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Attack of the Killer P’s – Providers Paying Patients’ Premiums

By: Sean Donnelly (The Phia Group, LLC)

A recent and unsettling trend in the healthcare industry involves medical providers paying insurance premiums or contributions on behalf of their patients in order to ensure that the patient’s coverage remains active. Providers engage in this practice because it is largely cheaper and easier to prolong a patient’s coverage and continue charging exorbitant amounts to the patient’s health plan or policy than to try and collect directly from a patient who would otherwise no longer qualify for coverage – a struggle that providers view as being akin to squeezing blood from a stone.

Surprisingly, the Internal Revenue Service (IRS) actually condones this practice as reflected in its Final Rule issued in 64 Fed. Reg. 5160-01 (Feb. 3, 1999). The IRS’ Final Rule, which clarifies the accepted methods for paying for COBRA continuation coverage, makes it clear that employer-sponsored health plans must accept premium payments made by a provider on a qualified beneficiary’s behalf. The Final Rule states:

“Many plans and employers have asked whether they must accept payment on behalf of a qualified beneficiary from third parties, such as a hospital or a new employer. Nothing in the statute requires the qualified beneficiary to pay the amount required by the plan; the statute merely permits the plan to require that payment be made. In order to make clear that any person may make the required payment on behalf of a qualified beneficiary, the final regulations modify the rule in the 1987 proposed regulations to refer to the payment requirement without identifying the person who makes the payment.” (emphasis added).

Accordingly, it does not appear that providers are engaging in any unlawful practice by paying premiums or contributions on behalf of their patients, at least from the perspective of the I.R.S. However, group health plans may be able to discourage this practice by arguing that such payments by medical providers constitute taxable income to the patient.

The starting point for the determination of “taxable income” is the computation of “gross income.” Internal Revenue Code § 61(a) defines gross income as “all income from whatever source derived.” Gross income includes “income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as cash.” 26 C.F.R. § 1.61-1. There is no provision in the law that excludes insurance premiums from the category of “income realized in any form,” and insurance premiums fit in very well with the examples of income provided in the regulation.

Furthermore, the doctrine of “assignment of income” posits that money paid to and received by a designated agent, but which is really intended for and paid for the benefit of a third person, is considered taxable income for that third person. Thus, when a hospital pays an insurance premium or contribution on behalf of a patient, the patient is considered to have “constructively received” that income, and it ought to be reported on the patient’s income taxes. Consequently, insurers and group health plans should argue that a provider paying an insurance premium or contribution on behalf of a patient amounts to nothing more than a provider giving money indirectly to that patient.

Finally, insurers and group health plans can also argue that when a provider pays a premium on behalf of the patient, the patient is thereby relieved of his or her obligation to continue making payments in order to maintain coverage. As such, a patient who is relieved of his obligation to make premium payments realizes an economic benefit – namely, the provider’s assumption of the patient’s obligation to pay the premium amount.

Next time a provider tries to pay the premium or contribution for one of your policyholders or plan members to further their own commercial interests, make sure they know that the patient may not be off the hook financially – money indirectly received is nothing more than income for tax purposes.