In the midst of the COVID-19 pandemic, the Internal Revenue Service (IRS) has published a proposed rule that would grant tax advantages to individuals’ spending on health care sharing ministries and direct primary care arrangements. Granting health care sharing ministries (HCSMs), in particular, a tax status reserved for insurance raises real questions about using federal funds to promote a coverage option that fails to provide consumers with financial protection for health care expenses. The IRS’ move comes at the same time the Trump administration has refused to open up enrollment for the Affordable Care Act marketplaces and declined to support enhanced federal funding of marketplace plans or Medicaid.
What does the proposed rule say? The proposed rule responds to President Trump’s June 2019 Executive Order directing the Treasury Department to consider ways, “to the extent consistent with law,” to treat expenses for HCSMs as eligible medical expenses under Section 213(d) of the federal tax code. In an explanation that reaches back to 1942 and tax code language that predates Section 213(d), the guidance asserts that monthly payments to HCSMs are akin to payments toward insurance and therefore should qualify as a medical expense, with the same tax advantages as health insurance premiums. The result, if the rule is finalized, is that monthly fees for HCSM enrollment could be deducted from personal income taxes or reimbursed under a Health Reimbursement Arrangement (HRA), including the newly adopted Individual Coverage HRA and the excepted benefit HRA.
What will the impact be? It’s hard to say what the impact will be for federal tax collections. Medical expenses must exceed 7.5% of a taxpayer’s adjusted gross income (AGI) in order to be deducted from taxes (or 10% of AGI beginning with the 2021 tax year). HCSM shares, on their own, are unlikely to reach that threshold. And though most forms of HRAs require individuals to have other coverage (e.g., a group health plan or an Affordable Care Act (ACA) compliant individual market plan), individuals offered an excepted benefit HRA could opt to use it to buy an HCSM instead of enrolling in their employer’s health plan. One HCSM marketing to employers, Sedera, suggests member companies can pair an HCSM with a group health plan “only designed to take care of preventive care needs,” and rely on the HCSM to help with costs not covered under the employer plan.
What’s the problem? Granting tax benefits to HCSM monthly shares as if they were insurance premiums will further blur what is already a fuzzy line between HCSMs and insurance and exacerbate the consumer confusion that already exists. HCSM features closely resemble those of insurance, including out-of-pocket costs akin to an insurance plan deductible, provider networks, coverage tiers based on metal levels, monthly costs that vary by age, and defined covered services. Many also pay commissions to brokers to sell memberships. Yet there is no guarantee that covered services will be eligible for reimbursement, as is required under an insurance contract, nor are there legal protections to appeal an unpaid claim for an independent, expert review.
The tax benefits are also likely to drive more aggressive marketing and invite fraud. The rule adopts the ACA definition of HCSMs whose members are exempt from the individual mandate penalty. Some ministries have touted their recognition under the ACA, saying the law included them as a “viable health care option.” But recent stories of unpaid claims have prompted regulators in multiple states to take action, including issuing consumer warnings and imposing new requirements on brokers who sell HCSM plans. Regulators in five states have taken action to shut down one HCSM in particular, Aliera, for operating as an unlicensed insurer.
The proposed tax benefits for HCSM enrollment fees will give new life to fraudsters and fuel greater enrollment at a time when tens of millions of newly uninsured may be searching for low cost coverage options.
What’s next? Comments on the proposed rule are due by August 10, 2020.