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.
Bryson Koehler is the chief technology officer at Equifax. He was previously CTO for IBM Watson and Cloud Platform, where he led a global team of cloud engineers, architects, security professionals, product and offering managers, technical communications specialists, research and development activities and operational systems reliability engineers.
With Koehler’s support, IBM reset its core strategic direction to be cloud-native and has radically advanced its cloud capabilities. By driving technical and cultural change and the way the company designed, built, and operated its core technology assets, Koehler helped accelerate IBM’s transformation. With security being a central priority for IBM, he brought all of the security teams together to ensure IBM had the world’s most compliant cloud, strengthening the company’s technical credibility.
Prior to his role at IBM Watson and Cloud Platform, Koehler was chief technology and information officer at The Weather Channel Companies (TWCC), before it was acquired in 2015 by IBM. In this position, he was responsible for setting the strategic vision, development, technical operations, financial planning and execution of all technology initiatives for TWCC. Under his leadership, the company launched its largest public, cloud-based API platform and migrated from 13 legacy data centers into a fully cloud-based company. Additionally, Koehler established leading partnerships with global technology companies such as Google, Apple, and Microsoft, as well as an independent developer network.
Digital Insurance's annual list of movers and shakers defining insurance innovation this year.
Stefan Merz is COO of PPRO.
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.
