New tax rule could boost HRAs, but don’t expect a big impact

Employers could soon be able to reimburse their employees for concierge medicine and healthcare sharing ministry payments, the Trump administration said Monday.

According to a proposed rule from the Internal Revenue Service, payments for direct primary care arrangements and healthcare sharing ministry memberships would become so-called “qualified medical expenses” under the tax code. They would also be tax-deductible under many circumstances, and employers would be able to reimburse their employees for those expenses through health reimbursement arrangements, or HRAs.

The proposal is “smartly crafted” because it creates “bright line” rules and eliminates much of the ambiguity in the current tax code, said former Department of Treasury counsel Bill Sweetnam, Jr., now legislative and technical director for the Employers Council on Flexible Compensation.

The IRS didn’t clarify whether flexible spending arrangements, or FSAs, could reimburse payments for direct primary care arrangements or healthcare sharing ministry memberships. Those expenses might be considered medical care or insurance, according to the agency, and FSAs can’t reimburse health coverage.

“It’s an open issue,” Sweetnam said.

But it’s unclear whether the rule would have any practical impact, even if the IRS implemented it as proposed.

The financial incentives created by making those arrangements tax-deductible are probably too small to influence consumer behavior. They’re also buried in the tax code, so most people would never know about them.

They also wouldn’t apply to many people because most people won’t deduct qualified medical expenses from their taxes going forward. After all, the expenses threshold will increase from 7.5% to 10% of gross income beginning in 2020, or 2021 if the IRS finalizes the rule as proposed. Most people don’t have that many medical expenses.

Likewise, fewer taxpayers itemize their taxes because lawmakers nearly doubled the standard deduction for individual income tax when it changed the federal tax code in 2017. The deduction increased from $6,500 to $12,000 for individuals, and from $13,000 to $24,000 for married filers.

According to the Internal Revenue Service, more than 30% of taxpayers itemized their deductions in 2017. The Tax Foundation, a conservative think tank, expects less than 14% of taxpayers to itemize their deductions for 2019 thanks to the boost in the standard deduction.

Still, even if someone doesn’t itemize their taxes, they could benefit if the IRS finalizes the proposed rule because FSAs, HRAs and health savings accounts require expenses to be qualified medical expenses for reimbursement. People taking part in those arrangements often can’t get reimbursed if their costs don’t qualify as medical expenses under the tax code.

It could also be “a sign that innovation in healthcare financing is receiving attention beyond just the health policy community,” said Mollie Gelburd, associate director of government affairs for the Medical Group Management Association.

But critical stakeholders in the healthcare community probably didn’t ask for the changes because “this isn’t something that has ever come up,” Gelburd said. Most practice groups participate in Medicare, which makes them much less likely to provide concierge medicine because they can’t contract with Medicare enrollees.

The proposed rule probably has more political value than real-world implications because it advances the conservative policy agenda and is costs nearly nothing compared to other policies the Trump administration could pursue. Conservative policy wonks tend to favor more individual choice, less regulation and lower taxes. The proposed IRS rule hits on all three themes.

It’s the type of policy win that’s hard to come by, especially in an election year.

But Gelburd is worried about a policy that encourages more participation in healthcare sharing ministries because they don’t have to provide the same benefits as traditional health insurance.

“Consumers that join those organizations may not understand what coverage they offer,” “That could result in frustrating and unexpected out-of-pocket costs,” Gelburd said.


Tags: covid-19, pandemic

Thanks! You've already liked this