)(i)-(iii) of the IRC. The term “permitted insurance” means insurance that relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property, or other similar liabilities as the Secretary may specify by regulations. Permitted insurance also includes insurance for a specified disease or illness, and insurance paying a fixed amount per day (or other period) of hospitalization. See § 223(c)(3)(A)-(C) of the IRC.

B. Direct Primary Care Practices

Although there is no federal definition of a DPC, a majority of states have defined DPCs as containing three core features. Specifically a DPC:

• Is a contract between a health care provider and a taxpayer;

• In which the health care provider agrees to provide primary care services to the taxpayer without billing a third party;

• In exchange for a monthly subscription fee that is cancellable by the patient.

The DPC may charge taxpayers a different monthly subscription fee depending on categories such as whether the enrollee is a child, adult or senior, similar to how other service providers (e.g., amusement parks, restaurants, movie theaters, etc.) charge differently for children and adults. But a DPC provider does not charge taxpayers different amounts based on their health status: a 40-year old taxpayer with a chronic condition will be charged the same amount as an otherwise healthy 40-year old taxpayer, without any prequalification assessment made by the practice.

In exchange for paying the monthly subscription fee, a taxpayer is able to receive, on demand, services for any of their primary health care needs. Primary care services include routine health care services, including screening, assessment, diagnosis, and treatment for the detection and management of disease or injury. While this differs from the more traditional payment model in which providers are paid for the provision of a specific health care service, the monthly subscription fees paid to DPCs still constitute payment in exchange for primary care services rendered, or for the promise to receive primary services within the agreed upon timeframe.

II. Legal Argument

The Koskinen Letter's assertion that HSAs and DPCs cannot be paired together because DPCs are not “disregarded coverage” is erroneous because it relies on a mischaracterization of DPCs as a “health plan” in the first place. As explained in further detail below, DPCs cannot be appropriately characterized as health insurance or health plans. Rather, DPCs, and specifically the monthly subscription fees paid to the DPC practice, constitute qualified medical expenses as defined by section 213(d) of the IRC.

A. A DPC arrangement is not health insurance.

At the outset, it is important to note that Congress has, for the most part, expressly delegated the regulation of “insurance”, including health insurance, to the discretion of the States. Since 1945, Congress declared in the McCarran-Ferguson Act, 79 Pub. L. 79-15 (Mar. 9, 1945), that the “continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.” See 15 U.S.C. § 1011. Later, in the Graham-Leach-Bliley Act, Pub. L. 106-102 (Nov. 12, 1999), Congress affirmed the McCarran-Ferguson Act expressly stating that insurance regulation “remains the law of the United States.” See 15 U.S.C. § 6701(a). Given Congress' delegation to the States to regulate insurance, it is highly relevant how States have generally categorized DPCs.

In the more than 25 States that have considered whether to designate DPCs as health insurance, all States have decided that DPCs are not health insurance. Given the definition of a DPC described above, it is no surprise that States have concluded DPCs are not health insurance. This is particularly true given that DPCs do not involve underwriting. That is to say, they do not “pool” the risk of various individuals through adequate pricing of the risks and accurate calculation of loss experience and statistical probabilities. See e.g., SEC v. Variable Annuity Life Ins. Co. of America, 359 U.S. 65, 73 (1959) (underwriting of risk is an “earmark of insurance as it has commonly been conceived in popular understanding and usage”); Group Life & Health Ins. Co. v. Royal Drug, 440 U.S. 205, 214 n. 12 (1979) (“Unless there is some element of spreading risk more widely, there is no underwriting of risk.”). To the extent DPC providers charge taxpayers differently based on their age category, it is no different than how other service providers charge adults more than children or other similar age distinctions.

The Iowa Supreme Court's discussion of “insurance” in Huff v. St. Joseph's Mercy Hospital of Dubuque Corp. posits a helpful framework for ascertaining when an arrangement constitutes “insurance.” 261 N.W.2d 695 (1978 Iowa). In Huff, the Supreme Court of Iowa determined that a prepaid obstetrical contract plan where the hospital would agree to furnish all necessary maternal hospital services for seven days relative to childbirth for $400 paid at least fifteen days in advance of delivery was not insurance. Id. at 701. The Iowa Supreme Court stated that such contracts “do cover the risks of assorted complications but the principal benefit or effect is the hospital care as opposed to a minimal indemnity feature.” Id.

Under the framework articulated in Huff, DPCs cannot reasonably be construed as “insurance.” DPCs do not involve an “indemnity feature”, which is one of the key characteristics of insurance. Rather, the principal benefit of a DPC is the primary care the patient receives. It also bears noting that DPCs do not advertise themselves as insurance nor do they require that patients adhere to the terms of the DPC contract for a specified amount of time. To the contrary, DPC practices recommend that patients purchase comprehensive insurance coverage and expressly stipulate that the patient may opt-out of the DPC at any time.

We also note that the IRS itself does not currently treat DPCs as “health insurance” for the purposes of the health insurance excise tax under section 9010 of the Patient Protection and Affordable Care Act. Pub. L. 111-148 § 9010, 124 Stat. 119, 865-68 (March 23, 2010). Section 9010 of the ACA imposes an annual fee on “covered entities” that provide health insurance. IRS regulations define “covered entity” as an entity “with net premiums written for health insurance for United States health risks,” that also falls into one of several categories of entities. 26 C.F.R. § 57.2(b). As an initial matter, DPCs do not have premiums, so they could not fall within this definition. Moreover, a DPC would likely not fall within the list of entities subsequently specified by the regulation:

• A DPC is not a “health insurance issuer” within the meaning of section 9832(b)(2) of the Internal Revenue Code, defined as an insurance company, insurance service, or insurance organization that is licensed to engage in the business of insurance in a State and that is subject to State law that regulates insurance . . .” (emphasis added)

• A DPC is not an “insurance company subject to tax under part I or II of subchapter L”(taxing life insurance and other insurance companies).”

• A DPC does not “provide[ ] health insurance under Medicare Advantage, Medicare Part D, or Medicaid.”

• A DPC is not a “multiple employer welfare arrangement (MEWA).”

• A DPC is not a “health maintenance organization” (“HMO”), because that definition includes “[a] similar organization [to an HMO] regulated under State law for solvency in the same manner and to the same extent as such a health maintenance organization” — DPCs are not required by most States to satisfy certain solvency requirements.

Indeed, the IRS currently allows taxpayers to use HSA funds to pay for certain medical care that resembles payment for the primary care provided by DPCs. For example, commercial insurers have adopted Medicare's universal global surgical payment system that bundles preoperative, intraoperative, and postoperative care into a single payment amount. The global period can extend 92 days, and the physician is expected to treat surgical complications at no additional charge. The patient, consistent with their high deductible plan obligations, is expected to prospectively pay the bundled amount on the first day of the surgery. Importantly, the patient may make this prepayment for a bundle of future medical services with funds from their HSA. The IRS has never determined that the prepayment to the surgeon constitutes “health insurance”. Similarly, the IRS has never determined that payment for maternity services, which is also made pursuant to bundled payment (except it is made retroactively, as opposed to prospectively), constitutes health insurance. Therefore, consistent with how the IRS considers payment for surgical procedures and maternity services to be HSA-eligible, the payment for primary are services represented by a DPC should also be HSA-eligible; a DPC is simply an alternative fee arrangement that the DPC practice uses to contract with individual patients for the provision of primary care.

Apart from how the States and the IRS currently treat DPCs, there is also a danger that treating DPCs as “risk-bearing” entities leads to a slippery slope. As stated above, DPCs do not involve underwriting. Although it is true that on occasion DPC practices may render more health care services than they are compensated for, this cannot be characterized as bearing risk in the traditional health insurance sense. All contracts are, in some sense, “insurance against future fluctuations in price.” See Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 367, (2002) (citing Richard Posner, Economic Analysis of Law 104 (4th ed. 1992)). In accepting the monthly fee, the DPC practice is betting that fixing its price at a certain amount will be more profitable than if it were to price its services separately and rely on fluctuating utilization. Charging a monthly fee also helps providers reduce overhead costs, such as administrative costs associated with processing payments for each service rendered. As the Iowa Supreme Court noted in Huff, “all insurance contracts concern risk transference, but not all contracts concerning risk transference are insurance . . . [e]ven in states having the broadest statutory or decisional definition of insurance, which if literally applied would include all or nearly all contracts transferring risk, many arrangements literally within such definitions are not treated as insurance transactions in legal contexts.” Huff, 261 N.W.2d at 700 (citations omitted).

B. A DPC arrangement is not a health plan.

The IRC does not define a “health plan” for the purposes of section 223(c)(1) of the IRC. In sub-regulatory guidance, however, the IRS has interpreted the term to encompass several programs offered to taxpayers by third parties, such as the government or an employer (“third-party programs”). When these third-party programs have offered “significant benefits in the nature of medical care or treatment,” the IRS has found them to be “health plans” under section 223(c)(1). See 2004-33 I.R.B. at 199 (Aug. 16, 2004), https://www.irs.gov/pub/irs-irbs/irb04-33.pdf. For example, the IRS has found that prescription drug plans offered by insurers, and certain FSAs, HRAs, and certain types of EAPs and QSEHRAs offered by employers, are health plans. See 2004-15 I.R.B. 717 (April 12, 2004) (prescription drug plans); 2004-22 I.R.B. 971 (June 1, 2004) (FSAs and HRAs); 2004-33 I.R.B. 196 (Aug. 16, 2004) (EAPs); 2017-47 I.R.B. 517 (Nov. 20, 2017) (QSEHRAs).

DPCs fall outside of the contours of a “health plan” as articulated in the IRS' current sub-regulatory guidance because DPCs ordinarily are not third-party programs. While some DPCs may be offered by employers, DPCs involve an innovative payment model directly between the provider and the patient which affords both parties a more stable payment structure.

An analogy to the legal industry is useful to explain why the lack of a third-party creates a material distinction between DPCs and the third-party programs listed above. Consider a consumer who is working with their local law firm to obtain representation on a civil matter. The law firm, as a provider of legal representation, may offer the consumer the option of being billed an hourly-rate or a fixed-rate (retainer) for the legal services rendered. By doing so, the law firm is offering the consumer two payment models to pay for its legal services. One payment model — the retainer — provides the parties with certainty. The consumer will pay, and the law firm will receive, the same amount of money every payment term, regardless of external factors outside of the parties' control. The other payment model — the hourly-rate model — creates more uncertainty for both parties. The consumer will pay less or more every payment term depending on external factors outside of the parties' control.

Here, DPCs are akin to the fixed-rate retainers offered by the hypothetical law firm. The provider offers the taxpayer a payment model that carries less risk for both parties than an alternative model in which payments fluctuate based on factors outside of the parties' control; namely, the taxpayer's health. By contrast, the hourly rate model is more equivalent to a traditional insurance arrangement, where a health care provider bills a payer on a fee-for-service basis for each service (described by a CPT code) that is performed. Such a model is equivalent to a program — like prescription drug insurance or an FSA — offered by a third party to further offload financial risks. Just as no regulator would consider regulating a retainer like it were a third-party risk-mitigation product, the IRS should not consider a fixed-rate payment model between a patient and a provider to be a health plan.

Moreover, even though some DPCs may be offered by employers, these employer-facilitated DPCs are distinguishable from employer-sponsored programs that the IRS has considered to be “health plans.” Those programs decrease the risk that employees will incur overly burdensome costs when they seek medical services or products in the general healthcare market. They do not create a patient-provider relationship or establish a payment model for that relationship. An employer-facilitated DPC, in comparison, establishes the payment model for the patient-provider relationship between employees and a specific provider. Thus, even though a third-party — the employer — facilitates the relationship, the function of the DPC remains the same: to establish a stable payment model between a patient and a provider.

Finally, it is also notable that participation in a DPC does not constitute minimum essential coverage (“MEC”) for a taxpayer because it only covers primary care and not the other basket of benefits essential to MEC, and it is not listed among the types of coverage specified by the IRS as constituting MEC. See 26 C.F.R. § 1.5000A-2(a). Indeed, Congress envisioned that DPCs would be something that would be paired with Qualified Health Plans (“QHPs”), indicating that DPCs themselves are not “health plans” as Congress understood the term when it enacted the ACA and as the Department of Health and Human Services has interpreted the term. See 42 U.S.C. § 18021(a)(3); 45 CFR § 156.245.

C. The fees that taxpayers pay to DPCs can be appropriately characterized as qualified medical expenses under section 213(d).

“Medical care” expenses were understood by Congress to apply to expenses for “the diagnosis cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” See 26 U.S.C. § 213(d)(1)(A). The IRS' implementing regulations reflect a similarly broad definition of “medical care” expenses and includes expenses for: “hospital services, nursing services (including nurses' board where paid by the taxpayer), medical, laboratory, surgical, dental and other diagnostic and healing services, X-rays, medicine and drugs . . ., artificial teeth or limbs, and ambulance hire.” 26 C.F.R. § 1.213-1(e)(1)(ii).

In short, qualifying medical expenses under section 213(d) of the Code are strictly confined to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness (or to prevent exacerbation of a chronic condition), such as special food that alleviates or treats an illness and is substantiated by a physician (and is not part of the normal nutritional needs of the taxpayer), See Rev. Rul. 55-261, 1955-1 C.B. 307, or expenses paid for a weight-loss program to treat obesity and hypertension. See Rev. Rul. 2002-19, 2002-16 I.R.B. 778. Expenses that are merely beneficial to the general health of an individual are not expenses for medical care, such as participation in a weight reduction program to improve the taxpayer's appearance, general health, and sense of well-being. See Rev. Rul. 79-151, 1979-1 C.B. 116.

The periodic subscription fee that taxpayers pay under a DPC qualifies as a “medical care” expense because it is incurred “primarily for the prevention or alleviation of a physical or mental defect or illness.” As described above, DPCs involve a fixed-fee arrangement between the provider and taxpayer, where the taxpayer pays a periodic fee in exchange for primary care services as appropriate. It generally includes all routine services, which includes screening, assessment, diagnosis, and treatment for the detection and management of disease or injury. It also typically includes technology visits via email, texting, or video. The costs of these services are not reimbursed by a third party.

Interpreting the periodic fees associated with DPCs as a qualifying medical expense is consistent with how the IRS has treated other types of fixed-fee arrangements. For instance, in Revenue Ruling 75-302, the IRS allowed a taxpayer to claim a deductible medical care expense under Section 213(d) of the IRC for a lump-sum life-care fee paid to a retirement home in exchange for lifetime care. Rev. Rul. 75-302, 1975-2 C.B. 86; see also Rev. Rul. 76-481, 1976-2 C.B. 82.² The IRS determined that:

the [taxpayer's] obligation to pay was incurred at the time payment was made in return for the retirement home's promise to provide lifetime care, and the payment was made in order to secure medical services despite the fact that the medical services were not to be performed until a future time if at all. Accordingly, the portion of the lump-sum life-care fee payment, made by the taxpayer pursuant to a contract, that was properly allocable to his medical care, is deductible as an expense for medical care in the year paid. . . .

Rev. Rul. 75-302, 1975-2 C.B. 86 at 3-4.

As Revenue Ruling 75-302 demonstrates, the IRS has recognized fixed-fee arrangements as medical care expenses. Consistent with prior reasoning, the Departments could clarify that the fixed-fees associated with DPCs also qualify as medical care expenses under Section 213(d) of the Code because they involve an obligation on part of the individual to pay a specified amount, which is a condition imposed by the DPC provider for its agreement to provide primary care services. Thus, the fixed-fee paid to the DPC provider would cover the provider's costs in rendering the medically necessary items and services to the individual which, as described above, themselves plainly fall within the types of services and items recognized by the medical care provision.

III. Conclusion

DPCs represent an innovative alternative payment model that aligns with the shift towards consumer-driven health care by fortifying the patient-doctor relationship while emphasizing the importance of primary care. The ability of taxpayers to pair a DPC with their HSAs is an important capability that will further promote Americans' access to the type of health care that is best for their specific needs.

As discussed in the foregoing, the Koskinen Letter needlessly places an obstacle to accessing DPCs by treating them as health insurance or as a health plan. D4PCF believes that DPCs are demonstrably neither health insurance nor health plans as Congress, States, and the IRS have conceived of those terms in the past. To the extent that DPCs may be considered to be “health plans” under existing IRS sub-regulatory guidance, we urge the IRS to exercise its statutory authority and revise its guidance to exclude DPCs from its definitional standard for “health plan”.

We appreciate your attention to this matter. Please be encouraged to reach out if you have any additional questions. For your convenience, I have copied my contact information below. We would welcome the opportunity to meet in person to discuss this matter further.

Sincerely,

Lee Gross, MD
President, Docs 4 Patient Care Foundation
Ann Arbor, MI
Email: leegross@msn.com