The current regulation is drafted in a way that would notallow an individual covered by a direct primary care arrangement toparticipate in a health savings account (or HSA). (Photo:iStock)

On June 10, 2020, the IRS issued proposed regulations to "treatexpenses related to certain types of arrangements, potentiallyincluding direct primary care arrangements . . . as eligibleexpensed under Section 213(d) [of the Internal Revenue Code]" inaccordance with an Executive Order issued by President Trump lastsummer.

In layman's terms, the President directed the IRS to update itsrules to allow for direct primary care, often called conciergemedicine, to be treated as a medical expense for tax purposes. Iffinalized, the new rules will allow individuals to claim retainerspaid to a primary care physician for guaranteed as a medicalexpense. They would also allow employers to help pay for a directprimary care doctor on behalf of their employees through the use ofa health reimbursement arrangement. More details on how this worksare available here.

Related: How employers can benefit from direct primarycare

Unfortunately, the proposed regulation is not as "friendly" tothe direct primary care movement as first glance suggests. Iffinalized, this regulation poses a significant risk to the directprimary care movement. Specifically, the regulation is drafted in away that would not allow an individual covered by a direct primarycare arrangement to participate in a health savings account (orHSA). Over 21 million Americans currently take advantage of HSAs inorder 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 becovered by a high deductible health plan. Subject to severalexceptions, most notably preventive care, this means that in 2020,an individual must pay out of pocket for at least $1,400 in medicalexpenses before their health insurance kicks in ($2,800 if theyhave family coverage). The philosophy here is that high deductiblehealth plans help make the insured more informed healthcareconsumers. The reward for individuals taking "control" over theirhealth 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 servicessuch as physicals, vaccinations, urgent care, labs, and diagnosisand treatment of illness BEFORE a high deductible has beensatisfied. Therefore, they conclude that "an individualgenerally is not eligible to contribute to an HSA if thatindividual is covered by a direct primary carearrangement."

This statement is certainly made as if excluding individualswith a direct primary care physician from participating in an HSAis an inevitable conclusion. That is not the case. It is wellwithin the IRS' discretion to determine that direct primary caredoes not count as insurance. This alone would resolve the issue.And, there is very little explanation as to why the IRS concludesDPC is insurance in a manner contrary to how limited coverage suchas this has been treated for other purposes. Importantly, thiscould be done while still treating direct primary care as atax-deductible medical expense.

Other alternative solutions exist. For example, the IRS couldclassify the services provided by direct primary care providers as"preventive" in nature. Currently, participants in HSAs can haveplans that cover preventive care before the deductible. And, thedefinition of preventive care for HSAs is already broad enough tomany maintenance medications. Why, then, couldn't the regulationssimply allow for individuals with direct primary care toparticipate in HSAs?

The short answer is that they probably could. With any luck, theIRS will review the comment letters being submitted on this issueby key stakeholders, including direct primary care providers andhealth insurance advisors, and come to a different conclusion withrespect to this key issue. If not, unfortunately, these newregulations that were designed to help expand access to directprimary care will prove not to be a gift to the industry, butinstead a trojan horse.

JenniferBerman is CEO, MZQ Consulting and SVPCompliance, at Kelly Benefit Strategies.

Read more:

• Direct primary care 101
• IRS proposes allowing use of HRAs to pay for directprimary care
• Direct primary care helps employers get more whilepaying less