It’s no secret that, for years, health care costs have been on the rise, reflecting a massive burden for employers and employees alike.
According to the Kaiser Family Foundation, the average premium for employer-sponsored family coverage has increased approximately 54 percent since 2009. In 2019, the average annual premium for employer-sponsored health insurance was $7,188 for single coverage — a 4 percent increase over the prior year. For family coverage, the average premium rose 5 percent in 2019 to $20,576.
Now, in the wake of COVID-19, that cost could be exacerbated, as health plans look for ways to recoup the cost of mass testing and widespread treatment. For example, in New York, insurers originally sought a near-12 percent rate hike to health plans. The state government stepped in to quash that plan, instead opting for only a marginal hike, but that’s just for 2021. In 2022 and beyond, health care costs have the potential to soar.
Patrick McCoy is the Director of Finance at the Metropolitan Transportation Authority (MTA) in New York where he manages the Authority's debt portfolio (currently $35 billion) and directs the issuance of over $2 billion in tax-exempt municipal bonds annually under the Authority's multi credit borrowing structure. The MTA is an active issuer of debt obligations to finance the bond funded portion of MTA's Capital Program. Pat has previously served as the Executive Director of the New York City Municipal Water Finance Authority, a public benefit corporation of the City of New York that provides capital financing for the City's water and sewer system. Pat was Executive Director of New York Water from January 2007 through August 2008.Previous positions include:Deputy Director of Finance for the MTA, 2002 through 2004, and Director of Finance, 2004 — 2007.Manager of Investor Relations for the NewPower Company, a publicly traded retail energy provider headquartered in Purchase, New York. Mr. McCoy was involved in NewPower's initial public offering and listing on the New York Stock Exchange. 2001 — 2001.Manager of Investor Relations for the New York City Municipal Water Finance Authority, the Transitional Finance Authority (TFA) and TSASC, Inc. (Tobacco Securitization), 1994 — 2000. Pat created the first investor relations program for the Authority.Senior Budget Analyst, Office of Management and Budget, Community Development Unit. 1991 — 1994.Pat currently serves on the Board of Directors of the Westchester County Health Care Corporation and on the Executive Board of the Government Finance Officer'sAssociation of the United States and Canada (GFOA).Pat holds a M.S. Degree in Urban Policy Analysis and Management from the New School University in New York, and a B.A. from St. Ambrose University in Davenport, Iowa.
Leslie M. Norwood is Managing Director and Associate General Counsel of the Securities Industry and Financial Markets Association. She has served the Association or its predecessor organizations for over 10 years. As the Co-Head of the Municipal Securities Division, Ms. Norwood is responsible for the legal, regulatory and market practice initiatives of the Association relating to all municipal securities products.Prior to joining the Association, Ms. Norwood was an Associate in the Corporate and Securities department at Greenberg Traurig. She also spent 6 years as an Associate in the Public Finance department of Sidley Austin LLP (formerly known as Brown & Wood LLP) where she represented bond issuers, borrowers and underwriters in fixed and variable rate transactions; general obligation, subject to appropriation and revenue bond (public power, education, health care and cultural institutions) transactions; and transactions with credit enhancement. Ms. Norwood received a B.A. from the University of California, Berkeley and her J.D. from Boston University School of Law. She is a member of the New York, New Jersey and California Bars.
So, if an even bigger health care premium crunch is coming, is there any way for taxpayers to find some relief? Potentially.
Last year, President Donald Trump issued Executive Order 13877, which directed the Internal Revenue Service on how to treat certain types of health plan arrangements. This year, the IRS responded by issuing proposed regulations. These new regulations included guidance for two alternate health care strategies — direct primary care, or DPC, arrangements and health care sharing ministries, or HCSMs. Under the proposed regulations, amounts paid for DPC arrangements and HCSMs are treated as deductible medical expenses. And that just may be the key to unlocking the respite many taxpayers desperately need.
What are DPC arrangements and HCSMs?
Before ditching traditional health insurance plans, taxpayers first need to understand how DPC arrangements and HCSMs work. Because these arrangements can take on a variety of forms, they will need to inquire about specific eligibility requirements and any limitations on the types of health services covered.
Under DPC arrangements, a patient contracts with their doctor for the provision of typical primary care services (e.g., preventative care, annual checkups, laboratory tests, etc.). Fees are usually fixed and paid on an annual or monthly basis (a typical monthly fee for a DPC arrangement is around $100), and in some cases doctors may charge an additional visit fee when services are performed. Obviously, this would be far more affordable than traditional health plans; however, many patients that pursue DPC arrangements also enroll in a high-deductible health plan to cover visits to specialists, urgent care or hospitals.
HCSMs are organizations whose members share medical expenses in accordance with a common set of ethical or religious beliefs, thus creating a cost-burden sharing system. According to the Alliance of Health Care Sharing Ministries, 1.5 million Americans are active members of an HCSM, and to date, the Department of Health and Human Services has certified 108 HCSMs.
That doesn’t mean it’s a slam dunk option for everyone, though. Proposed regulations lay out some detailed criteria that a group has to meet to gain HCSM status. For example, the organization has to have been in existence at all times since Dec. 31, 1999, and medical expenses of its members must have been shared continuously and without interruption since at least that date. It also must conduct an annual audit that’s performed by an independent CPA firm in accordance with GAAP, and have that audit made available to the public upon request. But if an organization can check all those boxes, it raises some intriguing options for some taxpayers that may be looking to save money during these uncertain times.
The grey area
While some of these options may seem enticing, they won’t be ideal for every taxpayer. For example, it appears that the IRS suspects its definition of a DPC arrangement may be limiting. Therefore, the agency is requesting comments on whether to expand the definition to include contracts with nurse practitioners, clinical nurse specialists or physician assistants who provide primary care services. Also, the IRS is requesting comments on whether other medical arrangements that don’t meet the definition of direct primary care (e.g., dental care or certain specialty services) should be included.
Meanwhile, the biggest disadvantage of HCSMs is inconsistent health coverage. HCSMs aren’t required to cover pre-existing conditions, cap out-of-pocket expenses or cover essential health benefits. They also can impose annual and lifetime benefit caps. In addition, because they’re based on common ethical or religious beliefs, HCSMs may require their members to abstain from certain activities. For some, this may seem too restrictive.
What’s more, if a taxpayer wants to take advantage of a health savings account, taking part in a DPC arrangement would limit, or in an HCSM’s case, outright preclude an employee from contributing to that HSA, which can offer substantial tax benefits.
The jury’s out
As health care costs continue to soar, some taxpayers will undoubtedly want to consider health care alternatives, but tax pros will have to weigh all the pros and cons before suggesting an alternative. Depending on the taxpayer’s circumstances, a DPC arrangement or an HCSM could either be a great fit or a square peg in a round hole. Preparers can help determine which category — if any — is right for their clients.
