The HSA & DPC Paradox

THE HSA AND DPC PARADOX: Could 2020 be the Year an Unstoppable Force Meets an Immovable Object?

By Kevin Brady, Esq. & John Shearer, JD, MHA

Here at Phia, we are not Physicists, Philosophers, nor Physicians. Fortunately for you, that fact hasn’t stopped us from questioning two of life’s great paradoxes.

The first question often heard pondered aloud: what would happen if an unstoppable force met an immovable object? The second: what would happen if patients could use their Health Savings Account (HSA) funds to pay for Direct Primary Care (DPC)?

Health Savings Accounts are an increasingly popular option that allows individuals to contribute funds to their HSA on a pre-tax basis, thereby reducing their taxable income. HSA contributions can then be used to cover “qualified medical expenses,” as defined in Internal Revenue Code § 213(d).

DPC, on the other hand, is a form of capitated health care where individuals, or sometimes employers or health plans, pay a periodic fee (typically monthly) to a provider for access to designated services without fee-for-service billing. A DPC program increases the accessibility of healthcare by making the delivery of services simpler for both the patient and the provider while also eliminating the administrative burdens associated with fee-for-service arrangements. DPC has become an especially attractive option for individuals and employers as healthcare costs continue to rise with unpredictable fluctuations in pricing. Independent of one another, HSAs and DPC have become unstoppable forces in the health care industry. Unwittingly, these unstoppable forces when brought together, somehow create an immovable object. Rooted firmly in the pathway of the potentially exponential growth of both HSAs and DPC are the IRS regulations restricting the use of HSAs in conjunction with DPC programs. Under the IRS rules, an individual with an HSA-eligible High Deductible Health Plan (HDHP) is not only (generally) unable to use their HSA funds to pay for DPC as a qualified medical expense, but they also risk forfeiting their HSA eligibility if they participate in a DPC program.

While the current guidance to determine whether periodic fee payments equate to a qualified medical expense is sparse, it is generally accepted that these fees would not meet the definition under IRC § 213(d). Currently, in order to offer DPC in a compliant manner, the service must be provided within a group health plan coupled with co-pays and related fee-for-service arrangements. To do otherwise would likely create an “other” plan (e.g. disqualifying coverage) thereby threatening an individual’s HSA-eligible status as they would no longer be covered by only a qualified HDHP. This current dichotomy is clearly counterintuitive given the spirit of DPC.

The crux of the issue here is that in practice, a standard DPC program and an HSA-eligible HDHP complement one another incredibly well. A DPC program can provide the basic care that individuals will likely require on a regular or frequent basis; and the more unpredictable (and costly) services that fall outside of the DPC program (emergency room, specialist visits, etc.) can be covered under a plan with low monthly premiums, such as under an HSA-eligible HDHP. Using both of these benefits in conjunction empowers individuals to better utilize the marketplace and receive the care they need while also keeping healthcare costs low. It also provides individuals with a tangible tax benefit, protections in the event they require higher-cost services, and ensures a consistent relationship with a primary care physician. Even though an HSA-eligible HDHP/DPC combination could be an appealing option for healthcare consumers across the country, the regulatory environment as it stands today simply hasn’t allowed for it.

In order for individuals to take full advantage of the tax benefits available with an HSA in conjunction with the predictable costs and arguably better care of a DPC program, this immovable object must first be overcome. The guidance on this issue must be clarified either through legislation in Congress or in the alternative, through the regulatory process.

Luckily, hope is on the horizon. As it stands today, there are currently three bills in Congress that seek to expand the use of HSAs. Two pieces of legislation have been introduced in the House of Representatives (The Health Savings Account Expansion Act of 2019 and the Primary Care Enhancement Act of 2019) along with legislation in the Senate (The Health Savings Act of 2019). While the nuances of the bills are somewhat different, they include revisions to the Internal Revenue Code that would allow individuals with HSAs to participate in DPC programs and include the periodic fee payments as a qualified medical expense.

The executive branch has also become proactive in paving the way for HSA and DPC expansion. In June of 2019, President Trump issued an Executive Order directing the Secretary of the Treasury to issue regulations that would clarify the issue as to whether periodic payment fees under a DPC program will be considered a qualified medical expense for HSAs.

Given the previous failure of similar bills and the current legislative environment in Congress, it seems most likely that the guidance and clarification needed to solve this paradox will be the result of the Executive Order and the resulting final regulations.

Like the unstoppable force that meets an immovable object, the HSA/DPC paradox may not be solved as soon as we like. The good news is that the forces are in motion to finally provide the desperately needed guidance on this issue. When this happens, how it comes to be, and what it will look like when all is said and done, are all questions that we will continue to ponder until the next paradox strikes a chord.

ShopHealth | Vol. 2 | Issue 3 Kevin Brady, Esq. joined the Phia Group Consulting team as an attorney in the summer of 2019. As a member of the consulting team, Kevin works on general consulting, plan document compliance, contract gap reviews, and general compliance issues. Kevin attended Oakland University in Rochester, Michigan graduating with his B.A. in History. He earned his Juris Doctor from Michigan State University College of Law in East Lansing, Michigan. While at MSU, Kevin was a member of the Journal of Business and Securities Law and worked in the MSU College of Law Immigration Clinic. After law school, Kevin worked as an attorney representing several healthcare providers in the Midwest. He is currently licensed to practice law in the State of Michigan.

John Shearer, Esq. joined The Phia Group, LLC as an Attorney in the summer of 2019. John is a member of the Phia Group Consulting team, providing consultative services to clients including employers, third-party administrators, brokers, and vendors on matters pertaining to plan administration, plan document review, contract review, and regulatory compliance with state and federal laws including but not limited to ERISA, ACA, HIPAA, COBRA, and FMLA.

John earned his law degree from the University of Kentucky College of Law where he was an Appalachian Law Fellowship recipient concentrating in health law. While in law school, John earned a Master of Health Administration from the University of Kentucky College of Public Health. He also holds a Bachelor of Science in Economics and a Bachelor of Business Administration from the University of Kentucky Gatton College of Business and Economics.

Prior to joining the Phia Group, John served as General Counsel and Director of Human Resources for a large Emergency Medical Services provider in Kentucky. John also has experience as an Administrative Summer Fellow in Ambulatory Medicine and as a Law Clerk in the Risk Management Office at the University of Kentucky Chandler Medical Center. He is licensed to practice in the Commonwealth of Kentucky.