We have a patient that is demanding a check from us (the provider) as refund instead of us refunding her HSA Debit Card. Can we do that?
You can give a refund in any way you want.
Businesses often have policies to give refunds in the same way that the original payment was made. For example, if you make a purchase at a store with a credit card and then return the item, the store policy is often to only make the refund to the same credit card. The main reason is to prevent refund fraud: the policy ensures that the refund is going to the same person that purchased the item. There may also be an advantage to the store in transaction fees by doing this.
In your case, you are probably familiar with your patient, so fraud is not a concern. And since the transaction was a debit card, the fees are probably lower than with a credit card.
Since the medical expense was paid by an HSA, when you refund the money the expense becomes one that is no longer a qualified medical expense for the patient’s HSA. The patient would need to return this money to the HSA or be subject to tax and penalties on this money. The easiest way for her to return this money is to simply let you refund it directly to the HSA, but if you give her a check she can send it in to the HSA bank herself as a mistaken distribution repayment.
It is possible that the patient wants to take the cash and pay the tax and penalty. Or she may take the cash, but claim other legitimate, not-yet-reimbursed medical expenses to offset the refund. It is also possible that she wants to take the cash and not pay the tax/penalty by lying on her tax return. She might get away with it if she is not audited. None of that is your concern, however; it is not your responsibility to make sure she follows tax law.
My conclusion is that you can make the refund however you want. If you decide to give the refund in a check, you may want to inform her that she may be subject to tax and penalty if she does not return the money to her HSA, but it is her responsibility to make sure that the HSA rules are followed.