A Menu of Options to Help People Cope with the Pandemic

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“For a family with $5,000 of out-of-pocket expenses and a 25% to 34% marginal tax rate, the savings of between $1,250 and $1,700 may equal a mortgage payment of four or more car payments. That’s welcome money in these difficult times.”

William G. (Bill) Stuart

Director of Strategy and Compliance

March 23, 2020

The COVID-19 pandemic will have short-term and long-term medical and financial effects on many Americans. Congress and the Trump Administration have enacted major legislation designed to help businesses, workers, and other US residents cope with the effects of loss of jobs, reduced income, quarantines, social distancing, shortages of certain goods and services, and general anxiety. Expect more legislation to come.

Our elected officials could increase the bang for their buck by enacting some common-sense legislation and guidance related to Health Savings Accounts and other tax-advantaged reimbursement accounts. Below are some suggestions. Many have been proposed before but haven’t been a priority. They should now be a priority in a pandemic. Others have been rejected as too expensive. But during a financial crisis in which Congress is spending more than a trillion dollars, they represent low-cost, targeted investments in people’s physical and financial health.

Allow HSA-qualified Plans to Cover Telemedicine at No Cost to Patients

Under current statute, HSA-qualified plans can’t waive cost-sharing on any services that don’t fall within the federal definition of select preventive care. That list includes services like routine physicals,  mammograms, flu shots, PSA screening, pap smears, and testing for certain chronic conditions.

We’ve never received guidance about the status of telephonic visits with physicians or other medical practitioners. One view is that these visits are merely a technology substitute for traditional in-person diagnose, treat, mitigate, or cure an injury, illness, or condition and the cost must be applied to the deductible. But another view maintains that telemedicine is little different from an after-hours call to your doctor that results in a quick diagnosis and perhaps a prescription called in to a pharmacy. Physicians don’t bill for these services.

We should be encouraging telemedicine visits, whether with a patient’s own doctor or another medical professional, during this pandemic. Patients who use telemedicine avoid coming into contact with germs at a doctor’s office. They free physicians to treat patients with more serious conditions. And behavioral-health services delivered telephonically are an efficient and effective way to help Americans deal with the angst and disruption of normal life that they experience during this crisis.

Proposal: Congress must pass legislation or Treasury must issue guidance stating that all telemedicine visits can be covered below the deductible. Sen. Steve Daines (R-MT), a long-time proponent of telemedicine who represents rural Montana in the senate, can draft the appropriate language.

Allow Tax-Free Distributions for OTC Drugs and Medicine

Prior to 2012, Health FSA participants and Health Savings Account owners could reimburse over-the-counter drugs and medicine tax-free from their accounts. But then along came the Affordable Care Act, which included a provision that these items could be reimbursed tax-free only with an annual  prescription or note of medical necessity from a state-licensed prescriber. That change in tax law all but eliminated tax-free reimbursement for these items, except for over-the-counter medicines that patients used regularly (like seasonal-allergy and acid-reflux remedies) for which patients could secure a prescription during an unrelated office visit.

This law should be changed immediately to return to the former standard. It would allow patients to self-treat simple conditions with drugs and medicine bought with pre-tax dollars, so that they don’t seek physician care for simple medical conditions; and it would free physicians from writing prescriptions for ibuprofen, flu remedies, seasonal-allergy medications, and acid-reflux pills.

Proposal: Congress must pass legislation that repeals the requirement that  over-the-counter drugs and medicine can’t be reimbursed from a Health FSA or reimbursed tax-free from a Health Savings Account without a prescription. The bipartisan legislation has already been introduced: HR 1922 and S 1089. The handful of paragraphs can be added easily to the next pandemic-relief bill.

Accommodate Direct-Primary Care into Health Savings Accounts

Direct-primary care arrangements have grown substantially in popularity during the past half dozen or so years. Under these arrangements, doctors no longer accept insurance. Instead, they charge patients a monthly fee that covers all routine services that the doctor provides. Doctors spend more time with their patients, are more focused on wellness strategies than merely on billable treatment transactions, and guide patients to the most cost-effective care when they require additional services.

But under current federal interpretation, these arrangements are classified as coverage – on par with medical insurance. So patients who participate in these arrangements can’t make or receive contributions to a Health Savings Account, since direct-primary care providers don’t charge a deductible of at least $1,400 or $2,800. Patients can’t reimburse the monthly fee from their Health Savings Accounts if they built balances prior to being disqualified by the direct-primary care arrangement.

These rules need to change, especially during a pandemic but also as a matter of common sense. Direct-primary care physicians can steer patients who test positive for the coronavirus to the appropriate care – which is especially important at a time when treatment protocols are being established on the fly. There will be a lot of inefficiency, waste, and overcharging in this environment. An effective direct-primary care physician can evaluate these treatment options and steer patients to providers who are both effective and efficient.

Also, direct-primary care providers are efficient in educating their patients. They use technology to deliver patient education en masse. It’s especially important that patients have access to webinars and other forms of collective, participatory education from a trusted source to manage their risk and understand when symptoms justify an office visit.

Physicians paid under traditional compensation models simply haven’t built the infrastructure or patient trust to deliver these services effectively.

Proposal: Congress must pass legislation to ensure that patients whose primary-care physicians participate in a direct-primary care practice aren’t disqualified from making or receiving contributions to a Health Savings Account and that the fees can be reimbursed tax-free from an account. The legislation (HR 3708 and S 2999 have already been in traduced with bipartisan support. The brief language merely needs to be included in the next pandemic-relief bill.

Allow Medicare Recipients to Open and Contribute to Health Savings Accounts

Americans over age 50 are disproportionately affected by this pandemic. Their retirement portfolios have been ravaged by the stock-market meltdown. And they’re more likely to become sick with exposure to the coronavirus. A great way to help them today and tomorrow is to allow anyone enrolled in Medicare to open and contribute to a Health Savings Account.

Medicare recipients in 2016 spent an average of $3,100 annually in out-of-pocket expenses, a figure that has only risen since then, and is higher for older enrollees. Allowing them to push $4,050 (2020 figure, adjusted annually for inflation) of their current or future expenses through a Health Savings Account would save the average senior more than $800 per year.

Proposal: Congress must pass legislation to allow Medicare enrollees to open and contribute to a Health Savings Account. The bill already exists: HR 3796, the Health Savings for Seniors Act. And it already has bipartisan support. The language simply needs to be added to the next pandemic-relief bill

Allow Every Insured American to Open a Health Savings Account, at Least through 2021

As noted above, this pandemic will have long-term financial as well as medical effects on people. Allowing all American adults with public or private medical coverage – not just those enrolled in an HSA-qualified plan, to open and make or receive contributions to a Health Savings Account would ease the financial strain and help them manage their out-of-pocket medical, dental, and vision expenses. For a family with $5,000 of out-of-pocket expenses and a 25% to 34% marginal tax rate, the savings of between $1,250 and $1,700 may equal a mortgage payment of four or more car payments. That’s welcome money in these difficult times.

Proposal: Congress must pass legislation allowing any American who doesn’t qualify as someone else’s tax dependent to open a Health Savings Account and make or receive contributions up to the statutory maximum. This provision requires only a brief paragraph or two in the next pandemic-relief legislation.

 Increase Contribution Limits for Health Savings Accounts, at Least Through 2021

Many Americans will lose their jobs as a result of the temporary economic effects of the pandemic. With the job loss, they’ll lose access to their employer-sponsored medical coverage and the employer contribution to premium. Those who receive unemployment compensation or continue their employer-Sponsored coverage by exercising their COBRA rights can pay their premiums tax-free with distributions from a Health Savings Account.

But today’s contribution limits ($3,550 for self-only coverage or $7,100 for family coverage, with an additional $1,000 for account owners age 55 and older) won’t buy much coverage in a market in which the average premiums are more than $7,100 for self-only and $20,500 for family coverage. Allowing account owners to increase their contribution limits would help them cope with the expense of paying the full cost of medical premiums during the pandemic or in the future.

Proposal: Congress must pass legislation increasing the statutory annual contribution limit to Health Savings Accounts to $10,000 for self-only and $20,000 for family coverage in 2020 and index that figure for a future year or years. This effort can be achieved with a short addition to the next pandemic-relief bill.

Liberalize Health FSA Rules for 2020

 Many Health FSA participants’ medical situations are in limbo. Some who planned to spend their remaining 2019 balances before the end of their grace period March 15 had elective procedures delayed. Others who test negative for COVID-19 may need treatment for other conditions. And still others can’t secure the necessary substantiation documents from medical providers focused on treating sick patients or dental or optometry providers that are closed or offering urgent care only.

The following temporary change in tax law would help Health FSA participants (and plan sponsors and administrators)

  • Allow a special mid-year enrollment period during which participants can enroll, disenroll, or change their elections.
  • Extend grace periods by allowing balances to carry over for use during the following plan year.
  • Suspend the limit of $500 of balance carryovers for plans that have this feature.
  • Suspend the requirement for substantiation of expenses purchased through medical, dental, and vision providers.

Proposal: Treasury must write regulations permitting these one-time adjustments for plans pears beginning between Dec. 31, 2019 and Dec. 31, 2020.

Liberalize the Dependent Care Reimbursement Account Program

Under current law, families can set aside up to $5,000 annually in a Dependent Care Reimbursement Account (sometimes called a Dependent FSA or a DepCare plan). That $5,000 ceiling bought a lot of day care when the provision became effective in 1986. But it’s not indexed under federal tax law, so each year it buys less and less care.

It’s important that the ceiling be increased and the age of qualified children be increased from up to age 12 by at least three years. As many states close schools for an indeterminate period of time to slow the spread of COVID-19, parents suddenly face the dilemma of staying home from work (and perhaps sacrificing part or all of their paycheck) or paying for care for their children during hours that they were expected to be at school. Receiving a tax break for this service would help them during a period of economic stress. And for parents whose day care were closed by local or state officials, reducing their salary reduction to match their lower costs would restore some much-needed money to their net paycheck.

Proposal: Congress must enact legislation to increase the DepCare limit to $10,000 and index it annually thereafter. Further, it must revise the definition of eligible child to up to age 15. Finally, for 2020, Congress and the Trump Administration must work legislatively and administratively to allow a special mid-year open-enrollment period to allow employees to begin participation or increase their elections to a DepCare account. Finally, in special rules to respond directly to the pandemic, these changes must be made retroactive to Jan. 1, 2020, so that parents can enroll or increase their contributions when they return to work and reimburse expenses already incurred.

Bottom Line

These modest changes to the tax code won’t by themselves relieve the medical effects of the pandemic on some and the financial effects on nearly all Americans. Not by a long-shot. But I’m reminded of the story of the grandfather and son who were walking along the beach after a storm. The grandfather bent over to pick up starfish and tossed them back into the water.

After observing a few times, the grandson said, “Grandpa, there are thousands of starfish washed ashore. You can’t possibly save them all. You can’t really make a difference.”

As he throws another starfish back into the ocean, the grandfather says to the young boy, “I just made a difference for that one.”

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