The House held a hearing Wednesday on the use of tax-advantaged health insurance accounts such as flexible spending accounts and health savings accounts for purchasing over-the-counter medications in the wake of the health care reform law.
The Patient Protection and Affordable Care Act largely did away with the ability to use FSAs and HSAs to buy over-the-counter drugs without a doctor’s prescription. Approximately 33 million Americans are in families with FSAs, which are offered by 29 percent of small businesses and 85 percent of large employers. An additional 11.4 million Americans are enrolled in an HSA.
“Millions of Americans use tax-advantaged plans to save for medical expenses,” said House Ways and Means Oversight Subcommittee chairman Charles Boustany, R-La., in his opening statement. “Plans such as flexible spending arrangements, health reimbursement arrangements, and health savings accounts allow consumers to set aside funds for out-of-pocket health care expenses such as deductibles, copayments, and, until recently, over-the-counter products not typically covered by insurance. Contributions to and distributions from these plans are generally tax-exempt and make health care more affordable to well over 40 million families.”
Boustany noted that until 2011, families with tax-advantaged plans could use the funds in the accounts to purchase over-the-counter medication such as allergy medication, cold and flu remedies, and first aid products without a doctor’s prescription.
“However, to pay for the massive entitlement expansion in the President’s health care law, the new law required that consumers using tax-advantaged plans must first obtain a doctor’s prescription in order to use their tax-preferred account funds to purchase over-the-counter medication,” he added “This provision alone is a $5 billion tax increase on the American people. As a result, millions of Americans now first have to visit a physician’s office before going to a drug store to purchase cold medicine with their FSAs, for example. This leads to increased wait times in doctors’ offices, greater costs both in time and dollars for consumers, and delays in obtaining treatment. This policy was not enacted to cure a problem or promote better health care spending—this was done to raise revenue, pure and simple.”
Boustany noted that when the new law was first enacted, the American Medical Association wrote that the limitations would “increase costs to the health care system, generate unnecessary physician office visits, and place a new administrative burden” on doctors.
Rep. Xavier Becerra, D-Calif., defended the Affordable Care Act, noting that it would expand health insurance coverage to over 30 million Americans. He said the provision that affects the tax treatment of reimbursements for over-the-counter medicines from certain tax-favored accounts would raise about $5 billion to pay for the cost of the law.
“This provision was initially suggested in a 2005 report from the Joint Committee on Taxation as an option to improve tax compliance,” Becerra said in his opening statement. “The new rule states that over-the-counter medications may no longer be reimbursed from flex spending accounts, health savings accounts, or health reimbursement accounts, without a prescription from a physician.”
Scott Melville, president and CEO of the Consumer Healthcare Products Association, a trade association representing U.S. manufacturers and distributors of over-the-counter medicines and dietary supplements, noted that in a survey conducted by his group in 2010, 88 percent of physicians recommend their patients attempt to address minor to moderate ailments themselves through the use of OTC medicines before seeking the care of a professional. “Additionally, 89 percent of consumers believe OTC medicines are an important part of their overall family health care and just as safe and effective as prescription medicines when taken according to directions,” he said. “In fact, 81 percent of U.S. adults use OTC medicines as a first response to minor ailments and half of parents reported that an OTC medicine has helped keep their child from missing school.”
Melville argued that OTCs are a proven means to keep health care costs down and avoid unnecessary visits to the doctor, a significant cause of rising health care costs. In 2003, the Internal Revenue Service expanded coverage of tax‐preferred accounts, such as FSAs and HSAs, to include OTC medicines as qualified medical expenses, allowing consumers to purchase OTC medicines with pre‐tax dollars.
“Unfortunately for consumers and the health care system, the efficiencies in processing these transactions ended on Jan. 1, 2011,” he said. “That is the date that a provision included in PPACA, which requires holders of FSAs, HSAs, and other tax‐preferred accounts to first seek a doctor’s prescription before purchasing or being reimbursed for purchases of OTC medicines, went into effect. There is no medical justification for this requirement, and as a nation, we want to encourage Americans to make smart, efficient health care choices, including through utilizing FSAs for OTC medicine purchases. But instead, the law today discourages efficient choices and sends the wrong signal.”
Problems for Doctors and Patients
Dr. Joel M. Feder, a co-owner of Overland Park Family Health Partners in Overland Park, Kan., testified on behalf of the American Osteopathic Association.
“In my experience, the majority of the patients that request a prescription for an OTC medication are doing so to address a simple cold or allergy; however, this still requires an appointment slot normally allocated for other patient needs,” he said. “As a result, my time available to address patients with more substantive health care needs has been reduced significantly. On average, I see about 25 patients per day, spending an average of 15 to 20 minutes with each patient—20 patients that visit my office for traditional care ranging across a wide array of health care needs plus three to five patients who are simply requesting a prescription for OTC medication, and in some instances numerous medications.”
Feder noted that research has found that an OTC medication is an effective, affordable, and convenient way for people to address their own health care needs. He cited a study by Booz & Co for the Consumer Health Products Association, which found the use of OTC medication saves the health care system $77 billion in avoided doctor’s visits and diagnostic testing.
“My practice is a relatively small practice with five providers, including four physicians and one advanced registered nurse practitioner,” he said. “We have 10 administrative staff working in the office who are extremely busy processing paperwork to keep the office running and filing claims for the patient care my partners and I provide. The additional task of processing requests for appointments for over-the-counter prescriptions is an unnecessary burden. Larger practices might be able to handle this with less disruption; nonetheless, physician practices are negatively impacted by this administrative burden —especially small practices like my own.”
Sjögren’s Syndrome Foundation CEO Steven Taylor talked about the costs of treating the immune system disease, which can lead to severe cases of dry mouth and dry eyes and other afflictions.
"Sjögren’s patients largely depend on the use of over-the-counter drugs and products to treat their disease and prevent devastating complications," he said. "The cost is untenable for patients and their families, as OTC treatments are not covered by insurance, are not tax deductible, and are no longer even covered under Health Savings Plans without obtaining a prescription. With so many OTC products needed for treatment, having to go to a physician or dentist for a prescription for each and every one presents an undue burden."
Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities, pointed out that only a minority of workers benefits from tax-advantaged accounts such as FSAs and HSAs.
“In 2010, 39 percent of all workers and 56 percent of workers in large firms had access to flexible spending accounts,” he said. “Only 37 percent of employees offered an FSA in 2010 chose to participate, and the average annual contribution to an FSA was $1,420, well below the new $2,500 limit. Thus, only about one worker in seven has an FSA. A smaller fraction of workers is enrolled in other tax-favored accounts.”
Problems for Supermarkets
Jennifer Hatcher, senior vice president of government and public affairs at the Food Marketing Institute, a trade group representing supermarket retailers and wholesalers, discussed the problems involved in implementing a payment system for dealing with the debit cards typically used by holders of flexible spending accounts and health reimbursement accounts to comply with the IRS’s original guidance in 2006 for health benefit cards and the changes that were later needed under the Affordable Care Act.
The IRS guidance required members of the FMI and other retailers to develop and implement an Information Inventory Approval System, or IIAS, if they wished to be able to continue to accept FSA debit cards for purchases.
“Each merchant POS system had to be engineered to identify and flag all eligible products and decline all ineligible products electronically," said Hatcher. "An associate had to be assigned to monitor and update this system on a monthly basis. The system also had to be able to maintain the data electronically to be produced in the event of an IRS audit. Anyone who has ever had the responsibility for an IT project can envision the complexity of this assignment.”
The guidance from the IRS back in 2006 and 2007 regarding the eligibility of certain items was extremely limited and only about one page in length. The food marketers needed to consult numerous attorneys and the IRS as often as they were willing and had dozens of conference calls to ensure the database was accurate and comprehensive.
“The hard work to develop this database of products has been successful and each month an electronic list by UPC code is updated to identify eligible and ineligible products and a link is emailed to each company,” Hatcher noted.
That all changed in March 2010 with the passage of the health care reform law. “The practical effect of this change is to require a $130 doctor’s office visit for a prescription to purchase an $18 package of Claritin,” said Hatcher. “Bandages and contact solution remain eligible without a prescription."
On Dec. 20 and 23, 2010 the IRS finally released guidance on how the change must be implemented and the change had to take place by Jan. 1, 2011, Hatcher noted.
"All of the eligible item lists for all merchant locations had to be updated at the busiest time of the year, which for grocery stores is between Thanksgiving and New Year’s," she said. "In total, 16,000 OTC medicines had to be removed from the SIGIS electronic eligible items list. Beginning Jan. 1, 2011, the extreme effort and expense that more than 11,000 companies undertook to comply with the original IRS requirement by Jan. 1, 2008 for an IIAS was negated. The associates in our member companies who invested so much of their time and resources into developing this system were frustrated.”
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